the HRM
During Prime Minister Pushpa Kamal Dahal’s recent visit to China, the two Asian neighbors agreed to establish a collaborative technical working committee to evaluate and update the Nepal-China Trade and Payments Agreement, 42 years after the original pact was signed in 1981.
With the tectonic shifts in global trade dynamics over the past four decades, Nepal has realized the necessity to update the bilateral trade agreement with the world’s second-largest economy. For Nepal, this has become crucial as the country faces a significant trade deficit with China and has not been able to fully utilize the preferential export facilities provided by the northern neighbor.
A 2021 World Bank report highlighted Nepal’s substantial potential for a significant boost in exports, with a particular focus on the Chinese market. In the report, the Washington DC-based agency coined the term “missing exports,” suggesting that Nepal’s current annual exports could potentially increase by up to 12 times. China stands out as the most promising export destination, with “missing exports” value of USD 2.2 billion yearly for Nepal.
Historically, Nepal has been dependent on trade with India and through the southern border for third-country trade. To this day, the immense trade potential with its northern neighbor remains largely untapped. Nepali producers and the government have struggled to leverage their strategic location as a neighbor to the world’s second-largest economy.
After three years of border closures and transportation disruptions, there is an increased sense of optimism for the growth of the Nepal-China trade stemming from the complete reopening of two crucial border points. Since the beginning of the Covid-19 pandemic in early 2020, Nepal’s trade with its northern neighbor faced challenges marked by the frequent closure and opening of Rasuwagadhi and Tatopani border points that have remained key channels for inland trade.
Lopsided Trade
In the last fiscal year, Nepal grappled with a considerable trade imbalance with China; the country’s trade deficit with the northern neighbor amounted to Rs 220.95 billion. The country’s exports amounted to a modest Rs 1.76 billion, while imports surged to a substantial Rs 222.71 billion.
Although China remains a significant trading partner for Nepal, the volume of exports to this northern neighbor has consistently remained low. In the fiscal year 2022/23, Nepal’s exports to China fell to the 8th position. Interestingly, Nepal exported more to distant economies like Germany, the United Kingdom, Turkey, France, and Canada than to China.
Interestingly, imports from China increased even during the fiscal year 2020/21 when the trade was affected due to the Covid-19 pandemic. That year, Nepal’s imports from China amounted to Rs 233.92 billion from Rs 205.51 billion in FY 2018/19 and reached Rs 264.78 billion in FY 2021/22, before slightly declining to Rs 222.71 billion in FY 2022/23.
Nevertheless, Nepal’s insignificant exports to China suffered massively after the start of the pandemic. The country’s exports to its northern neighbor saw a steep drop from Rs 2.1 billion in FY 2018/19 to Rs 1.19 billion in FY 2019/20, Rs 1 billion in 2020/21, Rs 808.75 million. With the full opening of the border points, exports to China improved to Rs 2.34 billion in FY 2022/23.
Failing to take advantage of the proximity factor, Nepal has always struggled to enhance its exports to China. China has extended the gesture of duty-free and quota-free market access to numerous Nepali products, a privilege granted to Nepal as a least developed country. The Nepal Trade Information Portal, under the Ministry of Industry, Commerce, and Supplies, reveals that China offers zero-tariff benefits to approximately 8,000 goods originating from Nepal, which constitute 95 percent of Nepal’s total exports to China. According to a study conducted by the South Asia Watch on Trade, Economics and Environment (SAWTEE) on Nepal-China Trade, between 2020 and 2022, over 90 percent of the value of goods exported to China from Nepal were covered by the zero-duty list for the least developed countries (LDCs), but the utilization of preferences averaged 68 percent.
To access these Chinese zero-tariff advantages, exporters must adhere to specific rules of origin conditions for their products. Nevertheless, Nepal has faced challenges in leveraging this duty-free facility to boost its exports. One of the reasons, according to exporters, government officials and trade experts, is the stringent documentation requirements imposed by Chinese authorities for obtaining export clearances.
As a result of supply-side constraints and weak trade logistics, Nepal has not increased its exports to China. According to former Commerce Secretary Chandra Ghimire, for every Rs 1 worth of goods Nepal exports, it imports goods worth Rs 341. This trade deficit reflects a significant imbalance. “Despite being China’s neighbor, Nepal has been unable to tap into its trade potential, while countries 10,000 miles away have managed to export goods to the world’s second largest economy,” he said.
Former Commerce Secretary Purushottam Ojha is of the view that Nepal has failed to add value to exportable products. “For instance, we’ve made a major error in sending Nepali herbs to the Chinese market for processing and packaging. Instead, the government should have invited Chinese companies to Nepal and established production units. This approach would have allowed for the export of value-added herbs from Nepal,” he explained.
Ojha adds that in 2013, Nepal exported goods worth Rs 2.73 billion to China, but this figure plummeted by a billion to Rs 1.73 billion in 2022. This decline represents a significant setback for Nepal in just a decade.
According to trade expert Rajan Sharma, a notable challenge in Nepal’s exports to China is the absence of market diversification and a research-oriented approach towards products and markets. “Numerous obstacles hinder Nepal’s exports to China, encompassing transportation challenges linked to road infrastructure, limitations in customs capacity, administrative complexities, restricted access to credit facilities, and China’s stringent quarantine regulations,” he said. Sharma, who is the former President of the Nepal Freight Forwarders’ Association, observes there is a need to focus on the agriculture and primary product sectors, particularly poultry and meat as exporting these items to the Chinese market is difficult due to stringent quarantine requirements. “To address this issue, it is important to accredit and improve Nepal’s existing laboratory facilities,” he mentioned.
Despite Nepal’s long inability to capitalize on the opportunities in the vast Chinese market, there have been some recent developments that indicate the South Asian nation can boost its exports with the right goods. In the second week of June, Nepal exported haylage as animal feed to China for the first time. The initial shipment containing 10 containers of haylage, produced by a company called Horizon International Pvt. Ltd. in Bharatpur, Chitwan was sent to the Chinese city of Shigatse. The company aims to export a total of 2000 million tons of animal feed within a year.
Nepal’s exports to China include goods of different categories with agricultural products topping the list. In FY 2022/23, agricultural products accounted for 20 percent of Nepal’s total exports to China, with the remaining share comprising non-agricultural products. Key exports to China from Nepal include woolen carpets, felts, paintings, musical materials, statues, ready-made garments, leather, and herbs. Additionally, items including tea, handmade paper, rudraksha, noodles, incense sticks, essential oils, copper articles, furniture, human hair, wigs, soap, aluminum products, cosmetics, jewelry, hats, cotton bags, and vacuum flasks have also been exported in substantial quantities. However, a range of other goods, including dairy products, flour, sugar and sugar products, chocolate, processed food, rosin, resin, turpentine, baskets, mats, lenses, and toothpaste, which were intermittently exported in the past, have seen no exports in the last two years.
Infrastructure Hassles
The bilateral trade between Nepal and China is mainly carried out through Rasuwagadhi-Kerung and Tatopani-Zhangmu (also known as Khasa) routes. The Tatopani-Khasa border point, situated 115 kilometers from Kathmandu, reopened on May 29, 2019, after a four-year closure following the 2015 earthquake. Before the earthquake caused severe infrastructure damage, this border point played a vital role in overland trade with China for decades. The Rasuwagadhi-Kerung customs point, located 190 kilometers from Kathmandu, gained prominence as an alternative route when the Tatopani-Khasa point was closed in 2015. Rasuwagadhi-Kerung customs point has since been upgraded to an international checkpoint, allowing individuals from third countries to cross the border.
While the road and customs infrastructure on the Chinese side is of world-class quality, the situation on the Nepali side is far from satisfactory. The main road connecting Tatopani and Rasuwagadhi consistently encounters issues, posing challenges for trade. These crucial customs points have consistently grappled with inadequate infrastructure, impeding trade and connectivity while driving up the overall cost of trade.
Traders report that the 35-40-kilometer stretch from Bahrabise to the Tatopani border is in poor condition, and Rasuwagadhi faces similar challenges. According to Ashok Kumar Shrestha, President of Nepal Trans-Himalayan Border Commerce Association, the connectivity infrastructures in Rasuwagadhi and Tatopani are in deplorable conditions. “The road not only requires repair but has also remained in the same state for an extended period. Given the current situation, it is likely to persist unchanged for the foreseeable future,” he said.
According to Shrestha, given the state of the road conditions, there is always a risk of potential road accidents, especially for large containers transporting goods. “The government has yet to identify an effective solution or prioritize road upgrades to address this issue,” he said.
Speaking at the program on Nepal-China trade organized by SWATEE on November 9, Rabi Shanker Sainju, former Joint Secretary at Ministry of Industry, Commerce and Supplies, said Nepal’s trade with China is adversely affected by the high transportation costs resulting from its inadequate logistics infrastructure. “With the evolution of the landscape of the Chinese consumer market, demand for high-quality products has increased, and this must be taken into account when looking to boost exports to China,” he opined.
Former Commerce Secretary Ojha thinks ensuring uninterrupted road connectivity to the border regions is of utmost importance to facilitate efficient trade. He views the establishment of supportive infrastructure, including storage facilities, customs checkpoints, and trade-related services, as indispensable in the border areas. “Unfortunately, Nepal currently lacks all these essential facilities. The absence of these developments hinders the smooth flow of trade activities and does not create a conducive environment for fostering enhanced commercial exchanges and regional economic growth,” he said.
In addition to road connectivity, air connectivity plays a crucial role, particularly in exporting high-value-added goods to China. However, Chinese export houses or logistics service providers operating under foreign direct investment (FDI) often benefit from these exports, say Nepali freight forwarders.
In the context of air exports to mainland China, freight forwarders play a limited role, handling only 12-15 percent of the export volume. In contrast, exports to the Tibet Autonomous Region (TAR) involve both air and land routes, with Chinese intermediaries predominantly managing these routes. According to Sharma, about 18 percent of the import volume from mainland China via land is overseen by Nepali freight forwarders, while approximately 50 percent of the import volume from mainland China by air is managed by Nepali freight forwarders. Imports from mainland China by sea are largely handled by Nepali freight forwarders.
Keeping Up with Times
The 42-year-old Trade and Payments Agreement is the primary document governing the Nepal-China trade. According to Ghimire, the agreement stands as a bilateral document and not a treaty.
The 1981 agreement permitted the use of various trading points for the transportation of goods between the two countries. However, with the passage of time, the agreement has become outdated, prompting the need for revision and amendment. “The provisions of the Trade and Payments Agreement are outdated and no longer applicable in the present context. The government of Nepal needs to advocate for the complete replacement of the agreement and also for a trade treaty with China,” said Ghimire, adding, “By negotiating a new agreement that reflects the contemporary trade dynamics and fosters mutually beneficial terms, both nations can establish a more robust and relevant framework for their trade relations.”
Besides the difficulties related to connectivity infrastructure and logistics, trade experts say a challenge also arises from the age-old practice of barter trading between traders in Nepal’s Himalayan regions and Tibet, with the majority of trade transactions being conducted through this system. Banking channels are rarely utilized in such trade activities, resulting in a lack of precise revenue data. “To address this issue, an agreement should be reached to shift towards trading through letters of credit (LCs), ensuring that financial transactions are conducted through formal banking channels,” said Sharma.
The Non-tariff Barriers
Despite China’s granting of the Duty-Free Quota-Free (DFQF) facility for over 8,000 Nepali goods, exporters have grappled with challenges stemming from non-tariff barriers imposed by Chinese authorities.
Stakeholders highlight that non-tariff barriers significantly impede trade with China. Exporters cite lengthy procedures, high transportation costs, and restricted market access as major obstacles. Other barriers encompass standardization and quality certification, stringent rules related to product origin, quarantine regulations, and adherence to local product standards.
Shrestha points out that persistent obstacles in exports primarily arise from non-tariff barriers, such as China’s preference for accepting local products from its bordering regions. While exports from the Sindhupalchowk border are permitted without certification, products from other districts face hurdles in this regard.
Ghimire emphasizes that the rule of origin clause in the trade agreement negatively affects Nepal’s export potential. He suggests that the stringent rules need to be revised and made more flexible because many Nepali goods do not qualify under this clause, resulting in trade hassles.
Furthermore, Ghimire raises the concern that as Nepal prepares to graduate from Least Developed Country (LDC) status in 2026, the country will lose its duty-free access, further impacting the benefits. He believes that this is a critical period for Nepal to make use of these benefits. He recommends that Nepal should proactively seek preferential treatment for specific products in bilateral trade with China to address the growing trade deficit between the two countries. “The government needs to engage in dialogue with China to secure preferential treatment for key Nepali products, including tea, coffee, herbal products, meat products, and various agricultural goods. This could be sought for a specified period after Nepal graduates from LDC status,” he said.
Ojha says that non-tariff barriers in China have led to limited product exports, mainly due to stringent quarantine rules and compliance with the rule of origin criteria set by Chinese authorities. According to him, only a handful of items from the duty-free access items meet the criteria for export.
Missed Opportunities
Experts say Nepal has missed opportunities presented by the agreements it signed with China, including the landmark Trade and Transit Agreement in 2016, which afforded Nepal access to seven Chinese ports for conducting trade with third countries.
In the aftermath of the 2015 Indian border blockade, Nepal inked the trade and transit agreement during the visit of then-Prime Minister KP Sharma Oli to China in April 2016. This agreement granted Nepal access to four Chinese seaports located in Tianjin, Shenzhen, Lianyungang, and Zhanjiang, as well as three land ports in Lanzhou, Lhasa, and Shigatse for importing goods from third countries. It also authorized Nepal to conduct exports through six designated transit points connecting Nepal and China. In April 2019, during the state visit of then-President Bidya Devi Bhandari to China, the two nations further solidified this arrangement by signing a protocol.
Nepal’s signing of the 2016 agreement aimed to reduce its dependency on India for international trade. The introduction of an additional transit route was expected to enhance Nepal’s negotiation leverage with India and mitigate potential threats from its southern neighbor.
Nevertheless, Nepal has not reaped significant benefits from the 2016 agreement, with only a solitary shipment arriving from a third country through Chinese ports. This specific shipment, comprising 15 tons of turmeric powder imported from Vietnam, reached the Tatopani border point via China’s Tianjin Port on September 6th.
“Nepal again failed. The protocol for the implementation of the agreement was signed four years ago. Since then, nothing has happened. It has already been long since the Covid-19 pandemic subsided. The government has not shown any seriousness in this regard,” said Ojha, adding, “Four years is a long period of time. What we are missing in Nepal is a strong political commitment.”
If the agreement is implemented, the transit facilities provided by China hold the potential to reduce trading costs and elevate Nepal’s trade with China, Central Asia, North East Asia, and South East Asia.
Need for Chinese Investment
China stands out as one of the world’s primary sources of Foreign Direct Investment (FDI), and Nepal has established itself as an attractive destination for Chinese investments. Chinese investment accounts for over 35 percent of the total approved foreign direct investments in Nepal.
Experts strongly advise that the Nepali government take proactive measures to encourage both the Chinese government and private sectors to invest in sectors that would foster trade between the two countries. This initiative not only holds the potential to boost trade but also to enhance Nepal’s production capabilities, leading to the creation of employment opportunities.
According to Ojha, for exports to materialize, Nepal must also attract Chinese investment. “When the Chinese invest in the Nepali market, the products produced through that investment can be exported to the Chinese market. The government needs to recognize the direct connection between trade and investment,” he said.
Nepal has struggled to capitalize on benefits from Chinese-invested and funded projects. For instance, the recently constructed Pokhara Regional International Airport, financed with a Chinese loan, has the potential to facilitate small-scale trade between Nepal and China. However, the Nepali government has faced challenges in attracting Chinese airline companies to operate flights to and from Pokhara. Ojha emphasizes that it is essential for Nepal to encourage investments in its border regions. A few months ago, Chen Song, the Chinese Ambassador to Nepal, said that Chinese investments in Nepal have reached Rs 216 billion, resulting in the creation of over 100,000 jobs, both directly and indirectly.
Moving Forward
As Nepal approaches its graduation from the category of Least Developed Countries (LDCs) in 2026, the potential loss of duty-free access for 8,000 products could exacerbate trade challenges.
Ghimire suggests that Nepal should advocate for special privileges for specific goods, similar to what the United States offers. In 2016, Nepal secured duty-free market access in the United States for travel goods, including luggage, backpacks, handbags, and wallets, under the Generalized System of Preferences (GSP) program, similar to other least-developed countries (LDCs).
Ojha underscores the substantial demand for herbs in the Chinese market and recommends the establishment of a Special Economic Zone (SEZ) in the border area. This SEZ, designed to enhance exports to China, would become a central hub for the production of herbs and various products.
He also emphasizes the need for a mechanism to address trade issues between the two nations. Establishing a joint group of businesses and implementing a structured business-to-business (B2B) mechanism is essential for fostering continuous engagement and collaboration.
“Regular meetings at the secretary or joint secretary level, along with scheduled sessions of existing bilateral mechanisms, should be prioritized,” said Ojha. “These initiatives would facilitate systematic identification and resolution of structural and procedural obstacles, ensuring compliance with mutually agreed provisions and strengthening the foundation for sustained trade relations between Nepal and China.”
“Securing preferential market access should be our top priority”
Chandra Ghimire, Former Secretary, Ministry of Industry, Commerce and Supplies
As the world’s second-largest economy with a population of 1.4 billion, China has immense export potential for Nepal. However, Nepal has missed significant opportunities. At present, for every Rupee worth of products Nepal exports, goods worth Rs 341 are imported which has created a massive trade imbalance. Despite its proximity to China, Nepal has failed to leverage its trade potential, while countries located 10,000 miles away export to China.
The Nepal-China Trade and Payments Agreement, operational since 1981, has become outdated, with many of its provisions no longer relevant. “The provisions of the Trade and Payments Agreement are outdated and no longer applicable in the present context. The government of Nepal needs to advocate for the complete replacement of the agreement and also for a trade treaty with China.
Nepal should negotiate for preferential market access with China, especially as it transitions to a developing nation, losing its zero-tariff access to the Chinese market. Currently, China provides zero-tariff treatment to approximately 8,000 goods from Nepal, constituting 95 percent of Nepal’s total exports to China. Securing preferential market access should be our top priority. Furthermore, during the treaty negotiations, the government should aim for provisions suited to an open market.
Another challenge in Nepal-China trade is the absence of a bilateral mechanism between the two nations. Establishing such a mechanism with regular secretary or joint secretary-level meetings is essential for addressing trade-related issues.
The rules of origin of goods in the trade agreement pose a hurdle to Nepal’s export potential due to stringent rules. The government should work on liberalizing these rules to facilitate smoother trade.
The prolonged border closure between Nepal and China during the Covid-19 pandemic, despite government efforts to reopen, represents a diplomatic setback for Nepal. The government now needs to prioritize making Nepal a significant trading partner for China. It should also address the concerns of the Chinese side which will foster a harmonious trade relationship.
“To facilitate exports, Nepal must attract Chinese investments”
Purushottam Ojha, Former Secretary, Ministry of Industry, Commerce and Supplies
Despite China granting duty-free access to Nepal for 8,000 goods through agreements signed in 2010 and 2014, Nepali exports to the Chinese market have faced substantial challenges. These hurdles stem from supply-side constraints, high production costs rendering Nepali products uncompetitive against Chinese counterparts, and non-tariff barriers such as stringent quarantine rules imposed by China. The stringent rule of origin criteria set by China has limited the number of Nepali items eligible for export.
To facilitate exports, Nepal must attract Chinese investments. Chinese investments in Nepal can lead to the production of goods for export to the Chinese market, a connection the government has yet to fully comprehend. We’ve made a major error in sending Nepali herbs to the Chinese market for processing and packaging. Instead, the government should have invited Chinese companies to Nepal and established production units. This approach would have allowed for the export of value-added herbs from Nepal.
Nepal’s exports to China have dwindled significantly, dropping from Rs 2.73 billion in 2013 to Rs 1.73 billion in 2022. To tap into its export potential, the government must promptly engage with China to amend the 1981 agreement between the two nations. Additionally, ensuring seamless road connectivity to bordering regions and developing essential infrastructure is crucial to facilitating trade effectively.
“Need to bring down cost of production for boosting exports to China”
Binod Kumar Sethia, President, Nepal Foreign Trade Association
To facilitate exports, the government should initiate dialogue with the northern neighbor with an aim to reduce the cost of production by 20 percent in Nepal. In many ways, importing goods from China is more efficient than importing from India, and addressing the issues of non-tariff barriers that currently trouble Nepali exporters is essential. On the import side, inadequate infrastructure is a significant hurdle, leading to a 20 percent increase in product costs within Nepal.
While imports have been relatively smooth, exporting goods faces difficulties due to language barriers. Addressing this issue is critical, as it’s uncertain whether Chinese authorities are willing to assist. Therefore, it’s important to consider including Chinese officials who can communicate in Nepali, to facilitate communication for enhancing the trade relationship between Nepal and China. Both countries possess significant potential for cooperation, and officials proficient in both languages could contribute to improved trade and economic outcomes for the two neighboring nations.
