The WTO has released the latest trade policy review of Nepal (prepared by WTO here and by Nepal here). The last review was done in 2012. Nepal has updated its trade policy and export strategies and investment as well as labor legislation since then. However, there is not much to show in terms of its effect on industrial output and exports growth, which suffers from supply-side constraints and inadequate trade facilitation measures.
Nepal became a member of the WTO on 23 April 2004 when it became the first LDC to join the WTO through the full working party negotiation process. It is also a member of two overlapping regional free trade agreements: South Asia Free Trade Area (SAFTA), and Framework Agreement on the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Nepal has bilateral trade agreement with 17 countries. The transit and trade treaty, railways services agreement and an agreement on cooperation to control unauthorized trade with India are the most consequential ones. The transit treaty with India allows Nepal to trade with other countries through Kolkata/Haldia ports and Vishakapatnam port (since 2016).
Here are some of the highlights from the TPR:
1. Exports have declined since the last review, but imports have more than doubled. Almost two-thirds of export and imports occur with India. As a share of total imports, agricultural (19%), iron & steel (9.7%), non-electrical machinery (8.5%), and transport equipment (8.9%) imports increased. Manufacturing import's (i.e. total minus agricultural and mining imports) share increased from 54.3% to 59.2% over the review period.
2. Nepal updated its trade policy in 2015 and Nepal Trade Integration Strategy in 2016. MoICS is responsible for implementing trade policy, but MOF has the final say in setting tariffs. Trade related legislation covers customs, export and import licensing, TBTs, SPSs, competition policies, investment regimes, competition policies, government procurement, and intellectual property rights.
3. NTIS 2016 provides the foundation for the implementation of trade policy 2015. It identifies 12 strategic area goods and services: large cardamom, ginger, tea, medicinal and aromatic plants, fabrics textiles yarns and ropes, leather, footwear, chyangra pashmina, knotted carpets, skilled and semi-skilled professionals, IT services and BPO, and tourism. Seven cross costing areas are trade capacity (including trade negotiations), trade and investment environment, trade and transport facilitation, standards and technical regulations, sanitary and phytosanitary standards, intellectual property rights, and trade in services. NTIS 2016 identified 190 actions to be implemented by 2020.
4. The bilateral trade and transit treaty with India allows each other unconditional MFN treatment and exemption from customs duties and quantitative restrictions on a reciprocal basis on a mutually agreed list of primary products. Nepal gets non-reciprocal access (no customs duties and quantitative restrictions) of its industrial products to the Indian market except for vegetable fats, acrylic yarn, zinc oxide and copper products under HS headings 74 and 8544. These four products face tariff quotas. The EU provides duty-free and quota-free access to Nepalese exports under its Everything But Arms (EBA) initiative. Nepal is beneficiary under the GSP schemes of Australia, Canada, the European Union, the Eurasian Economic Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, Switzerland, Turkey and the United States. The US is providing duty-free treatment for 779 products to help the country expand its trade and economic development following the devastating earthquakes in 2015. This unilateral preferential agreement started on 30 December 2016 and will last until 21 December 2025. China and Nepal also signed a bilateral agreement on transit transport in March 2016.
5. FITTA 1992 and IEA 2016 provide the legal basis for regulating, administering and facilitating FDI. There many other laws related to banking, environment, and labor among others that also affect investment. The Company Act, 2006 (as amended in 2017) simplifies and makes the process of establishing, managing and administering companies more convenient and transparent. The Industrial Enterprises Act (amended in 2016) is simplifies and clarifies the procedures for the entry, operation and exit of industrial enterprises. The SEZ Authority Act 2016 provides incentives for investors establishing firms within a SEZ: full tax exemption for first five years, income tax rebates, dividend tax exemption, VAT facility, and custom duty exemptions among others. Investment Board of Nepal and Department of Industry facilitate and approve investment proposals depending on the amount of investment or as specified in respective laws.
6. There are eight MFN tariff bands: duty-free, 1%, 5%, 10%, 15%, 20%, 30% and 80%. As of 2018/19, there are 5,572 tariff lines at the eight-digit level based on HS2017 nomenclature. The simple average applied MFN tariff (excluding ad valorem equivalents for specified duties) decreased from 12.2% in 2011/12 to 12% in 2018/19. Including ad valorem equivalents, the simple average applied MFN tariff in 2018/19 is 12.4%. The highest ad valorem rate of 80% applies to two tariff lines related to tobacco, along with motor vehicles, and arms and ammunition products.
7. Tariffs have been increasing, with an average tariff of 9.3% on raw materials (first stage of processing), 11.4% on intermediate goods, and 13.8% on finished goods.
8. Nepal bound 54 tariff lines at HS eight-digit level, with overall average bound tariff of 26.6%. The average bound tariff for agricultural products is 42.9% and for non-agricultural products 23.9%. However, applied tariffs (average 12.4%) are much lower than the average bound rate except for 38 tariff lines. These are mainly chemical products and some machinery including motor vehicles.
9. The simple average tariff rate for SAARC members is 9.5% (for non-SAARC members its 12.4%). For agricultural products the average preference margin is 2.2 percentage points compared to the applied MFN tariffs, and for non-agricultural products its 2.9 percentage points.
10. Other duties and charges imposed by Nepal include an agricultural reform fee of 5% (or 8% on some products) on selected agricultural products imported from India and Tibet Autonomous Region of China; and a road maintenance and reform fee of NRs4 per liter for import of petrol and NRs2 per liter for diesel. A customs service fee of NRs565 per declaration is charged o import consignments worth over NRs5,000. VAT and excise duties are also levied at customs points.