Nepal’s export value hit Rs141 billion in 2020-21 after approaching the Rs100 billion mark for two consecutive years since 2018. In the last fiscal year, the country finally achieved the target it had first set in its three-year Development Plan in 2013-16 to raise annual exports to Rs100 billion (approximately $1 billion). This achievement, in one of the most vulnerable sectors of the economy, is admirable, but it remains a matter of intellectual curiosity.

The goal the plan had set for Nepal is far lower than the export values of other least developed countries. In 2019, according to the World Trade Organisation, Bangladesh’s export value crossed $39 billion while Cambodia and Laos exported goods worth $14 billion and $6 billion respectively. The wide gap in the figures raises questions about Nepal’s export performance as they all face trade problems requiring longer transaction time and higher transactions costs.

Non-tariff measures

Similarly, the difficulty of complying with non-tariff measures, especially meeting the standards associated with health, product and environment for exports was no less challenging for entering international markets. These requirements added costs to their export price which escalated with a relatively lengthy transactions process, ultimately reducing their competitiveness. The problems for landlocked mountainous countries like Nepal are considered to be more arduous due to geographical location.

But the root of the problem lies elsewhere. Nepal operates a multi-modal transport system and has dry ports with one of them being connected directly by railway with Kolkata port for shipping. Nepal also possesses extended international routes for air cargo. So, this conventional thought appears to be less rational. It appears to be even more absurd given the country’s unprecedented rise in import trade despite the same trade facilities and the same topography of the country. This poses a question regarding the country’s sluggish export trade compared to the unparalleled import growth under the same circumstances. Therefore, it is the lack of “genuine” export entrepreneurship without consistent government policy measures that matters the most in Nepal’s case.

Lack of “genuine” export entrepreneurship here means that Nepali exporters are not induced by innovations, but exclusively dependent on preferential market access for tariff advantages for international competition and their sustainability in the global market. As a result, Nepali exporters have been stuck with the high market concentration and a small product base. This is clearly shown by the market and product composition in Nepal’s exports in 2020-21. In that year, India remained the single largest market absorbing 73 percent of Nepal’s total exports while the export of soybean was the single largest product which accounted for 38 percent of the total value. Similarly, as usual, except for carpets and garments, no other product has contributed substantially to overseas markets, such as the European Union and the United States. All these export destinations are crucial for Nepal’s exports in terms of trade preferences.

There are at least two obvious reasons for Nepal’s exports being concentrated in India. One is economic proximity and relatively low trade cost which naturally attracted trade between the two countries. Two, bilateral preferential treatment reinforced this phenomenon. Yet the product composition in bilateral trade relied heavily on the margin of tariff advantage for Nepali products. This means Nepal’s exports to India were concentrated extensively on those items which were subject to higher tariffs for India’s other trading partners. But the products had less value addition in Nepal giving a fraction of net benefit to the country. In a similar vein, the products which were focused to overseas export destinations were confined either to a handful of low-value agricultural commodities or labour-intensive products which are non-dynamic with regard to global demand.

Making the situation more challenging, the reduced average international tariffs had essentially eroded the margin of preference and competitive edge for Nepali products in the global market. And in the absence of export sophistication and innovations within the country, Nepal neither gained the ability to increase export values nor became able to diversify products for exports despite the ample opportunities offered by the preferential schemes available to the country.

A recent World Bank report reckoned Nepal’s untapped export potential at around $9.2 billion or 12 times its actual annual merchandise export. It declared Nepal among the 20 countries in the world with the least dynamic export with a growth rate of 4 percent on average since the turn of the century. Nevertheless, the bank advised Nepal to harness the potentials through “modernised export promotion, reduced trade costs, and boosted digital trade and e-commerce for more opportunities linked to global value chain”.

But the materialisation of these measures will depend on the concerted efforts of both the government and export entrepreneurs. So, it is necessary to change the national strategy based on the traditional ideology of concentrating on capacity building to the concept of proficiency building through subsidies that are not only based on export turnover as usual but on export innovation too.

Innovation in exports

The notion of subsidy as motivation for innovation in exports qualifies for two key reasons. While it involves the responsibility of the government as well as exporters on an equal footing, it also guarantees coverage of costs accrued by the firm for taking the risk as a“first-mover” in innovations. The first-movers are at high risk of losing temporarily on export sales due to externalities despite long-run profitability. As long as the externality is costly, subsidies that apply generally to all exporters will not encourage innovation. Thus, the government should give subsidies directly to innovators instead of offering subsidies based on export turnover only.

Nepal's export subsidy focused exclusively on boosting export values undermines the key factor that accelerates growth through innovation. Innovation in export is limited not only to product development but also applies to business operations, market intelligence, global marketing and branding of products that have been ignored by exporters. Against this backdrop, incentives for innovation will be a determining factor for Nepali exporters’ competitiveness as they are susceptible to the erosion of preferences with reduced world average tariffs and the likelihood of a global trade regime without preferential treatment in the future.