Nepal's Regional and Bi-lateral Trade Agreements: Performance and Prospect

Uma Shankar Prasad

Objectives
To review and analyze Nepals existing regional and bi-lateral trade treaties To suggest new countries and dimensions to be covered in future trade agreements

Major Issues to be Addressed

Increasing Nepals trade dependence on India and political sensitiveness No/long back trade agreements with major trade partners Lack of proper deal with destination countries for Nepalese labour migrants No visible benefit for Nepal from SAFTA/BIMSTEC

The Politics of Trade Policy Reform

Contradiction between the advocates and the sceptics particularly in developing countries
Most of the countries moving towards trade liberalization initiatives Nepal cannot be an exception

Direction of Nepals Foreign Trade (%)

Fiscal Year
1960-61 1995-96 2001-02 2005-06 Exports to India 99.8 18.5 59.5 68.3 Import from India 94.2 32.8 41.1 67.1

Source: Trade Promotion Centre

Major Export Trade Partners of Nepal (%)

Countries 2001-02 2002-03 2003-04 2004-05 2005-06

India U.S.A Germany France

59.0 19.8
8.5 1.0 1.7 1.2 0.6 1.0 0.1

52.9 25.4
7.1 0.9 2.1 1.1 0.8 0.9 0.1

57.0 18.0
6.6 1.1 3.1 1.1 1.0 1.0 0.1

66.6 13.0
5.3 1.1 1.8 1.0 0.9 0.9 0.3

68.3 11.6
4.7 2.2 2.0 1.2 1.1 1.0 0.4

U.K
Italy Canada Japan Bhutan Bangladesh

0.5 0.1

0.8 0.2

0.8 0.2

0.5 0.1

0.4 0.1

Thailand

Source: Trade Promotion Centre

Nepals Major Exports: Manufactured: garments, carpets, and pashmina Others: vegetable ghee, toothpaste, jute and jute goods, pulses, tea, herbs, polyester yarns, hide skins and handicrafts Nepals export to SAARC/BIMSTEC countries other than India: about 1 per cent of is total exports

Major Import Trade Partners of Nepal (%)

Countries 2001-02 2002-03 2003-04 2004-05 2005-06

India

52.1 4.0 2.6 6.8

55.3 3.7 3.1 7.0

58.0 4.0 2.4 6.4

59.8 5.6 3.5 5.2

67.1 4.1 3.5 2.1

China P.R.
Indonesia Singapore Germany Thailand

1.5
3.0 4.4 3.4 2.0

1.8
2.3 3.1 1.8 1.5

1.5
3.2 2.7 1.9 1.2

1.1
2.1 1.9 2.1 1.7

1.7
1.6 1.5 1.4 1.2

Malaysia
Saudi Arabia Japan Korea R. U.S.A

2.3
2.3

2.6
1.3

2.3
1.1

1.9
1.2

1.1
1.0

Source: Trade Promotion Centre

 Nepals imports are diversified than its exports

Nepals major import has been manufactured goods, which constitute around 30 per cent of its total import Machinery and transport equipment, minerals, fuel and lubricants, chemical and drugs, food and live animals are major imports

Nepals imports from SAARC/BIMSTEC countries, except India, constitute less than 1 per cent of its total imports

Unauthorized Trade between India and Nepal No authentic data exists The value may be eight to ten times of the officially recorded trade

Review of Regional Trade Agreements SAFTA

SAFTA was signed without agreements on:

Sensitive list

Rules of origin
Mechanism for compensation on revenue losses for the LDCs Technical assistance

 The non-tariff barriers in the region are inconsistent with the WTO provisions countries still maintaining tariff

The SAARC Transport Minister Level meeting recently held on 31 August 2007 has recommended to launch nine various roads, rail, sea, and air projects to link SAARC member countries can be seen as positive achievement

BIMSTEC
Both trade in goods and services included in the agreement Identified and covered six broad sectors for cooperation comprises trade and investment, technology, tourism, transport and communication, energy, and fisheries Need to implement effectively

Bi-lateral Trade Agreements

Nepal has bi-lateral trade agreements with 17 countries: Bangladesh (1976), Bulgaria (1980), China (1981), Czech Republic (1982), Egypt (1975), India, Democratic People's Republic of Korea (1970), Republic of Korea (1971), Mongolia (1992), Pakistan (1982), Poland (1992), Romania (1984), Sri Lanka (1979), UK (1965), USA (1947), Russia (1970), and Yugoslavia (1965) All the treaties, except with India, are static and perpetual in nature.

Indo-Nepal Trade Agreement

The major elements included in all the treaties are:

Exemption from basic custom duties and quantitative restrictions on imports of primary products on reciprocal basis Nepali manufactured goods (excluding some items on the negative list) are granted duty free access to Indian market without quantitative restrictions on the basis of nonreciprocity
Manufacturing goods imported from India is granted preferential entry to Nepal, without quantitative restrictions

 In the treaty of 2002, several restrictions were introduced

More rigid Rules of Origin: domestic content value addition requirement of 30 per cent of exfactory prices Tariff rate quotas Safeguard clauses

The renewed treaty 2007 did not address these key issues

TRQ on Nepals Exports in India

S. No. 1 Nepalese Article Vegetable (Vanaspati) Fats Quantity in MT Per Year 100,000

2
3

Acrylic Yarn
Copper Products

10,000
10,000

Zinc Oxide

2,500

Trade Arrangement with Other/SAARC Countries Nepal has trade agreements with four SAARC member countries: India, Bangladesh, Pakistan and Sri Lanka Trade Agreement with China aims to support the movement of persons rather than to facilitate trade An informal trade agreement, 2006 between Nepal and China realized to provide duty and quota-free access of Nepalese product to China but there is little progress in this direction so far

 Nepal's trade treaties with all the seventeen countries, except with are based on the MFN treatment The United States of America, which is the second largest trade partner of Nepal in terms of export and among the ten top countries in terms of import in 2006, has bi-lateral friendship and commerce agreement dated back to April 1947 in the Rana regime

Nepal's Treaty of Transit

Article I of the 1950 Treaty provided Nepal with 'full and unrestricted right' to use all Indian territories and ports Nepal's landlockness situation and political misunderstanding: termination Indo-Nepal transit relation in 1989.

The informal negotiation to use the Jawaharlal Nehru port

The Birgunj ICD is not operating at full capacity for various reasons: low frequency of cargo train (twice a week), inadequate information in the schedule of cargo etc.

The following problems are significant in the corridor between Nepal and India transit routes: Long transit from Kolkata to Raxaul Higher hauling costs Inefficiency of Kolkata/Haldia port Administrative decentralization in India and bribes.

Export Potential for Nepal

Carpets

The carpet/rug industry is major source of foreign exchange and employer of more than 50,000 workers Declining trend in the exports of carpets: elimination of quotas ,competition from China, India, African and Caribbean countries Nepalese garment exporters have advantages: lowlabour costs Needs the presence of foreign investors to increase its market access

Agriculture and Forest Products

Beans, peas, lentils, other legumes, cardamom, medicinal herbs and aromatics Comparative advantage extends to a range of other areas as well like honey, horticulture, livestock, fisheries, fibre, and off-season vegetables Large-scale subsidization of agriculture in India

Tourism internal security concerns and deteriorating tourism sector

Tea Significant obstacles to investment and expansion remain Inadequate participation of the private sector Hydropower The power sector suffers from high costs private sector participation not encouraging

Foreign Employment and Remittances

India: most popular destination for Nepalese migrants In recent years newer markets are opening: Republic of Korea, Malaysia, Qatar, Saudi Arabia and other Middle Eastern countries

Country-wise Foreign Employment

Country Saudi Arabia Qatar 2001-02 83,459 55,222 2002-03 101,449 82,072 2003-04 118,324 106,200 2004-05 131,683 148,152
% Change 2002-2005

57.8 168.3

U. A. E.
Bahrain Kuwait Oman Hong Kong Malaysia Korea Brunei Other Countries Total

25,672
3,171 2,973 1,753 64,643 3,119 1,993 242,005

38,322
3,989 3,880 380 2,317 108,445 3,831 4,22 1,945 347,062

51,082
4,595 7,074 453 2,989 154,215 5,155 3,635 453,722

63,585
4,853 8,760 758 3,167 220,505 5,480 4,457 591,400

147.7
53.0 194.7 80.7 241.1 75.7 123.6 144.4

Source: Economic Survey, Various Issues

Income from Remittance in Nepal

Year 1985

Remittance Income (Rs. Million)

657 34919 54235

% of GDP

1.5 9.5 12.4

2000
2004

Source: IPRAD and CBS, 2005

Barriers to Trade: Issues of Rules of Origins, Negative List, and NTBs

The rules of origin in SAFTA are one-dimensional: percentage of value addition criterion Asymmetrical type of exports and problem of setting rules of origin in South Asia 28 SAFTA does not have any deadline for phasing out the negative list Tea, herbs, and leather are export potential products for Nepal face both tariff and non-tariff barriers in the international market

Conclusions and Recommendations

Nepal has no bi-lateral trade agreement with Germany, France, Canada, Italy, Japan, Singapore, Malaysia, Saudi Arabia, Hong Kong, Thailand, and the other many major trade partners. Therefore, it is an urgent need for Nepal to initiate bi-lateral trade agreement with these countries in the present integration-oriented context. The agreement should not be limited to merchandise trade. It should include trade in services, investment, intellectual property and labour mobility. As of 2007, Nepal had signed bi-lateral trade agreements with 17 countries. But almost all the treaties, except with India, were signed quite back, i.e., before 1980. Hence, it is essential for Nepal to review these treaties in the present context.

 Nepals exports to Bhutan are increasing over the current years and there is more or less similar situation with Bangladesh as well. Nepal enjoys comparative advantage for uncooked pasta, soaps, and cereal products with Bhutan and for lentils, weaning foods, and vegetable seeds with Bangladesh. It is recommended that Nepal can gain by FTA arrangement with Bhutan and Bangladesh in recent years. Hence, priority should be given to these two countries for FTA arrangement. Nepal should also take initiatives for FTA with Sri Lanka. These initiatives towards FTA would make Nepalese trade diversified instead of India-centred. Remittances play an important role in improving living standards of households in Nepal. Given its importance to the economy, fresh bi-lateral initiatives between Nepal and the new destination countries regarding liberal labour mobility policy (labour market liberalization) particularly with Middle East countries are crucial and should be included in trade agreements.

 Tea, herbs, and leather are major export potential products for Nepal. However, these products face tariff and non-tariff barriers in the international market. Identification and removal of such barriers are essential to realize its export potential. Bi-lateral, regional, and multi-lateral trade negotiations can be utilized to address these barriers. However, this is not possible without a well-coordinated negotiation strategy with a sound capacity team. The increasing trend of trade deficit, informal trade between the two countries and imposition of Tariff Rate Quotas (TRQs) by India on some Nepalese exports are the major issues in Indo-Nepal Trade Treaty. These issues need to be addressed. Energy and services, i.e., Information and Communication Technology (ICT), tourism, education, healthcare, are most necessary sectors to be included, in future trade negotiations to benefit both the countries. Nepal could exploit its vast amount of untapped hydroelectricity to fulfil the high demand of energy in Indian market.

 Several issues need to be addressed to realize the potential benefits of tariff free access under SAFTA. These are: safeguard measures-sensitive lists and Rules of Origin (RoO), para-tariff and non-tariff barriers, trade facilitation, and transit and transport logistics. The fact is that most of the highly-traded and potential items are in sensitive list. However, the 1996 Indo-Nepal bi-lateral agreement has substantially reduced the sensitive list to only few items. Nepals bi-lateral agreement with India is more attractive to Nepal than SAFTA because of nonreciprocal and zero tariff access for Nepalese manufactured products to Indian market. Unless the number of goods from the sensitive lists is reduced in SAFTA, Nepal will benefit little from SAFTA. Similarly, if SAFTA does not compensate financially for customs revenue losses, Nepal would prefer to continue trading with India under bi-lateral agreement.

 Trade in services is inseparable from trade in goods. Service sector especially tourism is the most important for employment generation and foreign exchange earning for Nepal. Further, foreign investment in hydroelectricity, tourism, education, health etc. is necessary for Nepals economic development. Therefore, Nepal should negotiate to include services and investment liberalization in SAFTA as well as other bi-lateral trade negotiations. Although, liberalization of services and investment is included in BIMSTEC Agreement, it is essential to make it to work more effective. Nepal's potential feasible hydroelectricity power capacity of around 83,000 MW (currently only around 1 per cent is being exploited) could be a large net power producer and exporter to SAARC/BIMSTEC countries and especially to India where power demand has steadily increased over the years, if liberalization of services and investment within the region is fully materialized.