The coming trade policy

  • Balancing incentives and trade support will be the greatest challenge for policymakers
- Bijendra Man Shakya

Aug 26, 2014-

The government is all set to revise the current trade policy which was launched five years ago. This is probably the shortest time between revisions as previous policies lasted more than 10 years before they were amended. Trade Policy 2009 superseded the 16-year-old Trade Policy 1992 which replaced the first ever comprehensive Trade Policy introduced in 1982. Before that, trade policies mainly dealt with liberalization of the foreign exchange mechanism such as the Exporters’ Exchange Entitlement Scheme of 1960, the Dual Exchange Rate System of 1978 and the Single Exchange Rate System of 1981 which were introduced as an incentive to exporters.

With the liberalization of the foreign exchange and tariff regimes, Nepal entered a new era of trade policy formulation. As the economy was liberalized unilaterally and integrated into regional and multilateral trading systems, Nepal’s external trade situation has been confronted with a myriad of complications. Chief among them is the lethargic export trade and uncontrollable import trade leading to an unprecedented rise in the trade imbalance. Today, the country’s soaring trade deficit has emerged as a persistent challenge to macro economic stability. Therefore, the success of the country’s policymakers this time will depend on how they address these challenges and build an enabling environment for exports in the forthcoming trade policy.

There are two views with regard to an export strategy. One school of thought is based on promoting the self-owned export strategies of the business community supported by the government’s commitment to eliminate trade-related constraints and enforce the appropriate policies. It is believed that the sum total of the individual business strategies generated by this mechanism will constitute the national export strategy, making an explicit national strategy redundant. In contrast, another school of thought recognizes the importance of an explicit national strategy for export promotion that identifies priority sectors and makes interventions to improve trade-related services and the trading environment.

For a least developed country (LDC) like Nepal, where the export sector is not mature and less competitive, an explicit national strategy is important. The country’s current trade policy is largely based on this principle as it has framed a sectoral strategy with export potential products classified under the focus area and the thrust area under development programmes. While the former aimed at promoting the already established export products such as carpets, woollen goods, readymade garments, selected craft items, pashmina and silk products, the latter lent support to promising products based on agriculture, herbal remedies and craftsmanship. However, except for a couple of products, most of the prioritized sectors did not achieve progress, suggesting that our trade policy should be an explicit national strategy that ensures an enabling trading environment.

A national strategy should contain priority sectors and markets, support to priority sectors, market positioning and trade support services.

The selection of sectors should be based on their share and growth rates in the country’s exports. The degree of competitiveness, as defined by the possibility of changing their comparative advantage into competitive advantage, is of crucial importance for selecting the prioritized sectors for export.

For the selection of priority markets, factors like size, access and proximity to markets are vital. The prioritized sectors should be backed by specific programmes to improve their competitiveness. They may include programmes to enhance standards, quality assurance, accreditation and metrology, which are still beyond the reach of our exporters.

Our policymakers have often avoided market positioning for export products. In today’s competitive global markets, competitiveness depends upon how the products are positioned, whether in terms of price, quality or services. The trade policy should, therefore, examine how our exporters can succeed in the international market against their rivals. Equally important is providing trade related services that reduce constraints to trade and private sector development.

Given the disadvantages of Nepal’s geographical location and the inadequate trade support services and infrastructure with which our exporters must operate, the issue of export incentives should not be avoided at any cost.

Incentives are crucial for offsetting high input and transaction costs. At the same time, attracting export-oriented investment could be a decisive factor. It will be difficult deciding whether to dispense scarce government resources as subsidies or invest them in developing trade support services to build a trading environment that is conducive to efficient production and competitive exporting.

The greatest challenge for policymakers, thus, would be balancing export incentive schemes and trade support services in the forthcoming trade policy. That will ultimately depend on how strongly the private sector lobbies for incentives and how actively it participates in formulating the new policy.

- Shakya specializes in the economic and trade interests of Nepal and the LDCs.

Published: 27-08-2014 11:03

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