Twenty years after Nepal's WTO accession, opinions on its benefits are mixed. Some argue Nepal hasn't fully exploited global trade opportunities, citing the growing trade deficit. However, others, including Nepali negotiators, believe joining the WTO aimed to reduce dependency on a single trading partner and mitigate trade disruption risks, beyond just promoting and expanding trade.
BY NEWBIZ TEAM
When Nepal acquired World Trade Organization (WTO) membership in April 2004, it marked a significant milestone in the country's economic history. Prior to this, Nepal had never been part of a multilateral trading regime. Accession to the WTO allowed Nepal to integrate into the global trade system, moving beyond its previous reliance on bilateral trade agreements. The discourse on the WTO gained prominence in the country after Nepal started making preparations to apply for membership of the global trade body. It continued for a few years after Nepal acquired WTO membership. However, as Nepal marked 20 years of accession to WTO, the topic has notably faded from public attention, except for a few events organised in Kathmandu.
Nepal officially became the 147th member of the WTO on April 23, 2004. By joining the WTO, Nepal gained the rights that all members have under WTO agreements, such as non-discrimination by other WTO members and the ability to use the WTO's dispute settlement procedure. Nepal was the first Least Developed Country (LDC) to negotiate its accession to the WTO. Despite the demanding negotiation process, Nepal secured a relatively balanced accession package. During its WTO accession, Nepal committed to 11 services sectors and 70 sub-sectors out of 170 classified by the WTO. The country agreed to an average tariff binding of 42% on agricultural products and about 24% on industrial goods.
Nepal initially applied for membership in the General Agreement on Tariffs and Trade (GATT) in May 1989. However, the process was stalled for five years due to the political changes in 1990 that reinstated democracy after 30 years and normalized trade relations with India. Nepal renewed its efforts after the formal establishment of the WTO, re-launching its bid in 1998 by submitting the Memorandum on Foreign Trade Regime (MoFTR) to the Working Party (WP).
"One motive for Nepal to apply for WTO membership was to secure predictable transit rights via its southern neighbour, India, which had imposed a blockade on Nepal’s trade with third countries in early 1989," said economist Dr Poshraj Pandey, a member of Nepal's negotiating team during its accession to the WTO.
Twenty years after Nepal's accession to the WTO, opinions are mixed regarding the benefits that the country has received. Some argue that Nepal has not fully exploited the opportunities offered by the global trade system, citing the increasing trade deficit as evidence. However, others, including members of the Nepali negotiation team, contend that Nepal's decision to join the WTO was not only aimed at promoting and expanding trade but also driven by deeper strategic reasons. These reasons include reducing dependency on a single trading partner and mitigating risks associated with trade disruptions, they say.
In the two decades since joining the WTO, Nepal has actively participated in international trade negotiations, including the Doha Round and Trade Facilitation negotiations, as well as securing duty-free quota-free provisions for Least Developed Countries (LDCs). Furthermore, initiatives such as Aid for Trade (AfT) and the Enhanced Integrated Framework have allowed Nepal to advocate for its interests on the global stage and attract attention from other countries to Nepal's perspectives.
"As an LDC, Nepal benefits from preferential market access in several developed and developing countries," said Purusottam Ojha, a former commerce secretary. "This includes initiatives like the Everything But Arms (EBA) programme of the EU, Duty-Free Quota-Free (DFQF) market access in countries such as Canada, China, South Korea, and the US, among others, as well as GSP facilities and the Nepal Trade Preferences Bill of 2015 in the USA."
Given the increasing focus on quality standards in international markets, Nepal needs to seriously undertake quality standardisation and improvement programmes to enhance the quality of Nepali products.
Limited Success
Over the past two decades, Nepal has attempted to diversify its export destinations and product range. However, the main challenge remains increasing export volumes to these new markets and enhancing the value added to diversified products, which remains low. As a result, the benefits from these diversification efforts have been limited.
"In the past 20 years, Nepal has successfully diversified its trade. Nepali goods are now exported to 146 countries, and Nepal imports goods from 162 countries. This shows Nepal’s export market is expanding, although the overall trade volume remains modest," said Ojha.
A comparison of Nepal's exports between 2004 and 2023 suggests that the country has not significantly benefited from its WTO membership. Unlike other countries that joined the WTO around the same time, Nepal's export growth has been minimal. While Nepal has failed to even double its exports over the past two decades, countries like Cambodia and China have increased theirs by 8.5 and 28 times, respectively. In 2001, China exported goods worth $18.5 billion, while exports of Cambodia and Nepal were valued at $2.5 billion and $773 million, respectively, in 2004. By 2020, China's exports had surged to $3.346 trillion and Cambodia's to $23.2 billion.
In FY 2022/23, Nepal's exports totaled Rs 157 billion (8.9% of total trade), while imports amounted to Rs 1,611 billion (91.1%). The top 10 exported products, including refined palm oil, synthetic yarn and woollen carpets, represented 59% of total exports.
Nepal's top 10 trading partners - India, China, the European Union, Indonesia, the United States of America, the United Arab Emirates, Argentina, Malaysia, Australia, and Ukraine - account for over 90% of Nepal's total trade, with India and China representing more than three-quarters of all trade. Exports are heavily concentrated towards India which account for more than two-thirds of the total exports.
"Nepal has struggled to align its laws with WTO requirements due to legislative issues and poor coordination between ministries. Weak governance, corruption, and inadequate infrastructure have further hindered Nepal's ability to benefit from WTO membership," said trade expert Rajan Sharma.
Trade experts and government officials say that government agencies have not effectively discussed the pros and cons of WTO membership in international forums. Rabi Shankar Sainju, a former joint secretary at the Ministry of Industry, Commerce, and Supplies, said frequent transfers of key officials have weakened institutional memory, thereby impairing Nepal's ability to negotiate effectively.
Experts say Nepal's limited success in market diversification is partly due to quality issues, including standardisation. The low number of ISO-9000 certified industrial firms has limited the ability of local firms to enter major export markets like the EU, USA and Japan. According to Sharma, Nepal struggles to compete with other markets and meet market preferences and certification requirements of destination markets. Importing countries often impose rigorous technical standards, including quality, safety, and labelling requirements, which are difficult for Nepal to implement due to a lack of resources and expertise, he added.
Given the increasing focus on quality standards in international markets, Nepal needs to seriously undertake quality standardisation and improvement programmes to enhance the quality of Nepali products. Trade expert Bijendra Shakya said that while Nepal has export potentials for tea in Japan, barriers such as pesticide regulations and sanitary and phytosanitary (SPS) measures have hindered access. "Improved government infrastructure support could help the private sector enhance product quality and meet international standards for successful exports," he added.
Missed Opportunities
Trade experts and stakeholders unanimously agree that Nepal has not achieved the anticipated benefits since joining the WTO. They highlight the annual rise in trade deficits and Nepal's challenges in competing effectively in international trade as primary concerns.
While export volumes have increased incrementally, imports have surged significantly following trade liberalisation under multilateral and regional agreements. This liberalisation has posed a dual challenge for Nepali goods and services: reduced tariffs have led to an influx of cheaper foreign goods, while Nepali exports have struggled to compete in the international market. "Poor production and low productivity represent significant supply-side constraints for us. We need to strengthen our productive capacity and focus on developing products and services that leverage Nepal's comparative and competitive advantages," Ojha said.
Nepal has missed significant opportunities to leverage its WTO membership advantages. These include insufficient investments in industrial and logistical infrastructure, failure to align bilateral trade treaties with the multilateral trade system, inadequate investment in human resource development, lack of essential legal and institutional infrastructure to bolster production and exports, weak implementation capacity due to institutional shortcomings, limited mobilisation of aid for trade initiatives, and inadequate negotiating capacity to advocate for national interests.
The anticipated losses are likely to come from the EU, Turkey, China, the United Kingdom, Canada, Japan, the USA, and other countries that are offering preferential treatment to Nepali products.
Pandey attributes Nepal's inability to double its exports after joining the WTO primarily to domestic factors, particularly political instability. "This instability has deterred both domestic and international investors. Investors typically seek a return on investment, but the elevated political risk has made expected returns unattractive, resulting in negative outcomes due to associated costs," he added.
Experts argue that the growing trade deficit results primarily from Nepal's domestic policies and investment decisions rather than external commitments. "Of late, policies have been designed to discourage investment in productive sectors. Investment in Nepal has increasingly favoured sectors that are not easily tradable internationally, such as hydroelectric projects, hotels, education, and healthcare," Pandey said. "This emphasis on non-tradable sectors has constrained our capacity to create substantial employment opportunities."
Diversifying Products and Markets
Experts argue that Nepal must prioritise its industrial sector to increase exports and leverage WTO opportunities. With the share of the service sector growing and contributions from agriculture and industry declining, they recommend increasing the industrial sector's contribution to 15% of GDP. "This requires a strategic focus on manufacturing and agro-processing, and expanding IT services," they added
Pandey said that the government policies, of late, have often favoured rent-seeking activities instead of promoting productive sectors. Essential components like quality infrastructure, skilled workforce, business services and efficient supply chains have been neglected by both the government and private sector, he added.
In 2010, Nepal launched Nepal Trade Integration Strategy (NTIS) to boost exports and address the widening trade deficit. The latest blueprint, Nepal Trade Strategy 2023 (NTIS 2023), is ready for implementation. The fourth-generation trade strategy, which goes into implementation from the current fiscal year, will guide the country's trade policy for the next five years. Despite these efforts for the past one and half decades, however, export growth remains unsatisfactory. For example, most of the targets of NTIS 2016 were not met. The share of exports of the nine NTIS products in GDP for 2019/20 was only 0.76% percent, significantly lower than the targeted 4% percent target established by. The NTIS 2023 aims to increase Nepal's trade-to-GDP ratio from 49.4% in 2022 to 55% by 2026, and boost goods and services exports to 20% of GDP from 6.3% in 2021/22. The strategy now includes emerging items and emphasises service exports, broadening its focus beyond commodity exports. The range of products has been expanded to encompass new products like cement and electricity.
In the agricultural sector, it emphasises fresh and processed fruits and vegetables, along with spices and coffee. The plan also targets fragrant oil from forestry resources, cement from large-scale industries, and processed drinking water, honey and chhurpi (dog chew) from small-scale industries. Likewise, skilled and semi-skilled workforce, IT services, tourism, hydropower and construction services have also been placed as priority sectors/goods.
Nepal's exports surpassed Rs 200 billion in FY 2021/22, largely due to edible oil exports. Edible oils accounted for Rs 93.69 billion of the country’s overall export, with palm oil and soybean oil exports worth Rs 89.18 billion in FY 2021/22. However, these exports have declined since India lowered its customs tariff to contain inflation. In 2021/22, 77.59% of Nepal's exports went to India, with 22.41% to other countries, including China. The data from the Department of Customs shows the top five export destinations account for 92.12% of Nepal’s total export.
The government has introduced export subsidies for eight items to increase exports. As outlined in the federal budget for 2022/23 federal budget, an 8% export subsidy applies to clinker, cement, steel, footwear and IT-based services, including business process outsourcing (BPO) services.
Trade experts, however, have questioned the effectiveness of subsidies. They argue that subsidies often benefit buyers more than improving productivity. "While cash subsidies may seem attractive, their impact is limited without increased export demand," said Shakya. Stating that direct cash subsidies are discouraged by the WTO, with limited exceptions for Least Developed Countries (LDCs) like Nepal, Shakya said investing in infrastructure and enhancing productivity presents a more sustainable strategy for Nepal's export sector.
Post-Graduation
Amid concerns that Nepal has not fully capitalised on opportunities presented by the WTO, there is apprehension about the future of Nepal's international trade, particularly exports, following the country's graduation from LDC. Nepal will face challenges in adjusting to LDC graduation, including the loss of preferences and special treatments provided under regional and multilateral trading systems. It will also face heightened pressure to sustain preferences through bilateral agreements.
According to the National Planning Commission (NPC), while graduation from LDC will not affect the concessions obtained during WTO accession, trade-related implications of this graduation will result from the discontinuation of other preferences and support. The NPC said in its study report that the primary trade-related impact will be the loss of preferential market access for goods and reduced flexibility in complying with WTO regulations."
According to the International Trade Centre (ITC), Nepal's exports were projected to reach $1,372 million by 2026. It, however, has projected a 4.3% decrease in exports by 2026 to $1,313 million, resulting in a loss of $59 million, mainly due to tariff increases. This projection excludes the impact of changes in Rules of Origin criteria.
The anticipated losses are likely to come from the EU, Turkey, China, the United Kingdom, Canada, Japan, the USA, and other countries that are offering preferential treatment to Nepali products. Sectors expected to face significant export revenue declines include apparel, synthetic textiles, carpets, metal products and various manufactured goods.
Exports to India are anticipated to remain largely unaffected due to existing bilateral agreements. However, stricter Rules of Origin could pose challenges for Nepali exporters, especially in the clothing industry, according to the NPC report. For example, many clothing exporters currently meet the single transformation criterion for exporting to countries offering preferences. They may face challenges in meeting the double transformation criterion.
The impact on service exports, however, is expected to be minimal, as Nepal's primary service export - travel and tourism - has not relied on LDC-specific waivers. Nevertheless, the loss of special and differential treatment (SDT) provisions within the WTO framework could limit policy options for Nepal. Among the 155 SDT provisions across WTO agreements, 25 are specifically tailored for LDCs. These include provisions such as extended transition periods and flexibilities in commitments which afford greater policy latitude to LDCs. "The removal of these SDT provisions may diminish the available policy space for Nepal and other graduating LDCs," reads the NPC report.
To address these challenges, Ojha suggests implementing a transitional strategy with two main approaches. The first strategy involves developing productive capacity and enhancing the competitiveness of niche products and services focusing on items identified in Trade Policy-2015 and NTIS-2023. Concurrently, efforts should be made to reduce existing market access barriers, particularly non-tariff obstacles.
"The second strategy involves lobbying in regional and multilateral forums to secure the continuation of current preferences for a transition period of 10 years," Ojha said. "This will allow the country to significantly enhance the competitiveness of its products and industries."
Shakya said Nepal will lose access to the Generalised System of Preferences (GSP) post-graduation which will impact its market access in the EU. "To sustain export opportunities in Europe even after graduation from LDC, Nepal should engage in lobbying efforts. Establishing a bilateral treaty equivalent to the GSP could help mitigate challenges and secure market access," said Shakya.
