In today’s global economy, tariffs have evolved from mere protectionist barriers to tools of geopolitical strategy. The US-China tariff war, which began during Donald Trump’s first term in 2018, has already brought about a decisive shift in global trade flows.
The latest US decision to extend targeted tariffs on selected Indian goods has been framed as a ‘leveling measure’. Yet, it has also created new impetus for India to deepen market access discussions with Washington and strengthen its position as a reliable trading partner. This move could be a catalyst for India to negotiate more favorable long-term terms by demonstrating its manufacturing flexibility.
Nepal also has many goods on the top list of goods imported from neighboring India. This means that the new US customs policy will inevitably have an impact on Nepal-India trade and the overall economy of Nepal. After the upgrade to a developing country, Nepal’s preferential market access facility (GSP) period has expired and the country has started to face a 10 percent customs duty, which seems to be an opportunity for the country not to increase it.
After this, it can be expected that investment will flow into Nepal from abroad and exports will increase. A large part of Nepal's trade—both exports and imports—depends on India. According to the data of the Customs Department, 64 percent of Nepal’s imports in the fiscal year 2024-25 came from the Indian market. Similarly, India accounted for 67 percent of total exports. Since this is the case, changes in the US-India trade policy are certain to affect Nepal.
The US has imposed a 50 percent reciprocal tariff on India and a 10 percent tariff on Nepal, which is expected to give Nepal a competitive advantage in trade, but Nepal needs to take concrete steps from product development to export promotion to produce the quantities it can export to the US.
Looking at the past, the US is Nepal’s second largest export destination after India. Nepal exported goods worth Rs 18.32bn to the US in 2024-25, which is six percent more than the previous year.
This should be taken as an encouraging and positive step. In addition, to make all this sustainable and increase further, it is necessary and imperative for Nepal to create a joint mechanism between the government and the private sector to reduce transshipment risks and take advantage of customs rates.
There should be no delay on this front. The US has imposed only 10 percent reciprocal customs duty on Nepal. In such a situation, if trade negotiations with India fail and a 50 percent customs duty is imposed on India, there will be a 40 percent difference in customs rates between Nepal and India.
Even if the recently-imposed additional 25 percent customs duty is withdrawn, the difference in customs rates between these two countries will be 15 percent. Even a 15 percent difference in customs rates is very large in international trade. Nepal should be able to use this situation to its advantage.
Nepal’s main exports to the US are woolen carpets, rugs, ready-made garments, felt goods, clay and other metal utensils and handicrafts. In addition, apart from India, the US has imposed a 19–20 percent customs duty on other countries in the region—Bangladesh, Pakistan and Sri Lanka—which gives Nepal a competitive advantage.
In short, India has been exporting more goods such as carpets, textiles and rugs to the US than to Nepal. Similarly, Bangladesh is the largest exporter of ready-made garments in South Asia.
And, the US is also importing from it. Nepal also uses Indian land for trade with third countries. Although the trade war between India and the US could also bring uncertainty to Nepal’s trade routes with third countries, its likelihood is low.
The new US tariff policy seems to make Indian goods more expensive in the US market. As a result, Indian manufacturers may have to restructure their production systems. If India starts losing the US market, the Nepali market will also become more expensive, given chances of India adopting a policy of reducing production. Most of the industries operating in Nepal import raw materials from India and this means our production costs may go up. Machinery parts, industrial equipment, clothing and agricultural products from India are most likely to become more expensive in Nepal, exposing the Nepali populace to the risk of a high inflation.
In addition, the Indian rupee will weaken further as India’s exports are affected and dollar income decreases. This problem will be further complicated by the fact that Nepal’s currency is ‘pegged’ with the Indian currency. This is also the reason why Nepal’s monetary policy has not been independent.
This will naturally have an impact on the Nepali rupee. As a result, not only will Nepal’s dollar income decrease, payments will also become more expensive. In that case, the interest on foreign loan assistance will be expensive and so will the repayment.
The Nepali market may also benefit from the Indo-US trade war. If Indian products cannot enter the US market easily, India may adopt a policy of reducing prices and seeking alternative markets. Nepal can benefit from that. If India adopts this policy, the price of Indian goods imported into Nepal, such as food, industrial raw materials, and machinery parts, may decrease. According to public data, Nepal currently exports ready-made garments worth around Rs 4bn to the US. There is no doubt that this is likely to increase many times over in a few years if the existing customs duty remains in place.
If this policy works in the long term, the ‘backward forward linkage’ of the export-oriented Nepali industry is certain to become even stronger. After the 2015 earthquake, the US had given Nepal preferential market access to 77 different items. The Nepal government should take the initiative for similar preferential market access. For now, it is too early to analyze how Trump’s policies will pan out. But if implemented, India’s export earnings will decrease. The direct impact of this will be a decrease in dollar income for India as well as Nepal, making foreign payments expensive. This will ultimately mean a surge in inflation. There is also the danger of the US aggressive ‘tariffs’ triggering a global economic recession.
