Nepal's exports after LDC graduation - Implications of tariff changes and compensatory strategies - ITC and UN-OHRLLS

During the triennial review held by the United Nations Committee for Development Policy (CDP) in February 2021, Nepal was recommended for graduation from the Least Developed Country (LDC) category. Considering the context of the COVID-19 pandemic, it was decided that the usual 3-year preparatory period would be extended to five years. This means that Nepal will continue to receive LDCspecific support until 2026. The time until then is to be dedicated to preparing a smooth, sustainable transition out of the LDC category. This entails identifying the consequences of the loss of LDC support measures and devising strategies to offset them. In line with that goal, this study aims to estimate graduation-related trade losses for Nepal and to identify approaches to compensate them. The analysis uses a partial equilibrium model to calculate the impact of tariff changes on potential trade outcomes. This approach differs from others used in the literature in that we project current trade to its expected level in 2026, using forecasts of each country’s gross domestic product (GDP) and population, and estimates of income elasticities. Using projected rather than current exports is particularly important as we expect Nepal’s exports to shift towards fast-growing markets that do not have special LDC schemes. If that is the case, traditional approaches based on current trade values tend to overestimate the impact of LDC graduation. Likewise, we consider future changes in Nepal’s tariff advantages over competitors by including the 2026 tariff rates available from the tariff reduction schedules of trade agreements that are currently in force.The analysis identifies, at a detailed product and market level, for all potential partners, where losses are expected to be significant. The findings are contrasted with the untapped trade potential estimated for 2026 – a figure calculated by tailoring the ITC export potential methodology to the LDC graduation context. Whenever the trade loss identified exceeds the untapped trade potential, Nepal may seek to prioritize strategies to improve market access, e.g., bilateral or plurilateral agreements, or pursue market diversification opportunities. Conversely, whenever the untapped trade potential exceeds the trade loss, Nepal may seek to prioritize strategies that help companies overcome the frictions that prevent them from unleashing market opportunities, e.g., investment in trade promotion and advisory. The approach implemented thus provides estimates of expected trade changes after graduation and concrete recommendations on actions to buffer the effects. A description of tariff changes to be expected upon graduation is included in Section II, Section III presents the estimated effects of graduation-related tariff changes on exports and Section IV contrasts the effects found with export growth opportunities. Sections V concludes by summarizing the compensatory approaches matched to the most affected products and markets.