Bangladesh Trade Policy Reform Can No Longer Wait: World Bank Report Urges Action

🌏 Last week the World Bank launched a report, "Bangladesh Trade Policy at a Crossroads". The message coming out of that report could not be more prescient. Tariff and trade policy reforms cannot wait any longer. Furthermore, what was made clear is that reforms would actually pay for themselves. The argument about revenue loss that has thus far stalled reforms for over two decades are no longer valid. Latest modelling techniques are able to project outcomes based on the latest economy-wide application of trade policy reform.

📊 With Least Developed Country (LDC) graduation approaching and the need for export diversification becoming increasingly urgent, the country can no longer afford to treat trade policy reform as a marginal or incremental policy issue. The structure of protection has implications not only for import prices and customs revenue, but also for export competitiveness, investment incentives and the prospects for entering into deeper trade agreements.

🏛 National Tariff Policy Implementation Stalled

Rapid implementation of the National Tariff Policy (NTP) has become more urgent than ever because Bangladesh's tariff regime has long needed a coherent policy framework rather than piecemeal adjustments. The setting for trade policy today remains fundamentally unchanged over the past 25 years. Thanks to the high tariff and protection regime, exporting — outside the RMG industry — is not a profitable activity relative to selling in the domestic market. The domestic market has effectively been created behind high tariff walls. And the divergence is not marginal; it is significant. This is the anti-export bias that has become a widely used expression in policy circles.

Trade policy reforms must therefore be formulated within these limiting parameters. If Bangladesh is serious about export diversification and competitiveness, correcting this anti-export bias has to be at the heart of tariff reform. The reference to the 25-year stasis in trade policy framework is significant — Bangladesh's tariff regime has remained structurally unchanged since the late 1990s, despite multiple rounds of announced reforms and the formal adoption of the National Tariff Policy 2023.

💰 Bangladesh's Protection Rate: 28% Average, 42% Output

For Bangladesh, Policy Research Institute of Bangladesh (PRI) has a repository of disaggregated tariff data covering more than three decades, allowing us to undertake ex ante nominal protection analysis. On this basis, the average nominal protection rate in FY2027 is around 28 per cent, with roughly half coming from para-tariffs, while average trade taxes are considerably higher.

Surprisingly, despite pronouncements to the contrary, the proposed measures under the short-term stabilisation programme and the FY2027 Budget fall short of the commitments under the National Tariff Policy 2023. Implementation of the NTP is a critical part of preparation for LDC graduation. The question is: why is it still stuck at the proposal stage?

• 📊 Average nominal protection rate FY27: ~28%
• 📊 Para-tariff share of protection: ~50%
• 📊 Protective MFN output tariffs: ~42%
• 📊 MFN input tariffs: ~17%
• 📊 Top customs duty (with 3% RD): 28%
• 💰 Projected GDP gain from FTAs and tariff cuts: $4 billion (World Bank)
• 💰 Customs revenue growth in 1990s tariff reform decade: 11% (despite 50% tariff cut)
• 📅 NTP 2023 implementation status: Stuck at proposal stage

📜 Intermediate Goods Tariff Reduction: Bangladesh Context

Among the principal tariff rationalisation measures proposed by the World Bank is a reduction in tariffs on intermediate goods. While this is an absolutely correct posture of tariff reform, and is found to have worked well in Indonesia and Vietnam, the context in Bangladesh is so different that this reform measure has to be reformulated in the Bangladesh context. There exists a deep wedge between output and input tariffs that ensure super-high effective protection. While deep cuts in intermediate goods tariffs would mechanically reduce effective protection, the design must account for the specific structure of Bangladesh's input-output tariff differential.

Exemption rationalisation in the tariff structure is another area where reform is warranted. There is ample justification for eliminating end-user tariff concessions applied to a plethora of industrial sectors and subsectors, except for capital machinery imports. Protective Most Favoured Nation (MFN) output tariffs average around 42 per cent, compared with around 17 per cent for MFN input tariffs. This is already a wide divergence and provides significant protection, which need not be amplified through end-user exemptions that distort investment decisions.

💵 Revenue Concerns Addressed: Reform Pays For Itself

The question of immediate revenue loss will inevitably arise. But tariff reform should not be assessed only through its first-round fiscal impact. Second- and third-round effects can generate more revenue through higher economic activity. Economy-wide models such as TRIST and GTAP can help simulate alternative reform scenarios and assess their wider effects. The World Bank has done that and found clear evidence of Free Trade Agreements (FTAs) and tariff cuts adding $4 billion to GDP.

Before touching customs duty, regulatory duty (RD) and supplementary duty (SD) have to be addressed. RD is effectively an additional customs duty, meaning the top customs duty is not 25 per cent but 28 per cent when the 3 per cent standard RD is included. RD should be eliminated in a couple of years, while SD needs to cut sharply and become trade-neutral before LDC graduation. This would be an essential part of preparation for LDC graduation.

👕 Para-Tariffs And Consumer Goods Protection

Protection is concentrated particularly in consumer goods industries. Export producers have to sell at world prices over which they have no control, while high tariffs keep domestic prices of durable and non-durable consumer goods well above international prices. Beyond customs duty and RD, SD has increasingly become a protective instrument. In effect, half the protection comes from para-tariffs — RD and SD.

The industrial policy dimension is equally important. Industrial policy in Bangladesh is essentially trade policy — or, by and large, import tariff and export subsidy policy, applied to thrust sectors, priority sectors, development sectors, and so on. In recent times distortive and trade restrictive measures have multiplied, according to WTO reports. It is interesting that the New Industrial Policy Observatory (from Global Trade Alert) finds Bangladesh to have adopted as many trade distortive measures as some of the most protectionist economies globally.

💰 1990s Reform Lesson: Customs Revenue Grew Despite Tariff Cuts

The bottom line is that economy-wide impacts of tariff reform can offset short-term revenue losses. Bangladesh's deep tariff reforms in the 1990s showed no reduction in customs revenues throughout the decade, during which customs revenue grew by 11 per cent during the decade despite average tariffs were cut by half. The 1990s precedent is a powerful counter-argument to the revenue-loss narrative that has stalled tariff reform for two decades. If customs revenue could grow 11% while tariffs were halved in the 1990s, a similar reform programme today could generate comparable revenue growth while unlocking export diversification gains.

🤝 Trade Agreement Implications

The implications for trade agreements are equally important. With the current tariff structure, an FTA agenda will remain difficult, if not impossible. Note that Bangladesh has not been able to sign one FTA in the past 25 years despite several initiatives that were widely broadcasted. Bangladesh may be limited largely to EPAs (Economic Partnership Agreement) and CEPAs (Comprehensive Economic Partnership Agreement). How about an FTA with EU? If we cannot sign an FTA with Bhutan, can we realistically pursue more ambitious agreements with larger trading partners?

The 25-year failure to sign a single FTA — despite multiple initiatives — reflects the structural constraint that Bangladesh's high tariff regime creates for trade agreement negotiations. Trade partners are reluctant to negotiate FTA concessions with a country whose tariff structure makes meaningful market access liberalisation politically and economically difficult. Without tariff reform, Bangladesh's trade agreement agenda will remain aspirational rather than operational.

🌏 Strategic Imperative For Bangladesh's Post-LDC Future

The bottom line is clear: doing nothing will be costly; reform will pay for itself. The challenge is to move from tariff and trade policy reform as a stated policy objective to tariff and trade policy reform as an implemented economic strategy.

For Bangladesh's broader economic trajectory, the trade policy reform imperative is strategically critical for several reasons. First, LDC graduation in November 2026 will narrow the preferential market access Bangladesh currently enjoys, requiring the country to negotiate alternative trade agreements — EPAs, CEPAs and FTAs — to maintain export competitiveness. Without tariff reform, these negotiations cannot produce meaningful outcomes.

Second, export diversification beyond RMG depends on correcting the anti-export bias created by the high tariff regime. New export sectors — pharmaceuticals, light engineering, agro-processing, ICT services — cannot scale if the domestic market remains more profitable than export markets due to tariff protection. The government's export diversification targets cannot be achieved without the structural tariff reform that would align domestic prices with international prices.

Third, the $4 billion GDP gain projected by the World Bank from FTA and tariff cuts represents a meaningful contribution to Bangladesh's economic growth trajectory — equivalent to roughly 1% of GDP. This growth dividend, combined with the export diversification gains and trade agreement opportunities that tariff reform would unlock, makes the case for rapid implementation of the National Tariff Policy 2023 overwhelming. The coming months will reveal whether the government can translate the World Bank report's urgency into concrete policy action — or whether Bangladesh's trade policy reform will remain stalled at the proposal stage for another decade.