There is a fundamental contradiction in Bangladesh's trade policy. For decades, we have been talking about export diversification, attracting foreign investment, and gaining better access to international markets. Yet, a significant part of the trade system is still structured in such a way that it is more profitable for many companies to do business in the protected domestic market than to compete in international markets.
The issue has become more pronounced due to Bangladesh's graduation from the list of least developed countries. Bangladesh is still set for graduation on 24 November 2026, although the government has applied for an extension and the relevant UN process is ongoing. Under the European Union's new GSP framework, Bangladesh's ‘Everything but Arms’ (EBA) benefits are expected to be maintained for another three years after graduation, i. e. , until at least the end of 2029. This will provide some time, but it will not eliminate the core weaknesses of the trade system. The real test is whether Bangladesh can develop a sufficient number of competitive enterprises beyond ready-made garments before preferential market access narrows and international competition becomes tougher.
A major explanation for why change is occurring so slowly here can be found in the tariff structure. Over time, Bangladesh has reduced conventional import tariffs, but various taxes and supplementary duties imposed outside these tariffs still provide high levels of protection to many sectors. This has created a type of incentive against exports.
If the final products receive high protection, but the prices of imported machinery, parts, and intermediate goods remain high due to various tariffs and taxes, a strong incentive is created for companies to focus on the domestic market. Exporting necessitates facing international market prices, strict standards, and tough competition. The high protection in the domestic market reduces those pressures. Simultaneously, the impetus for investing in increasing productivity, technological development, and skill enhancement becomes weaker.
The ready-made garments sector helps in understanding both the successes and limitations of Bangladesh's trade policy. Garment exporters were given a special arrangement through which they received the opportunity to use raw materials and intermediate goods imported duty-free. This has allowed companies to take advantage of large-scale production, leverage Bangladesh's relatively low labor costs, and integrate their production systems with the international market. Conversely, the same opportunity has not been created for other promising export sectors like leather products, light engineering, agro-processed products, pharmaceuticals, and electronics. There is strong political consensus in support of the garment industry, but such consensus is much weaker for other sectors.
As a result, many sectors outside of ready-made garments face unreasonable tariff structures, regulatory complexities, high transportation and supply chain costs, limited access to trade financing, and various regulatory barriers. Simply adding new sectors to the list of priority export sectors without changing the core incentive structure will not yield much benefit. Bangladesh has been doing this for many years.
This brings the question of political economy to the forefront. The beneficiaries of protectionist policies are easily identifiable, but those who bear their costs are much more dispersed. A protected producer can directly see the benefits of tariffs through higher profits or less competition. Conversely, the costs are spread across the entire economy. Consumers pay higher prices, industries that use other industries'' produced or imported goods as inputs incur higher expenses, and potential exporters find it harder to compete in international markets. These groups are generally not organized, and their influence on policy-making is limited.
In contrast, industry associations have strong incentives to maintain existing protections. Arguments for protecting jobs or assisting nascent industries are often presented. These arguments are not unacceptable in all cases. There may be economic justification for providing some protection to a new industry for a specific period. However, the problem arises when there are no clear conditions for productivity increases, technological development, investment, or the ability to export alongside that protection. In such cases, temporary assistance gradually turns into permanent benefits. Once a benefit is established, withdrawing it becomes politically challenging.
The revenue system has further complicated this issue. For many years, the National Board of Revenue has relied significantly on taxes collected at the import stage. As a result, trade policy is asking NBR to reduce protection at the border, while revenue policy is pressing the same institution to collect even more revenue from the border. This is not merely a technical inconsistency; institutional incentives are involved. On the one hand, the call is for tariff rationalization, while on the other hand, reliance on import stage taxes for revenue targets is being maintained. Without eliminating this duality, major reforms will remain difficult.
The current global trade system has posed a real question for policymakers regarding tariff liberalisation. Protectionism is increasing in many developed and advanced developing countries. Therefore, policymakers in a country like Bangladesh may question why it should reduce tariffs when others are creating new barriers to protect their markets. This concern cannot be dismissed entirely. But the issue is different for Bangladesh. The inconsistencies and imbalances in our trade system cannot be ignored simply because protectionism is increasing abroad. The protectionism of other countries cannot serve as an economic justification for maintaining Bangladesh's flawed incentive structure.
Therefore, the first priority in Bangladesh's trade reforms should be to reduce non-tariff taxes that increase the cost of imported inputs used by domestic enterprises and create abnormal discrepancies in the rates of protection for final goods and intermediate inputs. Any protective measures that remain should have clear objectives and be time-bound.
They should also be brought under regular review. The nature of government support to industries must also change. Instead of providing indefinite protection from foreign competition, emphasis should be placed on supporting investments in technology, skill development, adherence to international standards, export financing, and infrastructure development.
Trade agreements have added another dimension to this discussion. The Japan-Bangladesh Economic Partnership Agreement signed in February 2026 was Bangladesh's first EPA, signaling a shift toward a mutually beneficial trade system.
However, domestic reforms are also needed to make free trade agreements effective. An FTA may reduce tariffs in the partner country's market, but it cannot speed up operations at the Chattogram port, reduce discretionary power in customs administration, enhance laboratory capabilities, ensure reliable energy supply, or enable companies to comply with rules of origin. If exporters are unable to competitively leverage these advantages, a significant portion of preferential market benefits will remain unused.
The same caution is necessary in the case of RCEP. After the RCEP ministers approved an effective team on Bangladesh's accession in September 2026, the process of Bangladesh's inclusion has progressed further. Deep integration with Asia's production network can create new opportunities in investment, trade in intermediate goods, and participation in regional value chains.
Simultaneously, it will expose protected domestic industries to stronger competition. Therefore, while leveraging this integration as an opportunity to attract investment, Bangladesh must also prepare its tariff structure, customs administration, standards regulatory institutions, and potentially affected industries.
#Selim Raihan is Professor of Economics, University of Dhaka, and Executive Director, SANEM. email: selim. raihan@gmail. com
*The opinions expressed here are the author's own.
* This piece has been translated by Rabiul Islam for Prothom Alo English Online