On April 2, 2025, United States President Donald Trump declared “Liberation Day” and imposed sweeping “reciprocal tariffs” on foreign imports. The policy established a 10 percent base tariff, with additional duties applied to specific countries. However, the White House abruptly paused most measures for 90 days, excluding Chinese imports, after global markets plunged and federal debt rates soared. In response, China vowed to “fight to the end,” imposing retaliatory monetary and non-monetary duties on US goods and companies.

This escalation has brought the world’s two largest economies face-to-face in a full-blown trade war, and the global economy has stumbled in between. It remains unclear what the White House will do after the 90-day pause. This uncertainty has already inflicted significant damage on the tightly interconnected global economy. The International Monetary Fund (IMF) has warned of a global economic slowdown and rising inflation. How will the ongoing tariff war affect the Nepali economy? It is crucial to grasp an overview of Nepal’s external trade profile to understand this.

Nepal’s external economic profile

Nepal’s trade is predominantly centred on South Asia, with India accounting for 64 percent of total trade, China for 13 percent and the rest of the world at 23 percent, of which the US contributes only 2 percent. Another staggering feature of Nepal’s external economic profile is its persistently large trade deficit. In the first eight months of the current fiscal year, Nepal’s imports totalled Rs1.6 trillion, while exports amounted to just Rs157.14 billion. This resulted in a Rs1.5 trillion trade deficit, highlighting Nepal’s weak tradable sector.

Nepal’s trade basket further exposes the lack of tradable products and services. Our exports are dominated by a few agro-based processed goods, accounting for 42 percent of total exports, followed by textiles (17 percent), semi-processed industrial goods (10 percent) and miscellaneous items such as ready-made garments, pashmina and handicrafts. Notably, Soybean and Palm Oil accounted for 31 percent of the total export, which is about Rs47 billion, after importing nearly Rs50 billion worth of crude soybean oil, primarily from South American countries.

On the import front, Nepal depends on foreign goods for almost everything: From petroleum products to vehicles and machinery (26 percent), medicines to chemicals and fertilisers (6 percent), rice and vegetables to edible oil (6 percent), electronics to telecommunication goods (6 percent), gold to coal (3 percent) and other intermediate and final consumable goods. This trade imbalance reveals Nepal’s import-based consumption market economy—about 92 percent of its imports are for intermediate and final consumption, while only around 8 percent are for capital goods—persistently facing a trade deficit. Due to skyrocketing remittances, the country has been able to maintain its foreign exchange reserves as well as its international trade.

Reciprocal tariffs and tariff war effects

Nepal remains largely oblivious while other countries grapple with the consequences of the tariff war. The Government of Nepal has neither responded to Washington’s universal 10 percent baseline duty on Nepali imports nor addressed the broader global trade challenges. Maybe because the US accounts for only 2 percent of total trade? Yet, the direct and indirect effects are real and imminent.

Nepal’s trade with the US during the first nine months of fiscal year 2024-25 totalled imports of Rs20 billion and exports of Rs13 billion. Major Nepali products to the US market include textiles and apparel, carpets, handicrafts, pashmina, jewellery and spices. Most of these products enjoy duty-free access to the US under the Nepal Trade Preference Program (NTPP), a US government initiative aimed at supporting Nepal’s recovery from the 2015 earthquake. If the White House imposes duties after the 90-day deadline, it will put double pressure on Nepali suppliers, such as handicrafts and pashmina, which are highly labour-intensive products and are surviving stiff competition from cheaper Chinese and Indian goods in the US market due to their free access. This will impact thousands of jobs in Nepal, particularly those held by women working in the informal household sector.

On the other hand, the escalating global trade war will come with indirect yet severe consequences for the Nepali economy. These spillover effects arise not from trade with the US per se but from tensions in bilateral trade between the world’s largest economies. The changing world order is likely to upset price levels, escalate disruptions in global supply chains with higher production costs, and trigger a world economic recession, eventually hurting the economies largely dependent on foreign employment and tourism.

Nepal—a country highly dependent on remittances—will soon begin to feel the effects. Let’s not forget that Nepal has long been able to offset its substantial trade deficit in the current account primarily through two foreign income sources: Remittances and tourism. Tourism earnings reached a record Rs76.55 billion last year. However, the industry is already witnessing a decline in tourist arrivals this year. Any further disruption in the global economy will have a direct and immediate impact on Nepal’s ability to sustain its import-based consumption economy. Rising price levels and a looming global recession will compel consumers to cut back on leisure spending, while higher production costs will likely push businesses to reduce their labour force.

Any opportunities for Nepal?

Although the ongoing tensions in the global trade order pose significant threats to Nepal, they also present new opportunities. Nepal can strategically utilise the current situation to its advantage in two ways: Through enhanced, fair trade and investment deals with countries from a fresh perspective and by leveraging its weaker currency base.

For example, while the US is likely to impose only a 10 percent duty on Nepali products, the measures are significantly higher on comparable goods from India (an additional 26 percent) and China (145 percent) due to ongoing trade frictions. This presents an opportunity for Nepal to strategically open the country to foreign direct investment in textiles and handicrafts. In their current form, these industries are scattered and highly labour-intensive, often based in home settings across Nepal. In contrast, China and India have large industrial bases which enable them to lower production costs and enhance competitiveness in foreign markets.

Similarly, Nepal’s weaker currency base, while often viewed as a vulnerability, can be an asset in export-driven growth. An already weaker currency and higher tariffs on direct competitors such as India and China will make Nepali products cheaper in the US market. Yet, to capitalise on these opportunities, significant changes are inevitable in the administration and investment of the government. Further, Nepal’s existing economic and industrial base is not strong enough to capitalise on these opportunities. The situation is exacerbated by Nepal’s deteriorating profile in the international market, which makes it unlikely in the immediate future. Unless there is a substantial foreign investment and technology transfer to Nepali industries, global opportunities are far from reach.

Therefore, the government’s obliviousness and disregard for the potential threats of a likely trade war in Nepal are detrimental to the country. Nepal needs to calculate possible effects, map out new opportunities for fair trade deals and safeguard existing bilateral and multilateral trade and employment arrangements with trading partners. The Nepal Trade Preference Programme (NTPP) is set to expire by the end of 2025. It must be renewed with diplomatic urgency. Diversifying the country’s export base and actively targeting tariff-free trade opportunities will also enhance Nepal’s global market access.