In early April, Nepali exporters celebrated new US customs policies that, they believe, could boost the competitiveness of Nepali goods in the US market. Their optimism was well-founded as the US is Nepal’s second largest export market.

Unveiling the reciprocal tariffs on April 2, US President Donald Trump said he was imposing elevated tariff rates on dozens of countries with significant trade surpluses with the US. In addition, a 10% baseline tariff was introduced on imports from all countries, citing what he described as an ‘economic emergency’. China was hit with the highest tariffs, while Asian garment exporters like Cambodia, Vietnam and Thailand faced tariffs of 49%, 46% and 36%, respectively. In South Asia, Sri Lanka faced the steepest tariff at 44%, followed by Bangladesh (37%), Pakistan (29%) and India (27%). In contrast, Nepal, Bhutan, the Maldives, and Afghanistan were each subjected to the baseline 10% tariff. The higher tariff rates were scheduled to take effect on April 9.

As the Trump administration rolled out a new tariff policy, stakeholders in Nepal began evaluating how the country might leverage its newfound competitive edge in the US market. Pashupati Dev Pandey, President of the Garment Association Nepal (GAN), told New Business Age that the lower tariffs compared to regional competitors could breathe new life into Nepal’s once-thriving garment industry. He said the new tariff regime offered a rare and valuable opportunity to gain market share in the US. However, the optimism quickly faded. On April 9, the Trump administration confirmed that while a 10% general tariff on nearly all imports would remain, the additional reciprocal tariffs were being paused for 90 days—with China as the exception. Tariffs on Chinese goods were instead raised to 145%. Just days later, certain Chinese electronics were granted exemptions from the levy. Nepal’s fleeting tariff advantage disappeared almost as suddenly as it had emerged. Analysts now warn that the additional 10% blanket duty, combined with existing tariffs, could further strain Nepal’s exports.

Nepal-US Trade Landscape

The United States is Nepal’s second-largest export destination, accounting for 11.4% of total exports in the last fiscal year, following India (67.7%). In fiscal year 2023/24, Nepal’s exports to the US totaled Rs 17.31 billion, marking an 11.5% year-on-year decline, while imports rose by 0.3% to Rs 19.48 billion, according to data from the Trade and Export Promotion Centre (TEPC). In the first nine months of the current fiscal year—from mid-July 2024 to mid-April 2025, Nepal exported goods worth Rs 13.11 billion to the US, while imports stood at Rs 19.94 billion.

Nepal’s exports to the US reached $120.5 million in 2024, down significantly from a peak of $171.4 million in 2003, according to South Asia Watch on Trade, Economics and Environment (SAWTEE), a Kathmandu-based think tank. The sharp decline followed the expiration of quotas on textile and clothing exports previously governed by the Multifibre Arrangement, and later by the World Trade Organization’s Agreement on Textiles and Clothing (ATC), which was in effect from 1995 until its expiry on January 1, 2005.

Imports from the United States have surged in recent years, particularly between 2019 and 2024, shifting Nepal’s overall trade balance with the US from a surplus to a deficit beginning in 2019—except in 2023, according to SAWTEE. Nepal’s major exports to the US include carpets, pet food, woolen felt products, ready-made garments, glassware, pashmina shawls, essential oils, musical instruments, handmade paper and Christmas items. The export portfolio is largely concentrated in a few key product categories. A single product category—textiles (including carpets and felt, among others)—accounts for the largest share of Nepal’s exports to the US, making up 58% of the total. Other significant export categories include "other agricultural products"—which comprise dog chews, animal products and essential oils—at 19%, and clothing, which contributes 9.2%, according to SAWTEE.

Moreover, Nepal’s exports to the US are heavily concentrated. The top 10 products exported at the 8-digit level of the Harmonized Tariff Schedule (HTS) represent approximately 67% of total US-bound exports. Notably, the top two export items—carpets and dog chews—alone accounted for 42% of the total.

Majority of Nepal’s Exports Subject to New Tarif

Nepal has been placed in the lowest tier for tariff increases, with a 10% reciprocal tariff added to its exports to the US. SAWTEE, in its latest report titled Decoding US Reciprocal Tariffs: A Nepali Perspective, concluded that the new tariff is applied in addition to existing duties. Chhurpi (hardened cheese), which is exported as part of the dog and cat food category, previously faced a zero Most-Favored-Nation (MFN) tariff. Now, it will be subjected to the additional 10% duty.

In 2022, about two-thirds of the value of Nepal’s exports to the US consisted of products that were exempt from MFN tariffs. These products will now be hit with the 10% duty. Goods covered by the Nepal Trade Preference Program (NTPP) will also face the additional 10% tariff. These products represented around 8% of Nepal’s exports to the US in 2022. Once the NTPP expires in December 2025, these goods will face the 10% reciprocal tariff plus the relevant MFN tariff, which averaged 7.5% in 2021. Moreover, about 11% of Nepal’s exports to the US are already subject to MFN tariffs. These goods are not covered under the GSP or NTPP. The tariffs on these products will increase by 10 percentage points.

Among the top 20 export categories for 2024 (classified at the 8-digit HTS level), 18 products were exported on an MFN basis. Although two of these items were previously eligible for duty-free treatment under the US Generalized System of Preferences (GSP), this program is no longer in effect. Of the 18 products, 11, which had zero MFN tariffs, will now incur the 10% duty. Additionally, two key exports, which had benefited from the NTPP, will also be subject to the 10% ad valorem duty (a type of import duty calculated based on the value of the goods). Most of Nepal’s major exports will now face at least a 10% tariff, with some products seeing increases of up to 30%.

Although the US reciprocal tariff policy is expected to affect Nepal’s exports of certain commodities, its overall impact on the national economy is likely to be limited, given the narrow scope of Nepal’s export basket, according to SAWTEE. “A 10-percentage point increase in tariffs on Nepal’s exports to the US could result in a 0.0096% decline in Nepal’s Gross Domestic Product (GDP),” it added.

An Uncertain Future

The future of Nepal’s trade with the US has remained uncertain, especially with regard to how the reciprocal tariff scheme will evolve or whether it will continue at all. At present, US tariffs on Nepali goods have risen by 10 percentage points, reflecting similar increases for other nations. Additionally, the design of any upcoming reciprocal tariff arrangements for these countries is still unknown.

These uncertainties also raise an important question: Can Nepal boost its exports to the US in the face of mounting challenges? These include higher tariffs in the US market, the expected expiration of the NTPP in 2025, the improbable renewal of the Generalized System of Preferences (GSP), which lapsed in 2020, the possible erosion of tariff benefits if other nations secure bilateral agreements with the US, and overall uncertainty in global trade dynamics. “The road ahead is full of uncertainties—there are doubts about whether and how the reciprocal tariff scheme will continue,” the SAWTEE report stated.

SAWTEE has said that the 10% baseline tariff hike imposed on most countries could lead to a decline in Nepal’s exports. However, since several other nations, many of which export similar goods to the US, are facing even higher tariff increases, Nepal might benefit from a relative competitive edge. This has fueled discussions around the possibility of industries relocating to Nepal to take advantage of this favorable position, according to SAWTEE. Even if the tariffs are reinstated after the 90-day pause, ongoing ambiguities continue to pose risks for Nepal. For instance, if Nepal experiences a sizable trade surplus due to the current advantage, future revisions to the tariff structure could wipe out those gains. Since the tariff increases are applied uniformly rather than tailored to specific products, even items that do not contribute to a surplus could be negatively impacted—potentially curbing overall exports.

These uncertainties may also discourage both local and international investors from establishing or expanding manufacturing facilities in Nepal to exploit the tariff gap. Making matters more complex, the US has signaled that it may reduce or remove additional tariffs through negotiations with strategic partners. This raises concerns that countries with greater influence, due to their economic size, trade volume or diplomatic leverage, could secure more favorable terms.

“As a result, nations like Nepal, which previously benefited from automatic trade preferences and special treatment under WTO rules, could find themselves at a disadvantage,” SAWTEE said in its report. Nepali policymakers must adopt a proactive and strategic approach to navigate the shifting landscape of global trade shaped by the evolving stance of the US on international trade.

Wait-and-Watch Mode

Nepali manufacturers, traders, government officials and economists say they remain in a wait-and-watch mode. Balaram Gurung, President of the Nepal Carpet Manufacturers and Exporters Association, said Nepal will gain a modest advantage if the US tariff-related policies announced on April 2 are implemented. “We are weak on the supply side due to the lack of domestic raw materials, skilled manpower, high freight costs and underdeveloped infrastructure,” Gurung said. “While we may benefit from favorable tariffs in the coming days, there are uncertainties as the US itself has yet to make a final decision.”

According to data from the Trade and Export Promotion Centre (TEPC), woolen carpets were Nepal’s third-largest export commodity by value in 2023/24. Nepal exported woolen carpets worth Rs 10.57 billion during the period, marking an 8.12% year-on-year decline. Exports to the US alone amounted to Rs 6.38 billion during the period—an 11.14% decline from the previous year.

Pashupati Dev Pandey, President of the Garment Association Nepal, told New Business Age that Chinese entrepreneurs operating in various sectors—including garments and footwear—in countries like Indonesia, Bangladesh, Thailand, Vietnam and Cambodia began reaching out to Nepali entrepreneurs after the April 2 tariff hike. “But they, too, adopted a wait-and-watch approach following the April 9 decision,” Pandey added.

Industry people have also criticized the government for its lack of diplomatic initiative to secure a more favorable tariff arrangement. “While many countries have begun negotiations with the US, our government is doing nothing,” said Chandi Prasad Aryal, Immediate Past President of the Garment Association Nepal. Aryal said that Nepal cannot be competitive unless it begins producing raw materials domestically. “That doesn’t happen overnight. It requires a clear strategy and investment,” he added.

However, Joint Secretary Bipeen Acharya, Head of the Bilateral and Regional Trade Division at the Ministry of Industry, Commerce and Supplies, said that the government is closely monitoring the recent developments. “We have been analyzing the US tariff policy and have shared our views with relevant stakeholders,” Acharya said.

The upcoming Trade and Investment Framework Agreement (TIFA) meeting, scheduled for September 2025 in the United States, will be crucial for discussions on tariff reductions, government officials say. Many say Nepal should advocate for tariff exemptions, citing its ongoing transition from Least Developed Country (LDC) status and its minimal share in total US imports.

Duty-Free Access Erodes

Some manufacturers fear that the inconsistent US tariff policy could dampen the demand for Nepali products. Rajendra Timilsina, owner of Himalayan Natural Food Product and Export Pvt Ltd, said customers could start looking for cheaper alternatives if the tariffs make dog chew expensive. Timilsina’s company currently exports 30-40 tons of dog chew every month. Nepal’s dog chew exports have seen remarkable growth in recent years. The country now exports dog chew to 26 countries, the largest market being the US.

Products in the “dog or cat food” category ranked as Nepal’s 12th most exported commodity by value in 2023/24. In the review year, dog chew exports totaled Rs 3.18 billion, with Rs 2.76 billion worth exported to the US alone. A total of 77 products from Nepal benefit from duty-free access to the US market under the Nepal Trade Preference Program (NTPP), which was established for 10 years following the April 2015 earthquake. However, under the latest policy, even these goods will now face a 10% tariff.

Similarly, goods that were previously exempt from most-favored-nation (MFN) tariffs account for about two-thirds of the value of Nepal’s exports to the U.S. in 2022. Products exported duty-free under the NTPP made up approximately 8% of Nepal’s total exports to the US that year. According to the SAWTEE report, about 11% of Nepal’s total exports to the U.S. are currently subject to positive MFN tariffs. These products will also see an increase in duties by 10 percentage points, with some items potentially facing tariff hikes of up to 30%.

The tariff uncertainty comes at a time when Nepal is seeking an extension of the NTPP, which is set to expire in 2025. Along with the NTPP’s extension, the reinstatement of the Generalized System of Preferences (GSP), which expires in 2020, seems increasingly unlikely, according to observers. In 2022, approximately 12.5% of Nepal’s exports to the US were potentially eligible for duty-free access under the GSP.

Call to Strengthen Production

Economists argue that Nepal should not be overly optimistic about a potential tariff advantage but should instead focus on strengthening its manufacturing and export capabilities. “Many countries have approached the White House for negotiations, and the developments in the coming days are yet to be determined,” Former Commerce Secretary Purusottam Ojha said. “Nepal will only have an edge over others if those countries are subjected to higher tariffs, but that remains uncertain at this stage.”

Even if the US tariff program resumes after the 90-day pause, future tariff adjustments could nullify this advantage, Ojha added. Many argue that the “reciprocal tariff” announcement is primarily a negotiating tactic by the US to facilitate the global market entry of its products in the long term. “There is no reason to be overly excited about the US tariff program at this moment,” Ojha said.

Economist Jagadish Chandra Pokharel also said that beyond the tariff discussions, which are likely to remain unpredictable for at least a couple of months, Nepal needs to focus on strengthening its production and export capabilities. “We have so far failed to take full advantage of the trade facilities offered by the US,” Pokharel added.

Dr Achyut Wagle, Vice Chancellor of Kathmandu University, said Nepal has not yet developed backward linkages in key export sectors. “For instance, while we emphasize the readymade garment sector, the raw materials—such as textiles and yarns—are all import-dependent,” Wagle said, speaking at a roundtable titled “Navigating Nepal-US Trade Amid Uncertainty”, organized by SAWTEE in collaboration with Kathmandu University School of Management (KUSOM) on April 21. “This is not just a trade issue but involves industrial policies and broader policy considerations.”

Dr. Posh Raj Pandey, Chair Emeritus of SAWTEE, highlighted the growing trend of fragmented global trading blocs and urged Nepal to prepare for joining sub-regional and regional trade arrangements. Concerns have been raised about the potential for the tariff advantage to encourage unfair trade practices. Private sector representatives warn that Nepal could become a dumping ground for goods re-exported to the US, potentially triggering further restrictions on Nepali products.

The SAWTEE report also highlights the broader implications of such tariff policies, including a possible decline in global demand, reduced tourist arrivals and a drop in demand for Nepali labor—all of which could adversely affect the economy. Additional concerns center on an expected influx of cheap Chinese products diverted from the US market. In Nepal, there is growing apprehension that domestic industries—particularly footwear and readymade garments—could come under pressure from these low-cost alternatives.

“It remains uncertain how the reciprocal tariff scheme will unfold after this pause, or whether it will be implemented at all,” the SAWTEE report stated. “Because the tariff hikes are blanket increases rather than product-specific, even items not contributing to the trade surplus could be affected, potentially halting Nepal’s exports.”

The report further warns that such uncertainty could deter both domestic and foreign investors from establishing or expanding manufacturing operations in Nepal, undermining hopes of leveraging the potential tariff advantage.

(This news report was originally published in  May 2025  issue of New Business Age Magazine.)