E-Kantipur

Commerce Minister Rajendra Mahato is scheduled to visit the US soon to make another attempt to gain duty-free quota-free (DFQF) access for Nepali garment exports. In September 2008, a high-level government delegation led by the then chief secretary of the government of Nepal had visited the US with the same objective in mind. They had met the concerned officials, lobby groups and senators to try to get DFQF market access besides getting pashmina and readymade garments included in the generalised system of preferences (GSP). They concluded that Nepal should be ready to sign a bilateral trade agreement with the US to ensure DFQF market access for garments at least. One and a half years have passed, but the government does not seem to be holding any discussions to identify the likely costs and benefits of such a treaty. However, a draft of the US-proposed Trade and Investment Framework Agreement (TIFA), which is considered to be a prelude to a bilateral free trade agreement, has already been returned with Nepal’s comments.

Costs and benefits

Nepali negotiators hope that the US will provide DFQF market access for Nepali products or include pashmina and garments in the GSP besides ensuring more trade related aid and facilitating foreign direct investment. In the worst case scenario, at least garments will get DFQF facility in the US if Nepal could sign the TIFA. If this happens, Nepali garments will be exempt from the 17 percent customs duty levied by the US. Nepal’s once vibrant export industry — which accounts for 7 percent of manufactured goods, 28 percent of exports and 21 percent of foreign exchange earnings and provides employment to 100,000 unskilled, uneducated and untouched persons from backward communities — will then get a new lease of life leading to a reduction in the trade deficit.

The question is whether the Nepali garment industry can compete with other countries. Nepali apparels cost twice as much as Chinese products, labour is notably cheaper in Bangladesh and the economies of scale are higher in Sri Lanka and India. In this context, Nepali products will merely exist in the US market without any remarkable growth, other things remaining the same.

It is obvious that every country will try to maximise its benefits while signing bilateral trade agreements. Nepal may have to face a number of non-tariff conditionalities while signing the TIFA like a commitment to enforce hard intellectual property rights (which is very common in the bilateral trade agreements that the US has signed with other countries), higher rules of origin requirement, “no child labour” and environment-friendly products. The government has not made public the provisions contained in the draft of the TIFA. The government should have approached the stakeholders with the general features of the TIFAs and bilateral trade agreements that the US has signed with other countries, the conditions put forth by the US for providing market access to the contracting parties, the likely conditions that Nepal may have to face in this context and the projected implications and long-term costs of such possible conditions in terms of facts and figures. If the above conditions have been included in the draft, Nepal will not benefit from the TIFA as expected because Nepal has not been able to add more than 32 percent value to the final price of its garments.

Supply efficiency matters

In Bangladesh, the garment sector now accounts for 76 percent of its total exports and provides more than two million jobs compared to 1.1 percent of exports and 400,000 jobs in 1982/83. Its progress was not disrupted even after quotas were phased out. In fact, it has been able to attract more foreign direct investment, expand exports, foreign exchange and employment generation and reduce poverty in a sustainable manner. The government of Bangladesh has left no stone unturned to support the industry, especially to improve cost side efficiency, by providing duty drawback facilities, income tax rebates and zero tariff on machinery inputs and creating export processing zones and an export development fund. Besides that, it has been continuously working to exploit and maintain its comparative advantages, raise the share of local inputs (particularly in knit fabrics) and strengthen competence in mass-produced basic garments (such as knit cotton and woven cotton products).

The government of Nepal has not worked seriously towards supply side improvement and cost reduction. The US tariff barrier is not the main reason behind the deterioration of Nepal’s garment industry. The quota facility provided by the US to underdeveloped countries like Nepal wasn’t going to last forever. The government and the garment producers forgot that. They should have come up with aggressive supply side reforms in time so that the industry would continue to expand even after the quota system was scrapped.

Nepal’s garment industry has not been able to diversify its products and is still producing the same old trousers and shirts. The new Trade Policy 2009 has also identified that the major causes behind the deterioration in the country’s export capacity are one, supply side capacity and two, technical barriers to market. However, no work has done to improve the supply side capacity. The latest Logistic Performance Index shows Nepal at the 147th position, far behind Bhutan, Bangladesh and Afghanistan, and that 30 percent of the final price of the export items consists of transport costs. The domestic business environment is not as friendly as it should be. Political interventions like strikes, violence, pressure for non-justifiable social security provisions and overall inefficiency are pushing up the cost of production.  The recently launched Free Enterprise Index reveals that the major negative factors that are hindering Nepal’s private sector are political instability and severe load-shedding.

The government thus has to work a lot for domestic reform and efficient transport and transit systems. While signing the TIFA with the US, it must obtain a pledge from the trade unions and the political parties to keep the industrial sector free of strikes for the next few years at least. There should be an aggressive power generation programme and a “things to do” list for improving the supply side. Without improvement on these fronts, DFQF market access alone will not produce any dramatic progress that the government is dreaming about.

Prakash Ghimire

prakashghimire.9@gmail.com

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