The fierce competition in the global textiles and clothing (T&C) market unleashed by
the expiry of the World Trade Organization’s (WTO) Agreement on Textiles and Clothing
(ATC) on 31 December 2004 has adversely affected Nepal’s ready-made garment (RMG)
industry, which ranks among the two top export products of the country.
While Nepal’s RMG exports started declining after 2001 due to the combined effects
of domestic conflict, the adverse international climate following the 9/11 attacks and the
global abolition of T&C quotas covering major Nepalese RMG exports, the ATC expiry
almost sounded the death knell for the country’s RMG industry. RMG export earnings
declined by a compound annual rate of 14.2 per cent between 2000 and 2007, and by 21.2 per
cent from 2005 to 2007. In the United States of America market, earnings declined by 18.5
per cent and 28.4 per cent, respectively, during the two periods.
A revealed comparative advantage analysis shows that Nepal’s RMG sector under
Chapters 61 and 62 of the Harmonized Commodities Description and Coding System (HS) as
well as the top 12 exports (for 2006) at the HS six-digit level continue to possess a
comparative advantage in the post-ATC period in the United States market. However, the
RMG sector as a whole as well as HS 61 and HS 62 products are under threat from increased
competition in the United States market because the revealed comparative advantage (RCA)
indices for the exports of the products have declined. The top three product lines – HS
620342, HS 620462 and HS 611020, representing more than 53 per cent of total RMG exports
by Nepal – are also in the threatened category, as are the tenth- and eleventh-ranking product
lines – HS 621142 and HS 610510. These results indicate that the ATC expiry has led to a
deterioration in Nepal’s competitiveness position in the United States market In contrast, HS
620630, 620452, 620520, 620920, 620292, 620640 and 611120 (ranking fourth to ninth, and
twelfth, respectively, in Nepal’s total RMG exports) appear to have remained competitively
positioned even after the ATC expiry.
Likewise, the RMG industry as a whole as well as HS 61 and 62 taken separately have
a lower comparative advantage in the post-ATC period compared with 1997-2000. The same
holds true for the top product line, HS 620342, and for HS 621142 and HS 610510 – all three
of which were found to be “threatened” when compared with the 2001-2004 period. Clearly,
the competitiveness of HS 620342 has declined since the 1997-2000 period, after which the
impact of the phasing out of global T&C quotas, coinciding with the intensification of
domestic conflict, began to hit Nepal’s RMG industry.
A small-scale survey of Nepal’s RMG firms and interviews with key informants
showed that the ATC expiry has adversely affected the country’s RMG sector. The industry is
finding it difficult to compete in the United States market. Firms rely completely on imports
for raw materials – which are sourced mostly from India, followed by China. This raises costs
compared with rival RMG-producing countries. RMG entrepreneurs believe that getting dutyfree
access to the United States market will increase exports to that destination. Export policy,
tax incentives, the labour market, availability of skilled manpower, market access and
availability of machinery are important factors affecting RMG exports. Export policy, labour
market and tax incentives are identified as the three most important factors (in that order) that
the government must address. Among trade, competition, tax and infrastructure/financial
sector development policies, trade policy is considered the most important, followed by tax
policy and infrastructure/financial sector development policy, and competition policy
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The country’s rigid labour law is identified as the most serious constraint on export
competitiveness. Bad industrial and export policies, severe power cuts and poor infrastructure
are other constraints. The possibility of Chinese investment in Nepal’s RMG sector is
considered low due to the differences in language and culture as well as the rigid labour law
and poor infrastructure.