US embassy cable - 02KATHMANDU467

UNCLAS SECTION 01 OF 02 KATHMANDU 000467 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SA/INS 
CINCPAC FOR FPA 
 
E.O. 12958: N/A 
TAGS: ETRD, PREL, NP, IN, India Relations 
SUBJECT: NEPALI REACTION TO TRADE TREATY RENEWAL WITH INDIA 
 
REF: 01 KATHMANDU 1675 
 
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SUMMARY 
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1.  (SBU)  Reaction in Kathmandu to the March 2 signing of 
the revised bilateral trade treaty between Nepal and India in 
New Delhi has been mixed.  The revised treaty terms include 
value addition requirements on manufactured goods and imposed 
quota restrictions on four items that together account for 
about 25 percent of Nepal's exports to India.  Government of 
Nepal (GON) officials, who had feared India would impose even 
more restrictive terms, are publicly billing the renewal a 
success.  Reaction in the business community is varied, but 
most believe the deal their Commerce Secretary signed is 
likely the best that Nepal, with limited bargaining power and 
next-to-no leverage, could hope for.  End summary. 
 
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HIGHER VALUE ADDITION REQUIREMENTS; 
QUOTAS ON "SURGE" ITEMS 
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2.  (SBU)  Reaction in Kathmandu to the March 2 signing in 
New Delhi of the revised bilateral trade treaty between Nepal 
and India has been mixed.  Government of Nepal (GON) 
officials are gamely--but not vociferously--claiming success. 
 Sources in the business community are generally less 
sanguine, but largely believe that the deal their Commerce 
Secretary signed is likely the best Nepal could hope for. 
 
SIPDIS 
 
3.  (U)  Under the 1996 treaty, which came up for renewal in 
December, the value of Nepali exports to its largest trading 
partner increased by nearly seven times over the past five 
years.  India now accounts for 43 percent of Nepal's total 
export market.  Re-negotiation of the treaty terms, which 
offered duty-free, quota-free access to specified exports, 
has been hanging like a black cloud over Nepal's Trade 
Ministry and the local business community since August 14, 
when the Government of India first announced its intention to 
open the treaty for review (Reftel).  India's concerns, 
according to Bhanu Prasad Acharya, Nepal's Trade Secretary, 
focused on two points:  1) the amount of value addition 
required for Nepali exports to qualify for duty-free, 
quota-free access; and 2) a purported "surge" in the volume 
of some exports. 
 
4.  (U)  The revised terms impose a quota on Nepal's exports 
of four items (vegetable ghee, zinc oxide, copper wire, and 
acrylic yarn), which accounted for about 25 percent of 
Nepal's  exports to India over the past year.  In addition, 
Nepal's manufactured exports must meet a minimum standard of 
25 percent value addition during the first year of the 
five-year treaty and 30 percent thereafter in order to 
qualify for duty-free access.  The agreement also reportedly 
allows for the unilateral imposition of anti-dumping measures 
if either party's complaints of dumping are not address 
within 60 days of formal notice.  The new terms take effect 
March 6. 
 
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GON CLAIMS MODEST SUCCESS 
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5.  (SBU) According to Purushottam Ojha, Joint Secretary at 
Nepal's Ministry of Trade, only the GON's "hard bargaining" 
prevented India from pressing for even less generous terms. 
For example, Ojha said the Indians had originally pushed for 
70 percent value addition.  Besides haggling the value 
addition requirement down by more than half, Ojha said his 
Ministry also succeeded in persuading India to exempt a fifth 
export--steel pipes--from quota restrictions.  He added the 
Indians were "adamant" about imposing some restrictions on 
the four items. 
 
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BUSINESS COMMUNITY SEES RED 
--------------------------- 
 
6.  (SBU) While the Trade Ministry may be trying to paint the 
new agreement as a modest triumph, reaction in the business 
community is more varied.  Rajesh Kazi Shrestha, the 
President of the Nepal Chamber of Commerce, told us the 
revised terms killed the "spirit" of the 1996 treaty by 
giving India greater latitude in restricting exports.  New 
provisions allowing the imposition of anti-dumping measures 
will leave Nepali industries at the mercy of India, he 
predicted.  Arun Chaudhury, head of the Nepal-India Chamber 
of Commerce, on the other hand, said that Nepal must expand 
its industrial base and should not count on special favors 
from its trading partners to stay afloat.  The world has 
changed since 1996, and Nepal must change with it, he said. 
Banwari Lal Mittal of the Nepal-USA Chamber of Commerce 
speculated that exporters of the four items now subject to 
quota restrictions might actually benefit from having fewer 
competitors in the market. 
 
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COMMENT 
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7.  (SBU)  Most Nepalis--including those at the Trade 
Ministry--realize the GON had few bargaining chips and 
next-to-no leverage going into the negotiations.  The terms 
of the 1996 treaty were generous to Nepal, and a raft of 
businesses tailored to export products to India under those 
very conditions--including the lack of value added 
requirements--have sprung up in the intervening five years to 
take advantage of that generosity.  But 2001 was not a good 
year for Nepali businesses for a number of reasons.  The 
combined effects of September 11 and the Maoists insurgency 
have crippled tourism; the international airport recorded 42 
percent fewer arrivals in November (the peak season) this 
year than last.  Meanwhile, exports of garments to the U.S., 
Nepal's largest textile market, have declined by 20 percent. 
India may have taken these factors into account in granting, 
according to the Trade Ministry, less rigorous terms than 
originally contemplated.  The observation that Nepal must 
expand its industrial base is just, but for Nepali 
businessmen struggling to get by, the message could not have 
come at a more difficult time. 
MALINOWSKI