Arya News - Think tank says impact on GDP will be small, but exporters face growing unpredictability. With tariff preferences set to expire, Nepal’s export competitiveness could be impacted.
KATHMANDU – A proposed 10 percent reciprocal tariff by the United States could impact Nepal’s exports, particularly to the US market. However, experts believe the broader impact on the national economy will be minimal due to the limited size of Nepal’s export base.
According to a new issue note published by South Asia Watch on Trade, Economics and Environment (SAWTEE), a 10 percent tariff hike on Nepali goods would cause only a 0.0096 percent decline in the country’s Gross Domestic Product (GDP).
The report, titled “Decoding US Reciprocal Tariffs: A Nepali Perspective,” was authored by SAWTEE’s Executive Director Paras Kharel and Senior Research Officer Kshitiz Dahal. It offers a critical analysis of how the shifting US trade policy, which increasingly leans toward reciprocity, could impact Nepal.
The report emphasises that the proposed tariff regime signals a departure from long-standing global trade norms. It may erode the preferential access that Nepali products currently enjoy in the US market, which is Nepal’s second-largest export destination.
Although implementation of the new policy has been paused for 90 days, uncertainty looms over how or whether it will proceed.
The possible imposition of 10 percent additional duties on Nepali exports could reduce demand in the US, especially for goods that previously benefited from duty-free status. The policy pause and lack of clarity have added to the concerns of Nepali exporters.
Addressing broader implications, Achyut Wagle, vice-chancellor at Kathmandu University, noted that Nepal lacks backward linkages in its major export sectors.
For example, while the country exports ready-made garments, it relies heavily on imports for essential raw materials, such as textiles and yarns. This, he explained, points to deeper issues in industrial and trade policy.
Posh Raj Pandey, chair emeritus of SAWTEE, stressed that Nepal should start preparing to join sub-regional and regional trade blocs, given the increasing fragmentation of global trade into such groupings.
Madhu Kumar Marasini, a senior fellow at SAWTEE and former finance secretary, suggested that Nepal, not yet a key player in global value chains, should adopt a cautious, wait-and-see approach.
Some private sector representatives warned that Nepal’s relatively lower tariffs could tempt third countries to use it as a transhipment hub to access the US market. Such a scenario would not generate jobs or meaningful economic activity in Nepal and could even lead to stricter trade scrutiny from the US, potentially harming legitimate Nepali exports.
Another issue raised in the note concerns the Generalised System of Preferences (GSP), a trade programme under which the US provided duty-free access to eligible products from developing countries.
The GSP expired in 2020 and is unlikely to be reinstated within the next four years. Approximately 12.5 percent of Nepal’s exports to the US in 2022 were eligible for GSP benefits.
Even after the programme’s expiry, over half of those exports continued under the GSP category in the hope of retroactive reinstatement. However, importers still had to pay the standard most-favoured-nation (MFN) tariffs, which ranged from a median of 4 percent to a maximum of 38 percent.
These goods may be subject to an additional 10 percent tariff on top of the MFN rates.
The Nepal Trade Preference Programme, which currently allows 77 Nepali products duty-free access to the US, is also set to expire in December 2025. The report suggests that it is unlikely this programme will be renewed or expanded, despite Nepal’s requests for extension during meetings under the Nepal-US Trade and Investment Framework Agreement.
One illustrative case involves chhurpi, a hard cheese used in pet food and exported under the category of dog and cat food. It previously enjoyed a zero percent MFN tariff but will now face a 10 percent duty. Goods with zero MFN tariffs made up about two-thirds of Nepal’s total exports to the US in 2022, all of which would now be subject to the additional tariff.
The report raises concerns about whether this shift in US trade policy will ultimately benefit Nepal. Even if the reciprocal tariff plan moves forward after the pause, future tariff revisions could negate any short-term advantages for Nepal.
Blanket tariff hikes, rather than product-specific ones, may ultimately harm exports that do not significantly contribute to trade surpluses.
There is also concern that larger economies or countries with more substantial diplomatic influence in Washington might negotiate better trade terms, leaving smaller economies like Nepal at a disadvantage.
Historically, Nepal has relied on unilateral trade concessions and the World Trade Organisation’s provisions for differential treatment. Under this new approach, those advantages could be eroded, the note reads.
In the last fiscal year, Nepal’s total trade with the US amounted to Rs36.79 billion, with exports totalling Rs17.31 billion and imports Rs19.48 billion. This resulted in a trade deficit of Rs2.16 billion. Nepal’s primary exports to the US included carpets, pet food, felt products, ready-made garments, ceramic items, pashmina, and handmade paper goods.