Bangladesh (BD) is slated to graduate from Least Developed Country (LDC) status in 2026. This achievement is inviting double-edged incidents. While satisfactory for the prestige, it means losing automatic duty-free access to developed markets like Japan. In this context, negotiations for a Japan–Bangladesh Economic Partnership Agreement (EPA) have reduced rising tensions between Japan and Bangladesh’s economic relations. The EPA will offer preferential treatment and attract Japanese heavy investment, but it requires careful management.
The economic backdrop helps to understand the urgency. In 2023, Japan exported approximately $2.0 billion to Bangladesh, while Bangladesh exported around $1.9 billion to Japan, presenting an approximate equitable bilateral trade relationship. But, Bangladesh is receiving preferential treatment as a less developed country. Nearly 350 Japanese companies made Japan a key investor in Bangladesh. Except that EPA Bangladesh may face new tariffs on its exports due to the lapse of LDC benefits, which will result in an increase of around 8–10% in duties on many products and an annual loss of about $7 billion in trade. After 2026, another proposal suggested that without an EPA, Bangladeshi exports might incur duties exceeding 18%.
EPA is seen as a safeguard for accessing in Japanese market and keeping Japanese companies in the Bangladeshi market. Ready-made garments and textiles account for the majority of Bangladesh’s exports to Japan. A successful EPA enhances exporters’ hope to diversify into other high-potential sectors. Notably, the door will be broadening for the jute products, leather goods, and agro-processing in the Japanese market. On the other hand, tariff reductions on industrial imports (such as steel, machinery, and vehicles) would lower import costs for Bangladesh, helping manufacturers produce low-cost products. Ultimately, a robust EPA boosts Bangladesh’s export growth, attracts significant Japanese investment, and enhances industries and consumer welfare through cheaper goods and improved technology.
Japanese investment in Bangladesh has surged significantly. Direct investment has reached $122.7 million in FY2022, more than double that of 2021’s level, and the cumulative stock of Japanese FDI is now several hundred million dollars. Additionally, the Japanese-backed Araihazar Special Economic Zone (SEZ) is expected to host 100 firms and create 100,000 jobs. Japan’s “China-plus-one” strategy is encouraging Japanese manufacturers to seek alternative destinations beyond China. With an EPA in place, Bangladesh could capture some of this shift, like Vietnam, with easier market access and SEZs. An EPA is the perfect solution for not only exporting Bangladeshi products to Japan, but also making Bangladesh a potential base for Japanese industry in South Asia and attracting Japanese investment.
Although the potential benefits are substantial, Bangladesh should not overlook the risks and challenges that may lie ahead. Bangladesh’s small and medium-sized enterprises account for approximately 90% of the country’s industrial units and 80% of industrial employment. Additionally, they currently contribute 30% to 32% of Bangladesh’s GDP. However, Bangladesh’s small and medium enterprises (SMEs) often lack adequate infrastructure and financing. Hence, new competition from Japanese investors can restrain them from the development process, requiring “flexible approaches” and special treatment of tariff lines.
Bangladesh’s Governance and regulatory readiness are also critical. Japanese firms frequently express dissatisfaction with Bangladesh’s legal and tax systems, as well as delays in customs clearance and opaque procedures. Heavy and strict customs rules, as well as unstable regulations, may hinder Bangladesh’s growth and investment attraction even after the EPA signing. Although Bangladesh formed specialized negotiating committees, allegations persist regarding lethargic progress. The committee must be dedicated to turning the paper opportunity into a tangible benefit. An EPA is not only an economic but also a piece of regional connectivity strategy, enhancing Bangladesh’s potential to connect with North-East India with Japanese support. A robust economic deal with nations like Japan helps Bangladesh to ensure a smooth transition from a developing country to a middle-income country through preferential treatment.
However, Bangladesh should not focus solely on the EPA; instead, it needs to scale up its potential through Japanese technical support, joint venture business collaboration, capacity building, technology transfer, and human capital development. This is the perfect way to safeguard its sustainable development. BD must have to ensure its companies’ better positions in the Japanese market. The balanced EPA appears positive for Bangladesh; however, incompetence has led to economic disruption, and local producers may struggle against increased competition. In these circumstances, Bangladesh should align its domestic monetary policy with international best practices and provide both technical and non-technical assistance to support the growth of small and medium-sized enterprises. The EPA will then be a milestone for Bangladesh’s proper transition.
Mehedi Hasan, researcher and former student of Japanese Studies, Social Science Faculty, University of Dhaka. He can be reach at: mhmehedi505@gmail.com
AloJapan.com