Potential Exports and Nontariff Barriers to Trade

Nepal National Study

• Publisher: Asian Development Bank
• Year: 2019
• ISBN:
  9789292616236
• Topic: Economics
• Subtopic: Exports & Imports
• Index: Economics

This publication explores how Nepal could boost its exports by addressing nontariff barriers to trade. It focuses on sanitary and phytosanitary measures and technical barriers to trade, and identifies export products that have potential for an increased market share in Bangladesh, Bhutan, India, Maldives, and Sri Lanka. It also examines the regulatory environment and demonstrates the need to upgrade quality standards and laboratory equipment, and strengthen accrediting and assessment bodies. The publication recommends how the public and private sectors can overcome these barriers.

Chapter 1
Introduction

1.1 Background and Context

The South Asia Subregional Economic Cooperation (SASEC) partnership brings together Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka to promote regional prosperity by, among other things, deepening regional integration, enhancing cross-border connectivity, and stimulating trade.¹ Despite commendable work by the SASEC program since its inception in 2001, intra-SASEC trade has not increased and diversified; rather, it has concentrated with India and stagnated at less than 1%, if India is excluded. The state of negligent trade with other SASEC countries except India begs the question as to why Nepal conducts most of its trade with other countries rather than with SASEC countries.

Many factors, including weak trade facilitation measures and burdensome transit procedures, contribute to this unfortunate scenario—and nontariff measures (NTMs) are one of the primary reasons. Studies and reports have pointed out that these NTMs are used as trade policies with protectionist intent.² For example, vegetable ghee is subject to a tariff rate quota and canalization when exporting to India; and exports of some agricultural products require an import permit in India.

A special set of NTMs—sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT)—present an interesting dilemma to exporters as well as policy makers: the same measures may be used to pursue both legitimate and protectionist goals, and the boundary between different motivations is very thin. The trade effects of such NTMs depend on the reasons behind the adoption and design. For example, if they are used to correct market failure such as information asymmetry, trade may be enhanced as consumer confidence in the product will increase demand for it. If the NTMs are employed with the intent to protect domestic producers, however, they are likely to reduce trade.³ Regardless, these measures have been found to be a major export impediment for least developed countries (LDCs)⁴—and Nepal is no exception.⁵

Although studies solely focused on the SPS and TBT constraints faced by Nepalese exporters are rare, some studies have pointed out how SPS measures and TBT have indeed been creating problems for Nepalese exporters. Raihan (2016), SAARC (2006), and Alburo (2004) offer instances where issues such as lack of recognition of test certificates and excessive testing requirements had created obstacles to trade. Similarly, Tika Bahadur Karki covers a wide array of topics related to SPS implementation in South Asian countries and discusses major SPS issues and constraints faced by South Asian Association for Regional Cooperation (SAARC) countries.⁶ Likewise, Kees van der Meer provides an in-depth analysis of SPS-related issues impeding Nepal’s trade of agricultural and food products.⁷ ITC (2016a) also discusses some SPS, TBT, and procedural issues faced by exporters, particularly in tea, honey, ginger, cardamom, herbal and medicinal products, coffee, other food products, handmade paper and paper products, carpets, garments, leather products, and metal, wood, and other handicraft items. The Confederation of Nepalese Industries provides a similar analysis of SPS and TBT issues faced by exporters of lentils, tea, ginger, and medicinal and aromatic plants.⁸

As a member of the World Trade Organization (WTO), Nepal has obligations to abide by the WTO agreements related to SPS measures⁹ and TBT.¹⁰ This has led to some reforms in the form of amendments to legislations and introduction of new policies, as well as the establishment of national enquiry points for SPS measures and TBT.¹¹ The national enquiry points carry out the important functions of notifying and publishing various information regarding the existing and new SPS measures and TBT. However, Nepal still has a long way to go in achieving the capacity and resources to have the SPS measures and TBT align with international standards, and, most importantly, implement them in an efficient and expeditious manner. This lack of competence in effectively addressing the SPS measures and TBT has significant adverse effects on Nepal’s export and trade—and consequently on its economic well-being.

The analysis shows that there is a plethora of products that Nepal exports in significant volumes globally, but the level of exports in the SASEC region is insignificant or nonexistent. Many of these products are subject to SPS measures and TBT in other SASEC countries. If the trade has not occurred solely because of SPS measures and TBT, it poses an interesting question of how Nepal is able to meet the SPS and TBT standards in other countries, but not in SASEC countries. Is it because some of the SPS measures and TBT are in place in SASEC countries to protect domestic industries? Or is it because importing SASEC countries lack SPS and TBT infrastructure such as adequate laboratory testing facilities to efficiently carry out the conformity assessment procedures and hence increase the cost of SASEC trade? Or is it because SPS and TBT procedures at the SASEC borders are inefficient and hence delay the movement of goods, thereby increasing SASEC trade costs? Similarly, the other important questions would be: How big is the misalignment between Nepalese SPS and TBT regulations and the international standards? and How severe is the lack of SPS and TBT infrastructure in Nepal? These findings will provide us with much needed knowledge of the specific needs of Nepal in addressing SPS and TBT constraints.

1.2 Purpose and Scope of the Study

Against the backdrop of proliferation of the SPS measures and TBT, as well as their likely association with dismal intra-SASEC trade, the overarching purpose of this study is to complement the SASEC program’s efforts to reduce and remove trade barriers, particularly SPS measures and TBT in the SASEC region.

The broad scope of the terms of reference for this national diagnostic study comprises the following:

1.2.1 Identifying Priority Products

(i)Identifying the specific items with potential for exports from Nepal and subject to SPS measures and TBT of the importing SASEC countries.

1.2.2 Identifying Sanitary and Phytosanitary and Technical Barriers to Trade Constraints

Carrying out a national diagnostic audit, which includes

(i)identifying current SPS and TBT infrastructure capacity constraints, and presenting prioritized recommendations for necessary future investments; and

(ii)identifying priority national capacity-building activities in the areas of standards and regulations.

1.3 Methodology

The diagnostic study has two important aspects: (i) identifying priority products, and (ii) identifying critical SPS and TBT constraints. The methodology for identifying priority products entails identifying products that Nepal exports in significant amounts to non-SASEC countries, but does not export at all or exports in negligible amounts to other SASEC countries, most likely because of the SPS measures and TBT these products face in other SASEC countries. Identifying critical SPS and TBT constraints is done through a gap analysis, which is also supplemented by a survey of exporters. Each step is discussed in detail.

1.3.1 Identifying Priority Products

The following methodology is used to identify 100 products that Nepal has high potential to export to other SASEC countries:

(i)Trade data is examined for the years 2010–2014 (United Nations International Trade Statistics Database, or UN COMTRADE). Trade data for 2015 is purposely excluded as an economic blockade was imposed on Nepal at its Indian borders. To avoid the possibility that the economic environment at the time might have produced a misleading trade figure for the year, data analysis is limited up to 2014.

(ii)To avoid outliers, products that have been exported only once within 2010–2014 are excluded.

(iii)To ensure that Nepal’s exports are not more expensive than imports from other nations, products are excluded where the average unit value of export of Nepal is higher than the average unit value of other SASEC countries. This ensures that Nepal’s potential exports can compete with imports from other parts of the world.

(iv)Products are excluded where Nepal’s share in total imports of importing SASEC countries is more than 20%, assuming these products are traded significantly and the SPS and TBT issues are minimal.

(v)Similarly, products for which the export value for each SASEC country constitutes a more than 20% share in total trade are excluded.

(vi)Finally, only those products that are traded in significant amounts (e.g., $100,000) are chosen to ensure the commercial viability of the exports. Products are not included where Nepal’s global export is below the specified amount or where another SASEC country’s global import is less than that specified amount. The specific amount will be different depending on which SASEC country is under investigation.

Based on secondary information, all SPS measures and TBT faced by the products obtained from steps (i) through (vi) in the SASEC country under investigation are compiled.

1.3.2 Identifying Critical Sanitary and Phytosanitary and Technical Barriers to Trade Constraints

The diagnostic study aims to identify the most critical SPS and TBT constraints that the potential products face. To this end, the diagnostic study includes the following two methods.

1.3.2.1 Gap Analysis

Based on a review of studies, field studies, and consultations with stakeholders, the gap analysis seeks to identify the major areas of nonalignment or conflict between national legislation, actual local practices, the SPS measures and TBT of SASEC countries, and international standards. The major steps in the gap analysis are the following:

(i)Identifying Nepal’s SPS measures and TBT—that is, identifying all the SPS measures and TBT that the potential priority exports of Nepal have to satisfy in Nepal before they are exported.

(ii)Identifying Nepal’s SPS and TBT agency—that is, the principal agency that overlooks the enforcement of SPS measures and TBT in Nepal.

(iii)Identifying SPS measures and TBT of the importing SASEC country—that is, identifying all the SPS measures and TBT that the potential priority exports of Nepal have to satisfy in the importing SASEC country before these products are allowed entry into the market.

(iv)Identifying the SASEC SPS and TBT agency—that is, the principal agency that overlooks the enforcement of SPS measures and TBT in the importing SASEC country.

(v)Identifying the distance to international standards—that is, identifying whether the SPS measures and TBT of the importing SASEC country is based on international standards.

(vi)Identifying procedural obstacles—that is, identifying the extent of SPS- and TBT-related procedural obstacles in both Nepal and the importing SASEC country.

Steps i-v will provide the level of misalignment of Nepal’s SPS measures and TBT with those of other SASEC countries as well as with international standards. This finding can be crucial if SASEC countries are to harmonize their national standards or decide to adhere to international standards. Step vi will provide the obstacles posed by implementation of SPS measures and TBT. These findings will likewise be crucial if SASEC countries are to streamline procedural delays and impediments through capacity building and/or the use of a mutual recognition mechanism.

1.3.2.2 Survey of Exporters

The gap analysis was complemented by a survey of exporters to dig deeper into the impediments to trade resulting from SPS measures and TBT in SASEC countries. The survey exposed several important SPS and TBT issues, including (i) how Nepal is able to conform to SPS and TBT requirements of importers other than SASEC countries; (ii) the major problems associated with the compliance of SPS measures and TBT in SASEC countries; (iii) the extent of procedural hurdles caused by SPS and TBT conformity assessment in both Nepal and other SASEC countries; and (iv) actions required from the government’s side to strengthen legal and institutional mechanisms to address SPS and TBT issues faced by identified priority products to other SASEC countries. Appendix 4 presents the major focus questions of the survey of exporters.

Following the introductory chapter, the diagnostic report is organized as follows: Chapter 2 discusses the pattern of Nepal’s import and export trade with other SASEC countries during 2014–2016. Chapter 3 identifies products which have the potential for export from Nepal to other SASEC countries, yet which may be subject to SPS and TBT requirements in the importing country. An overview of SPS measures and TBT in Nepal is laid out in Chapter 4, focusing on legal structures, institutional frameworks, and SPS- and TBT-related infrastructure. Chapter 5 identifies standards, regulations, and procedural obstacles in the SASEC countries that are impeding trade of Nepal’s identified potential export items. Based on the earlier discussions and findings, Chapter 6 provides prioritized recommendations for necessary future actions to mitigate SP...