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Should Nepal extend its LDC graduation deadline?

Should Nepal extend its LDC graduation deadline?

At the ongoing 13th World Trade Organization (WTO) Ministe- rial Conference, representa tives from the Least Developed Countries(LDC) are demanding an increased role of the global trade body for their smooth and sustainable transition.

Since the 12th conference that took place in Geneva in 2022, there has been some notable progress when it comes to addressing the demands of least developed countries. LDC rep- resentatives expect that the current meeting will deliver something more substantial.

The draft of the Abu Dhabi ministerial declaration that is currently under discussion states: “Recalling that, at our Twelfth session, we recognized the role that certain measures in the WTO can play to facilitate the smooth and sustainable transition for members after their graduation from LDC category.”

In this regard, the General Coun- cil meeting in 2023 took a vital deci- sion which has been welcomed by the draft text of 13 conferences. The decision of General Council states: “To encourage those Members that graduate or remove countries from unilateral tariff or duty-free and quota free (DFQF) preference programmes reserved for least developed countries (LDCs) based on their being graduated from the UN list of LDCs, to provide a smooth and sustainable transition period for withdrawal of such preferences after the entry into force of a decision of the UN General Assembly to graduate a country from the LDC category.”

The draft text of the 13th conference further states that the General Council recognizes the particular vulnerability and special needs of the LDC, and that their interests should be given due priority for them to secure meaningful integration into the multilateral trading system.

Nepal which meets the two out of three criteria is all set to graduate in 2026. Nepal meets the criteria for human assets index and economic vulnerability index, but it is yet to meet the gross national per capita. Officials say Nepal’s graduation preparations are not satisfactory and that its economy could face the risks after the graduation. 

Although Nepal has been continuously asking the international community to continue duty-free and quota-free preferences even after the graduation, there has not been any notable progress to strengthen the trade capacity of the country.

“Many countries which are graduating are coming up with specific proposals to improve in certain areas, and we are providing support to them. But Nepal has not come up with any proposal for us to support,” said an official requesting anonymity.  

In this scenario, Nepal can also request the United Nations to provide additional years to make the necessary preparations. For instance, the deadline could be postponed for 2029 instead of 2026, but Nepal is apparently sticking to the 2026 deadline.

Nepal’s economy suffered from the 2015 earthquake and the Covid-19 pandemic. According to the figure provided by the WTO secretariat, Nepal’s merchandise export averaged $835m during 2011-2019. With the onset of the Covid-19, they decreased from $968m in 2019 to $856 in 2020, below 2011.  Commercial services exports of Nepal almost doubled from $775m in 2011 to $1.5bn in 2019, but decreased to $830m in 2020, mainly due to a collapse of travel services induced by the pandemic.

The LDCs are accorded special treatment by the international community, mainly in areas such as trade and development cooperation, which is broadly known as “international support measures”. Trade is one of the key areas where LDCs enjoy exclusive preferences, both in the context of market access as well as in the implementation of WTO rules and disciplines. 

Graduation from the LDC category will eventually result in the loss of this special treatment, although the degree to which this will impact individual countries graduating from the LDC category differs. Nepal is asking developed countries to continue the preferential facilities even after the graduation, but this is not sufficient. Nepal has to make a comprehensive strategy for LDC graduation. 

Nepal’s trade deficit is widening. Nepal’s top markets are India, China, the EU, the US, the UK, Japan, and Canada. Nepal has bilateral agreements with India and the US regarding duty-free and quota free market access. 

A report prepared by South Asia Watch on Trade, Economics and Environment in 2022 states that about two thirds of Nepal’s exports are absorbed by India, and preferential market access there is built into a bilateral trade treaty and is not tied to LDC status. 

However, the report says, Nepal’s exports will face tariff increases in other major and potential destinations that offer LDC-specific tariff preferences.  

“While the EU, the UK, and Turkey provide a transition period of three years after graduation, Nepal will face new tariff regimes in other preference-granting countries post-graduation, according to the report,” according to the report. 

It further states: “For some products, the next-best tariff regime offers the same tariffs as the LDC-specific tariff regime, while for others the new tariffs will be distinctly higher. We find that exporters, in general, are not aware of the likely tariff changes.” 

The Nepali private sector is worried about the possible increase in tariffs and fear a severe impact given that Nepal's cost of production is already much higher than that of neighboring and other competing countries. For instance, the cost of production in the apparel sector is about 26 percent higher than that of neighboring countries, as per the Garment Association of Nepal. 

Experts suggest that either Nepal should seek the extension of the deadline or make a comprehensive strategy to mitigate the negative effects of the graduation. Under the Agreement on South Asian Free Trade Area (SAFTA), Nepal will face a significant increase in tariffs for its top two current exports—refined soyabean oil and palm oil. It exports these products to India through the SAFTA route, says the SAWTEE report. 

The report suggests that Nepal must use international/multilateral forums to pursue its post-graduation interests, including continuation of the use of LDC-specific provisions for a specific period, particularly regarding the provisions related to preferential market access, use of export subsidies and the flexible implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights.