Bilateral solutions for Nepal’s trade imbalance

Being landlocked between two large countries, Nepal’s international trade has been basically limited to China and India. With the end of the Rana regime and opening up to the world, Nepal’s trade diversification began in 1951. In his seminal article “Nepal’s Recent Trade Policy” published in Asian Survey in 1964, YP Pant describes how Nepal’s favorable trade with India before 1951 had turned to a deficit. Nepal’s trade volume with Pakistan (including the present-day Bangladesh) accounted for less than three percent of the total. Pant also mentioned that Nepal’s trade with Tibet was negligible.

With the construction of the Kathmandu-Lhasa Highway and other land routes, China became our second largest trade partner, today covering 14 percent of total foreign trade. India remains our major trade partner, making for 64 percent of total trade. Nepal has active transit treaties with India, Bangladesh and China. Again, our trade is basically limited to India and China.

What is bothersome is Nepal’s trade deficit, which hit $11.69bn in 2020-21. Nepal exports to India a tenth of what it imports from there. With China, while Nepal’s import was $1.95 billion in 2020-21, our export was a negligible $8.35 million. In the first six months of the current fiscal, the balance of payment (BoP) was at a loss of $2bn. Such huge trade deficits and negative BoP can herald an economic failure. Immediate attention is called for.

Compensating such huge deficits with tourism, which brought Nepal total revenue of $668 million in 2019, is unrealistic. Remittance too is declining. The demography of Nepali workers overseas is changing, with an increase in the number of skilled workers who are going to more advanced countries and regions, and choosing to settle there. They are less likely to send remittances to Nepal where they do not intend to live. Nepal is thus yet to find an effective way to balance its trade.

Failing regionalism

Multilateral trade forums, including the WTO, have emerged as a solution to trade barriers, promising coordinated trade negotiations that enable smaller economies to get fair terms. Regional negotiations also help member countries avoid double standards in dealing with different neighbors of similar cooperation potentials.

Simplification of multilateral cooperation definitely facilitates trades. Unfortunately, not all member countries and regions can make equal gains. Multilateral cooperation helps those who prove competitive in global trade, and hinders the relatively weak and disadvantaged.

What Nepal needs is to identify geographical and economic regions, membership in which gives it an opportunity to carry business more fairly. At present there is little scope of regional trade cooperation with the north as it is difficult for cargos to get past the vast, neighboring China. South Asia is where Nepal belongs, which is also why it helped establish the South Asian Free Trade Area (SAFTA)—with Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka as its signatories.

Nepal also joined the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) in 2004 whose priority areas include trade and investment, and tourism. Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand are members of the BIMSTEC Free Trade Area. However, our economic and trade cooperation has been basically limited to India.

Not that there is no possibility of meaningful cooperation within SAFTA or BIMSTEC. With Indian help, there are already signs of trade in products and services like electricity, agricultural products, information technology, medicine, tourism and education. However, compared to India and China, trade volumes with other countries are small, and any trade surplus with them is unlikely to offset the deficits with India and China.

Go bilateral

Nepal’s efforts at Nepal-China-India trilateral cooperation have not been successful. China and India share a long land border, and are also connected with seas. The Chinese land connected to Nepal is sparsely populated, and has limited scope for trade other than in minerals, and Indian pilgrimage to Mount Kailash and Mansarovar. Connectivity alone will not bring Nepal substantial economic gains. Further, long-term rivalry between China and India is not conducive to trilateral cooperation.

India, which maintains a porous, open border with Nepal, frequently sets conditions to imports from Nepal. India says its favorable terms of term only extend to goods and services originating in Nepal, and exclude the goods and services where foreign raw material or investment is involved.

Nepal is a minor trade partner for both China and India. But, for us, they are major ones. Here, economic and trade diplomacy could be useful. First, we should classify our trade items into essential and non-essential. We should then allow import of non-essential commodities, provided such imports do not lead to bilateral trade imbalance. Second, we should request China and India to invest in Nepal in sectors that contribute to import substitution, and promote our export to the investing country or to other markets outside our reserved quota.

Third, we should listen to their suggestions on bilateral trade balance, and try to accommodate them so long as such measures do not negatively affect Nepali economy, jobs, social harmony, culture, values, politics and international relations.

Sure, some items we import from our neighbors are refined third-country raw materials, or are in short supply here. Such items can be considered essential, and thus should be excluded in the evaluation of bilateral trade balance. These items as well as security-related and life-saving goods and services and new essential technologies can be covered through donations, remittance and international cooperation.

With right decisions and modest austerity, we can become self-sufficient in food and basic services. Outside these, Nepal should adopt a policy of balanced bilateral trade.

The author is a professor of pharmacy at Tribhuvan University