NEPAL: RESPONSE TO WORLD TEXTILE TRADE WITHOUT

UNCLAS SECTION 01 OF 02 KATHMANDU 000820

SIPDIS

DEPARTMENT FOR EB/TPP AND SA/INS

E.O. 12958: N/A
TAGS: KTEX ETRD NP
SUBJECT: NEPAL: RESPONSE TO WORLD TEXTILE TRADE WITHOUT
QUOTAS

REF: STATE 65849


1. Summary: The impact of post-2004 quota elimination on
the already depressed garment industry in Nepal is likely to
be substantial, if not disastrous, since the industry depends
on the U.S. market for nearly all of its exports. Neither
the Government of Nepal nor the manufacturers themselves
appear to be giving serious thought to how to remain
competitive in the post-quota world, and neither government
nor the private sector seems to be exploring diversification
into other manufacturing industries. Embassy's response to
reftel query regarding the likely impact of post-2004 quota
elimination on Nepal's garment industry follows below. End
summary.


2. The impact of post-2004 quota elimination on the garment
industry in Nepal is likely to be substantial. Garments
constitute Nepal's single largest manufactured export,
accounting for nearly 40 percent of all exports and for more
than 7 percent of all manufactured output in 2001. Although
some exporting to the EU occurs, the garmenty industry is
overwhelmingly focused on the U.S. market, with sales to the
U.S. accounting for approximately 90 percent of all garment
exports. Because of a limited labor pool and high shipping
costs, Nepali garment exports are generally not competitive
with other exporters in the region, such as India, Pakistan,
China and Bangladesh. At present Nepali apparel exports are
about 25 percent more expensive than those of regional
competitors. In general, both government and manufacturers
here fear that quota elimiantion will tend to disadvantage
relatively inefficient suppliers, such as Nepal.


3. More than the elimination of the quota regime, however,
government and manufacturers view preferential treatment
accorded to certain countries, such as those in sub-Saharan
Africa and the Caribbean Basin, as a threat to the export
industry. In 2001 garment exports to the U.S. fell by about
20 percent, a decline that both the Government of Nepal (GON)
and manufacturers attribute to competition from other
countries given such preferential treatment. Many garment
manufacturers, faced with shrinking orders from the U.S.,
have ceased production and closed operations. The GON and
manufacturers see similarly preferential treatment being
extended to Nepal as the only way for its garment industry to
survive.


4. Just as Nepal's export base remains largely
undiversified, with garments accounting for almost half of
all exports, the range of garments produced is similarly
narrow, with only a few categories accounting for almost 90
percent of all apparel exports to the U.S. Of the nine
categories allotted quota in 2001, for example, only three
used more than 50 percent of their allotment; one (woven
blouses) was left almost completely unused (less than 1
percent). To the Embassy's knowledge, garment manufacturers
have made no effort to shift production to take advantage of
the unfilled quota and/or to diversify production into other
industries. Nor has the GON thus far undertaken any measures
to encourage such diversification, and, as far as we know, no
such measures are being contemplated for the future. Instead
of exploring strategies for diversification, both garment
manufacturers and the GON are focusing their limited efforts
to revive the industry on (likely futile) efforts to persuade
the USG to grant preferential treatment, such as that
afforded to sub-Saharan African and Caribbean countries.
Despite the importance of the garment sector to Nepal's trade
balance, the GON's Ministry of Commerce was unable to project
the losses to export revenues likely after the end of the
quota regime.


5. The garment industry provides employment to an estimated
50,000 workers, equivalent to about 12 percent of the labor
force engaged in manufacturing. The industry is not
vertically integrated, relying almost exclusively on imported
imputs. Nepal does not export yarn or fabric, and exports no
more than a negligible volume of fiber to India. Nepal
engages in no overseas production of garments.


6. There is no system to sell quota to manufacturers or
exporters or for charging quota premiums. Quotas for the
U.S. market are distributed on a first-come, first-serve
basis, according to Kailash Bajimaya, Under Secretary at the
Ministry of Industry and Commerce. About 88 percent of the
quota available is allotted by the National Productivity and
Economic Development Center, the agency authorized to issue
visas for apparel exports, based on recommendations from the
Garment Association of Nepal (GAN). The remaining 12 percent
of quota is allocated to exporters on the basis of volume of
exports in the previous year. GAN charges export visa fees
ranging from the Nepali rupee equivalent USD 3 for quantities
from 1-250 dozen to USD 39 for quantities above 2,000 dozen.
In addition, the National Productivity and Economic
Development Center charges a fee of .02 percent of the FOB
value.
MALINOWSKI