Wednesday, April 13, 2016

Reality and requirements for Nepal-China accords to work

Nepal needs serious homework to benefit from accords with China, including the important one on transit

The agreements signed between Nepal and China during Prime Minister KP Oli’s state visit has in theory ended the sole dependence on India for utilizing the transit right of a landlocked country. Furthermore, theoretically it has also increased the odds of procuring petroleum fuel 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 triggered by the supplies disruption between Nepal and India, and the latter’s cold reception and subsequent reaction to the promulgation of a new constitution last year.

Practically, it bears 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 fronts. 

New agreements

Nepal and China released a 15-point joint statement, which was missing during PM Oli’s state visit to India, detailing the new understanding and agreements on a range of issues. The most consequential one is the Agreement on Transit Transport, whose 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 of Nepal-China Free Trade Agreement. It 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, analysts and the general public were quick to extol the agreements and are hoping for uninterrupted supplies and unhindered trade. However, operationalizing such agreements is not quick and easy. It requires serous homework, especially on our side, on policy, infrastructure, financial and procedural fronts. The usual tardiness of bureaucracy and meddling politicians will potentially slowdown implementation.

Trade and investment

The open border, state of infrastructure, business and family relations, language, free movement of labor, and the currency peg form the bedrock of Nepal’s trade relations with India. These are missing in the case with China and hence implementation will be even slower and difficult.

India accounted for 65.5 percent of total export and 63.5 percent of total import in FY2015. The figures for China are 2.6 percent and 12.9 percent, respectively. Accordingly, balance of trade with India was 62.2 percent of total trade deficit and 14.2 percent with China. The currency peg, which has remained unchanged since 1993 and has generally fared well for Nepalese economy given the fragile economic and infrastructure fundamentals, has supported the large and growing trade with India. Nepal’s top exports to India are light manufacture goods such as textiles, polyster yarns, zinc sheet, jute goods and some agro-processed items like juice. 

The Nepal India trade treaty allows for duty free access of manufacturing goods to India, a major incentive for Nepalese 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 the global trade negotiations. Nepalese exporters face a relatively high transaction cost and tough competition in the Chinese market. Tanned skin, handicraft, woolen carpet and noodles are the top export items to China. Interestingly, these light manufacture goods are produced by importing intermediate goods from India itself. This dynamics is not going to change anytime soon given the industrial base and its sophistication.

Regarding imports, the most important one is petroleum product, which accounts for about 20 percent of total import and is higher than the total value of merchandise exports. India has been the sole supplier of petroleum fuel, 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 fertilizers. 

Looking at the existing composition of export and import, it is not hard to notice that the basic items required by households and business community are actually imported from India and given the state of infrastructure, exchange rate regime, financial and business connectivity, it is not going to change overnight. For instance, due to the long distance and rugged terrain as well as Chinese taxes, importing fuel from China is about two times expensive than importing from India. 

If we look at investment, Indian investment is concentrated in manufacturing and energy sectors, while Chinese investment is focused on energy and services 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 percent and 15.7 percent, respectively with the latter growing at the fastest rate. Indian and Chinese foreign aid commitment is about 9.2 percent and 3.5 percent, respectively, of total aid commitment.

The other most important aspect is the open labor market in India, which absorbs a majority of the seasonal migrants from poor households from upper part of far-west and mid-west and the Terai belt. The remittances from India is an important source of the household’s expenditure. This access is missing in the case of China. Proximity-wise and cost-wise, the Indian market will continue to be more attractive than the Chinese market.

Ensuring viability

How can Nepal benefit from the renewed rapprochement with China on political-economic front, but also gradually lessen the over dependence on India? Given the state of infrastructure, trade and investment pattern, and business relations, there is little to gain in the short term. 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, this is easier said than done given the bureaucratic and political tardiness in implementing major infrastructure projects. Nepal has a lot of internal 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 bear no 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 is not easy to access and penetrate. Nepal is in a long haul to operationalizing the agreements with China and benefit from it.

It was published in The Kathmandu Post, 11 April 2016