AN OVERVIEW OF TRADE POLICY

Abstract summary:. This section summarizes some of the main findings of that report that
are relevant for the Bangladesh’s trading relationship with India, and includes new information
that is now available for 2004/05, especially on Bangladesh’s Para-tariffs which during 2004/05
continued to increase their role in Bangladesh’s policies of protecting domestic producers from
import competition. Various aspects of Bangladesh’s import policies are considered first and at
most length, since they would be most directly affected if there were an FTA between India and
Bangladesh. Although the economy has become increasingly open in recent years, total
merchandise exports have remained limited, averaging 18% of GDP since 2006. Exports remain
highly concentrated both in terms of products and destinations, which carries some risk, with
readymade-garment (RMG) exports to the EU and the U.S. the current mainstay. However, as a
reputable low-cost producer of garments, Bangladesh has gained global market share in recent
years. Trade policies can assume varying dimensions and scope depending on the number of
parties involved in the policy. Consider the following types of trade policies: National trade
policy: Every country formulates this policy to safeguard the best interest of its trade and
citizens. This policy is always in consonance with the national foreign policy, bilateral trade
policy and international trade policy. The International Trade Organization (ITO) was the
proposed name for an international institution for the regulation of trade. Bangladesh’s exports
are dominated by readymade garments, most of which are exported to the US and the EU. Nearly
all garment exports are from firms operating in export processing zones or as bonded
warehouses. In both cases they can import their textile and other inputs free of Customs duties
and all other import taxes (including the 3% advance income tax) with the use of “backto-back
LCs” i.e. letters of credit based on LCs issued for their exports. In addition, however, there are a
number of non-standard export policies which would need to be discussed with India in the
context of bilateral FTA, or with the India and the other South Asian countries in the context of
SAFTA

Trade policy defines standards, goals, rules and regulations that pertain to trade relations
between countries. These policies are specific to each country and are formulated by its public
officials. Their aim is to boost the nation’s international trade. A country’s trade policy includes
taxes imposed on import and export, inspection regulations, and tariffs and quotas.
Trade involves the transfer of goods or services from one person or entity to another, often in
exchange for money. A system or network that allows trade is called a market.

Introduction: Trade policy defines standards, goals, rules and regulations that pertain to trade
relations between countries. These policies are specific to each country and are formulated by its
public officials. Their aim is to boost the nation’s international trade. A country’s trade policy
includes taxes imposed on import and export, inspection regulations, and tariffs and quotas.
Trade involves the transfer of goods or services from one person or entity to another, often in
exchange for money. A system or network that allows trade is called a market

An early form of trade, barter, saw the direct exchange of goods and services for other goods and
service involves trading things without the use of money. Later, one bartering party started to
involve precious metals, which gained symbolic as well as practical importance. Modern traders
generally negotiate through a medium of exchange, such as money. As a result, buying can be
separated from selling, or earning.

Constituents of Trade Policy: A trade policy generally focuses on the following

specifications in terms of international trade: Tariffs: Every country has the right to impose taxes
on imported and exported goods. Some nations levy heavy tariffs on imported goods to protect
their local industries. High import taxes inflate the prices of imported goods in local markets,
ensuring that local products are more sought after. Barriers: They are state-imposed restrictions
on trading a particular product or with a specific nation. Some of the most common forms of
trade barriers are tariffs, duties, subsidies, embargoes and quotas. Safety: This determinant
ensures that only high-quality products are imported in the country. Public officials can lay down
inspection regulations to ensure that the imported product conform to the set safety and quality
standards.

The International Trade Organization (ITO) was the proposed name for an international
institution for the regulation of trade.
Led by the United States in collaboration with allies, the effort to form the organization from
1945 to 1948, with the successful passing of the Havana Charter, eventually failed due to lack of
approval by the US Congress. Until the creation of the World Trade Organization in
1994, international trade was managed through the General Agreement on Tariffs and
Trade (GATT).

. The Breton Woods Conference of 1944, which established an international institution

for monetary policy, recognized the need for a comparable international institution for trade to
complement the International Monetary Fund and the World Bank. Breton Woods was attended
by representatives of finance ministries and not by representatives of trade ministries, the
proposed reason why a trade agreement was not negotiated at that time.

In early December 1945, the United States invited its war-time allies to enter into negotiations to
conclude a multilateral agreement for the reciprocal reduction of tariffs on trade in goods. In July
1945, the US Congress had granted President Harry S. Truman the authority to negotiate and
conclude such an agreement. At the proposal of the United States, the United Nations Economic
and Social Committee adopted a resolution, in February 1946, calling for a conference to draft a
charter for an International Trade Organization. In March 1948, the negotiations on the ITO
Charter were successfully completed in Havana Charter. The Havana Charter (formally the
"Final Act of the United Nations Conference on Trade and Employment") provided for the
establishment of the ITO, and set out the basic rules for international trade and other
international economic matters. It was signed by 56 countries on March 24, 1948. It allowed for
international cooperation and rules against anti-competitive business practices. In the absence of
an international organization for trade, countries turned, from the early 1950s, to the only
existing multilateral international institution for trade, the "GATT 1947", to handle problems
concerning their trade relations. Therefore, the GATT would over the years "transform itself"
into a de facto international organization. It was contemplated that the GATT would be applied
for several years until the ITO came into force. However, since the ITO was never brought into
being, the GATT gradually became the focus for international governmental cooperation on
trade matters.

Seven rounds of negotiations occurred under GATT before the eighth round—the Uruguay
Round—concluded in 1994 with the establishment of the World Trade Organization (WTO) as
the GATT's replacement. The GATT principles and agreements were adopted by the WTO,
which was charged with administering and extending them.

The International Trade Policy: Today’s era of globalization depends on sound trade
policies to reflect market changes, establish free and fair trade practices and expand the
possibilities for booming international trade. International trade is the exchange of capital, goods
and services across international borders In most countries, such trade represents a significant
share of gross domestic product (GDP). While international trade has existed throughout history
(for example Uttarapatha, Silk Road, Amber Road, scramble for Africa, Atlantic slave trade, salt
roads), its economic, social, and political importance has been on the rise in recent centuries.
Industrialization, advanced technology, including transportation, globalization, multinational
corporations, and outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. Nations would be
limited to the goods and services produced within their own borders without international trade.
International trade is, in principle, not different from domestic trade as the motivation and the
behavior of parties involved in a trade do not change fundamentally regardless of whether trade
is across a border or not. The main difference is that international trade is typically more costly
than domestic trade. This is due to the fact that a border typically imposes additional costs such
as tariffs, time costs due to border delays, and costs associated with country differences such as
language, the legal system, or culture. An example of this is the import of labor-intensive goods
by the United States from China. Instead of importing Chinese labor, the United States imports
goods that were produced with Chinese labor. One report in 2010 suggested that international
trade was increased when a country hosted a network of immigrants, but the trade effect was
weakened when the immigrants became assimilated into their new country.

Trade Policy Effects: Government has long intervened in international trade by collecting
taxes, or tariffs, on imported goods. Tariffs have a long history since they are one of the easiest
ways for governments to collect revenue. However, tariffs have a number of other effects besides
generating government revenue; they also affect the success of business and the well-being of
consumers. And because tariffs affect the volume of trade between countries, they also affect
businesses and consumers abroad.
That governments have applied historically, including import quotas, export, quotas, export
taxes, and export subsidies. The effects are considered less than one set of standard assumptions
—namely, in the case when markets are perfectly competitive. This chapter examines the way
imperfect competition affects the gains and losses from trade policies. It focuses on empirical
models that estimate the impact of trade policies, with minimum structure imposed on the data.
The welfare effects of trade policy under imperfect competition are decomposed into four
possible channels: (1) a deadweight loss from distorting consumption and production decisions;
(2) a possible gain from improving the terms of trade; (3) a gain or loss because of changes in the
scale of firms; and, (4) a gain or loss from shifting profits among countries. The chapter focuses
on the concept of deadweight losses and discusses the terms of trade, along with considering
tariffs. It also reviews import quotas and their effect on product quality. In many industries,
quotas have led to an increase in the quality of imports purchased, which is an optimal response
by consumers and firms. It also reviews the evidence linking import competition, wages, and the
employment for the United States and discusses the impact of changes in product variety. The
last two decades have witnessed a shift in the focus of international trade research from trade
policy to other forms of trade frictions (e.g., transportation, information and communication
costs). Implicit in this development is the widespread view that trade policy no longer matters.
We confront this view by critically examining a large body of evidence on the effects of trade
policy on economically important outcomes. We focus on actual as opposed to hypothetical
policy changes. We begin with a discussion of the methodological challenges one faces in the
measurement of trade policy and identification of its causal effects. We then discuss the evidence
on the effects of trade policy on a series of outcomes that include: (1) aggregate outcomes, such
as trade volumes (and their price and quantity subcomponents), the extensive margin of trade,
and static, aggregate gains from trade; (2) firm and industry performance, i.e., productivity,
costs, and markups; (3) labor markets, i.e., wages, employment, and wage inequality; (4) long-
run aggregate growth and poverty, secondary distortions and misallocation, uncertainty trade
policy interacts with other developments, e.g., technological change. We point to areas and
opportunities for further research and draw lessons from the past to apply to future studies. We
conclude that the perception that trade policy is no longer relevant arises to a large extent from
the inability to precisely measure the various forms of non-tariff barriers that have replaced
tariffs as the primary tools of trade policy. Better measurement is thus an essential prerequisite of
policy-relevant research in the future.

Trade policy of Bangladesh: During the first part of the period covered by the India-
Bangladesh trade study, the last four of the protective Para-tariffs listed above were in force, and
since July 2004 when the regulatory duties were discontinued, the last three have been in force.
The IDSC for the most part is an across-the-board import tax at a flat rate from which relatively
few imported products are exempt. The Bangladesh economy emerged relatively unscathed from
the global economic crisis though the country remains vulnerable because its exports are not
diversified and it depends heavily on migrant workers' remittances. Although the economy has
become increasingly open in recent years, total merchandise exports have remained limited,
averaging 18% of GDP since 2006. Exports remain highly concentrated both in terms of
products and destinations, which carries some risk, with readymade-garment (RMG) exports to
the EU and the U.S. the current mainstay. However, as a reputable low-cost producer of
garments, Bangladesh has gained global market share in recent years. This trend is expected to
continue over the medium term, which could partially mitigate the impact of slow growth in
advanced economies. Bangladesh has outlined a vision of becoming a middle-income country by
2021. This would require it to grow by at least 8% per year, compared to the current 6%-7%,
driven by accelerated growth in the industrial and services sectors, diversification of export
markets and higher foreign exchange earnings from the export of semi-skilled and skilled labor.
Bangladesh needs to improve the investment climate and continue to carry out trade-related
reforms to increase domestic and foreign investment for more rapid and inclusive trade-
enhancing growth. The Government needs to focus its trade reform efforts on reducing trade
distortions, minimizing anti-export bias through further tariff reforms and ensuring greater
integration into the multilateral trading system. Low tax collections remain a major constraint
since they affect the Government's capacity to increase public investment in energy and other
infrastructure sectors. Bangladesh, an original Member of the WTO, grants at least MFN
treatment to all its trading partners and receives the special and differential treatment provided
for in the WTO Agreements. It continued to participate actively in the work of the WTO, serving
twice as the coordinator of the LDC Group in Geneva in 2007 and 2011, and advocating issues
of interest to LDCs, including greater market access, increased flexibility in the development of
multilateral trade rules as well as targeted assistance to trade infrastructure. The Government is
looking at ways to better coordinate policy on trade and investment-related matters between
ministries and departments, and between them and the private sector within the framework of
developing a comprehensive trade policy for the next five years. Bangladesh's involvement in
and commitment to regional integration initiatives has deepened during the review period with
the progressive development of a South Asian Free Trade Area (SAFTA) and a Bangladesh,
India, Myanmar, Sri Lanka and Thailand Economic Cooperation (BIMST-EC) Free Trade Area
as well as the expansion of product coverage under the Asia Pacific Trade Agreement (APTA),
also known as the Bangkok Agreement. Exports to SAFTA and BIMSTEC partner countries
have remained limited, accounting for only 3% of total exports in each case. Bangladesh, a
beneficiary under various GSP schemes and an active participant in the Global System of Trade
Preferences among Developing Countries (GSTP), is pursuing efforts to obtain duty-free access
to the United States market for its textiles and clothing, although exports to the U.S. under
preferences remain insignificant.

Conclusions: - Foreign investors are showing interest in large-scale relocation of labor-intensive

industries, particularly garments and related textile manufacturing. In addition, sectors such as
shipbuilding, pharmaceuticals, ceramics, and processed and frozen foods have shown dynamism
in recent years. International trade is that factors of production such as capital and labor are
typically more mobile within a country than across countries. Thus, international trade is mostly
restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor, or
other factors of production. Trade in goods and services can serve as a substitute for trade in
factors of production. Bangladesh has enjoyed robust growth during the review period and, given
its inherent strengths - especially a vibrant private sector and a large pool of inexpensive labor -
the prospects for continuation of such growth are relatively good.

References:

1. http://www.economywatch.com/international-trade/trade-policy.html.

2. https://en.wikipedia.org/wiki/International_Trade_Organization#cite_note-Irwin-3
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