Tuesday, April 13, 2010

Nepal-US Trade & Investment Framework Agreement (TIFA) & Exports

My latest column is about the implications of the US-Nepal TIFA. I make the point that there is little, if any, immediate gains in terms boosting exports. However, the pact is a right move in promoting Nepali exports industry and exports. A high level delegation led by Nepal’s commerce secretary was in DC. I met them twice last week.
There has been a lot of discussion about the proposed US-Nepal Trade and Investment Framework Agreement (TIFA). The Nepali delegation led by Commerce Secretary Purushottam Ojha is in Washington DC to finalize the pact, which the two countries will formally sign soon. The proposed new pact with the biggest economy in the world has reignited optimism among Nepali exporters. It is seen as a precursor to a free trade agreement (FTA) between the two countries.

Nepali investors and exporters should understand that TIFA is not a panacea for the ailing exports sector. In fact, nobody knows if the enactment of TIFA would boost exports to the US. It does not give additional tariff concessions for the beleaguered export-oriented industries, including ready-made garments. It is merely a pact that establishes a framework for enhancing trade, technical cooperation, and resolving outstanding disputes between the US and Nepal. It is not a silver bullet to regain the lost glory of Nepal’s exports to the US.

When the Nepali delegation floated the idea that Nepali ready-made garments be given the same preferential treatment that the US provides some African countries for quota and duty-free entry into the United States following the African Growth and Opportunities Act (AGOA) of 1992, the US representatives gave an apt advice: Improve domestic business environment and make it easier for the US companies that are already investing in other South Asian countries, mainly India, to invest in Nepal. Additionally, they asked the Nepali delegation to diversify exports basket. The probability of investment by a company that has experience of operating in South Asia is higher than a company that has no experience running business in the Indian sub-continent. The investors that are already investing in this region understand relevant business constraints better and, if given enough incentives, might invest in Nepal as well.

Source: USTR

Enough has been said about the demise of the garment industry in Nepal. But, no trade related discussion is complete without mentioning the downfall of this industry and its impact on the economy. Concerning the US market, the only notable item we were exporting with comparative advantage before 2005 was ready-made garments. This was possible not because our exports were price and quality competitive, but because the international market was not a level playing field for all garment exporters in the world. The end of Multi-Fiber Agreement (MFA)—which eliminated quotas on the trade of textiles and clothing— in 2005 crippled the domestic garment industry. It struggled to compete, both in terms of price and quality, with superiorly competitive garment producers from other countries. The message was loud and clear: We desperately need to enhance our competitiveness, diversify our export basket, and effectively market our goods and services abroad.

The policymakers need to realize that nothing will move forward unless there is political stability and cessation of incessant harassing of investors and entrepreneurs by militant labor unions and political youth wings. No matter how many TIFAs are inked, in the absence of security and political stability, there will be no substantial positive change in exports. The only direction exports and exports revenue can go are downward. Forget about foreign investors; even domestic investors will not invest if there is constant threat to life and private property.

To make TIFA effective, there is a need to look at binding constraints on investment and trade. Importantly, we need to upgrade technology and human capital capable of producing ‘nearby’ goods, which are in close ‘proximity’ with products that the economy is already producing. This would speed up transformation of not only the export-oriented industries but also the whole economy as rural and informal sector workers will be absorbed into the industrial and formal sectors. Furthermore, the country needs to address energy crisis and shortfall of infrastructure, which several studies have identified as the most binding constraint on Nepal’s economic growth.

Given this bitter reality, there is hardly any immediate tangible benefit out of the US-Nepal TIFA to the Nepali export-oriented industries. It does nothing except to implant optimism among investors that things are moving in the right direction and, if situation improves, trading opportunities will be much more reliable, secure and better.

What goods can we export with comparative advantage to the US market? Neither the policymakers nor the exporters have a definite answer. A comprehensive analysis of the potential for new exportable items to the US market is long overdue. In fact, a product-level and state-level analysis of the markets for Nepali goods in the US will be helpful to exporters because taste and preference of consumers in the $14 trillion economy are vastly different. The items under consideration right now are mostly a narrow set of agricultural and handicraft goods.

Not only there is a need to diversify our export basket, there is also a need to export goods that will help to increase exports revenue so that trade surplus with the US partly offsets overall trade deficit. The existing concentration of Nepal’s exports is extremely high, i e the export basket is composed of few goods upon whose international demand our export industry depends on. It is exposing the economy to greater trade and growth volatility. Studies have shown that the more diversified the export portfolio is, the lesser would be growth and export volatility. In addition, identifying and focusing on exporting goods and services that have high value-addition would mean sustainability of the export-based industries.

The US-Nepal TIFA will not provide immediate relief to Nepal’s ailing exports sector. However, this treaty is a right move in terms of smoothening and settling investment and trade issues, and enhancing trade and technical cooperation between the biggest economy in the world and the poorest country in Asia. There will not be any marked improvement in exports unless the binding constraints on investment and trade are addressed right away.

[Published in Republica, April 10, 2010, pp.6]