How significant has Xi’s visit been in boosting economic cooperation between Nepal and China?
The signing of the Transit and Transportation Agreement between Nepal and China in 2016 is one of the milestones in the history of transit transportation of Nepal; this has been one of the major drives in our diversification of transit routes. In 2017, Nepal signed a memorandum of understanding (MoU) to be a part of China’s Belt and Road Initiative (BRI) which is a signature project of Chinese President Xi Jinping. As a close neighbour, it is natural for Nepal to be part of BRI. It is also because we need funding for the development of our infrastructures. The development of infrastructures in connectivity has become very important for us in order to develop our domestic as well as international trade.
During Xi’s Nepal visit, two governments have signed 20 various agreements and MoUs on different areas of bilateral cooperation which will take Nepal-China ties to new heights. In totality, the whole gamut of the cooperation, be it in the area of energy, infrastructure development and various Chinese assistances such as in health and education are covered by the agreements. Having said that, we cannot be very sure that all things agreed between the two countries will be implemented in a timely manner and that there won’t be any problem in future. It is the implementation and execution that matters.
What do you think is stopping the final fine-tuning of the transit protocol?
It has been finalised but it is not clear how Nepal bound goods from third countries will be transported from Chinese sea and land ports. Similarly, it is not clear how Nepali goods are exported to other countries via China’s territory. These very detailed processes in our international trade haven’t been mentioned in the Transit and Transportation Agreement. Many things have been left to the discretion of Chinese customs officials. Also, the distances to reach Chinese ports are very long for us; the port in Tianjin is over 4,000 kilometres from Nepal’s border. Till date, the distance of 3,750 kilometres between Kazakhstan and the Black Sea is the world’s longest distance in-transit transportation. Longer distances translate to higher transportation charges and other expenses in trade. So, it raises the question about the practicality in using the ports.
There will be trial runs of the cargo transport from the ports in China to the Nepali border. That will be very much important to look into a range of issues related to how things will work including the cost, procedures we have to follow, required documents that need to be processed, among others. Similarly, we also need to be aware of the rough terrain, particularly in areas bordering Nepal and China’s Tibet.
How do you see the trend of growth of trade between Nepal and China? How useful would be the utilisation of ports in China for our third country trade?
We have a huge trade gap with China. Almost Rs 500 billion worth of imports are from China while our export is only Rs 2 billion in value. The ratio of export to import is 2:500. The utilisation of China’s transit transport route for our foreign trade can only have strategic value, not commercial value at this moment. We do not know whether the development of technology in the future might help us in this respect. For the time being, the utilisation of ports in China will be for the rest 20 percent of our international trade. Currently, we mostly export products to Turkey, Canada, USA and European countries and transporting cargo to these destinations through Chinese ports will take a long time. It is also important to note that surface transport is much costlier than ocean transport. The cost of surface transport through China will be almost six times higher compared to India.
Given the high imports and low exports, the current trade balance is in favour of China whereas the imbalance is on our side. In 2001-2002, Nepal’s export to China was around Rs 1 million; it reached merely Rs 2 billion in 2018. On the other hand, Nepal’s import from China reached to Rs 205 billion in 2018 from Rs 53 billion in 2001-2002. This clearly shows the precarious state of our foreign trade.
Why hasn’t Nepal been able to utilise the zero-tariff access provided by China for exporting 8,000 products?
When I was the commerce secretary in 2010, I had signed an initial agreement with the Chinese ambassador in Kathmandu to provide Duty-Free and Quota-Free (DFQF) access to Nepal’s 4,700 products and that very product range was increased to over 8,000 in 2014. Still, Nepal has not been able to boost its export to China and there are certain reasons behind it. First, China has provided this type of duty-free market access not only to Nepal but also to two other least developed countries (LDCs). At present, there is a competition between countries including Laos, Cambodia, Bangladesh and Mongolia to access the Chinese market. LDCs of Africa are also getting trade preferences from China. Our weak competitive capacity hinders us to benefit from the USD 14 trillion market. Producing goods of standard quality at lower costs is something we have not been able to achieve.
Second, tariff liberalisation in China makes it hard for Nepali exporters to export their products. As China has lowered most favoured nation (MFN) duty rates to fulfil their World Trade Organization (WTO) commitments, the margin of preferences available for LDCs is decreasing every year.
Third, stringent rules of the origin criteria also add to the difficulties of our exporters. If you see the agreement with China in respect of the DFQF access, there are criteria like 40 percent value addition on products and even changes in the customs tariff are also required for export of goods; it is more stringent than the rule of origin criteria outlined in Nepali-India Treaty of Trade.
Fourth, quarantine is another obstruction. For instance, Nepal mostly exports agricultural products to China where CIQ (China Inspection and Quarantine) for imported food and even the regulation standard serve as a barrier for us.
Fifth, language is another major non-tariff barrier; it is very difficult for Nepalis to deal with their counterparts because of communication problems.
Sixth is the connectivity problem. Traditionally, there are six border passes for overland trade routes with China - Olangchung Gola, Kimathanka, Tatopani, Rasuwagadhi, Hilsa and Kora La. These are six officially recognised and authorised border posts for overland trade between China and Nepal, but transport is difficult from these points at present. The Khasa-Tatopani border, which was closed after the 2015 earthquake, has been softly opened for operations. The under-construction Rasuwagadhi-Kerung road is a difficult pass. The rest of the border posts don't have proper road connectivity.
Nepal and China have agreed to conduct a feasibility study of the Kathmandu-Kerung Railway project. How hopeful are you about the prospects of the Trans-Himalayan Railway?
The Trans-Himalayan Railway and the economic opportunities it would bring are just wishful thinking at the moment. The Chinese side hasn’t made any commitment to construct the project. The proposed project will not go ahead if it is found to be expensive and technically unfeasible. I think until and unless China and India agree to utilise the territory of Nepal for the trade between the two countries, the railway project will remain a pipedream. Even if the railway project is constructed with Chinese aid, its maintenance cost will be too high for Nepal to bear. In my opinion, our focus should be on developing road corridors that are very important and feasible for us.
How do you view China’s rise in Nepal as a major FDI source country? What new potential areas do you see to attract Chinese FDI in Nepal?
The Chinese investment has increased dramatically over the last few years, unseating India as the largest FDI source country in Nepal. In the past, Chinese used to invest in small services sector businesses like restaurants, hotels and spas. But now their interests are in areas like hydropower and cement manufacturing. The statistics of the Department of Industry (DoI) shows that the total investment commitment from China until 2018/19 is almost Rs 123 billion - Rs 94.3 billion from mainland China and Rs 28.1 billion from Hong Kong. However, we don’t have the real figure of how much of this total investment has been realised.
Their investments in energy and cement can help us move towards self-sufficiency. Besides manufacturing, I think Nepal and China can extend their cooperation in hill agriculture. They have made some big strides in agricultural development in Tibet in recent years. We can learn new farming techniques from them for our mountainous regions.