On April 2, US President Donald Trump introduced a new tariff rule for more than 180 countries on what he called “Liberation Day.” Tariffs are taxes levied on goods crossing international borders. Under the new rules, there will be a baseline 10 per cent tariff on all imports into the United States, with even higher rates on countries that run substantial trade surpluses with the US. In practice, when a government imposes a high tariff on a product, the cost of importing that item increases for domestic consumers. More importantly, when a massive consumption-driven economy like the US erects high tariff walls, it creates disruptions across the global trade landscape.
Like many other regions, South Asia, a subcontinent of over 2.04bn people and a $5.3trn economy, will be severely impacted—particularly with the imposition of rather higher “reciprocal tariffs.” The policy places some South Asian countries like India (26 percent), Bangladesh (37 percent), Sri Lanka (44 percent) and Pakistan (29 percent) at a distinct disadvantage, with almost prohibitively high tariffs. At the same time, small exporters like Nepal, Bhutan, Afghanistan and the Maldives, whose trade volumes with the US have remained relatively low, face a universal 10 percent tariff, a gentle rap on the knuckles in comparison but a barrier nonetheless. While it was always an uphill battle for South Asian nations—and the Global South in general—to compete in the face of the structural inequities arraigned against them in the global export market, they now have their task cut out for them. America’s reciprocal tariffs will create new challenges for some South Asian nations seeking to export their way to prosperity and economic stability.
In 2024, India continued to dominate South Asia’s trade with the US, exporting goods worth $77.5bn while paying low average tariffs of under two percent. Meanwhile, Bangladesh, the region’s second-largest exporter to the US, faced a much steeper tariff of about 15 percent. Despite these challenges, Bangladesh’s apparel sector, primarily driven by ready-made garments, has managed to grow. Its exports to the US rose by 0.7 percent year on year, reaching $7.5bn by 2024. Sri Lanka, another major South Asian trade partner of the US, is still in the process of rebuilding after its 2022 economic collapse. It now faces the highest tariff in the region: 44 percent. This poses an extreme challenge to Sri Lanka’s export economy.
America remains Sri Lanka’s largest single-country market for apparel, accounting for over 40 percent of the sector’s total exports, which surpassed $5.5bn in 2023. These countries, which rely heavily on the US as their top export market, have been hit especially hard by both the 10 percent baseline tariff effective from April 5 and specific reciprocal tariff rates effective from April 9. Even a slight decline in orders from the US could result in job losses and economic instability, and the likelihood of order cancellations, workforce reductions and escalating debt burden.
The US is Nepal’s third-largest buyer of carpets, with imports valued at $48m in 2024. The newly-imposed 10 percent tariff could also pressure Nepali carpet exporters to either absorb additional costs or risk losing their market share to competitors. Nepal’s niche export products, including hand-knotted carpets, pashmina, RMG, leather and tea, may face reduced competitiveness in US markets, which accounted for $112m in exports in 2024. The new trade barrier could pose fresh challenges for these sectors by threatening to impact their growth and market share. However, amid the crisis, there is a potential silver lining for a country like Nepal. While Sri Lanka, India, Bangladesh, and even Nepal’s northern neighbour China risk losing their price competitiveness due to the overwhelmingly high reciprocal tariffs, Nepali manufacturers, especially large-scale and medium-scale makers of export-worthy products, can seize the window of opportunity this may open by positioning themselves as a reliable and cost-effective alternative.
The shifting sands of American trade policy create new uncertainties for India’s diverse set of export industries, Bangladesh RMG’s sector, and the textiles hubs of Sri Lanka and Pakistan. Southeast Asian competitors like Vietnam, Cambodia and Indonesia will also be adversely affected by the high reciprocal tariffs levied on them, accounting for 46, 49 and 32 percent, respectively. China, another low-cost manufacturing competitor and the world's premier exporter, is already subjected to a 20 percent tariff due to its alleged involvement in the fentanyl trade. China will now face an additional tariff, raising the total rate to a staggering 54 percent. This sharp increase represents a major escalation in trade tensions between the US and China, the two largest economies, and it renders the international market vulnerable to significant disruptions in the flow of goods.
These changes may be compelling enough for many companies that previously focused on manufacturing in Southeast countries like Vietnam to turn to smaller South Asian countries like Nepal in order to bypass US tariffs. This could substantially benefit Nepal. The baseline rate of 10 percent imposed on Nepal—significantly lower than tariffs imposed on Vietnam, Indonesia and China—means that Nepal may have a notable competitive advantage over other Asian economies. Businesses will increasingly seek alternatives to traditional manufacturing hubs such as China and Vietnam. Nepal, benefiting from low labour costs and affordable manufacturing conditions, is strategically positioned to attract attention as a viable alternative destination within global supply chains. Brands and retailers that had outsourced production to countries like Bangladesh, Sri Lanka, and Vietnam to avoid tariffs on Chinese goods may now view those destinations as less attractive under the revised US policies. Consequently, Nepal stands to benefit considerably as companies look to diversify and stabilise their international production bases.
By effectively leveraging its reputation for ethical manufacturing, Nepal could appeal strongly to socially-conscious consumers, particularly in North America and Europe, presenting its products as both sustainable and responsible alternatives in the global marketplace. Importantly, Nepal enjoys duty-free access to the US market for 77 specific products under the Trade Preference Program, an arrangement which remains effective until December 2025 despite recent tariff changes, and this only enhances Nepal’s attractiveness as a manufacturing and export hub. By strategically leveraging the shifting trade landscape, Nepal can position itself as a competitive and stable destination for industries to mitigate tariff-related risks.
This cannot be achieved unilaterally, though. Nepal will need to rope in businesses and governments in its region, South Asia, by positioning itself as an attractive investment destination. Given its relative tariff advantage, manufacturers from other South Asian countries such as India, Sri Lanka, and Bangladesh can leverage Nepal as a strategic investment destination, establishing joint ventures or manufacturing facilities to lower their tariff exposure considerably in the American market. Promoting complementary manufacturing—where initial production occurs in Sri Lanka or India, for example, and final assembly or processing takes place in Nepal—can optimise the tariff differential effectively while, at the same time, ensuring that both Nepal and its South Asian partner countries have the opportunity to be involved in the supply chain. The creation of bilateral Special Economic Zones (SEZs) in Nepal can also attract South Asian and international businesses seeking tariff-efficient production locations. Nepal and individual South Asian countries should also consider initiating negotiations for a bilateral Preferential Trade Agreement (PTA), particularly targeting niche sectors like herbal products, tea, spices, textiles and handicrafts. The South Asian Free Trade Area (SAFTA), if implemented in the right spirit, can also serve as an enabler.
While the ‘new normal’ will undoubtedly create instability and erect more barriers for South Asian exporters, it is usually possible to find a silver lining, even around the darkest clouds. This testing new phase in the life of the global economic order presents an unprecedented opportunity for strategic cooperation between Nepal and the rest of South Asia. Bolstering regional bilateral and multilateral ties is the right way to stimulate economic resilience.
