US embassy cable - 02KATHMANDU820

UNCLAS SECTION 01 OF 02 KATHMANDU 000820 
 
SIPDIS 
 
DEPARTMENT FOR EB/TPP AND SA/INS 
 
E.O. 12958: N/A 
TAGS: KTEX, ETRD, NP 
SUBJECT: NEPAL:  RESPONSE TO WORLD TEXTILE TRADE WITHOUT 
QUOTAS 
 
REF: STATE 65849 
 
1.  Summary:  The impact of post-2004 quota elimination on 
the already depressed garment industry in Nepal is likely to 
be substantial, if not disastrous, since the industry depends 
on the U.S. market for nearly all of its exports.  Neither 
the Government of Nepal nor the manufacturers themselves 
appear to be giving serious thought to how to remain 
competitive in the post-quota world, and neither government 
nor the private sector seems to be exploring diversification 
into other manufacturing industries.  Embassy's response to 
reftel query regarding the likely impact of post-2004 quota 
elimination on Nepal's garment industry follows below.  End 
summary. 
 
2.  The impact of post-2004 quota elimination on the garment 
industry in Nepal is likely to be substantial.  Garments 
constitute Nepal's single largest manufactured export, 
accounting for nearly 40 percent of all exports and for more 
than 7 percent of all manufactured output in 2001.  Although 
some exporting to the EU occurs, the garmenty industry is 
overwhelmingly focused on the U.S. market, with sales to the 
U.S. accounting for approximately 90 percent of all garment 
exports.  Because of a limited labor pool and high shipping 
costs, Nepali garment exports are generally not competitive 
with other exporters in the region, such as India, Pakistan, 
China and Bangladesh.  At present Nepali apparel exports are 
about 25 percent more expensive than those of regional 
competitors.  In general, both government and manufacturers 
here fear that quota elimiantion will tend to disadvantage 
relatively inefficient suppliers, such as Nepal. 
 
3.  More than the elimination of the quota regime, however, 
government and manufacturers view preferential treatment 
accorded to certain countries, such as those in sub-Saharan 
Africa and the Caribbean Basin, as a threat to the export 
industry.  In 2001 garment exports to the U.S. fell by about 
20 percent, a decline that both the Government of Nepal (GON) 
and manufacturers attribute to competition from other 
countries given such preferential treatment.  Many garment 
manufacturers, faced with shrinking orders from the U.S., 
have ceased production and closed operations.  The GON and 
manufacturers see similarly preferential treatment being 
extended to Nepal as the only way for its garment industry to 
survive. 
 
4.  Just as Nepal's export base remains largely 
undiversified, with garments accounting for almost half of 
all exports, the range of garments produced is similarly 
narrow, with only a few categories accounting for almost 90 
percent of all apparel exports to the U.S.  Of the nine 
categories allotted quota in 2001, for example, only three 
used more than 50 percent of their allotment; one (woven 
blouses) was left almost completely unused (less than 1 
percent).  To the Embassy's knowledge, garment manufacturers 
have made no effort to shift production to take advantage of 
the unfilled quota and/or to diversify production into other 
industries.  Nor has the GON thus far undertaken any measures 
to encourage such diversification, and, as far as we know, no 
such measures are being contemplated for the future.  Instead 
of exploring strategies for diversification, both garment 
manufacturers and the GON are focusing their limited efforts 
to revive the industry on (likely futile) efforts to persuade 
the USG to grant preferential treatment, such as that 
afforded to sub-Saharan African and Caribbean countries. 
Despite the importance of the garment sector to Nepal's trade 
balance, the GON's Ministry of Commerce was unable to project 
the losses to export revenues likely after the end of the 
quota regime. 
 
5.  The garment industry provides employment to an estimated 
50,000 workers, equivalent to about 12 percent of the labor 
force engaged in manufacturing.  The industry is not 
vertically integrated, relying almost exclusively on imported 
imputs.  Nepal does not export yarn or fabric, and exports no 
more than a negligible volume of fiber to India.  Nepal 
engages in no overseas production of garments. 
 
6.  There is no system to sell quota to manufacturers or 
exporters or for charging quota premiums.  Quotas for the 
U.S. market are distributed on a first-come, first-serve 
basis, according to Kailash Bajimaya, Under Secretary at the 
Ministry of Industry and Commerce.   About 88 percent of the 
quota available is allotted by the National Productivity and 
Economic Development Center, the agency authorized to issue 
visas for apparel exports, based on recommendations from the 
Garment Association of Nepal (GAN).  The remaining 12 percent 
of quota is allocated to exporters on the basis of volume of 
exports in the previous year.  GAN charges export visa fees 
ranging from the Nepali rupee equivalent USD 3 for quantities 
from 1-250 dozen to USD 39 for quantities above 2,000 dozen. 
In addition, the National Productivity and Economic 
Development Center charges a fee of .02 percent of the FOB 
value. 
MALINOWSKI