Should Bangladesh Pursue a Free Trade Agreement with Japan? A Gravity Model Analysis

Abstract

As Bangladesh prepares to graduate from its least developed country status, concerns have emerged over the potential loss of duty-free and quota-free (DFQF) access to major export markets, which could impact trade in Bangladesh. To address this challenge, Bangladesh is considering a free trade agreement (FTA) with its major trading partners, including Japan, which has always been a development and strategic partner of Bangladesh. This study examines whether such an FTA is necessary by employing a structural gravity model using bilateral trade data of 43 partners from 2011 to 2021 at the HS-02 level. The analysis evaluates the impact of losing DFQF access on Bangladesh’s exports to Japan and estimates the potential trade effects of an FTA. The results indicate that the removal of DFQF access would not significantly affect Bangladesh’s export flow to Japan, suggesting that an FTA may not be essential to maintain current export performance. However, the model predicts that an FTA could increase Bangladesh’s imports from Japan by approximately 4.8%, primarily driven by raw materials and capital goods. These findings suggest that while the short-term export benefits of an FTA may be limited, such an agreement could still support industrial development by providing improved access to intermediate inputs.

JEL Classification F1, F13, F14, F15, F17