The existing bilateral agreement has become outdated and is no longer suitable for the current situation, particularly as Nepal faces a substantial trade deficit with China.
Nepal and China have reached a consensus to revise the bilateral trade agreement 42 years after the pact became operational in 1981. During Prime Minister Pushpa Kamal Dahal’s recent visit to China, the two neighbors agreed to establish a joint technical working committee tasked with the review and modification of the Nepal-China Trade and Payments Agreement.
In light of the significant changes occurring in the international trade landscape, it has become important for Nepal to amend the bilateral trade agreement with the world›s second largest economy. The existing bilateral agreement has become outdated and is no longer suitable for the current situation, particularly as Nepal faces a substantial trade deficit with China.
Nepal and China have made continuous efforts to enhance their bilateral trade relationship and have even sealed the landmark Trade and Transit Agreement in 2016. This pact grants Nepal the privilege of utilizing seven Chinese ports for its trade with third countries.
In the aftermath of the 2015 Indian border blockade, Nepal signed the agreement on trade and transit during the then Prime Minister KP Sharma Oli’s China visit in April 2016, which provided Nepal access to four Chinese seaports located in Tianjin, Shenzhen, Lianyungang, and Zhanjiang, along with three land ports in Lanzhou, Lhasa, and Shigatse for the import of goods from third countries. This agreement also authorized Nepal to conduct exports through six dedicated transit points connecting Nepal and China. Three years later, the two nations further solidified this arrangement by signing a protocol during the state visit of the then President Bidya Devi Bhandari to China in April 2019.
Nepal signed the 2016 agreement with the hope that it would no longer be solely reliant on India for international trade; the introduction of an extra transit route would bolster Nepal’s ability to negotiate with India and mitigate any potential threats from its southern neighbor. During times of crises, the focus is primarily on meeting the needs and preferences of citizens, where the cost and time involved in trade may not be the primary considerations. Therefore, having an additional transit route for Nepal in case of emergencies is neither unjust nor unreasonable.
Nepal’s culture and mindset of people share closer affinities with India which makes trade with the southern neighbour more favorable than other countries. However, the fact that the Himalayan nation has repeatedly faced India’s warth over various political reasons over the years forced Nepal to look for an alternative to seek an additional trade partner. Although neither China’s business practices nor Nepal’s national character aligns seamlessly, the consistent provocation and India’s reluctance to accommodate Nepal’s modest trade facilitation requests have led Nepal to change its course in international trade.
Nonetheless, Nepal has not experienced significant gains from the 2016 agreement, with only a single shipment arriving from a third country through Chinese ports. This particular shipment, consisting of 15 tons of turmeric powder imported from Vietnam, reached the Tatopani border point via China’s Tianjin Port on September 6th. The claimed transit time of below 15 days is not owned by any logistics service providers as the dwell times and other transshipment activities have not been included. Not to talk about the cost factor as it has not yet been calculated in comparison to the approximately USD 2,400 for a 20 feet container with 38 to 45 days transit time via the Indian port of Visakhapatnam to the Inland Clearance Depot (ICD) in Birgunj at present.
Following three years of border closures and transportation disruptions, bilateral trade with China is gradually returning to normalcy, thanks to the reopening of the Rasuwagadhi and Tatopani border points.
In recent years, imports from China have exhibited consistent growth, with occasional interruptions such as the fiscal year 2019/20 when the Covid-19 pandemic affected trade. Conversely, Nepal›s exports to its northern neighbor have dwindled, resulting in a substantial trade deficit between the two countries. In the last fiscal year 2022/23, Nepal’s exports to China amounted to a mere Rs 2.34 billion, whereas imports from China reached Rs 231.5 billion during the same period.
Nepal›s major imports from China in the previous fiscal year included electrical goods (valued at Rs 16.70 billion), machinery and parts (Rs 21.17 billion), ready-made garments (Rs 17.96 billion), and telecommunication equipment and parts (Rs 31.55 billion), as reported by the Nepal Rastra Bank.
A significant issue concerning Nepal›s exports to China is the lack of diversification in markets and the absence of a research-oriented approach to both products and markets. Several obstacles hinder Nepal›s exports to China, including transportation challenges related to road infrastructure, customs capacity constraints, administrative complexities, limited access to credit facilities, and China›s stringent quarantine regulations.
Particular attention should be directed towards agriculture and primary products such as poultry and meat, which are facing challenges in the Chinese market due to strict quarantine requirements. Addressing this issue requires the accreditation and enhancement of Nepal›s existing laboratory facilities.
Furthermore, the absence of market diversification and a lack of focus on product and market research are significant impediments to Nepal›s exports to China. In addition to road connectivity, air connectivity plays an equally vital role, especially for the export of high-value-added goods to China. However, Chinese export houses or logistics service providers operating under foreign direct investment (FDI) often capture the benefits of these exports.
Nepali freight forwarders have a limited role in exports to mainland China, which primarily occur by air. Nepali freight forwarders handle only 12-15 percent of the export volume in this context. Conversely, exports to the Tibet Autonomous Region (TAR) involve both air and land routes, and they are predominantly managed by Chinese intermediaries. Approximately 18 percent of the import volume from mainland China via land is handled by Nepali freight forwarders, while about 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 overseen by Nepali freight forwarders.
The Kind of Negotiation Needed
Negotiating a transit route through a Chinese port to avoid transit via India for a landlocked country like Nepal can be a complex diplomatic and logistical challenge but is not impossible if specific transit terms and conditions are clearly outlined. These encompass the categories of permissible goods, transit charges, port procedures, mechanisms for road transport, mandatory documentation, and provisions for handling goods through customs brokers or via routes leading to dry ports or border points. It also involves the dissemination of information to pertinent government agencies and stakeholders in both countries.
The identification and selection of seven Chinese ports, strategically positioned for efficient transit, have already been established. Key factors taken into account include their proximity to Nepal’s border and the existing transportation infrastructure. However, concerns have arisen regarding the selection of ports that facilitate smoother transit, such as the port in Guangzhou instead of the port in Tianjin. The perplexity among Nepali traders stems from the apparent advantage of using the Guangzhou port due to its closer proximity, leading them to question why this preferred port was not included in the negotiations.
A comprehensive study was not conducted before reaching this agreement, and cost-related aspects were not taken into account. Nepal must now prioritize ensuring the security and effectiveness of the transit routes. This entails collaborating with China to implement security measures and streamline customs procedures to facilitate faster transit through the designated port. Additionally, developing a dispute resolution mechanism is essential, particularly when dealing with Chinese firms. This necessity is underscored by past experiences encountered by Nepalese logistics service providers and traders.
Enhancing infrastructure is of utmost importance and warrants a discussion to enhance connectivity between Nepal and China. This could encompass activities such as the construction or improvement of roads or railways, the establishment of warehousing facilities, and the creation of quality assurance laboratories at border points.
Aligning with China›s quality standards is a complex task that necessitates the establishment of a jointly agreed-upon laboratory by both nations to meet the market standards and preferences of each country. It is absolutely imperative to engage in negotiations for favorable tariff agreements to ensure that transit costs remain competitive and affordable. Additionally, there should be a long-term commitment to provide stability and predictability for trading partners and investors.
In the current dynamic business environment, characterized by digitalization and e-commerce, it is essential to proactively establish a monitoring system for overseeing the execution of the transit agreement. Furthermore, regular assessments should be scheduled to pinpoint areas in need of enhancement. Approaching these negotiations with diplomacy and a clear emphasis on mutual advantages is crucial. Nepal should be ready to provide concessions and incentives to make the transit route through China an attractive option. Furthermore, participating in multilateral dialogues that involve other stakeholders, including regional organizations and neighboring nations, could streamline the negotiation process and garner broader support for the transit route.
A significant challenge is the ages-long barter trading between traders of Nepal›s Himalayan regions and Tibet, with the majority of trade transactions conducted under this system. Banking channels are seldom employed in such trade activities, leading to a lack of accurate revenue data. An agreement must be reached to transition to trading through letters of credit (LCs), ensuring that financial transactions flow through formal banking channels.
Ultimately, the success of negotiating a transit route through Chinese ports hinges on the specific political, economic, and diplomatic circumstances involved. It is crucial to take into account Nepal›s unique context and engage in open and constructive dialogue with China in a timely manner, especially following the recent visit to China by the Prime Minister, government officials, and representatives from the private sector, before the outcomes of these discussions fade from memory.
In essence, logistics revolves around ensuring the seamless movement of goods through efficient processes, facilitating the smooth exchange of information between trading partners and government entities, and ensuring the proper flow of money through well-defined terms and accompanying documents that facilitate accurate record-keeping and future adjustments when necessary, supported by documentary evidence.
With effective planning, Chinese ports can serve as supplementary entry points for transporting goods to Nepal, providing Nepal with an advantageous position in negotiations with India or Bangladesh.
Sharma is a logistics expert and a consultant.
