Implication of WTO on Nepalese agriculture : competitiveness of tea

Abstract

Production, distribution and consumption of various agriculture products including tea in Nepal has been much affected after Nepal has signed into WTO agreement and became a member of it. It might have both positive and negative consequences in export and domestic consumption. The study entitled, “Implication of WTO on Nepalese Agriculture: Competitiveness of Tea" attempts to reveal the implications of WTO membership on the growth and export potential of cash crops in general and tea in particular. The problem was that Nepal has not brought out clearly the implications of WTO from legal and trade perspectives. This has limited the scope for taking full advantages from the agreements and developing appropriate measures, to defend trade interest. The biggest challenge Nepal faces in agricultural is lack of competitiveness of tea. So, the study has categorically investigated the constraints and opportunities of the competitiveness of tea in export market. 2. Objectives of the study The general objective of this research was to assess the implication of WTO agreements on cash crops of Nepal in general and particularly on tea. However, specific objectives were, to explore and compare the export and production situation of tea before and after the membership of WTO; to explore the competitiveness of tea in export market; to analyze the major economic aspects of green leaves; to examine and establish the linkage between the productivity of tea leaves and the educational status of the farmers including the land holding size and finally to put forth the issues for policy to debate on Nepalese tea. 3. Methodology of the Study To fulfill the research objectives both qualitative and quantitative data from both primary and secondary sources of information were used. As a primary source of information, a field-based micro-level data through structured questionnaire was used. Propability sampling design was followed to draw samples and data were collected from tea growers, processors and exporters. Ilam and Jhapa were chosen as the sample spots. The tea in the study includes Orthodox and CTC (cut tear and curl). To observe the changes in the state of tea, before and after the membership of WTO and to calculate the RCA index, data were obtained from secondary sources of information especially from International Tea Committee (ITC), National Tea and Coffee Development Board (NTCDB) and International Trade Centre (ITC). 4. Findings of the Study While reviewing and observing the implications of WTO on tea, Agreement on Agriculture (AoA) of WTO allows the government to provide subsidy and support programme to the tea industry, i.e. subsidy on credit, capital equipment subsidy, export subsidy and other support measures. But there is negligible subsidy and supports are provided by the government. Some subsidies on fertilizers, irrigation etc have been removed. As a result, there has been low investment in tea production after the membership of WTO which led to low level of production. The applied tariffs on major cash crops are significantly lower than the bound tariffs which are in the 40-60 percent range. For tea, the bound tariff level is 50 percent, while that for sunflower seeds, mustard seeds and sugarcane is 50, 40 and 60 percent respectively. Thus, in aggregate there is considerable scope for Nepal to raise applied rates to the bound levels when faced with, for example, depressed import prices or import surges, without the need for resorting to safeguard measures. Sanitary and Phyto-Sanitary (SPS) and Technical Barriers to Trade (TBT) agreements of WTO are most challenging tasks for agricultural products. These standard related measures could affect significantly in the export of cash crops of Nepal. For example, Nepal experienced the quality related trade problems which have come up with the export of Orthodox tea to Europe mainly on the ground of her non-compliance with pesticide residual level. These agreements required to adopt the good practices in crop production. However, study reveals that good practices in all stages, i.e., at farmers, processors and exporters level, it is too lacking in Nepal. Consumers of developed countries are more aware about food safety and they are increasingly demanding greater safety standards which may possess another challenge for Nepal. Nepal's position is very weak in the standard related agreements. It is due to the higher compliance cost, loose definition of standard, unclear risk assessment and lack of well equipped laboratories to test and certify the quality of food products. The study also shows that export market of tea for Nepal is vulnerable due to heavy dependency on Indian market. More than 90 percent of Orthodox and 40 percent of CTC Tea has been exported to India from Nepal. The Export of tea from Nepal has been increased every year. Before WTO (2002-2004) there was change in export by 48.33 percent and after WTO (2005-2007) it has increased by 94.4 percent. But all growth in export, after the membership period may not be the result of WTO. Because it had started to grow before the WTO period. Tea production and planted area is growing every year from 1998-2008. The production reached to 259 percent and plantation area increased by 62 percent respectively. Tea yield in Nepal is found to have increased by 122 percent during the last 10 years. However, it is just 58.4 percent that of Indian (1663 kg/ha) average for the year 2007/08. Study shows that at present yield level of Nepal is low but due to the virgin soil, youngness of tea bushes and gaining the knowledge about tea plantation, still there is potentiality to improve it to meet Indian level. There is positive relationship between production and export. These values for Nepal and India are 0.95 and 0.09 respectively. Correlated value for Nepal is very high which is near about perfect correlation than the value of India. It indicates that Nepal's position in production and export pattern is growing faster than the India. The production pattern of tea in Nepal had higher value which increased by 129 percentage point during the period (1999/2000-03/04) before WTO membership. But after (2004/05-08/09) the membership of WTO it has been increasing at lower rate, i.e. 28.57 percent. The main factors those have contributed to increase in lower rate are the decreasing in price of tea, increase in cost of production on labour, withdrawal of subsidy on fertilizer and price hike of energy and chemical/pesticide. As a result, profitable situation of tea industry has been degraded which discouraged production of tea. From the study it is observed that if other things remain same, predicted value of tea export for Nepal and India during the 2007-2015 will be increased by 75.16 and 2.60 percent respectively. The predicted export trend of India indicates that export potentiality of India is relatively lower than Nepal. Due to large number of population and high consumption pattern of tea in India there is low export potentiality. For the period of 15 years from 1990-2005, Nepal's labour productivity improved by 23 percent only. While this improvement was more than 60 percent for India. Nepal's position in R&D, Technology and Innovation are lacking behind in comparison to other South Asian neighbors resulting the low competitiveness of agricultural product. Despite the low competitiveness of Nepalese agricultural product in export market, some products, i.e., Tea, Cardamom, Ginger, Vegetable products and Dry vegetable are found to have a higher comparative advantage for Nepal. It was found that Nepalese tea has increasing Revealed Comparative Advantage (RCA) during the period 2003-2008. The value of RCA for the year 2003 was 19.62 percent and it was found to be increased in 2008 by 50.97 perecent. It indicates that Nepalese tea has comparative advantage in export market. The average productivity of tea is 2233 and 846 kg/ha for CTC and Orthodox type tea respectively. The average productivity (including both type) of tea is 1646 kg/ha which is less than India (1663 kg/ha). Total variable cost of CTC and Orthodox green leaves are found to be 8.67 Rs/kg and 14.36 Rs/kg respectively. Labor is the major contributing factor of green leaf production followed by chemical fertilizers and pesticides. Applications of these inputs are in decreasing trend in recent years. It was observed that, mainly two factors are responsible for declining tendency of fertilizer used; they are increasing the price of fertilizer and awareness on organic production of leaves. The benefits cost ratio of CTC (1.48) tea was found higher than Orthodox tea (1.11) type. Green leaf price trend seems to be fluctuating since last 10 years. It was found that green leaves price continuously declined from the year 2000/01 to 2005/06. There is restriction imposed by India to transfer the leaves from Nepal to adjoining location of Darjeeling and Silguri of India. It results the over supply of green leaves for domestic processors in Nepal. It leads to lower the price. Afterwards, there seemed to be changed in business environment because of arm conflict in Nepal. It has has been changed into peace process then. It creates relatively better business environment. Consequently, domestic processors have started to utilize their optimum capacity. It ultimately led to raise in green leaves price slightly. After the accession into WTO, demand pattern of green leaf is observed to have changed. Main causes of such change in demand pattern are; increasing number of processing factory and high demand of organic leaves. It has also been observed that after the mid 1990s' to 2000, the tea industry was profitable for farmers, processors and exporters. It was resuled into increase in processing factories. At the same time, there was complete ban of green leaf transfer from Nepal to India that led to establish the domestic processors. The demand of organically produce tea was increased due to the awareness of foreign consumer. Majority of the farmers (88.3 percent) were unaware about the WTO and its agreements. Among those who were informed about the WTO, 21 percent were aware on implementation of Sanitary and Phyto-Sanitary (SPS) measures because they are conscious about the food product which should be safe for human consumption. Most of the tea processors had experienced that entry into the WTO will positively affect tea sector as the easy access in global market. The compliance of standards for quality products is expected to increase the competitiveness in Nepalese tea sector. Most of the processors stated that the membership of WTO will not only be harmful but also does not contribute to the decline in the demand for tea. Majority of the farmers (87.6 percent) expressed the importance of auction market to enhance the tea trade. The auction market is also needed for maintaining price level; retaining quality; enhancing transparency in the price structure and increased communication with local buyers. The green leaf quality of Nepal is relatively better than India. The young tea bushes, virgin soil, low application of chemical fertilizer/pesticide, good tips and clone variety are the main factors for competitive strength of Nepalese tea. Similarly, suitable climatic conditions, such as warm and humid climate, with plenty of rainfall, and long duration of sunlight, are other factors for better production of green leaves. If we maintain the Good Agricultural Practice (GAP) and Good Manufacturing Practice (GMP) (these are the processes/activities to make product as safety to human consumption and it started from the plantation of the crops to processing and packaging of the products) in production process of tea which leads to increase in the competitiveness of tea. Furthermore, government of Nepal has formulated the tea policy and lunched, then, some programmes, such as subsidy on credit, principal repayment time schedule facilitation, transport facilities for cutting plant and training for small farmers. However, market access opportunities provided by WTO agreements and allowed subsidy and support schemes are negligible in tea sector. There is negative relationship between the educational level and green leaf productivity. The relationship is strong (G=-0.602) and significant for CTC, however, this relationship is found weak (G=-0.073) in the context of Orthodox. There is negative (G=-0.788) relationship between the land holding size and green leaf productivity. The relationship between two variables is strong and significant for CTC, however this relationship found weak (G=-0.272) for Orthodox type. As Nepal Tea industry is relatively young, the quality of tea trees is regarded as high and it is also considered as a potentially important crop. However, significant obstacles remain. There are some major problems which include, lack of technical knowledge and skilled labour; price instability; minimum support of the government; market uncertainty; inadequate infrastructure development; lack of disease and pest management; weak capacity of tea board and high charges of electricity. 5. Recommendations To resolve problems related to tea in Nepal it is necessary to increase the government support and subsidy for stable market price of green leaf. It should be determined in coordination with the stakeholders. There must be good guidelines for the use of chemical fertilizer/pesticides to the farmers and should be focused on organic production. Establishment of training centre and R&D, well equipped laboratory are some other measures. Nepalese logo of tea and auction market development, infrastructure development, such as agricultural road, irrigation and electricity facilities should be developed. Awareness programme on WTO agreements to the tea stakeholders is needed to develop the geographical indication to protect the own seedling and clones. 6. Conclusion After the membership of WTO there is improving scenario in the competitiveness of tea and farmers, growers and processors are conscious over it. Still, Nepal is not enough able to grasp open global market created through WTO membership. But this opportunity of access to the foreign market has brought challenges as well. The major challenge is to be competitive. Regarding this, Nepal should be wise to choose right commodity and right destination. There is no doubt that a comparative advantage criteria is one of the important criterions of choosing commodities for export. Nepal has comparative advantage in certain commodities most of which belong to agriculture sector. Some of the major cash crops are Ginger, Cardamom and Tea. Nepal is fortunate enough to be situated between China and India. If Nepal adopts proper policy then these countries could be good market and Nepal need not struggle for market in other part of the world. In the long run, Nepal needs to concentrate on those commodities in which Nepal has high level of comparative advantage and there is less possibility for other countries to produce those commodities with equal competitiveness.