As Nepal is looking up to economic recovery after the setback suffered due to COVID-19 pandemic, it is facing several structural and policy issues. The structural issues pertain to lack of industrialization and diversification of export basket while the policy hurdles include lack of priority and focus in economic planning and obstacles created by development and trade partners, especially China. The Duty Free Quota Free Access (DFQF), provided by China to Nepal is a running horse on paper, which has neither helped the country to enhance its exports to China nor to tide over its widening trade deficit with it.
Trade deficit of Nepal with China has been witnessing an increasing trend. In 2017-18, Nepali total exports to China stood above US$ 23 million and its import from China stood above US$ 1.5 billion. Although, China has given zero tariff facility to Nepali products since 2009, Nepal hasn’t been able to bring the trade deficit down due to unfavourable tariff conditions. China had assured Nepal for importing edibles, meat items and a number of plant products on the basis of special consideration for entry into the Chinese market, but these products are yet to receive duty-free access.
Even the DFQF access provided to Nepal by China is of no avail as it does not help the latter to enhance its exports to China. China offers duty-free access to these products according to the eight-digit Harmonised System (HS) code, which is applied mainly to specific products. But Nepal seeks duty-free access from China as per the six-digit HS code that will apply to a wider range of products including pashmina products, woolen carpets and handicrafts in which Nepal has comparative advantage. These products are currently not included in the DFQF list offered by China to Nepal. Kathmandu also lacks a comparative advantage in most of the goods traded through eight-digit HS code list.
4Despite receiving repeated assurances from the Chinese authorities, Nepali goods have been facing hurdles while being exported to China via land routes for the past few years. During former Prime Minister KP Oli’s visit to China, Nepal had made fresh request to the Chinese government to grant an enhanced level of market access for 512 tradable products. But, Beijing has not revised the DFQF list of Nepali products under its duty-free pledge as yet. China is the second largest trading partner of Nepal after India. Recently, it proposed (January 2022) to grant duty-free treatment to exports originating from Nepal if Nepalese products fall under the list of 8930 goods selected by China, but as long as Nepal’s industrial sector is not diversified, the benefits of the revised list would at best be limited. Beijing has further requested the Nepalese government to expedite the process of completion of exchange of notes to enter into the duty free agreement.
As part of its obligations at the World Trade Organisation (WTO), Chinas has been extending duty-free facility upto 98% of its tariff lines to products being imported from least developed countries, including Nepal. As most of the agro-based primary products are not included in Chinese list, Nepal has not been able to utilize this facility and exports only about 247 products to China under the duty free agreement. Nepal has been requesting China to include 512 more of its products in the list where it has comparative advantage.