Bhutan’s LDC graduation and International Trade

Bhutan has an edge over other LDCs because of its overwhelming trade dependence with India

With the graduation from the category of Least Developed Countries (LDC), Bhutan will no longer be entitled to avail LDC-specific preferences and international support measures (ISMs). These measures include development partners’ special attention and commitments to support with concessionary development finance and technical assistance; trade partners’ granting trade preferences; and special and differential treatment concerning various multilateral trade rules and regulations.

Considering the severe economic challenges confronted by the LDCs, the global community has designed various international support measures to help LDCs develop capacities to mitigate their challenges.

Implications for LDC graduation can arise broadly from preference erosion in international trade potentially affecting competitiveness, loss of policy space (tightening the scope of supporting exporters and domestic market-oriented industries), and any unfavourable impact on the prospect for obtaining development finance. However, Bhutan is different from many other LDCs in two respects: first of all, for trade, its overwhelming dependence is with India and a bilateral trade agreement, with no relevance to LDC graduation, is in place for this trade relationship; and Bhutan is not a member of the WTO and therefore, is not obligated to implement World Trade Organization (WTO) provisions.

Preference erosion in international trade

Being an LDC, Bhutan enjoys favourable market access conditions and less stringent preferential rules of origin in exporting to the most developed and several developing country markets under various Generalized System of Preference (GSP) schemes. After graduation, these benefits will either cease to exist or will be subject to less favourable terms of access. However, implications for LDC graduation will depend mostly on the nature and extent of favourable market access currently being utilized. In many cases, LDCs have not been able to utilize the market access provisions and thus the resultant implications are likely to be limited. Similarly, LDC graduation will have no impact on the products that are currently not covered by LDC-specific preferences and will have no relevance in those export destination countries that currently do not provide any preferential market access. In addition, the graduation impact can be limited due to an LDC’s having any bilateral or regional trading arrangement.

Market access conditions in India

Bhutan’s export with India is solely governed under a trade treaty between the two countries. In 1972, the Agreement on the Trade, Commerce and Transit between the Government of the Republic of India and the Royal Government of Bhutan was signed to promote economic cooperation between the two countries. The agreement was renewed in 2016. It allows duty-free exports of all Bhutanese products to Indian territories, regardless of the former’s LDC status. The agreement stipulates that Bhutan’s trade with India is not restricted by rules of origin criteria. Therefore, LDC graduation will not entail any significant impact on Bhutan’s exports to India. Therefore, more than half of Bhutan’s total exports are not affected by graduation.

Market access conditions in the European Union

Bhutan benefits from duty-free, quota-free preferential market access in the European Union under the Everything but Arms (EBA) initiative, which is an arrangement offered exclusively to the LDCs. After graduation, Nepal will continue to benefit from the same preferences for another three-year transition period granted by the EU. After that, it will no longer benefit from EBA but will have access to either GSP+ or Standard GSP, depending on the fulfilment of certain conditions. The market access conditions under GSP+ are more favourable, but to benefit from it a country must fulfil the Standard GSP criteria along with two additional criteria: the vulnerability criteria including the import share criterion – which requires the country’s share of GSP-covered import must remain below 6.5% of GSP-covered imports of all GSP countries; and the diversification criterion, which stipulates that the seven largest sections of GSP-covered imports must constitute 75% of imports from the beneficiary country for three years; and the sustainable development criterion requires the applicant country to have ratified and effectively implemented 27 international conventions on labour rights, human rights, environmental protection and good governance.

The share of GSP-covered import from Bhutan is 0.01% of GSP-covered imports of all GSP countries which is far below the 6.5% threshold. Again, the largest seven sections of GSP covered import is 99.9%. Therefore, the import share and diversification criteria are satisfied. Further assessment is needed for its meeting sustainable development criterion. However, it can be expected that Bhutan would be able to access GSP+ benefits. If Bhutan is qualified for GSP+, its major exporting items will continue to benefit from duty-free access. However, it will be subject to more stringent rules of origin as the country is exposed to major supply-side constraints. The minimum local value-added content for exports, under both GSP+ and Standard GSP, would increase from 30% to 50% (except for apparels). For apparels, products must go through a double-transformation process against a single transformation rule applicable for LDCs under the EBA. It is to be pointed out here that the current EU GSP regime will be replaced by a new regime in 2023, which will coincide with Bhutan’s graduation.

Therefore, any changes in the forthcoming GSP provisions will apply to Bhutan’s post graduation period market access conditions. The forthcoming EU GSP regime after 2023 does not make changes to the existing coverage of products and eligibility criteria. An analysis of market access conditions for major exporting items in the EU suggests that under GSP+ Bhutan will retain duty-free access for its largest exporting items included in HS 72. This category alone accounts for almost fourth-fifths export earnings from the EU. The exports under the second-largest category of HS 88 are irregular involving exports of used parts of aircraft. Tariff implications for this will also remain unchanged after graduation. Some minor export items that will be subject to significant changes in tariffs include dairy products. However, given its small volume of exports to the EU, no notable impact is expected. In fact, Bhutan will get duty suspension on most of its major exports even under Standard GSP. Therefore, the impact of graduation on export performance due to the EU will be negligible.

Market access conditions in the United States

Bhutan being an LDC can enjoy GSP facilities under its least developed beneficiary countries. The LDBDCs allows duty-free market access for more than 5,100 items (out of 12,000 products) at the HTS (Harmonized Tariff Schedule) 8-digit tariff line. After graduation, Bhutan will no longer be eligible for the GSP designed for LDBDCs. However, it could enjoy preferential duty-free treatment under a US GSP scheme designed for developing countries. This would result in Bhutan’s losing duty-free preference in 1,500 HTS items. Graduation will have no implications on the rules of origin provisions as they are same for both LDCs and developing countries. A GSP beneficiary country is required fulfilling a local content rule of not less than 35% of the appraised value of a product at the time of entry. Graduating Bhutan is not expected to lose any significant market access in the US as its most exporting items will continue to enjoy duty suspension under the GSP for the Beneficiary Developing Countries (BDCs). A major increment in tariff would be due to footwear for which average post-graduation tariff would be about 15%. However, given the small volume of exports to the US and most exporting items being subject to duty suspension under GSP for BDCs, Bhutan’s graduation from the LDCs is expected to have a negligible impact on its exports.

Market access conditions in Bangladesh

Bangladesh is an important export destination of Bhutan. Since both the countries are members of SAFTA (the South Asian Free Trade Agreement), Bhutan have preferential access in Bangladesh. However, the margin of preference is low as a large number of goods are kept under the so-called sensitive list in which there is no liberalization or preferences. After graduation, Bhutan will lose preference in only six items at the HS 6-digit level. This is however expected to have either negligible or no impact.

However, in terms of rules of origin, there will be an increment in local value-added content from 30% (for LDCs) to 40% (for non-LDCs). It is worth noting that Bhutan currently enjoys duty-free market access for 18 products in Bangladesh under a bilateral (preferential) trade agreement between the two countries which was signed in 2014. Apart from this, Bangladesh and Bhutan have started negotiating a preferential/free trade and transit arrangement to facilitate larger bilateral trade (in terms of both value and volume.

Tashi Namgyal from Thimphu