The Bay of Bengal Economy | Will India, Bangladesh and Japan change the South Asian trade story?

In an exclusive interview with Nikkei Asia, Bangladesh Prime Minister Sheikh Hasina said that the country is discussing free trade agreements with 11 countries. However, as a starter, Bangladesh is actively strengthening economic and trade ties with its old allies and strategic collaborators – India and Japan.

In fact, in August 2022, Sheikh Hasina gave green signal to begin formal negotiations for signing a comprehensive economic partnership agreement (CEPA) with India. This is Bangladesh’s first trade pact with any country, with a preference for India despite requests from China and Japan to have free-trade agreements.

How the Bay of Bengal Economy could be a game-changer for India, Bangladesh, and Japan

On April 11-12, Bangladesh, India, and Japan held a connectivity event in Tripura aimed at exploring connectivity initiatives and leveraging the commercial potential of the region. India’s landlocked Northeast region is of geostrategic importance to India, Bangladesh and Japan as it shares borders with several other countries, including Nepal, Bhutan, China, Myanmar, and Bangladesh.

While India’s northeast is key to Japan’s Indo-Pacific plan, Bangladesh is key to India’s northeast. So, the partnership with Bangladesh is inevitable to the Indo-Japan partnership. Moreover, the states in the northeast regions are of key interest to Japan as they provide access to the Bay of Bengal and ASEAN countries. This is also in line with Japan’s policy of Free Indo-Pacific Trade, which is in synergy with India’s Act East Policy, thereby forming a perfect ground for collaboration. Hence, Japan has proposed developing an industrial hub in Bangladesh with supply chains to the northeastern states of India and to Nepal and Bhutan.

The Matarbari Project – A Win-Win for All

Japan is also sponsoring a deep-sea port at Matarbari - Bangladesh’s first deep-sea port capable of hosting large vessels. Likely to become operational by 2027, it should serve as a critical port for India’s underdeveloped northeastern states while for Japan, it is a natural gateway to both south and southeast Asia.

Bangladesh is a focal point for Japan and India to run development projects in the regions around the Petrapole-Benapole border. Japan is gradually shifting away from its defensive stance and asserting itself as a key member of the US-led Indo-Pacific Alliance, known as Quad, aimed at containing China in the Indo-Pacific region. Japan’s involvement in the port project is seen as a victory over its rival, China.

Similarly, India too resonates with the same sentiments. Amid growing rivalry between China and India due to claims over northeastern states, India is pushing to have a strong foot in the region. In this effort, Bangladesh has emerged as a crucial ally. In 2022, Bangladesh has offered direct access to the main Chittagong port to India – the port accounts for 70 percent of the country’s imports and exports.

Japanese and Indian Investments in Bangladesh – The Numbers in Recent Years

India and Japan, both individually, have included Bangladesh in their investment radar. According to the Statistics Department of the Bangladesh Bank, accessed by ORF, the net inflow of FDI to Bangladesh from India and Japan in 2019 was $115.9 million and $72.3 million, respectively.

The two countries have shown interest in financing infrastructure projects in Bangladesh, such as the Chilahati-Haldibari rail link, the Dhaka-Siliguri rail link, and the Araihazar Economic Zone. India has extended three lines of credit to the country, while Japan has provided 'China Exit' subsidies.

While the trilateral relations of Japan, India and Bangladesh pick up the pace, and the infrastructure projects set to be completed over a five- to ten-year horizon, further proposals for joint discussions on investment promotion, customs and tariffs will set the stage for an economic boom in India’s northeast, Bangladesh, and open trade gateways for Japan.