Can Nepal and China tango?: The Kathmandu Post columnist

Chinese Premier Li Keqiang (right) talks to Nepal Prime Minister Khadga Prasad Sharma Oli during a signing ceremony in Beijing, China, on March 21, 2016.
Chinese Premier Li Keqiang (right) talks to Nepal Prime Minister Khadga Prasad Sharma Oli during a signing ceremony in Beijing, China, on March 21, 2016. PHOTO: REUTERS

Nepal's recent agreements with China seem more symbolic in nature and Nepal needs to do some serious homework to benefit from the accords.

Chandan Sapkota

The China Post/Asia News Network

The agreements signed between Nepal and China during Prime Minister KP Oli's state visit have in theory ended the country's sole dependence on India for utilising the transit right of a landlocked country.

Furthermore, they have also theoretically increased the odds of procuring petroleum products and other essential supplies either from or through China.

It marks a remarkable symbolic departure from the exclusive foreign, trade and transit relations Nepal has had with India for decades.

The impetus for this was provided by the supplies disruption between Nepal and India, and the latter's cold reception of and subsequent reaction to the promulgation of the Nepali constitution last year.

Practically, these developments bear little significance unless Nepal upgrades existing connectivity as well as constructs new commercial custom points with China, reduces cost of doing business, establishes trust among traders on both sides, and boosts productive capacity by taking decisive action on policy and implementation.

At the end of PM Oli's visit to China, the two countries released a 15-point joint statement, something that was missing during Oli's visit to India.

The statement outlined new understandings and agreements between Nepal and China on a range of issues.

The most consequential one is the Agreement on Transit Transport, although its operational details (protocol of the agreement) are yet to be worked out.

The Chinese government will also 'seriously consider' to provide enhanced market access to tradable goods and start work on joint feasibility study for the Nepal-China Free Trade Agreement.

The statement also includes promises to conclude a commercial deal on the supply of petroleum products.

Frustrated by the acute shortage of essential goods and supplies for about five months, Nepali analysts and the general public were quick to extol the agreements with China and are hoping for uninterrupted supplies and unhindered trade.

Such agreements, however, cannot be operationalised quickly or easily. It requires serous homework, especially from the Nepali side, on policy, infrastructure, financial and procedural fronts.

The usual bureaucratic tardiness and meddling politicians can slow down implementation.

The open border, state of infrastructure, business and family relations, language, free movement of labour, and the currency peg form the bedrock of Nepal's trade relations with India.

Such ties are missing in Nepal-China relations and hence implementation will be even slower and difficult.

In the case of Nepal, India accounted for 65.5 per cent of total export and 63.5 per cent of total import in 2015.

The figures for China are 2.6 per cent and 12.9 per cent, respectively.

Accordingly, balance of trade with India was 62.2 per cent of total trade deficit and 14.2 per cent with China.

The currency peg with India since 1993 has generally fared well for the Nepali economy, given the fragile economic and infrastructure fundamentals.

The peg has also supported the large and growing trade with India.

Nepal's top exports to India are light manufactured goods such as textiles, polyester yarns, zinc sheet, jute goods and some agro-processed items like juice.

The Nepal-India trade treaty allows duty free access of Nepali manufacturing goods to India, a major incentive for Nepali exporters to continue production despite the relatively high cost.

Similar tariff preferences are not available with China and the duty free access it allows to its market is applicable to all least developed countries (LDCs) as per its commitment during global trade negotiations.

Thus, Nepali exporters face a relatively high transaction cost and tough competition in the Chinese market.

Handicrafts, woollen carpets and noodles are the top Nepali export items to China.

Interestingly, these light manufactured goods are produced by importing intermediate goods from India itself.

These dynamics are not likely to change any time soon.

Regarding imports, the most important one for Nepal are petroleum products-about 20 percent of total import and higher than the total value of merchandise exports.

India has been the sole supplier of petroleum products, which is the largest import item followed by vehicles and spare parts, rice and paddy, and other machinery parts used in Nepal's industrial sector.

Meanwhile, Nepal's top imports from China are telecommunication equipment, electrical goods and chemical fertilisers.

Looking at the existing composition of export and import, it is not hard to notice that the basic items required by Nepali households and business community are actually imported from India.

This is not going to change overnight given the state of infrastructure, exchange rate regime, and financial and business connectivity. For instance, due to the long distance and rugged terrain as well as Chinese taxes, importing fuel from China is about twice as expensive for Nepal than importing it from India.

If we look at investment, Indian investment in Nepal is concentrated in manufacturing and energy sectors, while Chinese investment is focused on energy and service sectors.

Overall, Indian investment is higher than Chinese investment.

Meanwhile, Indian airlines bring in the largest number of visitors to Nepal, but the share of Indian and Chinese tourists is 17.1 per cent and 15.7 per cent respectively with the latter growing at a fast rate.

Indian and Chinese foreign aid commitments are about 9.2 per cent and 3.5 per cent, respectively, of total aid commitments.

The other most important aspect is the open labour market in India, which absorbs a majority of the seasonal Nepali migrants from poor households from upper parts of far- and mid-west and the Tarai belt.

The remittances from India are an important source of the household's expenditure in the country.

This access is missing in the case of China.

In terms of proximity and cost, the Indian market will continue to be more attractive than the Chinese one.

How can Nepal benefit from the new agreements with China on the politico-economic front, but also gradually lessen its dependence on India?

Like it or not, Nepal's dependence on India for trade, investment and third country access will not decrease any time soon.

In the medium to long run, a major effort to match the infrastructure, financial and business connectivity with China could be a game changer.

However, given the bureaucratic and political tardiness in implementing major infrastructure projects in the country, this is easier said than done.

Nepal has a lot of homework to do in terms of large public investment in infrastructure for enhanced connectivity, energy generation, capacity development, and country-specific export target based on Nepal's comparative advantage.

Else, the agreements with China will have little meaning beyond symbolism and we will continue to depend on India for pretty much everything used by households and businesses.

The Chinese market is open, but not easy to access and penetrate.

It is going to be a long haul for Nepal to operationalise the agreements with China and benefit from them.

* The writer is an economist.