Nepal’s trade relations with its neighbors and the role of economic diplomacy

Posted by : CESIF Nepal


Date : 2020-03-05

Centre for Social Inclusion and Federalism (CESIF) organized a webinar on February 24, 2020, focusing on “Nepal’s trade relations with its neighbors and the role of economic diplomacy.”


  • Mr Purushottam Ojha – He served as the Secretary of Ministry of Industry, Commerce, and Supplies. He is currently a freelance consultant in the areas of trade, transit, investment, private sector, and institutional development.
  • Mr Bijendra Man Shakya – He is a professor of Economics at Tribhuvan University. He consults for various trade related projects, and is a published author, writing primarily on trade and business.
  • Ms Apekshya Shah – She is an assistant professor at the Department of International Relations and Diplomacy, Tribhuvan University. She holds a Postgraduate Degree in Diplomacy and Foreign Policy from City, University of London.

Mr Purushottam Ojha opened the webinar by highlighting that from the perspective of economic diplomacy, the areas of interest for Nepal to be meaningfully engaged with the two neighbors are trade and investment, transit and connectivity, tourism, development cooperation, and the implementation of treaties and agreements.

The speaker said that while India and China make up for 3/4th of the Nepal’s total trade volume, the trade deficit Nepal incurs with both neighbors is unsustainable. If we are to refer to figures of last three years, there is a huge gap between import and export, he said. He added that in South Asia, Nepal is among the bottom most countries receiving foreign direct investment (FDI) despite having huge potential. He explained that while China and India are the biggest sources of FDI in Nepal, the outflow to Nepal is negligible in comparison to their outflow of FDI to other countries.

The speaker also argued that transit and connectivity are more significant from the perspective of a landlocked country and although newer concepts such as ‘landlocked to land-linked’ are being propounded in Nepal, there has been little progress. He highlighted that while Nepal has signed various treaties and agreements with its both its neighbors, there has either been no implementation or it has been utterly delayed. For instance, Nepal signed the agreement of transit and transportation with China in 2019; however, it is not yet operational. Similarly, while India and China have been development cooperation partners of Nepal for a long time, signed agreements remain dormant.

Mr Ohja cited that 36% of the 1.2 million tourists that visited Nepal in 2019, were from India and China. He said that although numbers fell significantly in 2020 due to the COVID-19 pandemic, there is a great potential for revival and even increasing the number of tourists. He suggested that economic diplomacy could play a major role in this.

Mr Bijendra Man Shakya opened by stating that the scope of economic diplomacy is so broad and comprehensive that it covers issues ranging from trade, investment, and migration, which he also referred to as the three basic components of globalization.

With regard to trade with Nepal’s neighbors, he said that while trends in figures with China seem irregular, figures with India from the past few years are smoother in comparison and show hope for change in terms of volume of trade. Regardless, unfavorable trade deficit and imbalance in which Nepal finds itself should be a focus in economic and trade diplomacy. He added that it should be given priority and tackled through formulation of trade policy, trade strategy, and economic diplomacy. He also argued that trade deficits do not simply occur because of interventions made by trading partners and that it is more of a domestic issue. He added that there is little talk on how to overcome trade deficit practically. Therefore, the role of economic diplomacy is key to overcome challenges of this nature. The speaker also pointed out that with respect to trade, Nepal has not been able to tap into favorable bilateral trading arrangements and preferential treaty arrangements with either of its neighbors.

Mr Shakya then explained that effective economic diplomacy would allow Nepal to negotiate favorable terms and conditions such as removal of trade barriers. He added that currently, Nepal’s preference utilization is far from desirable and that Nepal has been unsuccessful in exploiting two of the largest and most lucrative markets despite being so close in proximity.

The speaker highlighted that Nepal’s policy makers and diplomats have overlooked the role the private sector could play in facilitating economic diplomacy. He argued that even if the government makes the agreements and heads negotiations, the private sector is the main actor as they create business, trade, and investment. Therefore, there cannot be an expansion in trade and investment without considering the role of the private sector.

Ms Apekshya argued that one cannot ignore the failure of regional processes when talking about economic diplomacy with Nepal’s neighbors. She added that South Asia is the least integrated region, so doing business in the region is expensive. As a result, countries of the region trade more with distant countries than within the SAARC region which is all the more detrimental to landlocked countries like Nepal and Bhutan because they trade the most within the region. She suggested that pushing regional initiatives are important for a long-term connectivity opportunities and also because international markets can be very intimidating for developing countries like Nepal. She also suggested that regional forums that can open economic opportunities for Nepal should not be ignored.

The speakers also argued that when we talk about bilateral and multilateral negotiations in terms of economic diplomacy, it becomes more complicated as it is not just concerned with negotiations of commercial issues but also deals directly with the processes of strengthening the economy of a country. Moreover, she added that negotiations and decision making with regard to economic diplomacy need more deliberation as it holds more complexities than other forms of diplomacy.

The speakers highlighted that a distinct feature of economic diplomacy is that along with the foreign ministry, home based ministries like finance, trade, and environment are a part of the decision making process and also lead negotiations. Therefore, government agencies require better coordination and clarity in authority to properly execute their roles. She also added that issues such as the politicization of foreign policy agendas and loose diplomatic practices have weakened Nepal’s position and negotiation in the past. Therefore, there needs to be more domestic clarity as economic diplomacy depends on domestic realities.