Nepal: How a 21st century trade policy framework could boost exports, jobs and economic growth

Equipped with unique tourist destinations, a strong national brand, and favorable trade positions with developed countries, Nepal is a country full of untapped potential. But several obstacles are holding it back from being a modern and globally connected economy. Some of these are unavoidable, such as its remote and landlocked location. But others, including outdated and restrictive trade and investment policies, lack of sufficient infrastructure, and a low capacity for adhering to quality standards for exports, could be resolved with a more modern trade framework.

These obstacles affect exporters especially.  In 2003, Nepal accounted for US$12 out of every US $1 million of worldwide trade in goods and services. But by 2014, this number had fallen by 25% to just US$9. Further, few of Nepal’s agricultural exports make it to lucrative markets. Take Nepal’s tea, for example. Almost 90% of Nepal’s tea exports go in bulk to India, where products fetch just 5% of the price of other countries’ tea exports to the United Kingdom. The reason for this: lack of properly branded and individually packaged tea products. In another example, Nepal’s main service export, tourism, is concentrated in low-value activities such as trekking or hiking. In 2013, the average tourist spent just $38 per day in Nepal. Both of these are clear untapped opportunities.
 

The good news is that there is some demand for specialty products from Nepal in developed and emerging countries. The country has the opportunity to take advantage of e-commerce to export high quality garment products that are produced in small scale, join international production networks in niche-agro products, or upgrade and diversify its tourism export offering, among other opportunities.

So, how can Nepalese exporters better reach international markets? What will it take for Nepal to gain from access to the global marketplace by creating more and better jobs? A recent World Bank Group report, From Evidence to Policy: Supporting Nepal’s Trade integration Strategy , provides some hypotheses and recommendations.
Nepal needs a 21 ^st century trade policy framework if it is going to take part in the global marketplace and gain from it. In a world in which 80% of world trade happens within international production networks, such a framework recognizes four elements:

• Firms need to import intermediates to be able to export finished goods.
• Foreign direct investment is a key conduit for transferring global knowledge to domestic firms, and a platform to secure market access.
• Competition at home is crucial, so that firms can access good quality and reasonably priced backbone services that matter for producers, such as transport, logistics, telecom and others.
• Improved connectivity and efficient customs procedures are critical to ensuring speedy and predictable dwell times at the border. 

What does this mean in practice?

These elements translate directly to Nepal’s situation in several ways. First, Nepal’s tariff code can be streamlined, and tariffs for key intermediate inputs, which are needed to produce finished products, be reduced. Currently, restrictive trade policies are increasing production costs for Nepalese firms. For example, producers of pashminas, a traditional Nepalese export product, need to import the yarn from China, for which they pay a 5% tariff. This cuts into their competitiveness. In another example, Nepalese tea producers that opt to add value through professional packaging and branding are more heavily burdened: they need to pay 36% in tariffs plus value-added tax to buy the filter bags from Germany. While it’s clear that Nepalese exporters would benefit from tariff reforms, any such change would need to consider the country’s fiscal restrictions: more than 40% of the government’s tax revenue comes from trade-related taxes.
 
Second, investment policies need to attract, retain and connect FDI with domestic firms. Currently, FDI inflows into Nepal account for less than 1% of GDP, low by international standards. While this is in part related to firms’ perceived risks of operating in Nepal, several other factors don’t help: sector caps for foreign ownership, a long list of activities in which FDI is not allowed, restrictions for alternative forms of investment (e.g.: non-equity modes), and the lengthy processes needed to repatriate funds and hire foreign workers.

Third, more competition at home, especially in services sectors that are crucial inputs into production (transport, logistics, telecom, business and professional services, etc.) through increased openness to trade in services will also help reduce production costs. An example is related to the restrictions imposed in transport, a sector with little competition. For some exporters, transport costs are sizable. Among agricultural exporters, they account for one-third of total costs.

Fourth, continued efforts are needed to remove critical behind-the-border constraints on trade, notably through the modernization of the customs administration, simplification and automation of procedures, and reduction in transit costs.

What’s promising about this reform agenda is that the effects are multiplicative. That is, if reforms in these areas are bundled, the total impact is greater than the sum of the impact if each of these were to be implemented in a piecemeal approach.

Taking stock of these findings and making changes would help Nepal upgrade its exports, take better advantage of its untapped opportunities, and bring benefits for the country’s people.