A major chunk of Nepal’s export trade gets preferential market access in the international market. Without such privilege, the export performance of Nepal would have been daunting, if not trifling. But the privilege of preferential treatment has both opportunities and challenges. While it offers the advantage of duty to gain competitive edge, on the one hand, the reliability of the preferences poses question, on the other. In the context of rapidly reducing world tariff rates, the significance of trade preferences has drawn more attention than before. For a least developed country, like Nepal, the issue is even paradoxical.

Nepal enjoys trade preferences in two ways. One is through the bilateral trade negotiation with India, which goes much deeper than any other preferential treatment schemes. The next is the privilege offered unilaterally by the industrialized countries, primarily by the Quad countries (USA, EU, Canada and Japan), under the generalized system of preferences (GSP). There is a marked difference between the two, despite both being non-reciprocal schemes. In terms of predictability, preferential market access to India is time-bound as it depends on the validity of the trade treaties, which can be revised periodically, provided that both parties agree. Whereas the Quad country schemes are not binding and differ among them with respect to product coverage and the rules of origin.

Although Nepal has access to all these preferential schemes, it is still restricted from fully utilizing the benefits due to variation in the nature of schemes. For instance, Nepalese apparels are excluded from the facility of the US preferential scheme, and some key export items to India are subject to tariff-quotas. Likewise, the ignorance of the requirement to comply with stringent rules of origin and administrative procedures by the Nepalese exporters had restrained Nepal’s capacity to utilize the preferences fully.

The requirement of tough origin rules has induced LDC exporters, including Nepalese, to pay the applied tariffs and forego preferences. Because the rules of origin and related administrative procedures have remained strict and almost unchanged since the early 1970s, when preferential margins were significantly higher than at present. Next, the value of preferences has been reducing as the margins between the preferential tariffs and the MFN tariffs, which apply to all other partners in preference giving countries, are eroding gradually in recent years.

The issue of preference has, thus, become of increasing concern to Nepal mainly because of the negotiations for tariff reduction on non-agricultural products under the Doha Development Round of the World Trade Organization (WTO). The ongoing negotiations, popularly known as the Non-agricultural Market Access (NAMA), aim at reducing tariffs on industrial products, including a reduction or elimination of tariff peaks, high tariffs and tariff escalation; and the elimination of all tariffs in particular sectors. With the likely reduction of MFN tariffs in developed countries under NAMA, the benefits enjoyed under limited use of the GSP schemes are likely to be even less significant. If the commitments made in NAMA materialize, the GSP facility to Nepal would most probably be meaningless due to the export loss caused by erosion of preference margins. A report prepared for WTO in 2003 has estimated the export losses from preference erosion for Nepal to be US $17.8 million per year.

The impact could be even more distressing in connection with the preference margin and trade transactions Nepal enjoys in trade with India. Since the preferential rates for almost all Nepalese products are subject to zero tariffs, Nepal enjoys a preference margin of 100% of India’s MFN rates, and these rates are relatively high, compared with other developing countries. The simple average applied rate for India has reduced from 19.2% in 2005 to 14.5% in 2007. The declining trend of simple average MFN applied rate has been rapid for industrial goods than for agriculture products. Thus the constant reduction in India’s tariff rates has been eroding preferences to Nepalese export in India at a faster pace than expected. As a result, it can be anticipated that the impact of preference erosion to Nepal could be substantial, because Nepal’s export trade with India and the margin of preferences it enjoys with India are still attractive.

Nepal is likely not only to be affected by the reduction in tariffs under the multilateral trading system of WTO, but also to be vulnerable to a unilateral tariff cut by India. Both have already eroded preferential margins for Nepalese products, and continue to threaten competitive advantage of Nepalese exports in the international market. In sum, the preferential market access still remains crucial to Nepal’s export performance, but it’s high time to reckon the value of preferences, as the trade liberalization takes place rapidly, both unilaterally and multilaterally.

Shakya is Lecturer of Economics, TU— bijshakya@hotmail.com