WTO flags Nepal’s weak manufacturing base and narrow export markets

The WTO review identifies several connected weaknesses in Nepal’s global trade performance. Manufacturing is small, production capacity is limited, and exports are concentrated in both products and destinations. Poor infrastructure and high trade costs make it harder for businesses to compete. These problems matter because global trade rewards reliable supply, competitive prices, and consistent production.

Nepal also faces logistics and customs challenges. Only 13 percent of customs declarations use the green channel, while 42 percent go through the red channel for physical inspection. Modernising customs can reduce delays, but reforms work only when they are implemented effectively. Limited export diversification leaves firms with fewer markets and products.

The WTO urges Nepal to expand domestic production, diversify exports, strengthen logistics, and join regional and global value chains. The country has amended investment and e-commerce laws and modernised customs. However, stronger institutions, infrastructure, and implementation are still needed to turn these reforms into wider trade gains.

Nepal depends on manufacturing far less than an economy seeking stronger global trade normally would. Manufacturing contributes just 4.9 percent of GDP, showing that domestic factories and production capacity remain limited. This matters because manufacturing can create products for export, support jobs, and help businesses move beyond basic or low-value trade.

Nepal’s export market is also highly concentrated. Around 68 percent of merchandise exports go to India. That means one neighboring country absorbs more than half of Nepal’s merchandise exports. Even though exports rose from $860 million in fiscal year 2018-19 to $1.5 billion in 2023, the WTO found little progress in diversifying products or destinations.

This combination creates a narrow trade base. Nepal needs more manufacturing capacity and a broader range of buyers. The WTO specifically recommends diversifying products and destinations, strengthening logistics, and improving participation in regional and global value chains.

When most exports go to one country, Nepal’s trade performance becomes vulnerable to changes in that market. A slowdown, policy change, or disruption affecting India could reduce export sales sharply. Concentration also limits Nepal’s bargaining power and makes it harder for businesses to build experience in different markets. The article identifies this dependence as a major weakness.

Nepal also imports heavily to meet domestic consumption and production needs. The merchandise trade deficit stands at 24.3 percent of GDP. In simple terms, the value of merchandise imports is much higher than the value of merchandise exports. Remittances equal 25.3 percent of GDP, showing another major dependence in the economy.

The result is an economy exposed to external pressures on both sides of trade. Expanding domestic production and adding export destinations could reduce that exposure. The WTO calls for stronger manufacturing, more diverse products, and better participation in regional and global value chains.

Trade costs include expenses and delays linked to transport, customs, border crossings, and moving goods through supply chains. Infrastructure bottlenecks are weak or insufficient roads, logistics systems, border facilities, and other structures needed for trade. These costs matter because they raise the final price of exports and make delivery less reliable.

Nepal’s landlocked position makes cross-border transport especially important. Goods cannot move directly through a seaport from Nepal, so trade depends on routes and border processes connecting it with other countries. The article highlights high transportation costs, cross-border bottlenecks, and disruptions caused by natural disasters. JICA also stresses quality infrastructure, customs modernisation, and resilient supply chains.

These barriers can prevent Nepali firms from competing even when they can produce a product. Better infrastructure and coordinated border systems could shorten journeys and reduce uncertainty. The article points to one-stop border posts, stronger institutions, and partnerships among governments, banks, businesses, and investors as useful priorities.

Customs channels determine how quickly goods are cleared at the border. Green-channel declarations can pass through with fewer checks, while red-channel declarations require physical inspection. Inspections can help customs authorities verify shipments, but they also require time, staff, space, and handling. Those requirements can increase costs for traders and delay goods reaching customers.

Nepal’s figures show that clearance is not yet streamlined. Only 13 percent of customs declarations are processed through the green channel. By contrast, 42 percent still go through the red channel. This large share of physical inspections signals a system where many shipments face potentially slower processing. Delays can be especially costly for a landlocked country with long cross-border routes.

The WTO acknowledges Nepal’s customs modernisation efforts but stresses effective implementation. Better risk-based processing could allow more reliable shipments to clear quickly, while customs officials focus attention where it is most needed. Faster, more predictable borders would strengthen trade logistics and improve competitiveness.

Higher export earnings do not automatically create a broader export base. Diversification requires businesses to develop new products, meet market requirements, and reach new buyers. Nepal’s manufacturing sector contributes only 4.9 percent of GDP, so the country has limited domestic production capacity for expanding into more sophisticated exports.

The WTO notes that merchandise exports increased from $860 million in fiscal year 2018-19 to $1.5 billion in 2023. Yet around 68 percent still went to India, and there was little progress in diversifying products or destinations. High trade costs, weak infrastructure, and limited logistics can make new markets too expensive or unreliable. Customs reforms also have gaps in implementation.

Nepal has amended investment and e-commerce laws and pursued customs modernisation. The WTO says effective implementation is crucial. Future progress depends on expanding production, improving logistics, and helping firms enter regional and global value chains rather than relying on higher sales in existing channels.

Value-added exports are goods or services made more valuable through processing, design, skills, technology, or local inputs. Global value chains are production networks in which different stages, such as making components, assembling goods, or packaging, occur across countries. Joining these networks matters because countries can begin with specific stages and gradually build manufacturing skills, suppliers, and capacity.

For Nepal, stronger participation could mean producing more than basic goods or raw materials and supplying parts, processing, or specialised services to regional firms. That can create demand for better factories, trained workers, quality systems, and reliable logistics. The mechanism is cumulative: new production links can bring knowledge and investment, while local suppliers learn to meet international standards.

The article does not identify specific value-added products or chains for Nepal. It does state that the country should expand domestic production, diversify exports, and improve participation in regional and global value chains. Those steps could help Nepal earn more from trade and reduce its narrow export dependence.