Nepal is a landlocked nation, surrounded by India on 3 sides and by Tibet (now a province of China) in the north. Historically, international trade before the 1950s was with these countries. Exports have consisted of primary agricultural produce, while everything not produced locally has been imported. Throughout the years of development, these imports have included industrial inputs, fertilizers, and petroleum. Since the 1970s, the balance of trade has been increasingly negative. During the same period, however, exports of garments and carpets have grown, reaching sales close to US$300 million, and trade with other countries has increased to the detriment of the trade with India.
Until the 1950s, 90 percent of Nepal's trade was with its giant neighbor, India. The essentially open border facilitates trade, but also makes unquantifiable smuggling hard to control. Exports to India are generally supplied
|Trade (expressed in billions of US$): Nepal|
|SOURCE: International Monetary Fund. International Financial Statistics Yearbook 1999.|
by agricultural surplus from the fertile Tarai region— mostly rice, but also tobacco, jute, and vegetable oils. Raw materials such as hides, skins, herbs, textile fibers, metal ores, and some manufactured goods, such as bamboo products, wooden furniture, and textiles, are also exported. Imports consist of daily necessities such as salt, sugar, tea, medicines, petroleum products, and items such as chemicals, machines, cement, coal, and spare parts that are needed for development work. The trading relationship with India was first codified in 1950 with the Treaty of Trade and Transit, which lowered tariffs and tax duties on goods passing between Nepal and India. In successive modifications and renewals of the treaty (notably in 1960), transit facilities for trade between Nepal and other countries were established in India at the port of Calcutta. The decline in India's percentage of trade with Nepal to just above 30 percent in 1998 demonstrates the success of these arrangements. In March 1989, delayed negotiations led to the expiration of the treaty, and all but 2 trading points were closed for a year. This crippled the Nepalese economy, as internal trade (much of which had to pass through Indian territory) and external trade with India was subjected to virtual closure. Shortages of basic goods such as salt and petroleum caused considerable strife, leading to both anti-India and anti-government demonstrations in Nepal, and were partly responsible for the downfall of the Panchayat system. An interim government successfully reinstated the treaty in June 1990.
Trade with Tibet, mostly the bartering of agricultural produce, went into decline at the turn of the 20th century when the British in India opened alternative routes. The limited Tibetan market and its inaccessibility further hindered the development of this barter trade. Negotiations on maritime access via Bangladesh, traversing 26 kilometers (16 miles) of Indian territory, have been difficult. Nepal has been more successful in expanding its exports with countries such as the United States, Britain, Germany, and Japan, the value of which rose from 14.4 million rupees in 1965 to over 16 billion rupees in 1996.
Nepal's trade balance is skewed towards imports, partly because the demand for industrial inputs and consumer goods has grown while local production has not. In 1998, Nepal imported US$1.2 billion in goods while exporting just US$474 million. India, Hong Kong, and Singapore are the country's major import partners. Governments have attempted to increase export earnings by diversifying products, and also to reduce import costs by substituting imports with local production. Policies such as the Exporter's Exchange Entitlement Scheme and both a Dual Exchange Rate and a Single Exchange Rate were formulated to facilitate these objectives. To its credit, Nepal has obtained favorable agreements with its trade partners to offset its landlocked status. But the treaty crisis with India and the failure to agree on Bangladeshi access highlight the country's limited bargaining power. Still very much a developing nation, Nepal is unable to influence the global market to which it exports primary goods at prices that are generally both low and unpredictable; the geographical diversification of its trade needs to include a shift towards a wider array of manufactured products.