WTO membership, Opportunities and Challenges to Nepal

The World Trade Organization (WTO) which replace the General Agreement of Trade and Transfer (GATT), has came into effect from 1^st January, 1995 with the hacking of at least 85 founding members country. The WTO now comes at the third economic pillar of worldwide dimension along with the World Bank and International Monetary Fund (IMF). The new trade body-WTO with power to settle trade disputes between nations and to widen the principle of free trade to sectors such service and agriculture covers more areas than GATT. The WTO envisages the reduction of tariffs by more than one third and is concerned with further opening of markets.

WTO is an organization that has put forward the concept of removing non-tariff barriers for free trade of goods and services within the member countries. This means no country which is the member of World Trade Organization can impose non-tariff restrictions against imports from any other country which is also the member of WTO. Non tariff barriers include imposing trade embargo, restriction imports under quota and other forms on non-tax restriction. The establishment of WTO has helped fade the conventional approach of promoting the concept of import substitution and self dependency. The policy now is open liberal and outward looking and based on export promotion. The export promotion however, does not necessarily mean advocating protectionism policy and safeguarding domestic industries. It refers to enhancing competitive strength of industries with least comparative cost. The most important principles built into the foundation of multilateral trading system such as WTO are: Trade without Discrimination Freer Trade, and Predictability.

The WTO Agreements

The WTO's agreements are the result of negotiations between the members. GATT is the WTO's principal rule-book for trade in goods. A new rule has been created to deal with trade in services, relevant aspects of intellectual properly, dispute settlement, and trade policy reviews. Through these agreements, WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. Each country receives guarantees that its exports will be treated fairly and consistently in other countries' markets. Each promises to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitments.

Nepal and WTO

Nepal applied for membership of GATT in 1989 as necessitated by its geopolitical feature. GATT membership was an essential for Nepal to protect its transit right under GATT articles V especially in cases, when countries arises with the neighboring countries pertaining to trade and transit rights. Nepal did not take any initiatives to acquire membership prior to 1990's. It remained only observer of the GATT. During 1990s  the process of liberalization gained momentum and in 1997 Nepal applied for membership of WTO, an organization for rule based free trade.

Some civil society organizations, including South Asia Watch on Trade, Economics and Environment (SAWTEE), were strongly in favor of Nepal's WTO membership. They are proponents of in the multilateral trading system and took the view that Nepal would gain from it. They were more interested in building the strength and skills in negotiating team. The fifth Ministerial Conference of WTO held in Cancun in September 2003 approved Nepal's accession to the WTO and offered membership, subject to ratification by the government. Nepal was required to ratify the protocol of accession by 31^st March 2004, as per the terms of its accession.

On 23^rd April 2004, Nepal has formally been inducted in the WTO as its 147^th member. For an economy, which had already started economic liberalization program as early 1992, WTO accession does not come as a surprise. This is so because Nepal had initially applied for membership to the multilateral trading system in 1989.

Nepal membership in WTO presents a wide spectrum of challenges along with the opportunities. The current challenges are in the form of having a transparent set of legal framework that is consistent with WTO and the opportunities of having a stable trading environment that can accelerate domestic economic growth and development.

Opportunities of WTO Membership

WTO membership will confer equal level of new trading operations for all member countries. Benefit don not drive automatically but it depends on the ability to identify and take advantage of trading opportunities, fulfilled multilateral trading obligation, pursue and formulate development strategies, within the frame work of those obligation and above all depend in its economic finance and trade need.

Neither WTO membership will drastically change Nepalese present grim agricultural performance nor make Nepalese export highly competitive and profitable in the international markets. In fact WTO membership will confer greater export opportunities to Nepal, which greater challenges ahead to take advantages of new trading opportunities conferred by WTO membership.

Since Nepal is not a major player in the global trade, it will unrealistic to expect maximum gain from the WTO membership within existing countries economic status, agriculture performance, export performance and resource based. To gain maximum benefit conferred by WTO membership, Nepal has to formulate and conduct sound agriculture policies and strategies within frame work of WTO obligation, which will be capable of transforming present grim agricultural performances. It is therefore not a panacea. Integration with the global economy is necessary but not a sufficient condition for growth. WTO offers rights but with them some obligations. It provides opportunities but also some challenge. The specific potential benefits for Nepal after accession to WTO can be seen on the following grounds:

Country Status

As per WTO provision LDCs are exempted from reduction commitments i.e. tariff rates, export subsidies, domestic support. Nepal being a least developed country will secure important exemption from tariff reduction, elimination and reduction of subsidies and other supports to agriculture (because this facility is not provided to developing countries) which will indeed improve Nepal's competitive edges in the markets of neighboring countries.

Protection of Dumping

In the past, both developed and developing countries dumped their surplus agricultural commodities in the global markets at the subsidized price. The main aim of this policy was to eliminate competition and thereby gained monopoly in the global market. In 1993, Nepal could not export lentil to Sir Lanka because of subsidized lentil export from Turkey. UR agreement will definitely eliminate this type of unfair competition in the future. The developing countries will have to reduce the volume of export subsidies by 21 percent and the quantity of subsidized export by 14 percent over a ten year period but developed countries have to reduce volume of export subsidies by 36 percent and the quantity of subsidized export by 21 percent over a six year period. Hence this provision under WTO will improve Nepal's competitive edge in the global market.

Increase in Food Grain Price

To correct failure in the agriculture sector, the then government formulated the 20-year agricultural perspective plan and has clearly emphasized the production of food grains. The reduction in production subsidies in the major grain producing countries is likely to lead to increase world grain price (FAO, 1995). At present Nepal is a marginal food importing country. If present trend continues, food grain imports will become increasingly important, and Nepal will face a growing import bill, due to a rising volume of imports and expected global price increase increases (Gill, 1996). But if the targets of APP are achieved in the future, then Nepal will turn from food importing country in food exporting country by the year 2014/15. Thus Nepal could become the beneficiary of rising world price. With low tariff rate and removal of non-tariff barriers by neighbor countries will make Nepalese agricultural countries much more competitive in their markets and it will definitely stimulate Nepalese farmers to produce more.

End of Preferential Trading Arrangement

Nepal has never gained any preferential access of its agricultural products. According to new GATT rule, MFN must be granted to all member countries without discrimination. Dismantling to the preferential trading arrangement will open up new markets for Nepal in the future.

Export Subsidies

Under WTO provisions, Nepal could provide export subsidies. Since Nepal is one of the list developed countries in the world, cannot afford to provide export subsidies at a significant level, but can target particular products for particular market and subsidies some of the starts of the costs.

Dismantling of Non Tariff Barriers

Under UR agreement, all non tariff barriers are to be dismantled and converted into ordinary tariff and reduced in a given time boundary by developed and developing countries. This will open new market opportunities for LDCs. Nepal will gain new markets access in the both developed and developing countries markets.

Tariff Binding

Under WTO provision, member countries could declare their own tariff policy stating that it would not raise tariff rates beyond a creation percentage. Nepal could bind its high import tariff rates. Nepal being LDC would not require undertaking the reduction commitment. Nepalese framers could be protected, binding high import tariff rate, so that they could compete in the domestic market with more efficient overseas producers.

Access of Market

As per WTO provision a minimum access level has to be established for domestic consumption and has to be increased to 5 percent of domestic consumption over 6 year period. Under this provision all the member countries will be obliged to import the agricultural products, from agro exporting countries. Nepal will have market access not only in neighboring countries but also in overseas countries by the establishment of minimum access opportunities under WTO rules.

Rise in the Government Revenue

Lowering export and import tariff will expand trade and converting quantitative restriction into trade tax will increase the government revenue. Lower the tax rate, the greater will be volume of trade, result will be an increase in the government revenue. Simplification in the tariff structure would reduce administration cost and reduce corruption, smuggling and domestic price distortion and thereby increase the efficiency of resource use within the import completion and export sectors.

Impact in the LDCs and Developing Countries by SPS

Under the SPS agreement, countries must be based on international standard, guidelines or recommendation, where these exist, except as otherwise provided for in the SPS agreement. Thus transparency and science base standards are encouraged and the SPS major can be applied in a non-discriminatory manner (UNCTAD, 1998), these measure lead to increase high cost of production in the LDCs due to lack of skills in meeting such standard. WTO provision encourages development countries to provide technical and other assistance to LDCs like Nepal to meet SPs standards.

High value Agriculture Commodities Export

Traditionally Nepalese agriculture export constitutes bulk of lower commodities. But in recent year, the trade of Nepalese agriculture export has been more diversified and as a result, the export of pulse hides and skins, higher seed, tea and essential oil have come to prominence. Besides these traditional agriculture export items, some new export potential has emerged in the field of citrus, some new export potential has emerged in the field of citrus, apples, silk, honey, floriculture, vegetables seed, horticultures, angora rabbit  wool and yak cheese. WTO membership wills center potential access in the world market for these products.

Other important opportunity of WTO member can be summarized as below:

-          International business competition will entrance the capacity and productivity of Nepalese Industries.

-          Benefit from the provision of positive discrimination of LDCs preferences.

-          Import consistency for industrial inputs.

-          Possible assistance from WTO secretarial and trading partners for domestic capacity enhancement.

-          Well define trade will be institutionalized and there will be no frequent transit related tussles with India as used to be experienced in the past.

-          Safeguard from unilateral decision to trading partners.

-          Benefit linkage with transitional will be improved and it will improve production and employment.

-          Helps to increase Foreign Direct Investment (FDI).

-          Helps to eradicate the problem arising from the bilateral business with the neighboring countries.

Challenges of WTO Membership

A major pressing policy in Nepal is less the establishment of new industries than of enhancing the competitiveness of existing inefficient and technological stagnant industries. Industrial reform and restructuring need, thus to address various determinants of capability development: the incentive framework, the supply of human capital, the supporting technology infrastructure, finance for technological activity, and access to foreign technology. Coping with increased global market competitiveness also presents a great policy challenge to country, and how it responds to it will be crucial in its success in regional and global integration strategies.

Despite Nepal being an agrarian economy, its share in export is minuscule. The foremost challenge to the Nepalese economy is, therefore, non about what would be the impact of the agreement on agriculture, but about how to boost the farm output and institutionalize the sector in order to cash in on the opportunities of the market liberalization.

The present stage of financial sector development in Nepal indicates that full liberalization of the financial services sector is not possible in the near future. This is especially true since the inappropriate liberalization of financial services sector affects the exiting policy on capital account. Challenges of WTO membership can be explain as follows.

Employment

At present, 14 percent of the Nepalese workforce is believed to be unemployed and 47 percent underemployed. To achieve a higher level of production, in terms of both quality and quantity, sophisticated machineries and better technology have to raise production efficiency. It is machinery rather than labor that allows to achieve the target of meeting the market demand on schedule .Therefore it is very likely that the workforce is replaced instantly by machineries like in developed economies.

Negotiation for More Benefits

The task of negotiation for accession with the objective of gaining more and loosing less is challenging for Nepal primarily due to lack of knowledgeable and skillful human resources with the government as well as private sector.

Strengthening Institutions

Given the financial constraint of the government and the lack of proper policy intervention to cope with the responsibility and obligations posed by the WTO membership, the task of strengthening institutions seems difficult to achieve.

Specialization in Some Products and Services

This is a challenging task of Nepal, when there is lack of proper physical and institutional infrastructure, capital and resources for industrialization.

Making Industries Cost Effective

The old industries of Nepal need urgent restructuring and modernization in order to make them capable of producing quality goods at a competitive price. It is not possible to make industries cost effective without investment.

Income Distribution and Poverty

Since rules, laws, practices and norms of economic and social nature are shaped as per the requirements of the global village, the economy and society are put under the powerful influence of outside forces, such as INGOs and MNCs. Local monopolies are also replaced by international monopolist whose interest is not to co-operate with local government in resolving any social crisis but to reap economic benefits. The process aggravates the problems of income and wealth inequality, the rural-urban gap, poverty, unemployment and social and economic dualism. The country is thus forced to remain in a low equilibrium poverty trap.

Monopoly of MNCs in Patent

Due to the intervention of MNCs in local initiatives, due to huge research capacities and technological advancement, MNCs are able to patent other countries resources especially LDCs like Nepal Basmati rice which is originated in South Asia, was patented by one of the U.S.MNCS under the name of ‘Taxomati’. Similarly, ‘turmeric’ and ‘neem’ was also being patented in the U.S. recently a patent has been granted to a U.S. firm on Karela (bitter gourd), Jamun (Sygimium cumini) and brinzal for anti-diabetic properties despite their use being mentioned in several Indian texts.

Other important challenges of WTO membership can be summarized as below:

-          Even if WTO is rule based trading system, it is still power based in some extent since they offer bilateral deals.

-          Nepal can get advantage only after a long period due to various issues like as manpower, technology, resources etc.

-          Eventually phase out of quota system MFA agreement supposed to reduce export and eventfully creates some threat on Balance of Payment (BOP).

-          WTO extends the ends of Development Countries to Least Developed Countries.

-           Problems for granted farmers.

-          Enhancing competitive capacity is difficult.

-          Threats to domestic products by imports.

-          The economy will move vulnerable to external sector.

-          Displacement possible for non competitive goods and services.

-          Various existing legal provision, administrative system and process and institutional management and needed to be changed according to the commitment with the WTO strategy in the designed time schedule.

-          Administrative change, political instability and irregularity in rules and regulation.

Critical Analysis

It is argued that the market access opportunities provided by WTO system can lead to further investment addressing the constraint of limited domestic market for economic scale of productive operation, which also helps to raise investment, economic production of goods and services and industrialization process. Theoretically, WTO membership secured extended market opportunities in member countries without discrimination to Nepal’s exports. Analysis of pre and post accession period export data given below may present a glimpse of market access benefits to Nepal (or to what extent Nepal have been successful in realizing those market access benefits in Nepal’s favor).