Opinion in lead

Duty-free access alone not sufficient to boost export

Nepal’s merchandise exports to the US in 2021, at US$108.3 million, were lower than what they were at their peak in the late 1990s. This is not a result of Covid-19 shocks but driven by a plunge in exports of clothing since the early 2000s in the wake of the phase-out of global quotas in the textiles and clothing sector. Imports, on the other hand, have risen steadily, and the trade balance, consistently positive during the export boom phase, has worsened over the past two decades to turn negative in the four of the five years during 2015-2019.

The United States’ Nepal Trade Preference Programme (NTPP) entered into force on 30 December 2016, providing duty-free market access to a set of 66 products (at the HS 8-digit level, or tariff line level) exported from Nepal until 31 December 2025. This preferential market access was aimed at promoting Nepal’s trade and economic development in the wake of the devastating earthquake of April 2015 and its aftershocks. Due to changes in the tariff classification system beginning in 2017, the number of products increased to 77. While the Trade Facilitation and Trade Enforcement Act of 2015 (Sec. 915) that was the legal basis for the scheme included products that were otherwise ineligible for duty-free access under the Generalized System of Preferences (GSP) programme, duty-free treatment for 31 of the 77 products was extended to other developing countries under the GSP programme before the NTPP came into force at the end of 2016.

A SAWTEE study assesses the effect the NTPP. The 77 NTPP products (NP products) encompass a limited range of product categories, spanning six HS chapters: 40 tariff lines in Chapter 42 (Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silk-worm gut)); 13 tariff lines in Chapter 57 (Carpets and other textile floor coverings); 2 tariff lines in Chapter 61 (Apparel and clothing accessories; knitted or crocheted); 7 tariff lines in Chapter 62 (Apparel and clothing accessories; not knitted or crocheted); 2 tariff lines in Chapter 63 (Textiles, made up articles; sets; worn clothing and worn textile articles; rags); and 13 tariff lines in Chapter 65 (Headgear and parts thereof).

While total goods exports to the US have been on an upward trend since 2012, exports of NP products have been on a downward trend. Nepal’s aggregate exports of products under NTPP to the US averaged over 2017-2021 were 26.5 percent lower than during 2012-2015, compared to a positive growth of 18 percent recorded by total exports of other products. Exports of NP products in 2021 were U$8.47 million and had a share of 7.8 percent in total exports to the US (compared to 14 percent in 2012).

During 2017-2021, Nepal exported 1,082 products to the US. Of these, a total of 297 products were potentially eligible for duty-free access under GSP (both generic and LDC-specific) and 75 were potentially eligible for duty-free access under NTPP. A total of 75 of the 77 NP products were exported at least once during 2017-2021. Thirty of them were also on the GSP list. The US’ GSP programme expired on 1 January 2021, but imports into the US from Nepal continue to also claim GSP, on the assumption that it will be retroactively reinstated as in the previous instances of expiry.

The eligibility for preferential schemes—a product is considered potentially eligible if it is on the list of preferential schemes—has increased, from 18 percent in 2017 to about 29 percent in 2021. In the final year, 21 percent of exports were eligible for GSP-only preferences, 5 percent for NP-only preferences and about 3 percent for both preferences. The rest were subject to MFN tariffs.

The percentage of exports claiming GSP or NP preferences increased from 12 percent in 2017 to 20 percent in 2021. The share of exports claiming GSP increased from 9.4 percent to 16.6 percent, while the share of exports claiming NP preferences increased from 2.6 percent to 3.6 percent. The share of exports that were preference-eligible but for which no preferences were claimed increased, from 6 percent to 8.4 percent.

Preference utilization (defined as exports entering the US claiming preferences as a percentage of total exports), in the aggregate, is much higher for GSP-eligible products than for NP-eligible products, averaging 67 percent and 47 percent, respectively, during 2017-2021. The aggregate utilization rate for exports of NP products during 2017-2021 was 59 percent when considering utilization of both available preferences (NP and GSP), as some NP products are also on the GSP list.

Nepali products exported to the US that were not eligible for any preferential scheme faced a median tariff of 5.6 percent and a maximum tariff of 55 percent in 2020. Readymade garments and footwear are among products of export interest to Nepal that face high tariffs and do not get any tariff preferences. About two thirds of total exports to the US during 2018-2021, on average, faced zero MFN tariffs. About 84 percent of exports ineligible for preferences faced zero MFN tariffs.

The study does not find conclusive evidence that the introduction of the NTPP led to an increase in Nepal’s exports of the products it granted duty-free market access to. Leaving aside causal interpretation, a takeaway is that preferences granted under the NTPP were not able to increase exports of NP products relative to exports of non-NP products net of other effects on the two sets of products.

In a roundtable discussion organized on 20 July 2023 in Kathmandu, private sector representatives pointed out that information on the opportunities available under the NTPP had not been effectively disseminated, the exclusion of key products of export interest to Nepal from the scheme had reduced the value of the scheme to the nation’s overall export sector, and capacity building programmes should respond to the needs of export sectors and firms.

The reasons behind the relatively low utilization rates for products only on the NP list should be investigated and addressed, as should be the decline in utilization rates for products common to the NP list and the GSP list. There is considerable room to increase the utilization of existing preferences (whether GSP or NP, but especially products that are only on the NP list). Scaling up exports of preference-granted products by addressing productive capacity and supply- side constraints is also needed, as even a cent percent utilization of the available preferences is unlikely to translate into a substantial increase in the exports of these products without addressing those constraints. At the same time, reinstatement of GSP is important for Nepal as GSP accounts for 80 percent of Nepal’s preference-claimed exports. Restoration of GSP will also preserve preferences on over a third of exports of NP products even if the NTPP is not extended after expiration.

Extending the NTPP beyond 2025 is likely necessary to build the capacity to export. Effectively operationalizing the capacity building and technical assistance window under the Nepal-US Trade and Investment Framework Agreement would be crucial. However, lessons must be drawn from the implementation of the window so far. The fact that about 84 percent of the value of Nepal’s exports to the US that are ineligible for preferences face zero MFN tariffs implies an opportunity to exploit the export potential in these products further.

Dr. Kharel is Executive Director of SAWTEE. This article is excerpted from the working paper authored by Dr. Kharel titled ‘The 66/77 products inside out: The long and short of the United States’ Nepal Trade Preference Programme’. This article was published in Trade, Climate Change and Development Monitor, Volume 21, Issue 03, March 2024.