Powerful nations often try to mold the global economic and political system to their favor. The United States has been doing this since World War II. The inward-looking protectionist economic policies adopted under President Donald Trump, dubbed the 'trade war', are causing far-reaching ripples in the economy and geopolitics globally.

The United States has announced high tariffs on China, the European Union, India, and other major economies in an effort to reduce its trade deficit, bring jobs back to the United States, and boost domestic production. This trade clash, which began with April 2 as 'Liberation Day', has raised serious concerns and concerns about the potential impact on a small, developing and import-dependent economy like Nepal. 

This article analyzes the major economic, financial and geopolitical challenges that Nepal may face due to the American trade war and discusses the possible strategic steps that the government should take. 

Nepal's economy is structurally very open and outward-looking in nature. In the Economic Openness Index, Nepal appears ahead of America. This means, Nepal feels the direct impact of any upheaval in the world market quickly and deeply. Imports account for about one-third of Nepal's gross domestic product, which explains the dependence of the country's economy. When the US imposes additional customs duties ranging from 10 to 145 percent on Nepal's major trading partners such as China, India, and the European Union, it automatically increases the cost of production of goods and services in those countries.

When Nepal imports essential goods from these countries such as industrial raw materials, capital goods, machinery, fuel, food, medicine and high-tech services. In this case, the Nepalese importer has to pay the increased cost price. This increased import cost ultimately manifests itself as an increase in the prices of goods and services in the Nepalese market. On the one hand, this will increase the cost pressure on the consumers and on the other hand, there is a risk of making the overall inflation uncontrollable. Due to increase in production cost, the competitiveness of the domestic manufacturing industry decreases. It will also negatively affect the export trade which is already there. Therefore, the first and most direct hit of US customs policy is on Nepal's trade balance and price stability.

Looking at the structure of Nepal's foreign currency reserves, it is seen that the US dollar is highly dominant. Currently, the US dollar accounts for about 59 percent of the total foreign currency reserves of Nepal, which is equal to about 18 billion US dollars. US protectionist policies and the actions taken by other countries in response have shown signs of destabilizing global financial markets. Which has a direct impact on the exchange rate of the US dollar. Unexpected fluctuations in the value of the dollar will hit Nepal twice. 

1. It automatically increases the burden of foreign loans taken in dollars to Nepali rupees. For example, last year, excluding new loans, Nepal's total foreign debt liability increased by about 70 billion rupees only due to the appreciation of the dollar. This trend also creates pressure on the national budget and development projects. Because in the last two financial years, the principal and interest payments of public debt have exceeded the capital budget.

2. With the future of the US dollar and its credibility in the global economy being questioned, it is extremely risky to concentrate a large portion of reserves in a single currency. In the event of a possible crisis in the American economy or a sharp fall in the value of the dollar (dollar crash), there is a danger that the entire economy of Nepal may collapse. Therefore, non-diversification of foreign exchange reserves is likely to be seen as a serious challenge for Nepal's financial stability.

3. Two important pillars of the Nepalese economy are remittances and tourism. Both regions cannot remain untouched by the global economic turmoil. A US-initiated trade war will slow global economic growth and in some cases increase the risk of recession. When there is a recession in the world economy, it has a direct impact on the employment and income of the thirty million Nepali workers working abroad. In the case of loss of employment or decrease in income, there may be a decrease in remittance flow into Nepal, which will negatively affect the income of millions of families and the country's foreign exchange earnings. Similarly, international travel becomes more expensive due to global economic uncertainty and rising production costs. This may reduce the number of foreign tourists coming to Nepal. With the decrease in tourism income, thousands of businesses and jobs related to this sector, including hotels, transportation, guides, etc., will be affected.

4. The impact of the US customs policy was evident in the global financial markets. As uncertainty increases, investors gravitate towards safe-haven assets, which is why the price of gold has soared. On the other hand, fears of a trade war had a negative impact on the world's major stock markets. The instability of such international market also affects Nepal's small capital market and gold market. This can reduce the morale of domestic investors. This could lead to a decline in consumer confidence, which would help add more economic slack to an economy that has been sluggish since two years ago.

5. Traditionally, Nepal has been adopting a balanced and non-aligned foreign policy with its two huge neighbors - India and China, and its major development partner, the US, among other powerful countries. However, the raging trade war between the US and China and the strategic competition it has created has made it difficult for countries like Nepal to maintain their independent policy. The growing competition between America's Indo-Pacific strategy and China's Belt and Road Initiative may create pressure for Nepal to take sides. In such a situation, there is a high risk that Nepal's foreign aid, investment and overall diplomatic relations may be affected. It will become more challenging for Nepal to protect national interests while maintaining balanced relations.

6. In response to the tariffs imposed by the US, countries like the European Union, Canada, and China have also imposed retaliatory tariffs on US goods. This further escalated the global trade war and raised the possibility of a recession in the global economy. In this case, there may be serious disruptions in the international supply chain. For a landlocked and highly import-dependent country like Nepal, disruptions in the supply chain may lead to shortages of essential commodities and steep price hikes.

Strategic steps to be taken by Nepal

In the background of the US trade war and the global uncertainty it has created, it seems imperative that Nepal take some immediate and long-term strategic steps to protect its economy and national interests. 

First, there is an urgent need to diversify foreign exchange reserves. Reducing overdependence on the US dollar should be the first priority. Although the yields on US government bonds are currently high, the risk of a possible fall (crash) of the dollar cannot be ignored. Therefore, additional part of reserves should be diversified into other major currencies like Indian Rupee, Chinese Yuan, Euro. Also, it is wise to invest at least 25 percent of the total savings in gold or other precious metals. This minimizes the risk of currency fluctuations and dependence on a single currency.

Second, active participation in multilateral and regional forums should be increased. In the context that the world system is moving towards multipolarity, it is necessary for Nepal to increase its presence in the alternative economic and political platform without depending only on the Western powers. For this, initiatives should be taken to become a member of the BRICS Plus group and try to become a member of an alternative financial institution such as the New Development Bank. It can provide Nepal with financial resources and new business opportunities. 

Third, the process of participating in the Shanghai Cooperation Organization and the Regional Comprehensive Economic Partnership (RCEP) should be advanced in the political and trade fields. Considering the geopolitical map that a trade war could change, Nepal's push for full membership of the Shanghai Cooperation Organization could be strategically important. It could open new doors for regional security and economic cooperation, as well as increase connectivity with Central Asia and Eurasia. Also, it is necessary to explore the possibility of association or cooperation with the RCEP bloc established at China's initiative. Which can help diversify Nepal's export market. Participation in such a political and trade organization helps to reduce risk and uncertainty in the current situation where the United Nations and the World Trade Organization, created by Western powers, have become ineffective.