## **3.6. Beyond Trade in Goods**

Bangladesh may gain significantly more, in the long run, from diversifying exports to India, and thereby also exploit increasing possibilities for intra-industry trade. As the CGE analysis has shown, there could be fewer opportunities for Bangladesh (although not small by any means) at the ―intensive margin‖ (exporting more of the same to Indian markets) compared to exports at the ―extensive margin‖ (diversifying the export basket to India‘s large and growing market).<sup>43</sup> This is where FDI becomes very important.

A bilateral FTA between Bangladesh and India should go beyond ―trade in goods‖ to deepen cooperation and improve Bangladesh‘s export capability. Without significant structural changes in its production pattern, Bangladesh will be unlikely to derive the desired benefits from a bilateral FTA. Top priority, therefore, should be given to augmenting Bangladesh‘s export supply capability. This can be encouraged through a broader, bilateral cooperation mechanism in the areas of investment, finance, services trade, trade facilitation, and technology transfer. In the context of investment flows, horizontal and vertical integration of Indian and Bangladeshi industries could help to improve scale economies, especially for Bangladesh, and help Indian firms gain from the use of inexpensive labor. Closer economic cooperation between the two countries would also promote Bangladesh's prospects for attracting larger investment from India. Such investments, whether 100 percent Indian or joint ventures, would help to improve the country's export supply capability and boost exports to both the region and the outside world.

Bilateral economic cooperation should emphasize trade in services, to enhance connectivity, trade in health and higher education, tourism, and facilitate trade and transit, and so on. Empirical studies have found that trade in services can generate substantial gains over and above those from trade in goods.<sup>44</sup> Both countries would gain from continued trade liberalization, in both goods and services, and streamlining of trade transactions through trade facilitation.

Some sectors in both countries, however, are bound to lose out due to increased import competition. In Bangladesh these could include coal, dairy products, metal products, transport equipment, petroleum and coal products, paper products, publishing, electronics equipment, and mineral products. In India, the sectors could include leather products, apparel, meat products, and vegetable oils & fats. For this reason, a possible bilateral FTA will benefit from addressing (or at least trying to address) the costs of adjustment.

# **4. Connectivity, Trade Facilitation, and Transit**

Many empirical studies have examined the effect of transport costs on trade flows. Limão and Venables (2001) found a link between the quality of infrastructure and transport costs and concluded that infrastructure investments are important for export-led economic growth. Other studies argued that differences in logistics performance are driven only in part by poor quality of physical infrastructure services such as road, rail, waterways, port services, and interfaces.<sup>45</sup> The inadequacies are often caused by (non-tariff) policy and institutional constraints, such as red tape, inadequate enforcement of contracts, poor definition and enforcement of rules of engagement, asymmetry in standards, delays in customs, ports and border crossings, pilferage in transit, corruption, and highly restrictive protocols on movement of cargo.

One of the key challenges facing South Asia is high cost of trading. For example, transaction costs at the India-Bangladesh border are estimated to be very high due mainly to infrastructure bottlenecks both at the

> 43 Based on Hummels-Klenow (products) extensive and intensive margins. Refer to De (2012).

> 44 See, for example, Ahmed and Ghani (2009), Ahmed _et al._ (2010).

> 45

> Subramanian and Arnold (2001).

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