“Complete replacement of Indian products by China is not possible”

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“Complete replacement of Indian products by China is not possible”

Dr Posh Raj Pandey is the Executive Chairman of South Asia Watch on Trade, Economics and Environment (SAWTEE), a consortium of South Asian NGOs, working to build capacity of stakeholders in the context of liberalization and globalization. Dr Pandey has been working on issues of international trade and economic development for more than 20 years and has already served as a member of the National Planning Commission. He holds Ph. D. degree in Economics and Master’s Degrees in Business Management and Economics and was one of the negotiators for Nepal’s accession negotiation for World Trade Organisation (WTO) membership. In an interview with New Business Age, Dr Pandey shed lights on different aspects of Nepal-China trade. Excerpts:

Hopes of intensifying trade relations between China and Nepal have reached its height now. How serious in this?
The Chinese economy is a ten trillion dollar economy. If you look at the Chinese economic growth rate, it has been striking more than five percent over the last five years, and had reached double digits before that. Right now China has been able to establish itself as a driver of global trade. If we want to integrate Nepal with such a large economy, it can obviously reap many benefits. I am not only talking about trade. When we talk about economic integration, the issues of investment, flow of wages, technology, and knowledge also come in. Thus, I agree in terms of this broader prospect of trade when it comes to integration with China. 

Do you think that Nepal made a mistake by heavily depending on only India for its international trade? 
Yes, Nepal made a mistake in two policy issues. The first one is remittance. Our major source of foreign reserve comes from remittance. If we had low remittance, we would be forced to increase export at least to be enough to buy necessary commodities like fuel. We need to promote our export. Secondly, the diversification of our import. Nepal’s policy makers have failed to guide import diversification. Since our import is not diversified, we are currently facing this problem.

How do you think that Nepal and China can be good trading partners? 
There are two factors when it comes to trade. Number one is economic and the second is non-economic. With the economic factor, demand and supply determine the price level. The non-economic factor includes culture, connectivity and trading facilities which will also increase the cost of trading. There is an irony here in that, we need Garam Masala in our food; we need Bengali Saris for wedding dress and now we are trying to replace India by Chinese trade. The cultural taste of the youths of India and Nepal are more or less the same. For economic interaction, we need to have human interaction. So language also becomes another barrier for trade with China.

Let me give the example of Mongolia. Mongolia has a similar geopolitical location like Nepal. It lies between two giant countries, China and Russia. However, 60 percent of their trade takes place with China. That does not mean Russia cannot trade with Mongolia, but the issue is about non economic factors of trade. It plays a significant role in determining trade relationships. Mongolia’s trade with Russia is less than its trade with UK and USA.

Like I said earlier, if we want to improve the trade scenario, we need to focus on trade related infrastructure, transportation and also its cost effectiveness.

How do you see the prospects of Nepal China trade? 
Particularly for crisis management it looks good to turn to China. But if we plan to enhance Nepal-China trade in the present conditions, then I don’t see it as being benificial. Complete replacement of Indian products by China is not possible. At least a third of our trade will still rely on India as it enjoys the advantage of non economic factors. But, if we develop the trade related infrastructure, then some changes will obviously be seen. Whatever happens, our import will only rise and not our export. But given the circumstances, it will provide Nepal a bargaining chip with India.

When we talk about Nepal-China trade, we need to look at it in terms of a broader economic partnership. There are a few sectors where we should focus more. For example, the tourism sector. At present, the number of Chinese outbound tourists is increasing every day. And they have started to spend a lot more than before. Europeans and Americans spend on average 1200 Pounds Sterling per person but Chinese tourists spend 2600 Pounds Sterling. Another point is attracting investments. We can attract Chinese investment in big projects. Similarly, China has many hilly regions like Nepal. They use modern farming methods which can be used as a model for replication in Nepal. It can help Nepal to mechanise its agricultural system in the hilly regions. Thus we can focus more on these sectors as part of any economic partnership.  

There are more than 8,000 products that China has included in the tariff free list for Nepal to export to China. Do you think we need to review the list?
This falls into the category of diplomacy. The list is created for all developing and least developed countries around the world. China has given the same list to all the developing countries in a global quota system. Under the WTO, all developed economies are compelled to provide non-tariff facility to developing and underdeveloped economies. The list was created during the Doha round of talks. Among those thousands of products, none is in favour of Nepal’s trade. Nepal has also submitted 160 tariff line products to China, but none are included in that list. In addition, there are so many non-tariff barriers in trading with China.

Nepal is surrounded by two giant economies India and China. More than 60 percent of Nepal’s import is from India. Should Nepal start seeing its trade with China more seriously to end its high trade dependency on India?
If we only look at the trade relationship, we only achieved Rs 2.2 billion in exports to China last year, which is around 2.6 percent of our total export. If we look at the growth rate of exports, then it is declining. Thus we can say that China does not have a significant role in our export. But if we look at our import data with China, it stands at around USD 100 billion every year. Our total import growth rate with rest of the world is at 8.4 percent while we have a 39 percent import growth rate with China and it is growing fast. Thus, our trade deficit with China is huge. But, if we see the export-import ratio with India, it is 11.4 which means, if we export 11.4 Rupees, we import 100 Rupees where as we have this ratio at 2.2 with China.  For Rs 100 import, we export Rs 2.2 only. 

But, in order to decrease frequency of problem with India, it is necessary to enhance trade with China. 

The current unofficial trade embargo by India provided an opportunity to improve bilateral trade relationships between Nepal and China. But how can Nepal be assured that similar actions cannot be taken by China in the future?
Yes, that is not assured, but its assurance must come in some kind of agreement. We need to focus on our needs and then be a signatory of any contract. We can create better investment opportunities for Chinese investors in hydropower and the tourism sector. If we keep good relations with both neighbours it will be easier for trade promotion and economic integration.

What is your observation about the trade related infrastructure in Nepal or at the Nepal-China border to facilitate trade between the two countries?  
For Nepal, China means Tibet. Tibet is nine times larger in area than Nepal. However, its economy is much smaller than that of Nepal. The reason I said Tibet rather than China is because we do not have adequate infrastructure in place to trade with China. We need to cross the entire Tibetan region to reach the major trading cities of China. Thus, we need to ultimately focus on signing trade and transit treaties with China as well. The cost of trading with the big cities of China can be much higher than trading with Indian cities.

Nepal has a trade deficit with China also which is increasing every year. How can Nepal make its trade with China more balanced? 
The first important sector can be tourism in which Nepal has huge potential. Secondly, attracting Chinese investment and technology. The reason I am focusing more on investment is because, China has a per capita income of USD 7000, so the wage rate is quite high. In order to be competitive, China also wants production outside China. As we can enjoy low cost of production, Nepal can become a production base and export products till Sigatshe. India is doing the same thing- Dabur is making Nepal its production base and selling its product in UP and Bihar.

Can Nepal-China trade relations be similar to Nepal-India trade relations?
If we want to increase our trade with China, then we should talk about exports. Our large exports to China are mainly two products: plants and skin.

We export plants of worth Rs 70 billion and skin worth Rs 34 billion. The rest is simple border side trade which does not have any significant value. Thus, more than five percent of our exports to China is concentrated only in two products. 

The main questions that lie here are: Can we export those products to China which are being exported to India?
We are exporting copper wire to India; can we compete with China? We export Polyester yarn to India; can we compete in textile with China? We export jute to India but China has already manufactured an alternative to jute. So even if we try to divert our trade to China we don’t have products that can compete in the Chinese market. 

 What are the policy issues that are hindering Nepal-China trade?
There are four major issues. First is the increase in efficiency of connectivity. Second is trade and transit agreements. Third is that Chinese nationals require a visa for their destination before they leave their country. So, if they want to travel to Nepal, they should either go to Lasha or Beijing; which means, they will spend more getting a Nepali visa than travelling to Nepal. I personally have also advocated this issue two to three times. But I think it is changed now. Next we need to study the sectors which can give more benefit to Chinese investors and provide a special platform for investment. 

China is a huge market right in our neighbourhood. What products should we give priority to, to benefit from this market?
Nepal has a huge advantage in trading in hydropower. Rather than signing trade agreements with other countries, we can sign power development agreements (PDA) as well as power trading agreements (PTA) with China. As the number of outbound tourists is increasing every year, Nepal can reap huge benefits from tourism as well. 

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