The right balance in Indo-Nepal trade treaties

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: to wind up their operations.

Due to differences between the two governments on the trade deflection issue, the trade treaty of 1996, which was scheduled to expire in December 2001, could be renewed for a period of five years only with effect from March 2002. The automatic extension of the agreement for further periods of five years at a time has been ensured by the clause that the treaty continues, unless either of the parties gives to the other a written notice, three months in advance, of its intention to terminate the treaty.

The protocol with reference to Article V of the trade treaty stipulated adherence to a new rules of origin criteria. The rules of origin provisions made in renewed trade treaty requires Nepalese manufactured exports to fulfill twin criteria for their preferential access to the Indian market free of customs duties normally applicable and quantitative restrictions; (i) domestic content requirements defined in terms of value added which has been fixed at 30% of ex-factory price of articles produced in Nepal from March 2003 onwards; and (ii) requirements in terms of change in tariff heading at four digit level of the harmonised system code.

In addition, tariff rate quotas have been imposed on Nepal’s four export items to India, that is, vegetable ghee, acrylic yarn, copper and zinc oxide. Such products would enter duty-free up to the level of assigned quota, but subsequent exports would attract India’s normal MFN rates.

The Indian position on the imposition of rules of origin is that India’s trade preferences to Nepal are designed to promote the country’s industrialisation through backward linkages with its economy, which the rules of origin makes possible. But the question that arises in this context is that once the rules of origin are in place, was there a need to apply in addition, tariff rate quotas?

Further Nepalese negotiators have often been raising issues of India’s restrictive non-tariff barriers that severely constrain Nepalese exports to India, particularly its agricultural and food exports that are subjected to mandatory laboratory tests in laboratories located thousands of kilometers from the principal land customs stations. India’s decision to build up trade infrastructure in Nepal to facilitate Indo-Nepal trade is an effort in the right direction.