NEPAL: Nepal's Garment Industry Hangs by a Thread

With misplaced optimism, the Garment Assn. of Nepal is building itself a brand-new headquarters in Katmandu. By the time it is finished, however, there may be hardly anyone left to represent.

The pashmina bubble that buoyed the garment industry in the late 1990s has burst. Fashion trendsetters have moved on, leaving a glut of cheap Chinese knock-offs in their wake.

"Chinese pashminas feel silky, rather than woolly like the real Nepali ones [made from the underbelly hair of Himalayan goats], but we sell them as Nepali because that's what people want," says Supriya Gurung of Pashmina Industries, who runs a shop near the Royal Palace. Her Chinese pashminas all have "Made in Nepal" labels and she has laid off 50 workers at her factory in Katmandu this year.

By eliminating the quotas that gave uncompetitive Nepali garment makers a quasi-guaranteed market, the World Trade Organization delivered the coup de grace to the industry at the start of the year.

A sector that accounted for more than half of Nepal's exports in 2003 and employed 300,000 has entered a death spiral. Of 1,067 registered companies operating in 1995, only 25 remain in business.

In the first 11 months of the post-quota regime, sales to the U.S., which account for more than 80% of the Nepali industry's exports, crashed by 42%. Buyers such as Gap Inc. and Wal-Mart Stores Inc., no longer needing to search for countries without quota constraints and with greater discretion in sourcing their apparel, rationalized their global networks of suppliers, principally benefiting China and India.

For one of the poorest countries in the world, with a stagnant growth rate and some of the region's worst development indicators, it has been a severe blow. But in a last bid for survival, the Nepali government had hoped to use the recent WTO ministerial meeting in Hong Kong to secure the same duty-free access to the U.S. market that Washington already gives some Caribbean and African competitors.

"The European Union, Japan, Australia and Canada have given Nepal duty-free access, but America has not, despite its trade enhancement and poverty alleviation obligations under the Doha round," says Shyam Khetan, a vice president of the Garment Assn. of Nepal. "Developed countries must now make binding commitments to extend duty-free access in apparel as well as in other eligible products from developing countries."

James Moriarty, U.S. ambassador to Nepal, suggests that Washington will be hard to persuade: "The preexisting situation created all sorts of distortions. Nepal's garment industry was created by quotas, and now we're being asked to continue the distortions for poverty alleviation. Doesn't it make more sense to say, 'OK, perhaps this isn't an area where Nepal is particularly competitive; where are the areas where it can compete?' "

Like some other least-developed countries, Nepal is also lobbying hard for the textiles and garment industry to be stripped out of the Non Agriculture Market Access negotiations concerning industrial goods. This wish, however, is unlikely to be granted, trade officials say.

A Maoist insurgency, meanwhile, complicates efforts by Nepal to revive its textiles sector or to develop new sources of revenue. In theory, it has great potential to sell hydroelectric power to its energy-starved neighbor India, but political instability has discouraged the long-term investment that such projects require. Nepal is producing only about 500 megawatts of its estimated hydro capacity of 43,000 megawatts.

Tourism could be another mainstay of the economy, but the travel advisory on the wall of the U.S. Embassy warning of Maoist attacks explains, in part, why visitor numbers have plummeted to 55% of 2000 levels.

That is little comfort to Subrat Dhital, managing director of Cotton Comfort, Nepal's largest garment exporter. Since losing business from Wal-Mart and Target Corp., he has stopped production at seven of eight factories, leaving just one to cut, make and trim children's clothes for Gap. The U.S. reimposition of limits on Chinese apparel exports has not helped to win back lost customers.

"That safeguard has given a lifeline to a lot of countries, but not Nepal," he says. "Because of the turmoil, people did not consider giving orders back to us. They went to Bangladesh, India, Pakistan, Cambodia and Vietnam."

Until peace comes to Nepal, it will suffer the worst of all worlds, exposed to ever tougher global competition but limited in its ability to share the benefits of any trade liberalization.

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