Independent University, Bangladesh (IUB)

Course Title: International Trade and Investment Theory

Course Code: INB 302, Section: 01

Semester: Spring 2021

Submitted To:
Dr. Safayet Rahman

Submitted By:

Arifin Ahmed Zawad, ID- 2020149

Topic:
Trade theories used in Bangladesh for importing automobiles

Date of Submission- 29th November 2021

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Letter of Transmittal

November 29, 2021.

Dr. Safayet Rahman,

Faculty Member,

Independent University, Bangladesh

Dhaka, Bangladesh.

Dear Sir,

I would like to express my gratitude towards you for providing me the wonderful opportunity to
work on this report. It was truly a tremendous experience as I got to explore ideas, gather
knowledge, and express my analysis on trade theories used to import automobiles in Bangladesh.
The assigned task gave me the privilege to learn deeply about the concept of different trade
theories, how it is implemented and effectiveness of those for a country. By keeping every
circumstance in mind, I came up with this report. I have provided all the relevant information
regarding this topic.

I believe that you will not face any difficulties in understanding this report. Thank you so much
for your constant support.

Sincerely yours,

Arifin Ahmed Zawad

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Executive Summary

Bangladesh is a highly import oriented country. As of 2020 Bangladesh’s trade deficit amounted
to around 18.8 billion US dollars. One of the heavily relied on imports of our country is the
automobile industry. The lack of capital and insufficient resources in Bangladesh makes us to
import automotive from different countries especially, from Japan. With a huge population density
and improper infrastructures our country is infamous for excessive traffic congestions. Heavy
traffic along with high pollution compels the government to impose heavy tax duty on automotive
imports, which demotivates potential buyers to buy vehicles and encourages to take more public
rides. In this report I will try to identify which international trading theories our government
follows while importing automotive from abroad. I will be assessing the theories of mercantilism,
comparative advantage, Heckscher- Ohlin and economies of scale to try to understand which
theory better relates to our government policy on imposing high tax on automobile imports.
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Table of Contents

Contents

Introduction ................................................................................................................5

Trade theories used to import automobile .................................................................6

Mercantilism ..............................................................................................................6

Comparative Advantage.............................................................................................8

Heckscher- Ohlin Theory ...........................................................................................8

Economies of Scale ....................................................................................................8

Conclusion .................................................................................................................9

Reference ..................................................................................................................10
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Introduction

In modern days of globalization, the world has been moving very prominently. Bangladesh as a
developing country has well been able to move with the modern world and mark its name in the
global trade. The GDP of Bangladesh has been growing significantly each year, indicating towards
a better standard of living which relates to the increasing number of imports. People’s desire to
consume imported goods are ever growing therefore, the imports are also increasing in recent times
as determined by the increasing deficit in balance of trade over the years. One of the key materials
for Bangladesh’s import is automobiles. In this report I’ll be talking about the trade theories
implemented to import automobile in our country. It plays a huge role in the economy of our
country as it is a luxury product and a necessity for many. It is important because being a labor-
intensive country with fewer accessibility to modern resources we cannot produce modern
machines and equipment unlike other capital-intensive countries. Therefore, importing vehicles is
a necessary feature for our country as it is a reliable transporting system.
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Trade theories used to import automobile

Vehicles are an integral part of our life. To move with the growing world, we need to be fast,
adaptive, and efficient. Modern day vehicles are being a life partner for many as it is as necessary
as daily staple. Starting the day with dropping kids to school, to attending office at time and having
time off with friends on a road trip, all are done with the help of a vehicle. It is also a status symbol
for some alongside being a necessity. Especially for countries outside Asia vehicles are much
cheaper and considered as a necessity. However, countries such as ours still considers vehicle as a
luxury product therefore consumers still have to count hefty chunk of money whenever they
consider buying a new automobile, because we are import dependent on others, therefore, need to
pay a heavy tax duty in order to import a vehicle.

In Bangladesh for every thousand people there is only 2.5 cars allocated if we consider the
purchase of cars. The disparity suggests that vehicles are being too expensive to afford which
prevents the normal people from purchasing an automobile. The government willingly keeps on
imposing heavy duties on vehicles due to our poor infrastructure and high population density
which causes a huge traffic congestion whenever vehicles are on road during rush hours.

Mercantilism
So, the question could arise, why automobiles are so expensive to purchase in Bangladesh. The
answer to this could be the mercantilism theory of trade. This theory refers to a country which
prefers more exports than imports. It could mean that a country is trying to increase their wealth
and keep a positive balance of payment. For the context of Bangladesh, we are already a highly
import oriented country, therefore, to cut the deficit in the balance of trade the government must
be using the mercantilism theory to limit imports by imposing heavy tax and increase the
opportunities for exports. Another key reason for high tax duty on automobiles is the heavy
congestion in roads. The high tax rates are to make people reluctant to buy vehicles and try to
encourage the use of public transport. In addition to that it is done to promote local manufacturers
to be more efficient in producing cars and be competitive in terms of price with the foreign
competitors. This theory also helps the country earn more tax revenues from imported goods which
could be utilized elsewhere. If Bangladesh really wants to have a vibrant domestic car industry it
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should be export oriented and forward looking. Mercantilism trade theory will help achieve that
target as importing will always be a costly process. Being a high polluted country, the government
needs to prevent the use of fossil fuels, therefore, limiting vehicle by imposing heavy import duty
is the best possible way to do so.

The figure below shows the import tariff rate for vehicles with different cylinder capacity. The
import duty starts from 128% up to a maximum of 827%.

Figure-1: the import tariff of different CC of vehicles.

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Comparative Advantage
Supply of automobile in Bangladesh is largely dominated by import of reconditioned and new
vehicles mostly from Japan, China, India, and relatively less from the European countries and the
USA. The reasons to import most from Japan is due to their comparative advantage in producing
cars. They are relatively efficient in production of automobiles, therefore, helps them to achieve
economies of scale which helps to reduce the overall cost. Whereas Bangladesh is not efficient
and effective in producing quality automobiles, therefore, focuses on other aspects in which they
are more efficient on such as production of ready-made garments, jute, etc. however, there are
some firms who are now trying their best to manufacture automotive which will be reliable enough
to beat the foreign competitors.

Heckscher- Ohlin Theory

Bangladesh’s import of automobiles can also be determined by the Heckscher- Ohlin trade theory.
This theory suggests that a country should export those goods that make intensive use of factors
that are locally abundant, whereas import those in which the resources are scarce. For instance,
Japan is exporting automobile to Bangladesh in which they are extremely efficient and resourceful
whereas Bangladesh is only importing automobiles due to incapability of producing automobiles
efficiently. This specific theory evaluates on why Bangladesh imports automobile and Japan
exports them as Japan have better capital, and highly skilled workforce to manufacture vehicles
compared to Bangladesh’s heavily labor-intensive production with insufficient capital.

Economies of Scale
One of the major reasons for Bangladesh to import automobile from the Japan market is due to
relatively lower price. Japan has made this possible by achieving economies of scale over the years
through the help of internal and external economies of scale. The overall cost of the industry
decreases as the number of production increases. Automobile industry in Bangladesh cannot
compete with the global competitors due to limited endowment of capital in our country. Even
though labor force has been immense but to run an automobile industry huge amount of capital
and intensive machineries are needed which is scarce for a country such as ours.
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Conclusion

Due to a very small size of the domestic market, absence of international car manufacturers partly
because of the small market, lack of domestic sources of raw material, absence of backward
linkages, vehicle manufacturing and assembling industries did not develop in Bangladesh.
However, there are some firms who are now investing and trying to compete hard to manufacture
automobiles which can be sold in the domestic market at an affordable price. Also, from the
mercantilism perspective Bangladesh will want to be an exporter of automobiles and will be able
to minimize the import of vehicles further in the near future to reduce the trade deficit that has
been growing over the years. A better investment and capital are required to overhaul the
automobile industry in Bangladesh because trading countries are already having comparative
advantage and have sufficient capital endowments and economies of scale to produce vehicles at
a lower cost. A better infrastructure for vehicles and proper population management will be
necessary for the country to lower the tax duties on cars. If not, then the dream of a common man
to own his own ride will always be unfulfilled.
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Reference

Automobile sector development in Bangladesh: Challenges and Prospects – Policy Insights. (n.d.).
Policy Insights. https://policyinsightsonline.com/2021/01/automobile-sector-
development-in-bangladesh-challenges-and-prospects/?fbclid=IwAR3tvy51z1VCO_HA-
FUX7jsTMdLVZHM6Hqo1vvTQ7gAQqXPd9L6i0jqCGcI

lawyers & jurists. (2011, July 6). What is the reason behind imposing such a higher tax to the
imported cars? The Lawyers & Jurists. https://www.lawyersnjurists.com/article/what-is-
the-reason-behind-imposing-such-a-higher-tax-to-the-imported-cars/

Wing, L. A. (2021, May 26). Bangladesh Automobile Industry Overview and Emerging Trends.
LightCastle Partners. https://www.lightcastlebd.com/insights/2021/05/bangladesh-
automobile-industry-overview-and-emerging-
trends#:%7E:text=Although%20imported%20brand%20new%20cars,volume%20had%2
0risen%20to%2016%25.