Prashant Pokhrel:

The garment industry would not have existed in Nepal had there been no Multi-fibre Arrangement (MFA). The existence of quota system under MFA and spillover business from India and some other countries were the only factors that led to the growth of the apparel industry in Nepal. The quota system under MFA was introduced only to protect the domestic industries of the developed countries (DCs) and to safeguard them from the damage inflicted by “low cost producers”. This, however, was a blessing in disguise for Nepal as it could sustain itself for two decades on spillover business from countries such as India, China and Bangladesh. During the early 80s, Indian entrepreneurs started relocating their investment to Nepal to circumvent quota constraints.

It took nearly a decade for this industry to be recognised and to replace the dominating foreign factors of production by the Nepali components. Today, entrepreneurs, capital and labour are all Nepali. Average net value addition is 35% and retention of foreign currency is also estimated to be 35% to 38% of its export value. During its peak in 1999/2000, Nepal’s garment export accounted for about 50% of its total export whereas it was maintaining an average of 28% till 1999. Its contribution to GDP is said to be 7.2% during that period. At one time it used to employ roughly 100,000 people. Now it is employing 50,000 only, but most are Nepalis.

The Agreement on Textile and Clothing (ATC), which was crafted in 1995, is considered to be a major achievement of the Uruguay Round. It set out procedures for integrating international trade in textile and clothing into the GATT/WTO system, gradually eliminating quota restrictions over a 10-year transitional period ending on December 31, 2004. Nepal also became the147th member of WTO effective from April 14, 2004. We have now to determine whether we can convert the opportunity of “market access” into “sustained market entry “ or simply be contented with what we have.

The Nepali apparel sector is now sick. Countries like China, India, Pakistan, and Korea, which had been suffering from quota restrictions, will now benefit, but relatively new entrants like Nepal, Cambodia and Laos will have a difficult time surviving the global price competition. Nepal will also have to face the non-tariff barriers such as labour standard compliance, environment, rules of origin, logistics, etc. Nepal’s position in the international market in the post-MFA era will mainly depend upon four variables: (a) Preferential treatment that has been granted by the developed countries, (b) Rules of origin to be followed in the preferential treatment, (c) Nepal’ own cost of production in comparison to the two neighbouring giants, and (d) Buyers’ attitude toward Nepal as a reliable or alternative source of niche supplies.

The US is the single largest market of clothing as it received about 25% of global clothing imports in 1998. Till 2000, more than 95% of Nepal’s garment export was destined only to the US market. But when the European Union and Canada extended the duty-free concessions to many Least Developed Countries (LDCs), including Nepal, Nepal has succeeded in diverting about 20% of its exports to these developed countries. Garment export to the US in 2004 declined by 30% over 2003. It is frightening to see the export to the US in January 2005 further decline by 46% over the period of 2004.

The main cause of this decline is not only the end of the quotas, but also the wholesale price structure of the importing country brought about by the post-MFA era. According to an estimate of GAFTT (Global Alliance for Fair Textile Trade), the wholesale price index of clothing has gone down by 20%. New entrants and global competition will continue to force prices down. Other factors in the decline of Nepali export are: (a) product limitations, (b) virtual non-existence of backward linkage, (C) political unrest and deteriorating law and order situation, (d) lack of direct contact and skills of the exporters, and (e) higher lead time and transaction costs.

Reciprocity, non-discrimination, transparency and Special and Differential Treatment (SDT) for the weaker economies are some of the guiding principles of WTO. Paragraph 42 of the Doha Declaration is committed (without it being legally binding) to providing preferential treatment to the LDCs. In line with this commitment — but without any obligation — Nepal, along with many other LDCs, has been granted the preferential treatment not only by the 15 nations of the European Union but also by other DCs like Australia, Japan, Canada and some East European countries.

The US, the single largest importer of textile and clothing after having provided duty-free access to African and Caribbean nations four years back, has now clarified the misconceptions that the US is favouring only these countries over the poor Asians. By introducing a bill named TRADE (Tariff Relief Assistance for Developing Economies) Act 2005 in the 1st session of the 109th Congress, the US intends to give an enormous opportunity to 14 poor nations of Asia and the Pacific region, including Nepal. The bill is expected to be passed into law by April, with its relaxed rules of origin. This will be in force till Dec 2014. The passage of this bill would be a boon not only to the dying garment sector of Nepal but also to many other sectors.

Pokhrel is 2nd vice-president, Garment Association of Nepal