Trump tariff to benefit Nepal

US President Donald Trump’s announcement of hefty trade tariffs last week has reverberated worldwide, causing turmoil in international trade and stock markets.

The Trump administration announced a baseline 10% tariff on all goods from every country entering the US market, including products from Nepal. But other countries got slapped with even higher tariffs: 20% for goods from the European Union, 26% on Indian exports to the US, and a massive 54% on China. 

Many countries have imposed additional reciprocal tariffs on US goods, and there are fears of a global recession. It has been compared to dropping a nuclear bomb on the global trading system.

The tariffs will increase customs duty on foreign goods entering the US, ultimately increasing their prices for end consumers. This may reduce the competitiveness of imports, as a result of which there could be a decline in exports from China, Vietnam, India, Bangladesh, Sri Lanka and other countries that export manufactured goods to the US.

The US is Nepal's second-largest export market, with goods worth Rs17.31 billion exported during the last fiscal year. These include chhurpi dog chew, woolen carpets, pashmina, ready-made garments, and handicrafts. 

Dog chews and woolen carpets account for more than half of Nepal's total exports to the US. Nepal exported nearly 1,000 tonnes of dog chews to the United States. 

Following the 2015 earthquake, the US granted Nepal duty-free treatment for 77 items under its Nepal Trade Preference Program (NTPP). The period for these non-reciprocal preferential trade benefits will end on 31 December 2025.

It is not clear if the 10% tariff will apply to those items during the course of this year, and the ultimate fate of the NTPP. 

“The NTTP was passed as law by the US Congress a decade ago, so we can assume that the current administration will not revoke it through an executive order,” says Ravi Shankar Sainju, also the former joint secretary of the Ministry of Industry, Commerce and Supplies.

But he adds that the US is unlikely to extend the trade benefit to Nepal after December, as the Nepal government has not taken the necessary steps to renegotiate the NTTP. 

Kiran Saakha, president of the Nepal-USA Chamber of Commerce and Industry, also doubts that the NTTP will end immediately, adding: “The US Embassy was unable to provide us with a clear answer when we asked about the program. But as far as we understand, the benefits Nepal has received under the NTPP remain in place for now.”

Nepal has not been able to increase exports of the 77 specified products and reap full benefits of the zero tax facility. However, even with recent developments, economists say that a 10% duty on Nepali exports will not affect Nepal much and may even benefit the country,

Exports from Nepal would still be cheaper in the US market than goods from countries in the region which have had much higher tariffs placed on them, like India (26%), Pakistan (29%) Bangladesh (37%), and Sri Lanka (44%).

“The countries in the region export goods to the US that Nepal can produce,” says economist Poshraj Pandey. “With the US having imposed a relatively lower tariff on Nepal, there is a potential to actually increase exports to the American market.”

Saakha of the Nepal-USA Chamber of Commerce and Industry, agrees that the demand for Nepali goods could increase, but adds that the country must be more competitive.

Nepal had a booming ready-made garment industry leading up to the early 2000s with 500 industries employing 85,000 workers, and accounted for a quarter of the country’s total exports. But the termination of the WTO Agreement on Textiles and Clothing (ATC) in December 2004 ended quotas that countries like Nepal had benefitted from. Currently, cotton and polyester garments from Nepal are subject to 18% and 20% customs duty respectively in the US market. 

“Nepal has the opportunity to increase the export of ready-made garments once again,” says Bhim Kumar Giri of the Garment Association Nepal (GAN). “It is time to dust off our old machines and bring them back into production. Since garment exporting countries like India, Bangladesh, and Vietnam have been slapped with high tariffs, Nepal’s products will become competitive once again.”

But to take advantage of the tariff differential, Nepal has to be much more investment-friendly and transparent than it is now. While analysts discuss hypotheticals, there are doubts as to the US government’s commitment to its new tariff announcement. 

“We cannot be certain about Trump’s trade policies, he may reverse it just as suddenly,” says economist Pandey.

“There is cautious optimism about Nepal being less affected by Trump’s tariffs, but Nepal should not count its chicken before they hatch,” says trade expert Ravi Shankar Sainju. “Because daily expenses for the average American have risen, there may be less demand for Nepal’s exports.”  

In the past, high production and transportation costs and low productivity have hurt the competitiveness of Nepal’s products in the international market. Raw materials required to produce goods in Nepal have to be imported, and the country’s landlocked location increases cost of production.

Former GAN president Chandi Prasad Aryal says the fact that Nepali exports have lower tax rates will be meaningless unless the Nepal government removes existing hurdles to production and export, ensures domestic production of raw materials, and promotes productivity. 

“These new trade dynamics will be a wasted opportunity unless we can facilitate competitive production within Nepal,” he adds.

Nepal can benefit from the new US trade policy, but experts warn that Nepal must not misuse it. With high customs imposed on goods from neighbouring nations, there is a risk of those goods entering Nepal markets to be re-exported as Made in Nepal products.  

Says Kiran Saakha: “Government and entrepreneurs must be vigilant in preventing crimes that could lead to Nepal losing its credibility in the international market. Otherwise, the US might just as easily take away the small concessions it has currently granted to us.”