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Economic implications of Bangladesh on BREXIT led geo-economic order

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AKM Asaduzzaman patwary, Research fellow, Head of R&D, DCCI.

brexitThe recent geo economic change has plunged the many heavyweights, developing and least developed economies into deep tense and concern. World economy is going to encounter terrible episode engendering new panic and odds as a result of Brexit and Breixt implementation change. There are sayings that if USA sneezes the rest of the world catches cold and sun never sets in the British Empire. But, irony is the British Empire is going to crumble and downsize amidst of British referendum and upon Brexit implementation. The Brexit referendum trembled the EU base and rest of the World economies which have strong economic and diplomatic connectivity with Great Britain spurring the tension for redesigning the economic roadmap and robust economic negotiation. And, many UK business and progressive UK leaders die heart oppose the Brexit and anxiously comment sun may down soon if UK loose the position of business and financial power house.

Brexit also brought in huge thoughts and skepticism for sustained economic stability with British nationals, policy makers, political and economic leaders. As soon as the world gets laden and inundated with shock wave of Brexit and recovery struggle, the US government change with accession of Donald Trump brought another blow to the global economy. USA is the world economic hegemony and huge mover and shaker of the world trade and business ecology and has always been expected to be friendly for global economy. The philosophy of economic globalization has brought all economies into one shared economic platform and with shared interest and well off economies extended diverse form of trade, investment and aid privilege to frail and relatively marginalized LDC economies with the spirit of globalization. Liberal cross border trade helps global merchandise trade to surge and shape the global economy. Irony is the recent Government has pledged to repeal the conventional policy and withdraw the conventional and liberal economic orientation shaking and overshadowing the existing geo-economic and geo-political spree. The Great Britain has formally begun the BREXIT process off late as per the Article 50 of Lisbon treaty leading to EU market stalemate and upside down with likely hardest and unavoidable challenges for our trade, investment relation and longstanding EU, Britain and Bangladesh economic fraternity. Economic research projected that Britain may incur around 16 billion GBP tariff to Europe, 30 % of global trade loss and 70000 financial sector job loss.

Bangladesh and Britain have maintained trusted bilateral economic relationship for ages and no exception with USA. In the wake of recent Brexit, Britain has been considering keeping the current trade friendly relation with Europe even after Brexit implementation. In the same manner, many other countries which have trading relation with EU and Britain are required to reassess and negotiate the trading relation with EU and Britain separately. Many LDCs may consider PTA, FTA or struggle the DFQF facilities to realize from Great Britain. Under this geo-economic catastrophe, Bangladesh as a lower Middle income and visionary Economy, is substantially required to be strategic to identify the crises and forthcoming issues envisaging trade, investment and development aid ,cooperation and address them accordingly. An array of issues and observations on Brexit and Trump led contraction of likely geo economic consequences in our economy are elicited hereafter to estimate the economic impacts in Bangladesh.

  • The lowering value or purchasing power of Great Britain Pound Sterling will make Bangladeshi garments more expensive to British buyers. It will make imports expensive to the Great Britain and export to UK will end up with decline. In the wake of BREXIT, the RMG sector needs to explore new markets with additional basket of export products. The overall UK bound export will have deep cut.
  • Our economy is partly remittance dependant. A depressed Pound Sterling will result in low remittance sent by our people living in the UK and lowering our overall remittance reserve as GCC economic slump meanwhile caused reserve and economic shockwave.  
  • Capital Economics, a London-based research firm, projected that Brexit would cause at the most a GDP drop of 0.2 percent across Asia which is a matter of concern of Bangladesh. The government will have to make necessary adjustment in the proposed budget and keep the export sector vibrant by maintaining the tax at source on readymade garments export at 0.60 per cent instead of 1.5 per cent.
  • The major threat is uncertainty whether Bangladesh will enjoy Generalized System of Preference of Everything but Arms (EBA) scheme which grants duty- and quota-free access to all products, except arms and ammunitions, covering 99 per cent of all tariff lines. As implementation of Brexit by the British and the EU authorities will be in the coming two years, it will determine their tangled trade relations like the single market facility or performance like European Free Trade Association. If Britain exits leaving the single market facility, then companies like Primark, M&S, Asda, Newlook and others will face tariff charges in EU, resulting in higher prices and lower demand, eventually leading to lower import from Bangladesh. These hike deep concern whether the $5.0 billion garment export target by 2021 in the British market and $50 Export earning for Bangladesh will be realized or not. Moreover, uncertainty and volatility in the British market is likely to have adverse impact on its investment spree for Bangladesh.
  • The EU’s EBA was born in 2001 to give all LDCs full duty free and quota-free access to for all of their exports with the exception of arms. Bangladesh enjoys same privilege to UK market. This generous form of preferential treatment to LDCs globally encourages other partners to follow.
  • If the rate for pound continues to fall, businesses and investors are very likely to move their money out of the UK economy. Under such circumstances, Britain’s economy can slip back into a recession, badly affecting the rest of the world including Bangladesh, as we are the largest exporter of RMG in UK.
  • The EU-Bangladesh relation is formally structured through a Cooperation Agreement signed in 2001, which replaced the Commercial Cooperation Agreement signed in 1976. This Agreement is the main legal instrument governing several facets of the relationship. The EU-Bangladesh Joint Commission, set up under the Cooperation Agreement, regularly interacts on broad issues of trade, economic cooperation, development, human rights and good governance. The absence of UK from the structural dialogue with the EU, under the Joint Commission, will create new challenges for Bangladesh.
  • All 28 member states of the EU adhere to common EU standards. Exporters of fisheries and agro-products are regulated by the Food and Veterinary rules set by the EU. UK standards are now in tune with those rules. Problems related to health standards of import of such items have been dealt by the EU in the past. The UK, facing occasional problems with import from Bangladesh, had to go through a process where a final decision on continuing the import or placing a restriction order on certain products were decided at the EU level. Bangladesh will definitely miss the advantage of the Single Market, where one bulk importer in the Netherlands could distribute Bangladeshi products to UK without any barrier. Hopefully, UK will renegotiate its trade laws with the EU to let that happen.
  • With Brexit, the UK will no longer be obliged to offer job quotas to the citizens of the other 27 member-countries of the EU. This may widen the labour market for Bangladesh. The challenge here is to compete with other developing countries like India which has some comparative advantage on skilled workforce over Bangladesh.
  • As UK will no longer be required to tie-up its official development assistance (ODA) to the EU rules and directions, it may provide more assistance to Bangladesh. Though ODA from UK came down to $79 million in the last fiscal year.

    Recommendations to address forthcoming economic challenges

    • The government can form a support fund/subsidy to counter the immediate exchange rate loss and can pay attention to bilateral relations as out of the EU.
    • The exporters and their associations should start to recognise geopolitical risks and formulate long-term business strategies. They should also explore new markets and different channels.
    • As a LDC, Bangladesh government is now required to play a vigorous role to uphold trade interests and maintain relations with Britain. Any further trade deal less advantageous than existing EU deal will not be beneficial to our economy. The upcoming negotiation with UK on post Brexit needs to take care of it.
    • A high powered independent committee consisting of Ministry of Industry, Tariff commission, BIDA, private sector led by Ministry of Commerce can be formed in order ascertain the strategic business challenges and potential business and investment opportunities for Bangladesh from this geo=economic ambience due to US power shift.
    • The smooth separation of UK from EU can be considered as generous transition period by UK and extend the EBA facilities for Bangladesh for at least five years down the line because it will help mitigate possible trade flow shocks and is a reflection of the UK’s commitment to the continued progress of the developing world.
    • The central bank may also intervene to stabilize the exchange rate of pound against taka to support the exporters.
    • High tariff trade market access to UK for developing countries may not hold them competitive, therefore, manufacturing relocation in low cost hub is inevitable and Bangladesh can tap these opportunities.
    • High level diplomatic negotiation should continue for contextualizing the GSP Plus facility for Bangladesh later 2021.

The Brexit may traumatize UK and EU dependent economy and what will happen when UK is no longer in EU with no privilege of EBA is yet to be determined. The current geo economic order change can on one side change our economic landscape on the other side create new opportunities for Bangladesh and other economies across the world. Since Bangladesh envisioned to graduate into a middle income economy by 2021 and 28th largest economy by 2030, we must remain awake and keep eye on global changes and accommodate accordingly for optimum benefits for our economy in line with our cherished visions.

 

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