Ministry of Commerce And Supplies - Enhanced Integrated ...

N T I S20101.7 Declining Importance of Tariff AdvantagesMarket access environment is a critical element in export expansion.Nepal benefits from the unilateral GSP systems from the Quad countries.Nepal is a party to a Preferential Trading Agreement (PTA) with India that was renewed, first, in 2002 and, mostrecently, in October 2009. It allows for (i) exemption of primary products from import duties and quantitativerestrictions on a reciprocal basis; (ii) duty-free access for some Nepalese manufactures to India largely withoutquantitative restrictions, except for some sensitive items; and (iii) preferential access for Indian manufacturingexports without quantitative restrictions. The 2002 treaty introduced more stringent rules of origin, tariff ratequotas, and safeguard clauses. India also imposes countervailing duties (CVD) to make the prices of Nepaleseexports more comparable to Indian counterparts. 4 Moreover, Nepal’s preferential access to Indian marketshas eroded due to the recent policy announcement of the latter to provide similar access for exports from allLDCs to its market. While retaining the stringent provisions of the 2002 agreement, the renewed treaty of2009 has agreed to: (i) expand the number of trade routes from 22 to 27, (ii) grant recognition to the qualitycertificates issued by the competent authority of the exporting country based on the assessment of theircapability, (iii) scrap duty refundable process (DFR) allowing Nepal to import Indian goods in Indian currencywithout paying excise duty to India.Nepal is also a party to the South Asian Free Trade Agreement (SAFTA), whose members have committed a10-year tariff phase-out beginning in 2006. Members reached an agreement on some outstanding issues torender SAFTA effective from January 2006, which include safeguard measures--sensitive lists (to be within 20per cent of the total tariff lines of member countries) and rules of origin (at least 40 per cent value addition),as well as a revenue compensation mechanism for the LDC members for loss of customs duty (to be in placefor four years). The SAFTA agreement does not incorporate trade in services, cross-border investment ormovement of labour and no timeframe has been set for eliminating NTBs. The net benefits from regionalintegration under SAFTA for Nepal depends on scale economies gained from access to a larger marketoffsetting any trade diversion and loss of customs revenue. Given that it already has significantly higherinterregional trade by virtue of ties with India, particularly important for Nepal would be whether and howthe PTA with India is integrated into SAFTA. The impact on tariff free market access to Indian market as wellas a reduction in NTBs would be crucial. However, as trade gains might be limited by similar productionstructure and factor endowment, appropriate focus would be required on improving trade facilitation (transitagreements, lowering trade-related costs through better customs procedure and harmonizing standards). Thebenefits of SAFTA will also depend on the effective and time-bound implementation of safeguard measures,better infrastructure and regional connectivity, and extending SAFTA to cover services.In terms of predictability, preferential market access to India is time-bound as it depends on the validity of thetrade treaties, which can be revised periodically, provided that both parties agree. In contrast, preferentialmarket access schemes to Quad countries are not binding and differ among them with respect to productcoverage and rules of origin.Although Nepal has access to a number of preferential schemes, it has been restricted from fully utilizingthe benefits due to variation in the nature of schemes. For instance, Nepalese apparels are excluded fromthe facility of the US preferential scheme, and some key export items to India are subject to tariff quotas.Similarly, a weak understanding of the requirements to comply with stringent rules of origin and administrativeprocedures by Nepalese exporters has restrained their capacity to utilize the preferences fully.4India has recently imposed CVD of 4 per cent to readymade garments exports from Nepal over the maximum retail price (MRP) instead ofusual invoice value of their exports. Exporters have complained about such practice because MRP, being the negotiable retail price, standsthree-fold increase when CVD is imposed over it, the actual tax burden for the readymade garment exporters comes in a range of 8 to 10 percent (www.myrepublica.com).NEPAL TRADE INTEGRATION STRATEGY 2010BACKGROUND REPORT17