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At The Crossroads One year has passed since Nepal acceded to the World Trade Organization (WTO) and formally entered into a globally integrated trade economy. But the country is still flummoxed over how best to utilize the vast opportunities of extended and predictable market opened up by the WTO. The last one year passed without any concrete improvements in the export front although the country did not suffer from any onslaught of imports as well. A number of legal obligations are yet to be met. Now the time has come for strategic partnership between the government and the private sector to forge sustainable export regime to enhance exports of goods with comparative advantage and to distribute its benefits to the poorer section of society
By SANJAYA DHAKAL
Nepal became the 147th member and the first LDC member to enter the WTO through negotiations on 23 April, 2004. Its protocol of accession has been lauded by sundry stakeholders and even other countries like Bhutan and Cambodia sought its help in framing their own protocols. But the good news rests there.
A year after it entered the WTO, the country is as perplexed as ever on how to take advantage of the opportunities by expanding exports. Entwined in internal turmoil and conflict, the country has not been able to come up with ideas to expand its exports base. Instead, since January 2005, the expiry of the Multi Fiber Agreement has hit hard its garment exports, which dropped by whopping 41 percent in the first four months of this year.
“A year after WTO membership, Nepal stands in between the past and future,” said Prachanda Man Shrestha, joint secretary at the Ministry of Industry, Commerce and Supplies and Nepal’s most prominent WTO czar. “By entering into WTO framework, Nepal has now been recognized as a sovereign economic entity and we are now integrated with the global economy. But this does not mean that we can get automatic benefits. The WTO only seeks to provide a fair trading regime with a largely predictable market.”
Analyzing the last one-year, Ratnakar Adhikari, executive director of South Asia Watch on Trade, Economics and Environment (SAWTEE), said, “The government was not able to undertake major policy, legal and institutional reforms required to reap benefits from WTO membership (such as amendment to Export Import Act, Labour Act, Industrial Enterprises Act, etc.) and to mitigate the negative impacts of the membership (such as enactment of Anti-dumping and Countervailing Act, Access to Genetic Resources and Benefit Sharing Act, etc.).”
Adhikari has also pointed out the weaknesses of the private sector. “Our private sector has not been able to pool resources for investment in research and development, become innovative, reduce inefficiency, and enhance competitiveness so as to take advantage of the market access opportunities offered by the WTO. Neither have they been able to conduct research to identify the major market access barriers and supply side constraints in the post-accession era, nor have they been able to provide informed advice to the government on the positions to be taken by the country in the on-going WTO negotiations.”
Economist Dr. Bishwambher Pyakuryal believes that the fundamental objective of an LDC like Nepal in WTO should be to maximize its exports and take the benefits to the poorer sections of society.
And export cannot be achieved without first identifying goods where Nepal enjoys comparative advantage since it cannot compete with other developed countries in most consumer goods. “The cost of doing business and the cost of production of our goods are very high. Government must have policies to bring them down,” said a businessman.
Shrestha, on the other hand, believes that there are ample opportunities for countries like Nepal to benefit from WTO. “We should go for intangible value additions in goods, whose competitiveness does not depend on their cost of production. For example, by promoting quality brands like Himalayan tea/coffee or Shangri-la image, we can compete on our own terms. These goods with intangible value addition can also fetch substantially higher prices,” he said.
Nepalese agricultural products like tea/coffee, honey, ginger, vegetable seeds, medicinal plants, floriculture etc can have comparative advantages. But Nepalese farmers are not in a position to exploit the market on their own at a time when they are struggling to cope with the problems like market access, high cost of transportation and so on. Besides, they also have to deal with non-tariff barriers like Sanitary and Phytosanitary (SPS) requirements in which they have neither knowledge nor experience.
Agriculture, without doubt, is the major sector of Nepalese livelihood. It contributes 40 percent of the GDP and provides livelihood option to 80 percent of population. According to a study on “Market Access Barriers to Nepalese Agricultural Exports” by SAWTEE, both developing and developed countries impose high tariff as well as non-tariff barrier on agriculture products. “For instance, US imposes 144% tariff on sugar; Canada imposes 360% on butter; Japan imposes 360% on wheat; and EU imposes 200% on beef,” said Adhikari, adding. “Besides, EU has imposed very harsh measures on pesticides residue. They don’t even allow tea leaves picked with hand containing traces of nicotine.” As such Nepalese farmers can become vulnerable in the coming days as they might have to face the onslaught of agro-products from other countries in the domestic market even as they themselves will be stopped from exporting their produce due to tariff and non-tariff barriers.
Businessmen and industrialists say that in the last one year, there has not been any marked change in trade volume due to WTO. “We have not faced any problem just because of WTO. This is because, our tariff binding obligations has been very conservative providing us room for flexibility,” said Rajendra Khetan, vice president of Confederation of Nepalese Industries (CNI).
In agriculture Nepal has bound for 42% percent tariff on average compared to the existing 14%. Likewise, in non-agriculture products it has bound for 24% tariff on average compared to the existing 11%. On 148 IT products, Nepal has committed to bring down tariff rate to 0 within five years. It bound the tariff rate of 480 products on existing applied rate; for 58 products, it bound their rate lower than the existing one. So, there will be revenue implications for Nepal on these 58 products plus 148 IT products. “According to one study, the loss due to these revenue implication will be to the tune of Rs 192 million. But this amount will become less if we are able to expand our trade,” said Shrestha.
Likewise, as per its obligations, Nepal will also need to do away with Other Duties and Charges at the Custom point. At present, it is imposing Special Tax, Local Development Tax and Agriculture Improvement Tax at the custom point, which will have to be gotten rid of within 2 to 10 years. Ridding ODCs will result in losses worth Rs 430 million.
Presently, the government earns 30 percent of total revenue from customs, which means our revenue is custom-based. “This also reflects the poor trade expansion. Besides, since we have porous border with India there are increased possibilities that informal and border traders will pay tariffs if the latter is lower,” Shrestha added.
Legislative Obligations
During negotiations, Nepal agreed to open up 70 sub-sectors of Service trade. Nepal also promised to implement fully the provisions of the Agreement on Sanitary and Phytosanitary (SPS) Measures by 1 January 2007 following an action plan in different stages which started with the adoption of the Food Act and the implementation of Codex Alimentarius, and will continue with the establishment and operation of a single enquiry point.
According to Shrestha, Nepal needs to liberalize/amend/enact 24 acts to fulfill the legislative obligations. He said that as part of policy reforms, the government is preparing to enact bank and financial institution ordinance, electronic transaction ordinance; and is preparing to amend Export Import Act, Patent Design Trade Mark Act, New Company Act, Security Exchange Act.
Laws relating to Health Institution, Plant Resource, Access to Genetic Resources and Benefit Sharing, Competition, Anti-dumping and Countervailing, Multimodal Transport are under the process of enactment while draft formulation of laws relating to Industrial Property, Plant Variety and Farmers’ Right, Insolvency, Special Economic Zones are already completed, Shrestha said.
Technical Assistance
During its accession, Nepal had received assurances from the WTO members that it will get technical assistance to prop up its capacity to reap benefits from the global trade.
But as Dr. Posh Raj Pandey of UNDP, said, Nepal made ‘legally binding commitments’ in exchange of ‘non-binding assurances of technical assistance.’ He said there is a challenge for the government to capitalize on non-binding assurance of technical assistance from WTO members.
Of late, there have been some developments in the technical assistance front. According to the Ministry officials, Australia has helped in the completion of National Study on TRIPS and Policy Response. Consultant from US government has identified improvement needs in Custom Administration. Regional Trade Advisor from ESCAP and full-time consultant from DFID have been made available. Asian Development Bank (ADB) has completed a study on Market Access and Productivity Growth for Small and Medium Enterprises (SME). The Europen Union has agreed to support for capacity building in TBT and SPS measures. Norway has extended support for SPS requirement on export of Nepalese honey.
Trade & Development
Nepal, as an LDC, has been pursuing for the development dimension of trade as per the Doha Development Agenda. “Nepal has given priority on Agriculture Negotiation, Service Negotiation, Special and Differential issues, Trade facilitation and LDC position. Nepal intends for LDC common proposal through forthcoming LDC Trade Ministers’ meeting on June at Zambia for the Sixth WTO Ministerial Conference later this year,” said Shrestha.
As a WTO member, Nepal is on a legally equal basis with the U.S., India, China and the European Union and other large economies. Among many things that Nepal now needs to carry out include amending its legislations, building institutions, enhancing capabilities, identifying and promoting products/services in which the country enjoys competitive advantage, diversifying exports and so on.
It will need to consolidate niche market adding intangible value for exports and benefit from location between largest and fastest growing economies. And in so doing, the challenges it will have to confront will be manifold including strengthening of institutional capacity to fulfill WTO obligations; addressing supply side constraints to transform available market access into trade opportunities; averting marginalization of country as well as weaker section of society; and addressing poverty by trade development
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