Bonded Warehouse Facility
In Nepal, the bonded warehouse facility was initially limited to garment producers exporting to third countries (i.e., non-India markets) and only for fabrics, not accessories. The facility was recently extended to other producers exporting to third countries, although few non-garment exporters currently use this scheme. The bonded warehouse facility is not available to producers exporting goods to India, so these exporters must use the duty drawback facility. Investors entitled to import duty exemptions must provide Customs with a bank guarantee up to the amount of the value of duties for each shipment of imports. The bank guarantee is released upon evidence of export receipts within 12 months from the date of importing the raw materials. The Government is considering ways to extend the bonded warehouse facility to garment producers exporting their goods to India. However, this is complicated by Nepal’s trade relationship with India under their trade treaty as India is concerned that bonded warehouses will be used as conduits for smuggling to India those goods that have substantial differential tariff rates between the two countries.
2.7 Strategy for Technical Assistance Improving Trade Policy Advice and Implementation
Nepal’s trade policies are developed and implemented by different agencies, including, inter alia, the Ministry of Industry, Commerce, and Supplies (MOICS), Ministry of Finance, and National Planning Commission. Other agencies also play a role, usually indirect, such as the ministries responsible for foreign affairs and agriculture. The multiplicity of objectives and participants inevitably results in a degree of contradictory signals and, at times, a lack of direction. In addition, it should be recognized that there will always be competing interests and pressures seeking to influence trade policies. A number of common elements exist among the countries that have had relatively effective trade policy regimes. Chief among these is a close alignment of national economic objectives and strategies with trade policy.
Equally important is having in place an institutional structure that adopts an economy-wide perspective and, to some extent, government-wide perspective. This usually takes the form of an apex body within the Government that can assess and balance competing objectives while ensuring consistency with national economic objectives and strategies. Examples of such bodies include Australia’s Productivity Commission, EU DG for Trade, and U.S. Office of the Trade Representative.
Many countries have adequate technical skills and understanding to design appropriate trade policies, but lack the capacity necessary to implement these policies effectively. This can only be done if there is a
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clear and consistent trade policy framework and sufficient technical understanding and managerial capability throughout the Government. The implementation of trade policy inevitably encompasses virtually every government office or agency concerned with the economy—from customs to environmental and consumer regulation, agriculture and industry, and tourism.
Technical assistance for Nepal to build increased capacity for trade should take place in the general context of developing and strengthening the institutional structure, infrastructure, as well as the technical and policy management skills needed for effectively understanding and implementing trade policies.
Design and implementation of more effective trade policies fall into three broad areas:
! Trade policy evaluation: This entails the analysis and assessment of the economic implications of existing and alternative trade policies and is usually the responsibility of economists with strong backgrounds in international trade.
! Trade promotion: The success or failure of trade policies is usually measured in terms of the levels of trade that ensues. The commercial opportunities provided through liberalization programs must be sold both in markets at home and abroad. Typically, this role falls to officers based in foreign missions and/or export development agencies.
! Trade negotiation: With the proliferation of bilateral and regional trade agreements, this has become an increasingly important function. It usually falls to trade negotiators to translate trade policies into policy parameters, such as tariff rates, rules of origin, and negative lists. Unfortunately, trade negotiators too often operate in ways that are inconsistent with the underlying objectives of countries with larger trade policies. Therefore, it is important that the people that represent Nepal in trade negotiations fully understand national trade policies and receive adequate technical support.
Technical assistance should be designed to assist the HMGN in these three broad functional areas and within an appropriate overall institutional structure.
Institutional Structure to Support Strategy
The National Planning Commission (NPC) in Nepal already holds an “apex” position in the development of economic policies and has the responsibility of balancing competing interests and ensuring consistency between policies and national economic objectives. An early step in developing a comprehensive technical assistance strategy for trade should be a detailed audit of the process of trade policy formulation and implementation in the NPC and the other responsible agencies, principally MOICS. The audit should document not only the existing process for arriving at trade policy decisions but also the available expertise drawn on in this process and its location within the bureaucracy.
Consideration should be given to building an apex body that assumes primary responsibility for trade policy development and evaluation and trade negotiation functions. Primary responsibility for trade promotion functions may be brought within this body or be established in another institution, such as the MOICS or Ministry of Foreign Affairs. It is essential to establish strong linkages between the apex body responsible for trade policy and other government agencies with an interest in trade, as well as with the private sector. Technical assistance by national and international advisors can be useful in this regard by providing opportunities to increase understanding and awareness of Nepal’s trade policy objectives and strategies. Building up such a program of technical assistance is high priority. In the interim, the two trade divisions of the MOICS need to be strengthened with technical training and advisory support. The continuity of staff, that have gained expertise on trade negotiation matters also need to be ensured by the Government. Otherwise, Nepal’s trade negotiations ability will be seriously weakened.
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Nepal needs to strengthen its economic diplomacy capacity through providing specialized training to MOICS and foreign service officials and making them accountable for trade promotion. The neighboring Indian states of Uttar Pradesh, Bihar, and West Bengal figure prominent in the Nepal-India trade and wield considerable power in practice in affecting trade. Given this, the Government should appoint trade representatives for promotion and trade facilitation in these capitals.
Finally, the National Steering Committee for the Nepal Trade and Competitiveness Study should continue with the terms of reference to finalize the policy and action plan, obtain Cabinet approval, and monitor implementation.
Technical Capacity for Design and Implementation
A program of technical assistance for the development and implementation of more effective trade policies should reflect the three key functions discussed above. Suggestions follow for areas where support may be usefully directed.
Trade Policy Evaluation
A strong, ongoing capability to analyze trade policies is usually the foundation on which effective policies are built. Nepal has a number of capable trade economists inside and outside of government. However, consistent financial and institutional support necessary to develop a trade policy evaluation unit has been lacking. An audit of capacity and feasibility study of creating such a unit is urgently required.
Support for implementation is critical but is usually more difficult to provide. Most donors’ technical assistance programs are structured in ways that emphasize short-term exercises with tangible deliverables.
Technical assistance to support implementation usually entails providing long-term advisors that work closely with government officials. If steps were taken to establish a dedicated Trade Policy Unit, this would necessarily involve the appointment of a long-term advisor to simultaneously assist in the design and establishment of the unit and advise on the mechanism for taking on board and implementing the policy advice emerging from the unit. A possible model for establishing formal links between trade policy advice and implementation is one where a specific ministry is given responsibility for referring particular trade policy issues to the specialist unit for analysis and advice. The responsible minister then tables the reports from the unit in Parliament, for further consideration of the recommendations.
Trade Promotion
Over the years, there has been much financial and technical assistance to export promotion agencies in developing countries, with mixed results. One model that has not worked well has been Government-dominated or -led export promotion activities. Direct support to private sector groups or to joint public-private initiatives has been more effective. For example, such countries as Sri Lanka have made good use of demand-driven, matching-grant facilities to support export development. Others, however, including Indonesia, have not done as well using this approach. There will inevitably be a role for Government officials in Kathmandu and posted abroad to promote trade in various ways. While these should not be the “front line” in these efforts, this is an area where limited assistance may yield significant results.
Trade Negotiation
Strengthening capacity in trade negotiations has two dimensions: i) increasing capacity in the mechanics of the process and ii) improving understanding of the country’s trade policies among those conducting and directing the negotiations. It is important to see how often trade negotiators that are operating more or less independently of policymakers frustrate the core objectives of trade policies. The institutional
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reforms indicated above form at least part of the first step in addressing shortcomings in this area.
Integrating the trade negotiators into the policy analysis functions may be part of the answer. Building negotiating capacity through training is another important aspect. Numerous short courses aim at
“commercial diplomacy,” and integrating trade negotiation with policy analysis. These courses would be useful in Nepal’s context.
2.8 Recommendations