Bangladesh–Bhutan FTA: Mutual Gains, Challenges and Strategic Outlook

Bangladesh and Bhutan are South Asian neighbors’.

The Kingdom of Bhutan was the first country to recognize Bangladesh's independence. The relationship between the two countries is strong and long-lasting. In recent years, both countries have committed to a strategic development partnership, such as hydropower, duty-free trade, and transport. They are general members of the South Asian Association for Regional Cooperation (SAARC) and BIMSTEC. Also, Bangladesh has a permanent embassy in Bhutan. The relationship between the Kingdom of Bhutan and the People's Republic of Bangladesh is full of rich history. The first Bangladesh-Bhutan bilateral trade agreement was signed in 1980. This strong bond was further strengthened by the signing of the Preferential Trade Agreement (PTA) on 6 December 2020. Bangladesh's first-ever bilateral PTA which came into effect in July 2022. Bhutanese Prime Minister Tshering Tobgay recently expressed interest in signing a free trade agreement (FTA) with Bangladesh and connecting the two countries' economic corridors to increase trade and investment. He showed his keenness at a meeting with Chief Adviser Professor Muhammad Yunus at the United Nations headquarters here in the USA on the sidelines of the 80th UN General Assembly.

Tobgay hopes both countries could greatly benefit if Bhutan’s Special Economic Zone, Gelephu Mindfulness City (GMC), is connected with the Special Economic Zone in Kurigram that Bangladesh has officially allocated for Bhutanese investors. Chief Adviser Professor Yunus welcomed the proposals, stressing that both countries should explore all avenues to expand trade and investment Bangladesh and Bhutan can take their bilateral relations to a new level through improved connectivity, trade and investment. The greatest benefit of the PTA is the removal of tariff barriers, ensuring duty-free access to a positive list of goods. According to the existing agreement, Bangladesh enjoys duty-free access for nearly 100 products to the Bhutanese market, comprising the principal exportable items such as garments, jute, leather goods, pharmaceuticals, cement, and electrical products. Bhutan also enjoys duty-free access to the vast Bangladeshi market for 34 products. It is particularly useful for Bhutan's natural resource-based export and small-scale manufacturing sectors, like boulder stones, oranges, cardamom, limestone, and fruit juices.

Before the agreement, Bangladesh's export to Bhutan had never exceeded $10 million, but was valued at $9.5 million in FY22. Bangladeshi exports to Bhutan stood at $14.3 million in FY25, according to the Export Promotion Bureau (EPB). Under the PTA, 100 Bangladeshi products now enjoy duty-free access to the Bhutanese market. When the FTA (Free Trade Agreement) is signed, this benefit will be furthered, with almost all Bangladeshi products gaining duty-free access to Bhutan. Bhutan's Prime Minister has expressed interest in linking the special economic zone (SEZ) allotted for Bhutanese investors in Kurigram District, Bangladesh, to Bhutan's own special economic zone, the Gelephu Mindfulness City (GMC). This connection would boost bilateral investment and economic relations, create new employment opportunities, and assist in elevating the national income of Bangladesh. 

But Bangladesh trade with Nepal and Bhutan can be tested now that India withdrew its transshipment facility, where products were shipped to third countries via Indian airports and ports like Nhava Sheva (Jawaharlal Nehru Port) and Kolkata. For Bangladesh, a strategically guiding a graduation to Less Developed Country (LDC) status, the pact is a vital pilot project in negotiating bilateral trade agreements and guarantees access to the market before wider markets risk losing non-reciprocal preferential treatment. Its impact has been felt, with bilateral levels of trade registering an appreciable increase since the PTA implementation.

Bhutan can benefit from increased trade and investment, especially in the areas of hydropower and tourism. The hydropower sector, which forms the backbone of Bhutan’s economy, could also become more dynamic under an FTA. Bhutan aims to utilize its vast hydropower potential by exporting electricity to neighboring Bangladesh. Having Bangladesh as a stable and reliable buyer would be highly beneficial for Bhutan’s power sector and national revenue. Under a full Free Trade Agreement (FTA), compared to the existing Preferential Trade Agreement (PTA), a larger number of products will enjoy duty-free access, creating new opportunities for Bhutan to increase its export earnings and enter a broader market. The MoU on Inland Waterways 2017, renewed in 2022, facilitates Bhutan's use of Bangladeshi seaports like Chattogram and Mongla for its transit trade, to provide landlocked Bhutan with sea access. The deepening of this economic relationship positions Bangladesh as Bhutan’s second-largest trading partner, second only to India.

In the scenario of FTA between Bangladesh and Bhutan, Bangladesh is going to encounter some potential problems. One of the significant issues results from the contrast in market size and industrial base of the two nations. Although the existing Preferential Trade Agreement (PTA) has brought favorable results so far, the transition into a full FTA will require careful consideration of the following questions: Bangladesh's trade deficit with Bhutan is presently in Bhutan's favor. Following the operation of the FTA, the concessionary duty-free imports will further escalate, which may result in increased imports from Bhutan and further widen Bangladesh's trade deficit, unless Bangladesh's exports are increased proportionally. Since Bhutan is a landlocked country, it will have to rely on the transit facilities of India for trade with Bangladesh. To derive the maximum benefits from the FTA, the flow of transit and connectivity has to be uninterrupted. In the recent past, the Indian withdrawal of transshipment facilities for third-country-bound cargo may have become a stumbling block for Bangladesh's trade with Bhutan and Nepal. Even if electricity from Bhutan is imported, the transmission will pass through the power grid of India, and hence a Tripartite Agreement (Bangladesh–Bhutan–India) will be required. Negotiation and signing of this trilateral treaty would also present actual difficulties. Industrial protection and competition will be another area of concern. Certain Bangladesh domestic industries may face competitive pressure if Bhutanese products are produced at less expense or with superior quality standards.

The long-term goal of transitioning from a PTA to an inclusive FTA, as envisioned by Bhutan, must be examined with an integrative vision that transcends the traditional tariff reduction. The highest strategic success is connectivity both physical and virtual. The connectivity plan to connect Bhutan's Gelephu Mindfulness City (GMC) Special Economic Zone (SEZ) with the Bangladeshi-granted SEZ in Kurigram offers a model for inclusive regional value chains. This link is crucial in promoting cross-border investment, including Bhutanese investment in Bangladeshi medicines and Bangladeshi partnership in Bhutan's fiber optic linkages and hydropower industries. Bhutanese hydropower export to Bangladesh is one of the most significant long-term strategic choices that entails intricate tripartite talks with India to make transmission operational.

LDC Graduation Readiness of Bangladesh, the FTA is a significant component of its post-LDC graduation trade policy. Joining this FTA provides valuable experience with bilateral trade negotiations and alleviates reliance on a small number of large export markets, compensating for the risk of loss of access to non-reciprocal developed country markets. Besides bilateral advantages, the FTA also strengthens the case for regional economic integration in South Asia. Through reviving two-way commerce outside the sometimes-dysfunctional SAFTA framework, Bangladesh and Bhutan are setting a good example of practical, outcome-driven regional coordination. It is an example of cooperation between an emerging economy and a high-value niche market based on mutual trust and respect for one another's national development priorities, particularly Bhutan's prioritization of Gross National Happiness (GNH).

Lastly, the Bangladesh-Bhutan PTA and aspirations for a follow-up FTA are an economically shrewd and diplomatically astute economic and diplomatic initiative. It is an important vehicle to enable both countries to achieve bilateral access to each other's markets, deepen cooperation in critical non-traditional sectors like energy and tourism, and seal their long-standing friendship. Success will hinge on addressing proactively systemic risks through open monitoring and ongoing diplomatic engagement, particularly for key transit infrastructure. The partnership is a paradigm of constructive engagement in the South Asian landscape.

Written by: Tanim Jasim

Author's Bio: Assistant Professor, Department of Bangla, University of Dhaka, Dhaka 1000, Bangladesh

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