Opinion in lead

Revisions to Nepal-India trade treaty overdue

With the Nepal-India Treaty of Trade up for renewal this year, the Nepal government should seek revisions to the treaty with a view to enhancing mutual benefits from the same.  

Influential voices have been suggesting that the treaty be revised to protect Nepali farmers from unfettered agricultural imports. Under the current treaty, Nepal and India provide one another duty-free access for agriculture products. Nepal levies an agriculture reform fee of 5 percent or 9 percent on certain agricultural products from India. Nepal has the latitude to impose much higher tariffs than the current rate, but that option has been hamstrung by the Nepal-India trade treaty. The question is whether Nepal can continue to afford providing tariff-free access to heavily subsidized agricultural products from India. One option is to remove select primary agricultural products, including cereals, from the list of primary products on which both countries are currently providing reciprocal tariff-free access. 

The list of primary products eligible for duty-free access must be accompanied by Harmonized System codes to avoid ambiguities regarding which products qualify for duty-free treatment and hence to remove possible arbitrariness in the application of this provision. 

While pushing for an amendment that allows Nepal to protect its agriculture sector through tariffs, Nepal government should prepare a strategy for protecting vulnerable groups from a rise in food prices due to an increase in import prices that could result from tariff hikes. Possible measures include targeted subsidies and checking anticompetitive practices. If anticompetitive practices have, even with zero tariffs, led prices faced by Nepali consumers to significantly exceed the levels that would prevail in a competitive market, checking these practices could moderate or even offset the upward pressure on prices exerted by tariff increases.

The treaty in its current form restricts Nepal’s ability to negotiate preferential trade agreements. Article III of the treaty requires the two countries to extend to each other any trade preferences that they provide to a third country. This means, for example, that Nepal has to automatically extend to India any tariff concessions it grants Bangladesh, a South Asian neighbour with which Nepal is negotiating a preferential trade agreement. A number of trade agreements that India is party to do not have such a provision. 

Further, India has been imposing quotas on imports of vegetable ghee, acrylic yarn, copper products and zinc oxide from Nepal since 2002, when a number of trade restrictions were formally introduced during the treaty’s revision. Imports within the quota are granted duty-free access whereas imports above the quota are subject to non-preferential tariffs. There are no such quotas in India’s global scheme of trade preferences granted to products originating in least developed countries (LDCs) and in India’s scheme of preferential tariffs for products originating in LDC members of the Agreement on South Asian Free Trade Area (SAFTA).  

Since there is already a provision in the treaty that allows the adoption of “safeguard measures” to check imports in the event such imports cause or threaten to cause serious injury to domestic industry, the imposition of quotas is unduly restricting trade. Moreover, the administration of these quotas is riddled with hassles, designed to discourage imports even within the quota. 

Nepali exports have also been constrained by onerous rules of origin: value addition of 30 percent and a change in tariff heading at the Harmonized System 4-digit level. These were introduced in the 2002 revision which marked a departure from the most liberal bilateral trade treaty of 1996. Roughly speaking, rules of origin are aimed at ensuring that only goods sufficiently originating in Nepal enjoy duty-free access to the Indian market. Interestingly, the treaty does not subject goods entering Nepal from India under tariff preferences to any rules of origin.  

The twin rules of origin applicable to exports from Nepal need to be replaced with a single rule based solely on domestic value addition, in view of Nepal’s weak industrial base, low productive capacity and supply-side constraints and the preference erosion experienced by Nepali exporters in the Indian market as a result of India’s providing generous tariff concessions to other countries unilaterally or as part of free trade agreements. Setting the required domestic value addition at 25 percent, down from 30 percent in the existing treaty, would make the rules of origin in the Nepal-India treaty consistent with the agreement on simplified and preferential rules of origin for LDCs reached among WTO members, including India, in the 2015 Nairobi Ministerial Conference of the WTO.  

While revising the treaty, procedural irritants in the export of, for example, pharmaceutical products, vegetables, and medicinal and aromatic plants from Nepal in the form of inspection, import licensing, certification and registration requirements must be addressed. Since testing and certification issues are considered to be major barriers to Nepali exports of items like cardamom, ginger, and other agricultural and food products, provisions in the treaty that aim to address them must be strengthened and effectively implemented.  

In Para 6 of Protocol to Article VI of the treaty, both countries have agreed to grant recognition to the sanitary and phytosanitary certificates (including health certificates) issued by the competent authority of the exporting country with regard to agricultural and food products. Proper implementation of this provision has to be ensured so that conformity assessment measures do not result in duplicate efforts (double testing and certification) and undue burden to Nepali exporters, primarily small and medium enterprises. In cases where Nepal lacks competency for product testing and certification, India’s assistance to improve testing capacities for the products of interest mentioned above could also be sought, as agreed upon in Para 3 of Protocol to Article I.  

There are also provisions in the treaty that could benefit Nepal but whose implementation status is weak or ambiguous. Para 3 of the Protocol to Article V provides for India granting relief in the application of excise duty on manufactures produced in small-scale units in Nepal to the extent such a relief is provided to such products produced in small-scale units in India. Now that the excise duty has been subsumed under the Goods and Services Tax (GST), introduced in 2017, the provision should be amended to reflect the GST regime. Moreover, the extent to which the existing provision was utilized by Nepali manufacturers should be investigated and measures taken to increase the utilization rate if it is found low. 

Likewise, there is a need for effectively operationalizing the provision for joint meetings of local authorities. The Protocol to Article XI of the treaty provides for joint meetings of local authorities comprising customs officers, quarantine/food test officers, local chambers’ representatives, and any other local officials nominated by the respective governments, in order to resolve problems arising in the clearance of goods at the land customs stations. At present, the meetings are limited to customs officials and the mandate is not clear. There is a need to enlist the participation of all the relevant agencies and provide a clear mandate to the joint committee through a terms-of-reference. 

At present, bilateral trade disputes are generally discussed in the meetings of the Inter-Governmental Committee (IGC), led by the Commerce Secretaries of the two governments, and the Inter-Governmental Sub-Committee (IGSC), led by the respective Joint Secretaries. Disputes are also raised through diplomatic channels. This not an effective way to resolve disputes as there is the need for a clearly specified dispute settlement mechanism or grievance redressal mechanism. 

These recommendations are based on a study undertaken by South Asia Watch on Trade, Economics and Environment (SAWTEE) and a roundtable discussion on the topic held in Kathmandu on 6 April 2023.

This article was published in Trade, Climate Change and Development Monitor, Volume 20, Issue 04, April 2023.