India and Nepal forged a bilateral treaty of trade way back in July 1950. The treaty envisaged a customs union between the two countries. The trade treaty of September 1960 removed the requirement of a customs union, enabling Nepal to adopt its own tariff and trade policy, which led to its trade diversification with third countries.
The trade treaty signed in August 1971 exempted Nepal?s exports of primary products to India free of basic customs duties. This treaty offered to grant Nepal, on the basis of non-reciprocity, favourable treatment to imports into India of products manufactured in Nepal, containing not less than 90% of Nepalese and/or Indian materials manufactured in Nepal in respect of customs duty and quantitative restrictions normally applicable on them.
For other manufactured articles in which third country material are used, if value of Nepalese and/or Indian materials and Nepalese labour added in Nepal is at least 50% of the ex-factory price of the product, the government of India will provide favourable treatment to imports of such products in India.
In August 1978 India agreed to sign two separate treaties, a treaty on trade and a treaty on transit, fulfilling a long-standing Nepalese demand. In addition, the Indian demand to prevent deflection of unauthorised trade was also satisfied with the signing of an Agreement on Cooperation to Control Unauthorised Trade.
After the expiry of this treaty in 1988, a trade deadlock ensued between the two countries until a democratic government was set up in Nepal in 1990. Following this, a new agreement was signed in December 1991, which was renewed in December 1996, under a revised protocol with reference to Article V. A notable feature of this treaty was that it provided, for the first time, the Nepalese access to the Indian market free of customs duties and quantitative restrictions for all articles manufactured in Nepal on the basis of certificates of origin issued by the then HMG of Nepal (or by its designated agency, the Federation of Nepalese Chambers of Commerce & Industry), waiving the rules of origin requirement entirely.
Following the concession, there took place considerable buoyancy in Nepalese exports to India. However, taking advantage of Nepal?s low customs tariff on a number of sensitive products, with minimal or no processing, Nepali companies made large inroads to the Indian market. In particular, a number of small scale vanaspati manufacturers in Eastern India were unable to meet the competition and had 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.
?The writer is professor of South Asian studies, School of International Studies, Jawaharlal Nehru University
