Nepal and India have agreed to renew the preferential trade treaty, but it now comes with new definitions for manufacturing, as well as quantitative restrictions on the four problem products of which there is said to have been a "surge" in exports to India to the detriment of industry there-vegetable ghiu, acrylic yarn, copper wires and zinc oxide. In general, Nepali industry is happy that the treaty row is over and it can get back to business without worrying for another five years. But it is unhappy that it took so long, when it was already clear last August last year that India wanted specific rules of origin and other safeguards in place before it would sign the extension. Sensing that, the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and its Indian counterpart the Confederation of Indian Industry (CII) had proposed a way out months before India actually sought the changes on 14 August. But the government sat on the FNCCI idea, rather than acting on the proposal.
Under the new provisions, Nepali ghiu makers will now only be able to sell 100,000 tons of the product in India duty-free. (Last fiscal year Nepal exported roughly 125,000 tons of ghiu). Any sales over this new limit will take place under the Most Favoured Nation (MFN) regime. Likewise, the quota fixed for duty free acrylic yarn export is 10,000 tons (against the roughly 11,000 exported last year), copper wires 7,500 tons and zinc oxide 2,500 tons. This could mean short-term problems for all four industries-which involve a total investment of over Rs 10 billion-but industry sources say that the decision could be helpful to Nepal in the long-run, since it would direct investment into other industries that involve more value addition. This could be a problem because it is uncertain who would issue and monitor the quotas.
"The new protocol is more restrictive but we knew it was coming," said Rajendra Khetan, vice president and spokesman of FNCCI. "We now have to be more competitive and not rely only on duty differentials and prepare better for joining the World Trade Organisation."
Under the new agreement, which came into effect 6 March, Nepali products seeking duty-free access to Indian markets-except tobacco, alcohol and cosmetics-will be required to have at least 25 percent local value addition this year. From 2003, the foreign content in finished products crossing the border should not be over 70 percent. The updated protocol also requires that exports be accompanied by origin certificates in a new format, but Nepal has a "transition period" for this until mid-April. The revised protocol requires that the ex-factory price of the export product be stated, as well the CIF (the cost cost, freight and insurance at the customs point) value of the imported raw materials and parts, and the value added in Nepal. In addition, the treaty now specifies what cannot be considered sufficient to pass as "manufacturing" or "processing"-for example, cost of operations to ensure safe storage of materials, breaking up and assembly, slicing, cutting, slitting, re-packaging and labelling, etc.
Finally, there are very stringent safeguards: the affected country can take unilateral action where exports cause "injury" to local production if joint consultations between the two countries do not yield a result within 60 days. Should this clause be activated then the entire industry, and not only the erring producer, could be penalised. The agreement was signed in New Delhi on 2 March. Nepal's exports to India have grown five-fold after the December 1996 treaty, from Rs 5.2 billion in 1996/97 to Rs 27.2 billion in 2000/01. Imports from India have also doubled, from about Rs 25 billion to Rs 47 billion during the same period.
