Despite a huge potential market in China, Nepal’s exports to the country have been on a continuous decline for a decade. Nepal has also failed to capitalize on the preferential treatment provided to 4,721 exportable items in 2010. But why is Nepal’s export to China far lower vis-a-vis global export growth? I believe it is the country’s inability to consistently follow up on and implement agreements signed during multiple bilateral meetings between Nepal and China.
The two countries have signed more than half a dozen bilateral agreements since 1981. The Trade and Payment Agreement (TPA) signed on November 22, 1981 in Kathmandu was the first after Nepal recognized the sovereignty of China over Tibet in 1956. Since, the two countries have inked other bilateral treaties related to trade and transit such as the Bilateral Road Transportation (BRT) in 1994, Trade and Other Related Matters between Nepal and TAR in 2002, Agreement of Cooperation for Industrial product Inspection between General Administration Quality Supervision, Inspection and Quarantine of the People’s Republic of China and Nepal Bureau of Standards and Metrology in 2005. In 2009, Nepal and China agreed to establish an inter-governmental committee called Nepal-China’s Tibet Trade Facilitation Committee. Additionally, in 2010 the two countries signed Letters of Exchange (LoE) granting special preferential tariff-treatment to certain goods originating in Nepal and exported to China.
On the surface, the low volume of export to China can be attributed to two broad two reasons: one, supply-side constraints and two, problems related to productivity levels and administrative capacity and bureaucracy. Inadequate transportation, scarcity of customs capacity, long administrative process, lack of credit facility, absence of dry port and language and payment issues are hurdles to smooth trade between the two countries. Constantly declining exports to China and mounting imports from the northern neighbor have resulted in a mammoth trade deficit of Rs 45 billion in 2010/11.
Trade is the most viable means for development because it provides incentives and benefits to both the parties. Though China has agreed to support Nepal in encouraging, supporting and establishing payments through banks by a letter of credit in the Agreement on Trade and other Related Matters 2002, Nepal has failed to take full advantage of this and other such concessions. China’s dissatisfaction with Nepali laboratories’ certificates is also considered a major barrier to exports. But what about the Agreement of Cooperation for Industrial Product Inspection (ACIPI) 2005, which has an explicit clause that establishes mutual recognition of inspection certificates? Not just that, China has even agreed to assist Nepal in establishing laboratories with rich technology. Then why does our government not consistently follow up with China for implementation of these agreements?
Some reports claim that China hinders exports from Nepal by creating non-tariff barriers. The government should constantly follow up with its Chinese counterpart to get to the bottom of the matter and clarify all such issues. Let’s take an example, which explicitly demonstrates how the government’s lethargy contributes to low exports to China. China agreed to finance the development of a dry-port in Larcha, Tatopani. However, Nepal has been reluctant to break the transport syndicate that is dampening all such prospects. Breaking the transport syndicate on the Araniko highway is the first step towards utilizing the dry-port.
The bleak scenario of Nepal’s scant trade with China compared to its global trade points to other factors as well. The production capacity of the country is a major issue to be addressed but as we know, it takes years to strengthen this. What the government can do right away is address the problems faced by Nepali exporters in the border areas and in transportation sector. But it calls for strong will at both diplomatic and bureaucratic levels. Nepali bureaucracy is so weak that it can’t even ensure effective and timely implementation of agreements at the political level.
Nepal’s widening trade deficit at the global level may be attributed to its unstable macro-economic situation, shortage of power, limited production capacity and geographical constraints, among others. Problems with export to India and other Third World countries arise of our limited access to sea ports and hurdles caused by Indian and other customs. However, there is ample room to improve the trade with China, or at least ease the complications. In 2001-02, Nepal exported goods worth of Rs 1.1 billion and imported goods worth Rs 11.2 billion. Ten years down the line, in 2010-11, export to China is just Rs 925 million whereas imports have reached Rs 46.6 billion. Declining exports and mounting imports leading to a massive trade deficit is a stark measure of government inefficiency.
At the root of Nepal’s trade growing deficit with China is government’s inability to consistently follow up on and implement past agreements.
There is a pressing need to immediately list goods in which Nepal has comparative edge. A concrete study to identify these goods that have a high demand in China with low competition from other countries should be carried out as soon as possible. The products that are listed in the Nepal Trade Integration Strategy (NTIS), 2010 are losing their competitiveness in the Chinese market. For instance, goods like ginger, lentils and medicinal herbs are no longer as competitive as they used to be; we need to draw up a fresh list of exportable goods
It is also important to constantly engage in productive talks with China in order to keep the trade environment conducive. For instance, the Trade and Payment Agreement, 1981 has provided for an implementation and dispute settlement body. Under this provision, both the countries can meet at any a given time to resolve issues concerning trade and transit arena on the request of the two countries. However, no such efforts have been made till date.
Effective implementation of already agreed plans should be the first priority for Nepal. There is no doubt that the private sector has an integral role to play, in that it can produce high quality goods for the Chinese market, while the government should also look to remove supply-side constraints in the long term. However, that cannot be an excuse for the government not to take immediate steps.