Here's an industry that has done its bit for Nepal's economy. With steady growth registered over the last fifteen years, Nepal's garment industry is today the highest foreign exchange earner in the manufacturing segment. But that will change when the WTO trading regime takes effect after 2005.
Today, Nepal sells more garments than woollen carpets, and the last two years have been positively scintillating. Taking advantage of the US guidelines devised in 1974 for the allotment of trade quotas to least developed countries (LDCs), Nepali garment exporters have developed the US as their main market, selling clothes worth $164 million last year, up from $126 million in 1999. That represents only 0.0174 percent of total imports into the US although it is a full 85 percent of Nepal's garment exports.
But despite this 30 percent boom, entrepreneurs are sceptical about the future. They're right in thinking so and it is about time they began planning ways of competing in the global market-with no quotas and with competitors who have economies of scale that cannot even be compared with Nepal. The only advantage Nepal has over those producers is the experience in selling in the US.
The reason for the jitters in the Nepali garment industry is the opening of the US market to garments manufactured in sub-Saharan Africa. Some Central American countries have also been granted preferential access, and Sri Lanka and Singapore are also lobbying the US government for duty-free market access. The main eligibility criterion now for exporting nations is a per capita income under $1500. Nepal's per capita income hovers a little above $200 and businesspersons here say that if they've understood the provisions correctly, they're also entitled to the duty-free export quota.
The decision to allow duty-free access from sub-Saharan countries comes within the 10-year transitional programme of the WTO Agreement on Textiles and Clothing (ATC), which came into effect on 1 January 1995. ATC is a special safeguard mechanism to deal with new cases of serious damage or threat thereof to domestic producers during the transition period. Before the Agreement, most textile and clothing exports from developing countries to industrialised countries were subject to quotas under a special regime outside normal GATT rules. But since 1995, WTO members have committed to removing the quotas by 1 January 2005 by integrating the sector fully within GATT.
Nepali exporters have plenty of cause for worry. Nepali garments are relatively more expensive and will obviously become less competitive if businesses in the US have access to a wider variety of products. The Nepali garment industry's global market access relies primarily on the quota system. Though businessmen are hopeful that US would grant duty free access to Nepal as well, they are unsure when that decision will be made. They believe that Nepal is already losing out to new players out to make a killing before the WTO regime and that if the US does not decide in their favour soon enough, that disadvantage will be pressed home, at a great loss to Nepali business.
Presently, businessmen in the US importing textile products from Nepal pay 18-21 percent duty. "If other countries are not obliged to pay any duty, certainly, they will be at an advantage," says Udaya Raj Pandey, general secretary of the Garment Association Of Nepal. In addition, there's been no serious impact assessment study on what the planned phasing out of the Multifibre Arrangement (MFA)-the official US term for the quota system it has been phasing since 1995.
"The challenge facing the garment industry is immense. Nothing has been done to obtain duty free access to the US textile and clothing market, and entrepreneurs are yet to understand the impact of Nepal's accession to WTO," says Pandey. Entrepreneurs say the Nepali government must start lobbying soon for duty-free export privileges, if nothing but to use the next four years to some profit. But it appears that the government is not particularly interested or bothered. It's still not entirely a doomsday scenario-under the WTO regime, Nepal being an LDC, will be entitled to a number of facilities, including low tariff barriers and preferential treatment in some sectors.
The other market Nepali garment exporters could explore is the EU, but they have not taken it up seriously. Explains JP Agrawal, joint-secretary of GAN: "Since there is high volume in the US market, even when there is less margin we can sustain ourselves. The EU market volume is much less."
After the removal of the quota system, Nepal will have to compete with 123 other countries for their slice of the American pie. "Most garment factories will shut down after removal of the quotas. The high cost of production here means we won't be in a position to compete with other countries in the global market," says Chandi Dhakal, owner of Nepal's largest garment factory, Momento Apparels. All the raw materials are imported from third countries and transportation costs are high. It is for these reasons that garment entrepreneurs feel that they won't be able to compete in the global market after WTO comes into the force.
Nepal has stuck to basics, and is far removed from the world of high-fashion apparel. Entrepreneurs blame this on the lack of co-operation and support from the government. For instance, the government had promised to provide soft loans and bank guarantees to apparel manufacturers and exporters, but all that remains on paper. For their part, entrepreneurs also want a separate labour policy for this industry. With such a crisis in Nepal's premier manufacturing segment, in an industry that employs over 40,000 people, entrepreneurs and the government had better sew things up fast.