By Chandra Ghimire
When Nepal stepped into the outer world by putting aside its policy of self-isolation prior to and post WW2, it established diplomatic relations with the United States (US), following the United Kingdom (UK). The Nepal-US relationship began with the Agreement of Commerce and Friendship on April 25, 1947. In South Asia, this was a watershed moment for Nepal, as its neighbour India was about to achieve independence from the British Raj.
It was an intriguing journey for Nepal and the United States, as their diplomatic ties were galvanised with a trade agreement at the very outset. Since then, the relationship between the two countries has matured over 76 years, walking together with unflinchingly cordial track records. However, when it comes to yielding trade benefits, a bunch of questions crosses one's mind concerning policy discourse: To what extent has the trade relationship deepened and widened by now? Did their trade relations offer the much-anticipated platter of fruits to the common people? After all, in the current world, any bilateral relationship is not spared from money matters.
The two friendly nations have been parties to the Trade and Investment Framework Agreement (TIFA) since April 15, 2011. The major aims of the TIFA include creating a mechanism for further dialogue on initiatives to expand their trade through enhanced cooperation and more comprehensive agreements. It also aims to resolve trade and investment problems between them as quickly as possible. Needless to say, the spirit of the TIFA in international trade encompasses trade in goods and services and covers the affairs of intellectual property as well.
To facilitate this agreement, a permanent mechanism called the Council on Trade and Investment has been established, with representation from the Ministry of Commerce in Nepal and the US Trade Representative (USTR). The council is expected to meet at least once a year, or more frequently as mutually agreed upon.
Significantly, the TIFA outlines a six-point provision for the duties and powers of the Council. These include identifying opportunities and issues related to trade and investment, considering trade, investment, and trade facilitation matters for mutual interest, addressing technical capacity building in service-related trade, removing impediments to trade and investment, and seeking advice from the private sector and civil society. All of these provisions aim to promote and expedite trade and investment between the parties involved in the framework.
Time for Appraisal
Since the TIFA was signed by the then Deputy Prime Minister, Bharat Mohan Adhikari, on Nepal's behalf and the US Trade Representative (USTR), Ron Kirk, on behalf of the United States, twelve years have passed. Given the time that has gone by, it is now appropriate to embark on retrospection and introspection in search of answers to the aforementioned two policy questions.
The Council on Trade and Investment has convened only six times to discuss various matters, whereas it was expected to meet at least twelve times. The most recent meeting, the sixth Council meeting, took place on May 19, 2023, in Kathmandu. The past five meetings were organised at various times and locations: the first meeting on an unrecorded date in April 2011 in Washington, DC; the second meeting on June 10, 2016, in Washington, DC; the third meeting on April 20, 2017, in Kathmandu; the fourth meeting on November 13, 2018, in Washington, DC; and the fifth meeting virtually on December 15, 2020.
During these Council meetings, a range of bilateral trade and investment-related issues were discussed, with the main focus areas including the investment climate, digital economy, intellectual property protection and enforcement, customs and trade facilitation, agricultural trade, market access and technical barriers to trade, digital trade & e-commerce, labour, financial services, investment promotion, labour rights, and trade in agricultural products.
Since the Fourth Council Meeting, the utilisation of the Nepal Trade Preference Program (NTPP), which has been in effect since 2016, has been among Nepal's concerns. Subsequently, especially since the fifth meeting, the issue of Nepal's graduation from the LDC status seems to have become a top priority for the country.
Nepal's Trade Performance
Nepal's trade relation with the US appears to be unsatisfactory despite the presence of agreements and institutional mechanisms. It is a common challenge for small economies like Nepal to face disadvantages in bilateral trade when dealing with larger economies like the US. However, some neighbouring states, such as Bangladesh, have managed to achieve significant accomplishments, providing hope for others.
The table below illustrates Nepal's trade performance in goods with the US. First, it highlights the lopsidedness of Nepal's trade with the US. Between 2015 and 2019, Nepal experienced a small trade surplus, which was meagre, only in 2017. Second, Nepal's trade deficit with the US has steadily risen, reaching $60 million in 2019 from $1.20 million in 2018. Third, for Nepal the trade relation with the US is much bigger than that of the US. Nepal's exports to the US constitute around 10% of its total exports, whereas US exports to Nepal make up only around 1 percent of its total exports. This significant variance in trade volumes suggests a cause-and-effect relationship, wherein even a small change could have a substantial impact on Nepal's bilateral trade landscape, while the US remains relatively unaffected.
Interestingly, data shows that Nepal's trade with Brazil in 2021/2022 is double the size of its trade with the world's largest economy. However, there is no trade agreement or bilateral mechanism in place with Brazil. This indicates that the trade potential with the US is essentially underutilised despite the existence of the TIFA.
To recap, a weak trade performance of Nepal in the US markets is a predominant feature across the period. The above-presented analyses point out a long uphill journey for Nepal to urgently manage ahead in regards to boosting its competency and removing barriers against Nepali goods.
A Big Puzzle
Whatever the case, this is heartening news for Nepali trade that the US Government has two major preferential schemes on offer. First is the Generalised System of Preferences (GSP), and second is the Nepal Trade Preference Program (NTPP). Nepal is entitled to the first US preferential scheme, the GSP, which allows approximately 5,000 different products from Nepal to enjoy duty-free access to the US market. This list includes around 3,500 products applicable to all countries in the GSP program and 1,500 products dedicated to least-developed countries (LDCs). According to data sourced from the USTR, in 2011, the US imported a total of $18.5 billion under the GSP Program, while Nepal's share remained at just$5.1 million, accounting for merely 0.027 percent. This seems to be a very small share of the overall cake.
The latter scheme, NTPP, provides duty-free access to a total of 77 tariff lines from Nepal. These tariff lines cover 56 textile-related tariff lines, 10 leather and footwear tariff lines, nine clothing tariff lines, and two tariff lines for other manufactured products. However, Nepal has failed to make a significant utilisation of the scheme except for 2021, which marked a satisfactory rise in its utilisation.
All the instances mentioned above raise questions and point towards further challenges. One factor that seems to be worrisome for Nepal is the discomfort it faces in the face of LDC graduation, as this will eventually lead to the elimination of many preferential market access opportunities, including those with the US, after 2026. In such a scenario, Nepali traders will have to compete with others on more equal terms.
Significant efforts needed
Although there are several challenges, they are not burdensome; rather, they epitomise opportunities. Bearing that in mind, Nepal has to assertively come forward to fully utilise the Trade and Investment Framework Agreement (TIFA) at a speedy pace. Now, our focus ought to shift to the next level of securing newer agreements to attract US investment into Nepal as much as possible. A welcoming environment should be created, particularly for industries like Information and Communication Technology (ICT), large-scale physical infrastructures, tourism, and agriculture-related businesses.
Additionally, Nepal needs to intensify new rounds of negotiations to obtain grace periods for preferential market access as well as new trade agreements after its graduation from LDCs. While pursuing these agreements, the focus should be on gaining low-hanging fruits to serve the nation's best trade interests effectively. Furthermore, expanding tariff lines in the Nepal Trade Preference Program (NTPP) should be a prime agenda to consider seriously. Capacity building of Nepali entrepreneurs and strengthening the supply-side is an ongoing and pressing issue.
Overall, the US possesses one of the most cherished and celebrated markets in the world. Nepal truly deserves access to this market and should, therefore, be prepared to seize the opportunities it presents without delay.
(Ghimire is a former Secretary of the Ministry of Industry and Commerce. He can be reached at [email protected] for comments.)