NEPALI REACTION TO TRADE TREATY RENEWAL WITH INDIA

UNCLAS SECTION 01 OF 02 KATHMANDU 000467

SIPDIS

SENSITIVE

STATE FOR SA/INS
CINCPAC FOR FPA

E.O. 12958: N/A
TAGS: ETRD PREL NP IN
SUBJECT: NEPALI REACTION TO TRADE TREATY RENEWAL WITH INDIA

REF: 01 KATHMANDU 1675

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SUMMARY
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1. (SBU) Reaction in Kathmandu to the March 2 signing of
the revised bilateral trade treaty between Nepal and India in
New Delhi has been mixed. The revised treaty terms include
value addition requirements on manufactured goods and imposed
quota restrictions on four items that together account for
about 25 percent of Nepal's exports to India. Government of
Nepal (GON) officials, who had feared India would impose even
more restrictive terms, are publicly billing the renewal a
success. Reaction in the business community is varied, but
most believe the deal their Commerce Secretary signed is
likely the best that Nepal, with limited bargaining power and
next-to-no leverage, could hope for. End summary.

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HIGHER VALUE ADDITION REQUIREMENTS;
QUOTAS ON "SURGE" ITEMS
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2. (SBU) Reaction in Kathmandu to the March 2 signing in
New Delhi of the revised bilateral trade treaty between Nepal
and India has been mixed. Government of Nepal (GON)
officials are gamely--but not vociferously--claiming success.
Sources in the business community are generally less
sanguine, but largely believe that the deal their Commerce
Secretary signed is likely the best Nepal could hope for.

SIPDIS


3. (U) Under the 1996 treaty, which came up for renewal in
December, the value of Nepali exports to its largest trading
partner increased by nearly seven times over the past five
years. India now accounts for 43 percent of Nepal's total
export market. Re-negotiation of the treaty terms, which
offered duty-free, quota-free access to specified exports,
has been hanging like a black cloud over Nepal's Trade
Ministry and the local business community since August 14,
when the Government of India first announced its intention to
open the treaty for review (Reftel). India's concerns,
according to Bhanu Prasad Acharya, Nepal's Trade Secretary,
focused on two points: 1) the amount of value addition
required for Nepali exports to qualify for duty-free,
quota-free access; and 2) a purported "surge" in the volume
of some exports.


4. (U) The revised terms impose a quota on Nepal's exports
of four items (vegetable ghee, zinc oxide, copper wire, and
acrylic yarn),which accounted for about 25 percent of
Nepal's exports to India over the past year. In addition,
Nepal's manufactured exports must meet a minimum standard of
25 percent value addition during the first year of the
five-year treaty and 30 percent thereafter in order to
qualify for duty-free access. The agreement also reportedly
allows for the unilateral imposition of anti-dumping measures
if either party's complaints of dumping are not address
within 60 days of formal notice. The new terms take effect
March 6.

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GON CLAIMS MODEST SUCCESS
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5. (SBU) According to Purushottam Ojha, Joint Secretary at
Nepal's Ministry of Trade, only the GON's "hard bargaining"
prevented India from pressing for even less generous terms.
For example, Ojha said the Indians had originally pushed for
70 percent value addition. Besides haggling the value
addition requirement down by more than half, Ojha said his
Ministry also succeeded in persuading India to exempt a fifth
export--steel pipes--from quota restrictions. He added the
Indians were "adamant" about imposing some restrictions on
the four items.

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BUSINESS COMMUNITY SEES RED
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6. (SBU) While the Trade Ministry may be trying to paint the
new agreement as a modest triumph, reaction in the business
community is more varied. Rajesh Kazi Shrestha, the
President of the Nepal Chamber of Commerce, told us the
revised terms killed the "spirit" of the 1996 treaty by
giving India greater latitude in restricting exports. New
provisions allowing the imposition of anti-dumping measures
will leave Nepali industries at the mercy of India, he
predicted. Arun Chaudhury, head of the Nepal-India Chamber
of Commerce, on the other hand, said that Nepal must expand
its industrial base and should not count on special favors
from its trading partners to stay afloat. The world has
changed since 1996, and Nepal must change with it, he said.
Banwari Lal Mittal of the Nepal-USA Chamber of Commerce
speculated that exporters of the four items now subject to
quota restrictions might actually benefit from having fewer
competitors in the market.

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COMMENT
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7. (SBU) Most Nepalis--including those at the Trade
Ministry--realize the GON had few bargaining chips and
next-to-no leverage going into the negotiations. The terms
of the 1996 treaty were generous to Nepal, and a raft of
businesses tailored to export products to India under those
very conditions--including the lack of value added
requirements--have sprung up in the intervening five years to
take advantage of that generosity. But 2001 was not a good
year for Nepali businesses for a number of reasons. The
combined effects of September 11 and the Maoists insurgency
have crippled tourism; the international airport recorded 42
percent fewer arrivals in November (the peak season) this
year than last. Meanwhile, exports of garments to the U.S.,
Nepal's largest textile market, have declined by 20 percent.
India may have taken these factors into account in granting,
according to the Trade Ministry, less rigorous terms than
originally contemplated. The observation that Nepal must
expand its industrial base is just, but for Nepali
businessmen struggling to get by, the message could not have
come at a more difficult time.
MALINOWSKI