Roundtable discussion on Nepal-India treaty of trade

South Asia Watch on Trade, Economics and Environment (SAWTEE) organized a roundtable discussion on 6 April, 2023, to seek inputs from relevant stakeholders regarding the required amendments and revisions to the Nepal-India Trade treaty in order to further develop trade between Nepal and India for mutual benefit.

Press Release

Kathmandu, 6 April 2023. With the Nepal-India Treaty of Trade up for renewal this year, the Government of Nepal should seek revisions to the treaty geared towards removing barriers faced by Nepali goods in India, restoring Nepal’s policy space to protect its farmers from unfettered agricultural imports, and enabling Nepal to pursue preferential trade agreements with other countries. These views were expressed in a roundtable discussion on the bilateral trade treaty organized today by South Asia Watch on Trade, Economics and Environment (SAWTEE) where a study done by SAWTEE on the topic was also presented.

Trade experts, policymakers, exporters, importers and freight forwarders were among about three dozen participants in the event.

The trade treaty has a validity of seven years. It was last renewed in 2016 without any amendments.

Mr. Madhu Kumar Marasini, Secretary, Ministry of Industry, Commerce and Supplies (MoICS), stated that three rounds of negotiations with India have already taken place in connection with revising the trade treaty and he is hopeful of reaching an agreement, taking into account as many suggestions of stakeholders, as possible. He added that without increasing productive capacity and production, changes in the treaty alone will not help boost exports.

Ms. Shreejana Rana, President, Nepal India Chamber of Commerce and Industry (NICCI), highlighted that NICCI and think tanks can play a big role in bridging the prevalent coordination gap between the private sector and the government. She further stressed that regular research on Nepal-India trade and continuous monitoring of the implementation of the bilateral trade treaty are urgently needed to realize the huge potential in mutually beneficial bilateral trade.

“Nepal can’t continue to afford providing tariff-free access to heavily subsidized agricultural products from India. Therefore, select primary agricultural products, including cereals, must be removed from the list of primary products on which both countries are currently providing reciprocal tariff-free access,” said Dr. Posh Raj Pandey, Chairman, SAWTEE, presenting the think tank’s research on the treaty that suggests key areas for amendments. The research was supported by The Asia Foundation.

Nepal has the latitude to impose much higher tariffs than the agriculture reform fee of 5 percent or 9 percent it currently levies on certain agricultural products from India, thanks to the policy space it secured for itself

when acceding to the World Trade Organization in 2004, but that option has been hamstrung by the Nepal-India trade treaty.

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, said Dr. Pandey. In similar vein, the list of primary agriculture products that are to be exempt from reciprocal duty-free access must also be specified in terms of HS codes.

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, says Dr. Paras Kharel, Executive Director, SAWTEE, and a co-author of the study. He notes that possible measures include targeted subsidies and checking anticompetitive practices. He argues that 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.

Touching on another dimension of policy space, the SAWTEE study identifies a provision in the treaty that 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.

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. There are no such permanent 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). Imports within the quota are granted duty-free access whereas imports above the quota are subject to non-preferential tariffs. Participants in the roundtable called for scrapping the quotas.

As the SAWTEE research reveals, 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 stringent 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.

Dr. Pandey suggests that the twin rules of origin applicable to exports from Nepal 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.

Nepali jute products have been subject to anti-dumping duties in India for the last seven years. In theory, dumping is said to occur when goods are exported for less than they are sold in the domestic market or third-country markets, or at less than production cost. Nepali jute product manufacturers say they are not doing so. On this issue, Dr. Pandey pointed out that as per WTO rules anti-dumping duties can be imposed only if dumped exports are causing material injury to domestic industry, and expressed doubt that Nepali jute products were causing material injury to India’s domestic jute manufacturers. Mr. Raj Kumar Golchha, President, Nepal Jute Mills Association, in a statement, says India continued with the anti-dumping duties on Nepali jute products for another five years in late 2022 even though India’s Directorate General of Trade Remedies had, following a detailed investigation, concluded that anti-dumping duties would not be applicable to Nepali jute products. He points out that Nepali jute product exporters source 40 percent of their raw jute from India, their products make up less than 2 percent of the Indian market, and they also source machinery and parts from India.

Procedural irritants in the export of, for example, pharmaceutical products, vegetables, and medicinal and aromatic plants from Nepal in 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, suggests Mr. Kshitiz Dahal, Senior Research Officer, SAWTEE, and a co-author of the study.

In Para 6 of Protocol to Article II 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, notably 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 to Nepal must be sought and provided, 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. SAWTEE research points out that 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 meeting of local authorities, argues Mr. Rabi Shanker Sainju, former Joint Secretary, MOICS, who led bilateral trade and transit negotiations with India. 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, says Mr. Sainju, adding that 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, says Mr. Sainju, emphasizing the need for a clearly specified dispute settlement mechanism or grievance redressal mechanism.

Background Note and Agenda

Presentation slides

Media Coverage