Industrial cooperation between China and Bangladesh M. Shahidul Islam Research Fellow, IGS, BRAC University Prepared for the 3rd Yunnan Bangladesh Cooperation Dialogue, Kunming, 30-31 December 2013

Outline Industrial cooperation between China and Bangladesh: Convergences The rise of China’s vertical economy and hollowing out of low-end manufacturing Bangladesh’s manufacturing take-off Bangladesh’s industrialization/export model Incentives for Foreign Investment in Bangladesh Success of foreign investment in Bangladesh -Korean investment and Korean EPZ Feasibility of Yunnan/China-Bangladesh Industrial Park(SEZ/EPZ) in Chittagong

Convergences: The rise of China’s vertical economy. China’s focus on consumption-led growth model, development of high-end manufacturing and service sector 20 trillion worth of domestic consumer market by 2020 End of era of China’s low-end manufacturing, Bangladesh has advantages in low-end labor incentive manufacturing - From 2003 to 2007 Bangladesh achieved annual export value growth of about 20%, a testimony to its export competitiveness China’s demographic window closes, Bangladesh’s opens Bangladesh is in the midst of China and India, connecting point of Southeast and South Asia Boasting regionalism: BICM

Chinese economy rebalances towards consumption

A trillion dollar opportunity Source: WDI, World Bank and Author’s calculation

Bangladesh’s manufacturing catch-up

Bangladesh’s manufacturing catch-up China Bangladesh World Manufacturing Value Added (MVA) average annual real growth rate (in %), 2005-12 9 5.9 2 MVA per capita at constant 2005 prices in US$, in 2012 1147 108 1277

Five broad groups of manufacturing

RMG and other labour incentive manufacturing: Bangladesh’s advantages Big opportunities in RMG sector for Chinese investors China’s domestic market is around $310bn Chinese importers imported $100m worth of clothing items in last 9 months (2013) from Bangladesh, and their target is to reach $1bn next year (2014) Increasing Chinese interest could open opportunities for new sectors

Bangladesh’s industrialization/export model: success of EPZ Export Processing Zones (EPZs) are export oriented industrial enclaves which provide the infrastructures, facilities, administrative and support services for a wide variety of enterprises.  EPZs have been instrumental in drawing FDI and increasing exports The Bangladesh Export Processing Zones Authority (BEPZA) is the official organ of the government to promote, attract and facilitate foreign investment in the Export Processing Zones. EPZ provides: Plots/factory building in custom bonded area Infrastructural facilities Administrative facilities Fiscal & non-fiscal incentives Attracts : foreign & local investment Type: A - 100% foreign ownership 205 (58%) B - joint venture 49 (14%) C - 100% local venture 98 (28%)

Major EPZs in Bangladesh and export volume   Recent Export performance by EPZ (in USD) 2008-09 2.6 2009-10 2.8 2010-11 3.7 2011-12 4.2 2012-13  4.8 Cumulative 18 Korean EPZ

Incentives for FDI Bangladesh enjoys tariff-free access to the EU, Canada, Australia and Japan. 100% foreign ownership permissible  Duty free import and export of raw materials and finished goods Relief from double taxation Non-Fiscal Incentives 10 years tax holiday for the Industries to be established before 1st January, 2012 and Industries to set up after 31st December, 2011 tax holiday period will be Tax exemption period Rate of tax exemption First 02 years (1st and 2nd Year) 100% Next 02 years (3rd and 4th Year) 50% Next 01 years (5th Year) 25%

Success story: Korean investment in Chittagong

Potential of Chinese Industrial park: Chittagong could be a better site

Existing industrial agglomeration in Chittagong

Chittagong in the global urban map

Industrial and commercial advantages of Chittagong Chittagong has been a seaport since ancient times Port city, industrial city, gateway to the country’s international trade Hub of Bangladesh’s ‘Look East Policy’ Highest concentration of Export processing Zones- leading industries (RMG, Footwear & leather) Potential to be the most prospective manufacturing destination – Emerging industries: ship building, oil refinery, light engineering, furniture industries and home appliance Air and sea connection (Site for proposed deep-sea port) Favourable investment policies for (foreign) investors

Industrial and commercial advantages of Chittagong Comparatively cheap labour Availability of skilled productive labour force in the area Easy permission for industrial operations Issue of import/export permits Special simplified labour law helpful for maintaining congenial industrial relations Connectivity between Chittagong and the rest of the country through roads, railways, waterways and airways Proximity to Myanmar and Yunnan

Proposed deep sea-port in Chittagong

Potential sectors for Chinese investment RMG Agri business Electronics Frozen food Garment & Textile ICT and Business Services Leather and leather goods Light engineering Power industry Life science

Chinese sez IN CHITTAGONG: AN UPDATE China has submitted a proposal to set-up a special economic zone on the other side of the river Karnaphuli The Chinese authorities have tagged the proposal with funding for the 3.4 k.m. Karnaphuli Tunnel (the country’s first ever underground river tunnel) This (developing Chittagong as industrial and connectivity hub by developing SEZ, improving highways, constructing new Railway, building a tunnel) was, in fact, envisioned by ADB a few years back. The GoB is considering giving a part of 1100 acres of land available/reserved for EPZ to China

What China needs to do TO SET UP MORE INDUSTRIAL PARKs IN Bangladesh? China’s overall investment in Bangladesh is still low, it needs to increase investment in the country Chinese companies should take the advantages (traffif and other incentives) that Beijing is offering to import more products from Bangladesh. This can be done by setting up more industries in Bangladesh- both in EPZ and joint venture with Bangladeshi companies Chinese investment/EPZ/industrial park in Bangladesh could cater China’s internal demand as well as global demand. While the potentials of Chinese industrial parks/SEZ are explained here and the Chinese authorities are already working on setting up of a SEZ in Chittagong, more opportunities could arise in the area surrounding Sonadia, Cox’s Bazar, the site selected for Bangladesh’s first ever deep-sea port. There should be an institutional (industrial and academic) mechanism to engage the potential investors of China in Bangladesh