Visits by prospective Chinese buyers to Ilam, the tea capital of Nepal, against the backdrop of Nepali tea facing uncertain access to India caught the attention of the international media. Nepal has long sought to diversify its trade partners and secure alternative transit routes, an aspiration that long predates the freefall in China–India ties in the wake of COVID-19.

Nepal’s southern border with India has been blockaded four times since 1960. Nearly two thirds of Nepal’s trade is with India and most of its imports from the rest of the world transit through its southern neighbour. The last blockade, which came on the heels of the devastating 2015 earthquakes, prompted Nepal to sign a transit agreement with China in 2016.

Tea ranked tenth in Nepal’s export basket in 2022. The Himalayan nation exported tea worth US$32.5 million that year out of total merchandise exports of US$1.3 billion. In the decade to 2022, India absorbed on average 89 per cent of Nepali tea exports.

Market diversification is taking place, albeit slowly. Data from Nepal’s customs department shows that India’s share dropped from 89.6 per cent in the 2019–20 fiscal year to 83.9 per cent in the first eight months of 2023–24. Meanwhile, China’s share rose from 0.21 per cent to a still minuscule 0.46 per cent.

China has begun easing import procedures for Nepali tea at Nepal’s persistent request, raising hopes of tapping into the Chinese tea market. Tea is among the more than 8000 products from Nepal and other least developed countries that face zero tariffs in China. The Chinese buyers who visited Nepali tea gardens in March 2024 were visibly interested in orthodox and specialty tea.

Tea exports to China in 2022 amounted to US$70,000, half their 2017 value. The closure of the Nepal–China border in the wake of COVID-19 hit exports to China hard. Tea was no exception. In normal times, the bulk of exports to China took the overland route. In 2019, the land route carried about 70 per cent of tea exports to China. In 2020, 2021 and 2022, nearly all tea exports to China were airfreighted.

Nepal’s tea export strategy sees an opportunity for Nepal to capitalise on the growing green tea market. It identifies China as an untapped niche market for Nepal’s orthodox tea. At present, India remains Nepal’s top destination for both crush, tear and curl tea and orthodox tea. The export strategy finds the prospect of market diversification higher for orthodox tea.

In the 2022–23 fiscal year and the first 10 months of 2023–24, the unit price of Nepali tea in China was five times higher than in India. Small farmers have a significant presence in the production of orthodox tea. Aided by the availability of small processing equipment imported from China, small processors have also proliferated.

Two dozen tea-laden trucks bound for the Indian market were held at the Nepal–India border for six days in April 2024 after Indian customs asked for laboratory test certificates for each truck’s content. Usually, a certificate based on samples from an export consignment would be sufficient for the customs clearance of additional consignments from the same consignor for six months. It takes between two weeks and one month to get the results from the designated lab in India. While Indian customs eventually cleared the consignments, tea exporters fear the restrictive measure could be introduced again.

The fear is not unfounded. Tea exports from Nepal have been subject to restrictions in India from time to time. In late 2021, India banned the blending of its prized Darjeeling tea with Nepali tea. The ban was lifted a year later on the condition that the blended product not be labelled as Darjeeling tea.

Meanwhile, a June 2022 report of the upper house of India’s parliament calls for restrictions on imports of Nepali tea, including through the imposition of anti-dumping duties, a testing requirement for every import consignment and revision of the Nepal–India trade treaty that grants Nepali tea duty-free access to the India market.

The report repeatedly alleges that Nepali tea is substandard without evidence, ignoring that tea exports are backed by certificates issued by authorised Indian labs and that Nepali tea bushes are much younger. It notes that Nepali tea is ‘inexpensive’ while advocating for anti-dumping duties, but does not mention the lower production costs in Nepal.

Destination-market trade policy uncertainty hangs over Nepal’s exports of food and agricultural products. The need for a robust, up-to-date national quality regime backed by well-equipped, internationally accredited labs to prove compliance with the safety standards and technical regulations of export markets is recognised in Nepal’s trade strategy. This applies to exports to India or China. But market diversification reduces the cost of external trade policy shocks — especially when motivated by protectionism or geopolitics — and is a potential avenue for export growth.

Nepal’s tea export strategy emphasises piloting a tea auction house to fetch better prices and diversify markets. Even as the strategy was being written, government agencies were reportedly working to set one up. Experts believe an auction house would be a game changer for the Nepali tea sector. But delays in the implementation of plans, policies and strategies are the norm rather than the exception in Nepal. Persistent problems faced by Nepali tea in its largest export market can be expected to provide fresh impetus to bringing the auction house idea to fruition.

Paras Kharel is Executive Director at South Asia Watch on Trade, Economics and Environment.