Critical Analysis of Impact

WTO in Nepal: Opportunity or Threats?

Submitted to:
Mr. Gokarna Awasthi
Subject Instructor
International Business

Prepared by:
Mukunda Bhattarai
2012-MBA-515
Roll No.: 013, KOHINOOR

Apex College
Mid Baneshwor, Kathmandu, Nepal
January 3, 2014
WTO in Nepal: Opportunity or Threats?
1. Background
Nepal accelerated economic reform programs in the early 1990s with the adoption of liberal and
market oriented policies. The reform measures have covered almost all sectors of the economy
including trade and investment sector. However, the trade performance has not been satisfactory so
far. Trade deficit increased in the 1990s to 18.3 percent of GDP as compared to 13 percent of 1980s
(NDF 2004). Similarly, despite the various policy initiatives to boost FDI inflows, Nepal could not
attract substantial investment during that period.
Nepal's foreign trade is heavily reliant on India. Similarly, as a land-locked country we have to rely
on India to get access to the rest of the world. Transit route via China is neither convenient nor cost-
effective. Bilateral treaties and friendly relations manage trade and transit between Nepal and India.
Nepal had to face extreme economic difficulties whenever bilateral relations were not satisfactory.
For example, India's trade embargo of 1988/89 was very costly both to the economy and the
government that inspired Nepal to be a member of multilateral trading system.
Nepal has a very low industrial base, that can be explained by increasing trade deficit during 1980s
and the 90s. Likewise, Nepal's trade is not diversified. For example, 90 percent of Nepal's total export
is concentrated on India, USA and Germany. Trade is not diversified both in terms of market and the
product. A large chunk of exports (about 50 percent) depends on carpets, readymade garments and
woolens.
2. How Nepal become WTO member? (Accession Process)
Nepal had applied for GATT membership for the first time in 1989. It obtained an observer status in
1995 and submitted the memorandum on Foreign Trade Regime in July 1998. The first meeting of
the working party for Nepal's membership was held in May 2000 in Geneva. The second meeting was
held in September 2002 in the same place. The third meeting held in August 2003, gave final shape
for Nepal's membership. The fifth Ministerial Conference at Cancun, Mexico approved Nepal's
membership package on 11th September 2003. Consequently after the government's approval on
April 23, 2004, Nepal became a fully fledge WTO member.
In this way Nepal became the first LDC to obtain WTO membership by accession after almost fifteen
year's efforts. In the course of accession process Nepal had to furnish answers to a large number of
questions and queries. Similarly, bilateral negotiations were held with a number of countries. Nepal
has made commitments to a number of areas while negotiating for the membership. Nepal has
secured the rights to protect cottage industries and to provide export subsidies. It also has a right to
grant subsidies up to 10 percent to agriculture sector.
3. Impact of Entry
The impact of multilateral agreements on member countries economy depends on the types of
provisions and the level of implementation of such provisions. It is too early to evaluate the impact of
Nepal's entry into the WTO since it has recently became a fully fledge member. However,
counterfactuals of membership and ex-ante evaluation of Nepal's entry can be carried out with the
help of extrapolations of such provisions and agreements. Sector-wise effects of such provisions, in
general, can be stated as following:
3.1 National Economy
The economic reform process of 1980s got momentum in the 1990s. Nepal initiated economic
reforms process in industry, trade, finance, foreign exchange, foreign investment etc even before the
Uruguay Rounds. A study recently carried out but by the International Monetary Fund has shown that
Nepal is a leading liberalized country with 2 points where the countries in the world are graded with
1 to 10 points. Therefore, Nepal's entry into the WTO will not have significant impact on the
direction of national economy.
3.2 Government Revenue
One of the basic functions of the WTO is to liberalize trade and conduct world trade according to
multilaterally agreed rules. This requires the member countries to reduce tariff rates in accordance
with their commitments and provisions of multilateral trading agreements. On the other hand the
member countries can protect their industries with nothing but tariffs. In a country like Nepal, where
commodity taxes play vital role in revenue mobilization, is bound to have a considerable pressure on
government revenue mobilization. However, commodity taxes based on foreign trade are already low
in Nepal. There is a possibility even to raise binding ceilings of such taxes. Viewed from these
perspectives, Nepal may not have such a huge fiscal pressure to comply WTO rules and provisions.
3.3 Agriculture
The Agreement on Agriculture has become one of the most contentious issues of WTO. The agenda
on agriculture have been creating havoc in WTO meetings and conferences for a long time. It was
one of the main causes of Cancun debacle. The agreement requires heavy reduction on domestic
support and export subsidies on agriculture from industrial and developed countries.
3.4 Trade and Industry
There are several agreements in WTO concerning trade and industry sector. Tariff, antidumping and
safeguards measures have allowed substantial dispersion of protection in many countries. Similarly,
as stated above, the Agreement on Subsidies and Countervailing Measures allows export subsidies to
the countries with per-capita income less than US $ 1000. However, experience has shown that there
is not much prospect of using such subsidies to gain competitive advantage vis--vis industrial
countries.
4. SWOT Analysis
Nepal's entry into WTO has the following strengths, weaknesses, opportunities and threats.
4.1 Strengths
Liberalized economy is the main strength of Nepal. As stated earlier Nepal initiated a sweeping
economic reform programs after the restoration of democracy in 1991. Entry for foreign investment
was substantially simplified. The reforms covered almost all sectors of the economy including trade,
investment and finance. Before liberalization Nepal's trade regime was characterized by high tariffs,
quantitative restrictions, import licensing system and control of foreign exchange transactions that is
now liberalized. This helped Nepal obtaining WTO membership and, is expected to help in fulfilling
commitments of membership package. Nepal has a number of other strengths as well.
4.2 Weaknesses
No doubt, WTO offers tremendous opportunities and benefits to its members. However, the
experience has shown that LDCs are not able to materialize such opportunities and benefits due to
four main reasons. Firstly, they are marked with their inherent structural or supply-side constraints.
Secondly, the institutional weaknesses of WTO impede the LDCs form acquiring its potential
benefits. Thirdly, frequent non-compliance of WTO provisions has been noticed from the influential
WTO members. Similarly, non-cooperation and short-term self-interest of some of the players of
global governance has hindered LDCs from materializing the provisions and opportunities which are
being offered by WTO.
Nepal has inherent domestic weaknesses like bureau pathology, poor infrastructure, lack of
competitiveness, under-developed capital and money market, lack of well-developed and strong
private sector, lack of effective regulatory framework, low level of human capital and lack of sound
business environment etc. Similarly, transport cost is very high in Nepal. Political instability has
significantly low level of predictability in governance.
4.3 Opportunities
Nepal's entry into WTO has reduced and even avoided in some cases, the cost of non-membership. A
large share of international trade (more than 90 percent) takes place among WTO members. Nepal's
major trading partners and neighboring countries are its members, In this situation remaining aloof or
outside the system might pose high cost to the economy.
Nepal's entry into WTO is expected to have increased benefits to the consumers due to cheaper
import, sustained increase in volume of export spurred by predictable access to foreign markets and
the possibility of attracting foreign direct investment. The standard of living is expected to improve
with an increase in economic growth through massive expansion of commercial activities within and
outside the country. It offers expanded market for Nepalese exports. It also helps to expand and
diversify exports as it provides a secure and predictable trading environment. There is a high
possibility of foreign direct investment inflow in the country under transparent and predictable
trading environment.
Nepal, being one of LDC, can enjoy special provisions, benefits, concessions and facilities of WTO.
Similarly, she can obtain technical assistance from developed countries. As mentioned earlier, there
are a number of special provisions of positive discrimination in favor of LDCs. The participation in
WTO can also relieve LDCs like Nepal from the scourge of periodical renewal of bilateral trade
agreement.


4.4 Threats
There are three major threats to LDCs from WTO membership. Firstly, there is a possibility of
marginalization of weaker economies. Secondly, it may cause global exploitation and widen
inequality both at national as well as global level. Similarly, survival itself is challenging to LDCs in
absence of resources, and knowledge-base since there is hardly a level playing field in WTO.
WTO membership creates erosion on flexibility of policy discretion. Policy makers have less
freedom in selecting policy options because of the excessive policy prescriptions of multilateral
financial institutions like the World Bank, IMF and WTO. Similarly, there is an erosion of the margin
of preferences Nepal was enjoying under various bilateral and multilateral agreements. After the
transition period of the Agreement on Textiles and Clothing, which ends by the end of December
2004, Nepal's major export sector, carpet and readymade garments will have to face serious threats.
Meeting additional costs for compliance of WTO commitments as well as the increased cost for
participation is significantly high. It will definitely create pressure on budget allocation. There is a
danger of dumping Indian goods in Nepal. Similarly, elimination of subsidies and other preferences
may increase food prices that hits hard to the general public. The agriculture sector will also be in
trouble when the government takes its hands off from this sector in the name of redefining and
relocating the role and scope of the government.
5. Conclusion
WTO is undeniably a major player in the field of global economic governance. It has integrated the
world economy very fast by creating greater degree of interdependence among the nation states in all
economic spheres of life.
No doubt, WTO membership offers a large number of opportunities to the least developed countries
like Nepal. However, benefits do not derive automatically. It requires ability to tap opportunities.
Benefits of WTO so far have been confined to industrialized countries and a few large and influential
developing countries. Similarly, the cost and challenges of membership are immediate whereas
opportunities and benefits are only prospective.
However, Nepal does not have any alternative to WTO membership. The only option is to streamline
opportunities and benefits and minimize risks and threats. This requires turning participation into
influence.