Can Nepal’s Garment Industry Stand Alone?

In one of the Trade and Investment Framework (TIFA) meetings in the United States, Chandi Prasad Aryal, Immediate Past President of Garment Association Nepal, remembers US officials telling the Nepali delegation: “Better you talk to your government.” Aryal had raised Nepal’s garment sector–related issues, highlighting the country’s poverty, lack of competing power, and how Nepal could enhance the sector.

The remark, though blunt, captured a truth Nepal’s manufacturing sector has struggled with for nearly two decades: global markets may  offer sympathy, but they rarely offer solutions. Those must come from home.

Once a leading foreign exchange earner,  Nepal’s garment industry saw a dramatic decline after the expiration of the Multi Fibre Agreement (MFA) in 2005. The MFA had granted Nepali garments duty-free access  to major markets, particularly the United States. In 2003,  Nepal exported garments worth over $200 million. The sector employed tens of thousands and powered industrial clusters in Kathmandu and beyond.

But when the quota regime ended, Nepal was suddenly exposed to fierce global competition. Large-scale producers from China, India and Bangladesh, backed by integrated supply chains, lower production costs and better logistics, quickly dominated global markets. Nepali manufacturers struggled to compete, exports fell sharply, and many factories shut down.

Two decades later, the industry stands at another inflection  point, this time shaped not only by 
the legacy of MFA’s expiry, but by Nepal’s impending graduation from Least Developed Country (LDC) status, India’s new trade pact with the European Union, and volatile tariff policies in the United States.

The central question is no longer whether Nepal can regain lost ground. It is whether the country can compete without relying on preferential trade regimes.

The LDC Graduation Reckoning Nepal will graduate from LDC status in November 2026. While the milestone reflects development progress, it also carries economic consequences. Nepal will gradually lose duty-free and quota-free market access  and other special trade concessions granted under LDC arrangements.

Currently, Nepal exports all products except arms and ammunition to the EU at zero tariff under the Everything But Arms (EBA) scheme, a facility granted to least developed countries. This preferential access  will remain in place until 2029. After that, Nepal must qualify for the Generalised Scheme  of Preferences Plus (GSP+) to maintain tariff advantages.

Paras Kharel, Executive  Director at South Asia Watch on Trade, Economics and Environment (SAWTEE), warns that failure to secure GSP+ would significantly raise costs for exporters. After that, if we do not get the Generalised Scheme of Preferences Plus (GSP+), the tariffs on garments and textile export could increase by around 6.5% on average, Kharel says.

GSP+ grants vulnerable developing countries duty-free or significantly reduced tariff access to the EU market for over 66% of product tariff lines. Securing it requires compliance with governance, labour, environmental and human rights conventions — areas where Nepal must demonstrate sustained institutional commitment.

The stakes are high. According to the Department of Customs, Nepal exported goods worth around Rs 12.26 billion to the EU’s 27 member states in the last fiscal year (FY 2024/25). Key exports include readymade garments, felt products, handmade carpets, pashmina,  handicrafts, tea, coffee, honey, musical instruments and handmade paper.

Readymade garments alone accounted for Rs 8.75 billion in exports last fiscal year, according  to the Trade and Export Promotion Centre. In the first six months of the current fiscal year, exports stood at Rs 4.59 billion, a 2.07% decline from Rs 4.69 billion during the same period  last year. Garments contributed 3.2% of total exports in value terms in the first six months of the fiscal year.

Nepal’s garment export destinations have undergone a dramatic structural shift since the phase-out 
of the quota regime. In 2003,  the United States dominated both knitted  (HS 61) and woven  (HS 62) apparel  exports, accounting for over 80% and 70% respectively. By 2022,  the US share had 
collapsed  sharply, while Europe emerged as the primary destination.

The European Union now absorbs nearly half of knitted  exports and over 42% of woven  apparel. The data reflects a decisive pivot from a US-centric model under  the MFA to a Europe-oriented strategy shaped by LDC preferences, a transition that now faces renewed uncertainty.

The India–EU FTA Shockwave Even before LDC graduation takes effect, another structural shift is  reshaping Nepal’s export landscape. India has secured sweeping duty-free access  to the European Union market under  a newly concluded free trade agreement finalised in New Delhi at the end of January.  The deal grants immediate tariff elimination  on 70.4% of tariff lines, covering 90.7% of India’s exports, including textiles and garments, leather and footwear, tea, coffee, spices, sports goods, toys, jewellery and precious stones. A further 20.3% of tariff lines will see phased zero-tariff access  within three to five years, while 6.1% will benefit from reduced tariffs and preferential access, significantly strengthening India’s competitive position in Europe.

For Nepal, the implications  are immediate. Indian products, produced at scale and supported by sophisticated logistics, will now compete directly with Nepali exports in the EU market.

Rabi Shankar Sainju, Vice Chair of SAWTEE, describes the challenge clearly. “There is a clear risk of Nepali products losing market share due to intense competition from Indian goods,” he said.

Trade analysts identify readymade garments, carpets and floor coverings, pashmina and woollen 
products, leather goods, footwear, bags, handicrafts and felt products as particularly  vulnerable. 
Agricultural exports such as tea, coffee, spices and honey  may also face stiffer competition.

Kharel underscores the pressure on flagship products. “Nepali carpets will now face direct competition from Indian carpets in the EU market,” he said.

Nepal’s exporters already operate under  high logistics costs, limited direct flights, expensive air freight and capacity constraints in national  carriers. Any erosion of tariff preference narrows margins further.

The Mirage of a US Advantage While Europe presents structural challenges,  the United States has 
offered episodic, and short-lived, opportunities. When  the Trump administration unveiled  reciprocal  tariffs in April 2025,  Nepal was subjected only to a 10% baseline  tariff, while regional competitors such as Sri Lanka (44%), Bangladesh (37%), Pakistan (29%) and India (27%) faced steeper rates.

For a brief moment, Nepali exporters sensed an opening. Pashupati Dev Pandey, President of
the Garment Association Nepal (GAN), had told New Business Age that the lower tariffs compared to regional competitors could breathe new life into Nepal’s once-thriving garment industry.

But optimism  faded  quickly. On April 9, the administration paused additional reciprocal  tariffs for 90 days, except for China. Tariffs on Chinese  goods were raised to 145% before certain exemptions were granted. The reciprocal  tariffs later came into effect in August.

Then came another twist recently: the United States Supreme Court struck down the far-reaching 
global tariffs imposed under  emergency powers law. In response to the recent court’s verdict, Trump had said he would raise the global duty on imports into the United States to 15%, doubling down on his aggressive tariff policy. But 10% tariff was imposed upon implementation of Trump's decision.

Amid the policy swings, Nepal’s fleeting tariff advantage evaporated. At a policy dialogue organised by SAWTEE and the Garment Association Nepal in January-end, observers noted
limited impact so far but uncertainty ahead.  Kharel reflected on the missed opportunity.

“We failed to develop a narrative to leverage the tariff advantage due to various constraints,” Kharel added. “Countries like Bangladesh would not have delayed  taking advantage of such a situation.” Aryal, too, recalls initial expectations. When  the US imposed around a 50 percent duty on India, we thought that business and trade would increase in Nepal and that we would benefit significantly, Aryal of GAN, said.

But structural constraints proved decisive.

“Unless we are cheaper than countries like China, Sri Lanka, Bangladesh, India or Pakistan, we 
cannot compete,” added Aryal. “The reason is simple,” he continued. “We do not have raw materials. When we have to import raw materials, we do not have a port. Transportation costs add up. Sometimes shipping via Kolkata and then onward makes the freight cost almost equal to sending  goods directly to the US. All of this increases expenses.”

Lack of stable government added to our difficulties, experts argue. While most countries negotiated 
and secured arrangements with the US administration, Nepal was not proactive. Aryal emphasises the need  for direct engagement.

“If we want to come out of this situation, move up, and grow our trade, the first thing we need  to  do is engage directly with the American government. No trader will give Nepal business out of goodwill alone. Business does not work on sympathy,” Aryal added.

Structural Flaws, Not Just Tariffs

The recurring  theme across  all these developments is clear: Nepal’s challenge  is not merely external. It is structural.

Sainju argues  that the garment sector’s struggles reflect broader weaknesses in Nepal’s 
manufacturing policy.

“One of our biggest mistakes has been reliance on preferential tariffs as an LDC,” Sainju said. “We 
always knew this would end. After LDC graduation, we would have to move to GSP Plus. We knew this 10 or even 15 years ago. But we ignored  that period. Now, as the deadline  approaches, garment producers are asking the government for extensions.”

But, did we use that period  to improve competitiveness? No. We waited, he added.

“We could have developed mixed products. Even within garments. Using natural fibres. With  distinctly Nepali designs.”

Nepal neither integrated into regional value chains nor diversified markets meaningfully.  Innovation remained limited. Productivity gains were modest. Compliance  with evolving labour and environmental standards lagged behind  regional competitors.

Sainju stresses that future competitiveness must be rooted in deeper reform. “We must strengthen 
trade negotiations with India and other countries. Global trade conditions are changing every day. 
We must integrate into regional and global value chains. We cannot do everything ourselves. We must improve productivity, labour standards, environmental compliance,  and quality. If India becomes a manufacturing hub, we can produce intermediate products. Even components can be worth billions.”

He also sees potential opportunities within India’s industrial expansion. Demand for Nepali yarn,  fabrics and leather inputs could rise. Border-state industrial growth may create demand for  hydropower, construction materials and services.

But these opportunities require strategic positioning, not passive expectation.

A Final Turning Point

Nepal’s garment story has long been one of rise under  protection and decline under  competition.  The MFA era provided shelter. The post-MFA world exposed vulnerabilities. LDC preferences extended breathing space. Now, that space  is narrowing again.

The coming years will determine whether Nepal’s export strategy remains preference-driven or 
transitions toward productivity-driven growth.

India’s integration with the EU, shifting US tariff regimes and Nepal’s LDC graduation together  mark a structural reset in global trade conditions. Preferential access  will no longer compensate for high freight costs, fragmented supply chains, limited scale or policy inertia.

The blunt message delivered years ago in Washington still resonates: “Better you talk to your 
government.”

Global markets will not preserve Nepal’s share  out of goodwill. Business  does not work on 
sympathy. It works on cost, quality, reliability and integration.

Nepal’s garment sector stands at a crossroads once more. Again, the question is no longer whether  trade preferences will erode,  they will. The real question is whether Nepal can finally build a competitive manufacturing ecosystem that survives without them.

The next chapter will not be written in Brussels or Washington. It will be written in Kathmandu, in policy reforms,  trade diplomacy, industrial upgrading and supply-chain integration.

And this time, waiting may not be an option.

(This report was originally published in March 2026 issue of New Business Age magazine.)