Nepal China Trade : Prospects and Challenges

  8 min 37 sec to read
Nepal China Trade : Prospects and Challenges

For Nepal, increasing trade with China significantly – to a point where it can match the country’s trade with India - seems to be a task easier said than done. But that doesn’t mean Nepal cannot give it a try, at least to end its dependence on one country for international trade.

--By Akhilesh Tripathi

Major Export/Import Goods
The top ten exports of Nepal to China are wood products; metal products; textiles; mineral products; leather products; wearing apparel; chemical, rubber, plastic; machinery and equipment; vegetable oils and fats; and crops. Basically, no high value added products.

Meanwhile, the top ten imports of Nepal from China are wearing apparel; textiles; electronic equipment; machinery and equipment; leather products; vegetables, fruits, nuts; chemical, rubber, plastic; manufacturers; metal products; and motor vehicles and parts. Basically, the demand for most of these is price elastic.

The high Himalayan range in Nepal’s north has always served as a natural barrier prompting the country to trade more across its flat border with India, but the latter’s current blockade against Nepal has forced it to explore the trade prospects with China and tackle the challenges that come in the way. 

Both economists and businessmen now seem to be of the view that Nepal should seriously consider its trade with China which has been increasing consistently over the past decade since 2006. If given the chance to grow, they add, Nepal-China trade can also work as a means to end the country’s over-dependence on India for trade.

Business with China has been booming in recent years, though the trade balance is largely tilted towards China. According to the statistics maintained by the Trade and Export Promotion Centre (TEPC), growth rate in Nepal’s commerce with China has outpaced that with India, Nepal’s largest trading partner. It grew more than 17 times since 2006.  “Lately, China has been growing in importance,” says former finance minister Dr Ram Sharan Mahat, “Because of new trade horizons and the cheap pricing of Chinese goods, Chinese trade vis-à-vis Nepal has been growing.”

The volume of trade between Nepal-China has increased by more than double between 2010 and 2014. Although India still stands as number one when it comes to trade volume, the growth rate of trade with China has shot up and is rising continuously. Nepal’s total trade with China which stood at Rs 46.39 billion in fiscal year 2010/11 rose to Rs 103.21 billion in fiscal year 2014/15.

Rising Trade Deficit
There are obvious benefits to increasing trade with the world’s 2nd largest economy. Experts roundly believe that Nepal can only stand to gain if it fully explores and concludes business deals with the ancient middle-kingdom. However, our export to China is far less than the import from there. In fact, the import has been rising every year while export hasn’t been able to keep pace with the rising import. In 2010/11 total export earnings from China declined to Rs 750 million from Rs 1 billion in 2009/10. In 2014/15, total exports to China stood at Rs 2.36 billion declining from Rs 2.99 billion in the previous fiscal year. 

In contrast, import from China has been growing at the rate of 39 per cent per year. It rose from Rs 45.64 billion in fiscal year 2010/11 to Rs 100.85 billion in fiscal year 2014/15. As a result, the trade deficit with China has risen from Rs 44.89 billion in 2010/11 to Rs 98.49 billion in 2014/15. Although China has given zero tariff entry to nearly 9,000 Nepali products, Nepal hasn’t been able to bring the trade deficit down. Nepal has been exporting nearly 370 products including noodles and agro products to China.

Poor Connectivity
Overland connectivity between Nepal and China is not very efficient.  

But China has given priority to building infrastructure on its own side of the border with Nepal. Within the past decade, Beijing has rapidly upgraded the track on its own side of the border, with blacktop running all the way to Lhasa. Similarly, China has already linked Shigatshe, a plateau town within 300 kilometres of Nepal, with rail service.
Overland links have so far made little difference in the trade volume or balance, as almost all goods arrive by ship. Movement through the Tatopani-Khasa and Rasuwagadhi-Kerung trade routes had come to a halt following the April 25 earthquake but Nepal was not much bothered about it until India imposed the unofficial blockade. Nepal requested China to resume the operation of these routes only towards the end of September.  

The talk of Nepal becoming a commercial bridge between its two giant neighbours does the round from time to time. However, to assume such a role in the trade between India and China, Nepal needs better infrastructure. The Chinese have already funded a high-mountain container facility at Tatopani and pledged $190m for a 44.5 sq km cross-border free trade zone at Kerung. On the Tibet side of the border, as part of their five-year-plan for the region launched in 2011, China has tarmacked 5,000 new kilometres of road.

In 2011, Chinese officials also announced that they were considering laying train track all the way to the border at Khasa. If it were up to officials from Nepal, the railroad would not stop at the border. Then-Nepali Foreign Minister Narayan Kaji Shrestha suggested China extend the line across Nepal to Lumbini, the birthplace of Buddha on the Indo-Nepal border.

China Pledges to Build ICD at Rasuwa, Sindhupalchowk

Nepal and China have agreed to expedite reconstruction of customs infrastructure at the two major trade routes — Tatopani-Lhasa and Rasuwagadhi-Kerung — damaged during the earthquakes of April and May. This was agreed upon during the customs deputy director general level talks between Nepal and China on November 5 in Kathmandu. 

A 20-point deal aimed at expanding bilateral trade was also sealed during the talks. Damodar Regmi, deputy director general of the Department of Customs, and his counterpart Long Chengwei, head of the Chinese delegation, inked the pact on behalf of their respective governments.

As per the agreement, the Chinese side has pledged to construct the inland container depot (ICD) at Larcha of Sindhupalchowk and Timure of Rasuwa at the earliest. The ICD Larcha is under construction and construction works of ICD Timure will start soon.

Nepal has also sought immigration facility for truckers to enter China and the Chinese side has agreed to the proposal put forward by Nepal.

Nepal and China have also agreed to upgrade the infrastructure of customs and road connectivity at seven other border points. Reportedly, full-fledged customs points will be operated in Yari, Humla-Purang; Olangchung Gola, Taplejung-Riwa; Jumla-Penan; Mustang-Lizi; Larke, Gorkha-Tibet; Chhekampar,Gorkha-Tibet and Kimathanka, Sankhuwasabha-Riwa in a bid to boost trade relations with the northern neighbour.

Nepal has also requested China to simplify the duty free quota free (DFQF) facility extended to Nepal by modifying the harmonised system code (HS code) of the products to six digits from eight digits. Nepal has raised the issue to narrow down the non-tariff measures imposed by the government of China so that Nepali exporters can reap the benefits of trade with China. China has extended DFQF facility for 8,030 Nepali goods in all tariff lines but trade deficit with China has been increasing every year.


Chinese Investment
According to businessmen doing business with China, the recent developments in the economic and trade spectrum indicate that the Chinese business community has attached a high priority to investing in Nepal focusing on sectors like tourism, mineral extraction, cement production, information technology, education, hydropower, agriculture and herbal medicine. “This is a welcome development and must be encouraged,” says Pancharatna Shakya, vice-president of Nepal-China Chamber of Commerce and Industry (NCCCI). 

However, according to Shakya, the first and foremost requirement to attract Chinese investment to Nepal is political stability. “Once there is political stability in Nepal, Nepal will start getting more and more foreign direct investment not only from China, but from throughout the world,” says Shakya.

Shakya says that there is possibility of inviting Chinese investment in agro-processing and herbs processing and export such products to Tibet and other Chinese parts that are far from mainland China. “We have noticed that visits by Chinese business leaders and delegations have increased in recent times. These possible Chinese investors are coming to Nepal to explore investment possibilities in various sectors hoping that conducive environment will be restored in Nepal soon and that will open up new opportunities for them,” says Shakya. He adds that to build on this Chinese optimism, the Nepal government must work jointly and aggressively with private sectors of both the countries.