Nepal’s EU Export Advantage at Risk after India Secures Duty-Free Access

Nepal’s exports to the European Union could face increased competitive pressure after India secured duty-free access to the EU market under a newly concluded free trade agreement, trade experts have warned.

They say the India–EU Free Trade Agreement (FTA), finalised in New Delhi on Tuesday, is likely to have an immediate impact on Nepal–EU trade, as Indian goods will now compete directly with Nepali products that currently enjoy zero-tariff access to the bloc.

India is Nepal’s largest export destination, followed by the United States and the European Union. With two major economies—India and the EU—entering a comprehensive trade pact, competition in the European market is expected to intensify, particularly in labour-intensive and price-sensitive sectors.

According to the Department of Customs, Nepal exported goods worth around Rs 12.26 billion to the EU’s 27 member states in the last fiscal year (FY 2024/25). Nepal’s key exports to the bloc include readymade garments, felt products, handmade carpets, pashmina, handicrafts, tea, coffee, honey, musical instruments and handmade paper.

At present, Nepal exports all products except arms and ammunition to the EU at zero tariff under the Everything But Arms (EBA) scheme, a facility granted to least developed countries (LDCs). This preferential access will remain in place until 2029. However, experts say the advantage will gradually erode once India—backed by large-scale production, lower costs and a well-developed supply chain—also enjoys duty-free entry.

Sectors most at risk

Trade analysts say Nepal’s exports of readymade garments and textiles, carpets and floor coverings, pashmina and woollen products, leather goods, footwear, bags, handicrafts and felt products are most vulnerable. Agricultural exports such as tea, coffee, spices and honey are also expected to face stiffer competition.

Analysts say these are sectors where India has lower production costs, large-scale production and more reliable supply capacity, warning that Nepal could lose market share in the EU unless it strengthens competitiveness.

Short-term risks, long-term opportunities?

Trade expert Ravi Shankar Sainju said the FTA would have a direct and immediate impact on Nepal’s EU exports.

“There is a clear risk of Nepali products losing market share due to intense competition from Indian goods,” he said.

However, Sainju added that the agreement could also open strategic opportunities in the long run if Nepal positions itself as a regional supply-chain partner rather than a direct competitor. He said demand for Nepali yarn, fabrics and leather inputs could increase in India’s garment industry, while industrial growth in India’s border states could boost demand for Nepali hydropower, construction materials and services.

Carpets, garments and pashmina under greatest pressure

Paras Kharel, executive director of South Asia Watch on Trade, Economics and Environment (SAWTEE), said carpets, garments and pashmina would be the most affected sectors.

“Nepali carpets will now face direct competition from Indian carpets in the EU market,” he said.

Kharel noted that Nepal is scheduled to graduate from LDC status in 2026. Although the EU has provided a three-year transition period, India’s access to duty-free treatment on about 99 percent of its exports under the FTA will significantly weaken Nepal’s preferential advantage.

High costs and weak logistics add to challenges

Nepal’s export competitiveness is already constrained by high logistics costs, lack of direct flights, limited capacity of national airline and expensive air freight, making Nepali products costlier in the EU market.

Pashupati Dev Pandey, president of the Nepal Garment Association, said the agreement could cause short-term losses but also create opportunities if Nepal leverages bilateral arrangements with India.

“Demand for Nepali raw materials, fibres and inputs could increase if supply chains are used strategically,” he said.

Experts said the India–EU FTA presents both risks and opportunities for Nepal, but warned that without improvements in productivity, cost reduction, product differentiation and proactive trade diplomacy, it will be difficult for Nepal to retain its foothold in the EU market.

What India gains under the FTA

•          Immediate tariff elimination on 70.4 percent of tariff lines covering 90.7 percent of India’s exports, including textiles and garments, leather and footwear, tea, coffee, spices, sports goods, toys, jewellery, precious stones and selected marine products.

•          Phased zero-tariff access within three to five years on 20.3 percent of tariff lines accounting for 2.9 percent of exports, including processed food items, selected marine products, and arms and ammunition.

•          Reduced tariffs and preferential access on 6.1 percent of tariff lines covering about 6 percent of exports, including poultry products, preserved vegetables and bakery items. Preferential quotas will also apply to automobiles, steel, shrimp and prawns.