- By Dr. Posh Raj Pandey
The narrative suggesting that WTO membership has caused increased imports and a higher trade deficit is more reflective of our domestic policies and the activities of our private sector rather than being directly attributable to the WTO itself.
Nepal's decision to become a member of the World Trade Organization (WTO) was not only aimed at promoting and expanding trade, but also driven by a deeper strategic reason. Beyond the obvious goal of enhancing trade, there were additional strategic considerations that motivated Nepal to join the WTO. These strategic motives likely included reducing dependency on a single trading partner (India), mitigating risks associated with trade disruptions and strengthening Nepal's position in international trade negotiations by leveraging the multilateral agreements provided by the WTO. Until that time, Nepal's trade was heavily dependent on India. However, there was a pressing question about what to do if there were issues in trade with India. This concern was highlighted when India imposed a trade blockade in 1989. To mitigate such risks, Nepal decided to pursue a multilateral trade regime as an alternative. If the trade agreement with India was not renewed, the multilateral agreements under the WTO would provide a viable alternative. Even in the context of trade negotiations with India, our fallback position improved significantly after becoming a member of the WTO.
This is why WTO membership was of strategic importance for Nepal. Another important point is that, until then, Nepal's participation in the international community was primarily through the UN system, the World Bank and the International Monetary Fund (IMF) on economic issues. However, Nepal lacked access to a global platform specifically for trade. Economic, development and trade issues are interlinked and interconnected. Without full participation in the global community, we cannot effectively advance our national interests. The WTO represents a rule-based trading system that supports weaker economies. For Nepal, as a weaker economy, adopting this system was advantageous. Nepal joined the WTO in 2004, and from a strategic standpoint, it has achieved the objective. Another benefit provided by the WTO is a predictable market. However, Nepal has not fully capitalised on this advantage. The Nepali private sector, lacking a comprehensive understanding, frequently attributes Nepal's increased trade deficit to WTO membership. WTO membership has not had a detrimental impact on Nepal's economy. In contrast, other countries faced pressures to liberalise trade, which sometimes led to reductions in tariffs, impacting domestic industry and causing the collapse of import-substituting sectors. In our negotiations during accession to WTO, the majority of our tariff commitments focused on maintaining them at or above existing most favoured nation rates rather than reducing them. Nepal did agree to tariff reductions on IT products and vehicles, but significant tariff reductions were not implemented overall. The narrative suggesting that WTO membership has caused increased imports and a higher trade deficit is more reflective of our domestic policies and the activities of our private sector rather than being directly attributable to the WTO itself.
Nepal became a member of the WTO in 2004, shortly after China’s accession in 2001. China's goods exports amounted to $18.5 billion in 2001. Cambodia, which joined the WTO with Nepal, had exports valued at $2.5 billion, compared to Nepal's $773 million. By 2020, China's exports had surged to $3.346 trillion and Cambodia's to $23.2 billion, whereas Nepal's exports only reached $1.5 billion. Since joining the WTO, China's exports have increased by 28 times and Cambodia's by 8.5 times, while Nepal's exports have not even doubled. If one argues that WTO membership harms economies, then the same logic should apply to China and Cambodia. The issue lies not with the WTO itself but in Nepal's inability to fully leverage the predictable international market opportunities provided by the WTO. Other countries seized these opportunities, but Nepal did not. WTO membership provides opportunities, but it is up to us to exploit them. China, Vietnam, and Cambodia succeeded in doing so; we failed.
Nepal's inability to double its exports after joining the WTO stems primarily from domestic rather than international factors. Political instability stands out as the main domestic issue, leading to policy uncertainty and heightened political risk. This instability has deterred both domestic and international investors from committing to Nepal. 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. Our policies have often prioritised rent-seeking activities over fostering productive sectors. Essential components like quality infrastructure, a skilled workforce, quality business services, and an efficient supply chain have not received adequate attention from the government. The private sector, too, has shown limited interest in engaging with these critical areas.
The growing trade deficit is primarily a result of our domestic policies and the specific investment decisions we have made, rather than obligations stemming from external commitments. Of late, our policies have been designed to discourage investment in the productive sector. Instead, investment in Nepal has increasingly favoured sectors that are not easily tradable internationally. This emphasis on non-tradable sectors has constrained our capacity to create substantial employment opportunities. Investments have predominantly flowed into non-tradable areas like hydroelectric projects, hotels, education and healthcare, which capitalise on the domestic market. As a member of the WTO, Nepal pledged to harmonise its laws and regulations with international standards. This commitment necessitated mutual recognition agreements tailored to specific products rather than applying broad, generic agreements. It was essential for our rules and standards to align with those established by foreign markets, requiring comparable infrastructure, including laboratories, and a skilled workforce. Unfortunately, we overlooked this critical aspect.
In terms of market diversification, our traditional export destinations have remained largely unchanged: approximately 60-65% to India, and around 10-12% each to the EU and the US. This indicates a concentration rather than diversification of commodities, with stagnant progress in market diversification. To address this, we must generate an exportable surplus. Currently, about 60% of Nepali economy is dominated by the non-tradable service sector, while contribution of manufacturing and agriculture remain at 5% and 24% respectively. To enhance economic diversity, we should strive to increase industrial output to at least 15% of the economy. This requires a strategic focus on boosting manufacturing, agro-processing and expanding IT services within the service sector.
(Pandey is Chair emeritus of SAWTEE)
