Textiles and garments were the major export products of Nepal following the decades of the late 70s until they declined with the onset of the new millennium. The staged phase-out of the quota under the Multifibre Arrangement of the General Agreement on Tariffs and Trade (GATT)—a short-term international trade agreement relating to textiles and garments—which came to full circle at the end of 2005, opened the market for competition. Consequently, there was a free fall in the exports of those countries that could not compete.

Nepal was the single loser among the least-developed countries in Asia. Conversely, two other countries, Bangladesh and Cambodia, made good progress in maintaining and upscaling their exports in the international markets. With the steady growth of garment and apparel exports, Bangladesh is now the second-largest exporter after China.

Trade partner

The United States and the European Union (EU) are the major export destinations for Nepali garments. The phase-out of the quota and the gradual reduction in import duties in the EU countries have had a double-whammy effect on Nepali products. This causes the loss of a secured market on one side and unfastens open competition with other players on the other. Traditionally, the US has been a big market for textiles and apparel, but the market was protected for domestic producers. The protective rate of customs duties ranges from 5 to 32 percent, depending upon the type of fabric and the specific product category.

For a landlocked country like Nepal, where the cost of transit transportation is an extra burden, it is almost impossible to offset the production and shipment costs to penetrate the US market. Hence, Nepal sought some reprieve to check the spiralling exports and looked for preferences that aligned with the African Growth Opportunity Act (AGOA), which assists the economies of sub-Saharan Africa and improves economic relations between the US and the region. During the first decade of the century, several Nepali delegations visited the US to discuss the issues in the Trade and Investment Council formed under the Trade and Investment Framework Agreements (TIFA) agreement.

Initiatives taken from both sides to provide relief to the ailing garment industries of Nepal also resulted in the introduction of the Nepal Trade Preferences Bill in the US Congress. However, the initiatives didn’t see the light of day until the bill was re-introduced at the end of 2015. Section 915 of the bill passed by the US Congress under the title “Trade Facilitation and Trade Enforcement Act” has made provisions for providing tariff concessions to 77 products produced in Nepal.

This concession was offered as a good gesture to support Nepal in recovering from the adverse effects of the 2015 earthquake. Textile items, leather and footwear, clothing and others were among the listed products. Although the Act was enacted on December 30, 2016, its benefits remain largely unutilised. Nepali industries complain that actively traded products stay out of this list.

Despite the provisions on zero tariff preferences extended to the said Nepali products, the preference utilisation rate is at the lower end. A study done by a think tank based in Kathmandu shows that the utilisation rate in the export of these products was 26.5 percent between 2017 and 2021. The scheme includes major export items from Nepal, including carpets, shawls, handbags, gloves and clothing accessories. However, the total volume is insignificant compared to the total import of these products in the US.

The US is Nepal’s important trade partner. Over the last decade or so, it has become the second export destination after India and is one of the country’s eight top import sources. Unlike other major trade partners, there is no wider gap between Nepali exports and imports from the US.

The weaker supply-side capacity is the major constraint to the poor performance of Nepali exports under the trade preferences programme. The production cost is higher in Nepal due to extra costs involved in transit transportation, low labour productivity and poor transportation and logistics services. Inadequate human resources in the factories and manufacturing units also add to this problem. Another crucial factor is the inability of the Nepali producers to switch over to the products covered under the scheme. There were continued efforts to increase the preferences’ coverage of traditionally traded items rather than exploring and utilising the new products.

However, certain conditions are laid for eligibility of the preferences under the scheme. First, the rules of origin criteria are more stringent than other trade agreements, such as bilateral agreements with India and South Asian Free Trade Area provisions. Second, the eligibility criteria for the African Growth Opportunities Act also apply to this scheme. Nepal qualifies under those stated parameters but is still not making substantial progress in utilising the preferences. This requires reorientation of the domestic policies and measures to encourage the producers and manufacturers to introduce changes to their production and processes to fit into the framework of the programmes.

Way forward

Minimising production costs and delivering goods are the primary requirements for industries. We could leverage the special economic zones established near the border posts to incentivise the manufacturing units with rebates in leasehold fees and attenuated regulatory arrangements.

Programmes for improving the efficiency of transportation and logistics services should be implemented. Skill development of the workers through training and retraining, increasing access to finance, and awareness building of the exporters on issues like dealing with intellectual property rights should also be executed. Proper documentation of preferences is equally vital in export development. Backward linkages should be encouraged by focusing on the use of domestic textiles and fibres so that the benefit of export trickles down to the rural household.

Another caveat is that the preferences available to Nepal under the US Trade Preferences Scheme will be over by the end of 2025, around 16 months from now. Nepal is on the path to graduating from LDC in 2026, so the government must develop a strategy and plan to continue with the preferences even after graduation. The US and Nepal may carry on negotiations for this arrangement, and the Trade and Investment Council can serve as the best platform for such consultations.