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Study on Nepal-China TradeStudy on Nepal-China Trade Objectives of the Study Methodology Trade Trends: Global and China Top Export Potential Products to China Survey Findings: Trade Problems and Suggestions

=>Exporters=>Importers=>All Stakeholders

Critical Trade Barriers to Export Growth=>Tariff and Non-Tariff Barriers

Stakeholders’ Perceptions of the Physical Facilities and Services at theBorder Points

Review of Nepal-China Trade-related Treaties and Suggestions Recommendations

=>Government of Nepal=>Private Sector

Presentation Outline

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Qualitative and quantitativeQualitative and quantitative Primary sources of informationPrimary sources of information◦◦ Field visits toField visits to China border points (China border points (TatopaniTatopani,, KhasaKhasa,, RasuwagadhiRasuwagadhi,, KerungKerung))◦◦ Interviews and consultations with stakeholders (sites and Kathmandu)Interviews and consultations with stakeholders (sites and Kathmandu)◦◦ OnOn--site observationssite observations◦◦ Focus group discussionsFocus group discussions

Secondary sources of informationSecondary sources of information◦◦ Published/online materials (Published/online materials (TEPC,TEPC, MoCSMoCS, NRB,, NRB, MoFMoF, NPC, NPC) and) and

international sourcesinternational sources (WB, ITC, IMF, WITS(WB, ITC, IMF, WITS--UNUN CComtradeomtrade,, etcetc)) as well asas well asreview of other literature.review of other literature.

LimitationsLimitations:: There may not be data uniformity because of different sources ofThere may not be data uniformity because of different sources ofdata. The timeframe used for the review and analysis of the information isdata. The timeframe used for the review and analysis of the information isbased on the availability of comparable data and requirements of the study.based on the availability of comparable data and requirements of the study.

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Nepal's Global Export, Import, and Trade Deficit; 2001/02Nepal's Global Export, Import, and Trade Deficit; 2001/02--2010/11 (Rs. billion)2010/11 (Rs. billion)

0

50

100

150

200

250

300

350

400

450

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Fiscal Year

Export

Import

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Indicators

TYIP (2007/08-2009/10)

TYP (2010/11-2012/13)

Target(2009/10)

Actual(2009/10)

Target(2012/13)

Actual(2010/11)

Export (Rs. 58.9 billion in2006/07)

(Rs. billion) 100.0 61.0 100.0 64.6

Average Export Growth(%) 19.3 1.2 17.9 5.9

Trade Deficit/GDP ratio(%), (18.5% in 2006/07)

15.0 26.8 20.0 24.7

Export/Import ratio (%),(30.5% in 2006/07)

n/a 16.2 24.4 16.3

Development Plans and Trade Indicators

0

5

10

15

20

25

30

35

40

45

50

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Fiscal Year

Export

Import

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5

0

5

10

15

20

25

30

35

40

45

50

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Fiscal Year

China

Total

Nepal's Export/Import Ratio (%):China and TAR

0

10

20

30

40

50

60

70

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Fiscal Year

China

TAR

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Trade Indicators (2001/02-2010/11, AveragePercent Change)

Nepal's Trade Indicators (2001/02-2010/11, Average Percent Change)Indicators World China TAR

Export 3.5 -1.9 -9.5

Import 15.5 17.2 13.3

Trade deficit 20.7 18.3 16.2

Total trade 12.8 16.2 11.1

Export/Import ratio -10.4 -16.2 -20.0

Import > Export by (%)

-2001/02 130.0 917.0 334.0

-2010/11 516.0 4,940.0 3,262.0

Top Export Potential Products to ChinaSelection Criteria:

(a) RCA (ratio of the export share of the concerned product inNepal’s total exports to the share of world exports of the sameproduct in total world exports, year 2010) >1

(b) China’s global import growth of the product (2006-2010,average compounded) >10 %

(c) Nepal’s global export growth (2003-2010) of the product >10%

(d) China’s total import volume of the product in 2010 > $100,000

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Products IdentifiedS.N Product S.N Product

1 vegetables 11 brans

2 iron & steel products 12 ginger

3 tea 13 aluminum wires

4 rosin and resin acids 14 string musical instruments, played with abow

5 herbs and essential oils 15 ornamental ceramic articles

6 juice 16 mattresses of rubber or plastics

7 packing-related plasticgoods 17 sacks and bags of jute or other textile fibres

8 lentils 18 buckwheat (millet and related seeds)

9 rags, twine, rope 19 oil-cake

10 ghee 20 carpets

Trade Problems and SuggestionsWeighted (by number of responses) Ranking of Most PressingProblems Faced by Exporters

Rank(1 = highest…) Problem

1 Transportation2 Customs capacity3 Administrative process4 Lack of credit facility5 Absence of dry port5 Not enough consignment in Kathmandu-Lhasa route6 Language7 Payment problem7 Low capacity of exporters

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Weighted (by number of responses) Ranking of Most PressingProblems Faced by Importers

Rank (1 =highest…) Problem

1 Transportation

2Branding (lack of authentic brands and associatedproblems)

3 quarantine

4 Customs capacity

5 Lack of credit facility

5 Absence of dry port

6 Language

7 Absence of warehouse

8 Administrative process

9 Excessive competition

Weighted Ranking of Major Problems Identified by the StakeholdersS.N Problems Responses % of total

1 Transportation 36 12.5

2Cumbersome procedures and administrative hassles in the delivery of governmentservices at the border points

29 10.1

3 Road condition 28 9.8

4 Export product (cost, quality, price, quantity, economies of scale, competitiveness) 21 7.3

5 Quarantine 19 6.66 Checking Hassles 19 6.67 Customs Infrastructure (dock yard, etc.) 16 5.68 Language problem 13 4.59 Uncooperative attitude of border officials 13 4.5

10 Manpower 12 4.211 High Chinese customs and lack of preferrential access to China 12 4.212 Financing and payments 10 3.513 Investment, industrial, trading and security environment 10 3.514 Warehouse 9 3.115 SPS 8 2.816 Product standardization 8 2.817 TBT 5 1.718 Product branding 5 1.719 Information and awareness 5 1.720 Large number of traders and lack of export/import houses 5 1.721 Product theft 4 1.4

Total 287 100.0

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Weighted Ranking of suggestions for improving Nepal-China Trade Performance

S.N Suggestions Responses% oftotal

1 Improvements of roads and transports 21 10.7

2 Quick administrative process, simpler procedures, and less hassles 15 7.6

3 Construction of dry port 15 7.64 Production of quality and demanded goods 14 7.15 Tariff concessions 13 6.6

6 Subsidy, incentive and concessions from the government for the export 10 5.1

7 Early clearance from Chinese side 9 4.68 Provide credit facility and ensure convenient payments system 9 4.69 Improvements of customs yard (including parking facility) 8 4.1

10 Development of infrastructure and security 7 3.611 Build export/import houses 6 3.0

12 Quarantine support and less stringent quarantine checks by China 5 2.5

13 conduct market assessment and demand analysis of Chinese markets 5 2.5

14 Imparting knowledge and raising awareness 4 2.015 Promote enabling economic and trading environment 4 2.0

16Proper enforcements of measures adopted and agreements reached, including the local levelunderstandings, besides increasing capacity in this respect

4 2.0

17 Cooperation from Chinese side 3 1.518 Development of export entrepreneurship 3 1.5

19 Improve Nepal-China Trade Treaty by incorporating favorable terms and conditions 3 1.5

20 Increase mutual (Nepal-China) talks 3 1.5

21 Strengthen Nepal's quarantine facility and personnel expertise 3 1.5

22 Recognize quality and quarantine certification of each side 3 1.5

Critical Trade Barriers to Export GrowthTariff Barriers

• in 2010, 198 products (6-digit HS code, UN Comtrade) exported to China fromNepal

• Among these, 163 or 82.3 percent of the products fall under China’s zero-tariffprovision

• In terms of trade volume, 67.2 percent of Nepal’s exports to China in 2010consisted of products included in China’s zero-tariff provision

• Only one-third of the products would thus be theoretically affected by thetariff barrier

• Though the Nepalese exporters have not been able to fully benefit from thezero-tariff provision granted by China due to,-Administrative hassles, 40% value addition requirement, China’s preconditionof fulfilling its relevant domestic procedures for providing the zero-tariff accessas per the letter of exchange of 14 May,2010 etc.,

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Non-Tariff Barriers

• Strict Chinese quarantine and lack of internationally accredited lab facilityin Nepal

• Procedural and paper-work hassles and non-recognition of the Nepalesequarantine certificates

• Discretionary, arbitrary, non-transparent, inconsistent, and subjectivepractices at the border-points

• Import of substandard goods from China due to lack of Nepalesequarantine's technical capability

• Agreement of cooperation for industrial product inspection concluded in2005 has provided for establishing information channel for laws andregulations and inspection standards for industrial products. However, nosuch information channel exists.

Non-Tariff Barriers…• Agreement of cooperation on mutual recognition providing for mutually

recognizing each other’s inspection certificates and accepting thecertificate as evidence for release has not been in operation.

• The agreement of cooperation has made a provision for setting upchannels for mutual notification and solution of quality problems ofindustrial product. However, no such arrangement prevails.

• The agreement also includes as a working procedure the listing ofproducts for inspection cooperation through mutual consultation. The listhas not yet been decided.

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Overall assessment of services and facilities by the stakeholdersat the border-points (% of responses)

• Infrastructures, customs processes, procedures and business services(transportation, storage, insurance, banking and exchange rate) rankedfrom “Excellent” to “Worst” based on the frequency of stakeholderresponses.

• The responses were totaled and multiplied by their respective weights(“Excellent” by 1, “good” by 2, “Average” by 3, “Weak” by 4, and “Worst”by 5). The weighted values were summed into a single value.

• The weighted value obtained was divided by the total number ofresponses to derive the weighted average coefficient.

• The sum of weights (1,2,…,5) is 15 and its average is 15/5=3. So, if theweighted average coefficient is < 3, it indicates better-than-averageranking; If the coefficient >3, it indicates lower than average ranking. If thecoefficient = 3, it indicates average ranking.

Overall assessment of services and facilities at the Nepal border-point (% ofresponses)

RespondentsExcel(%)

Good(%)

Avg(%)

Weak(%)

Worst(%)

Total(%)

Weightedcoefficient

Exporters 0 33.3 30.4 23.2 13.1 100 3.2

Importers 0 23.8 44.2 23 0 100 2.9

Chambers & InformedPublic

1.7 21.1 40.3 31.6 5.3 100 3.2

Nepalese Customs 8.1 75.7 0 16.2 0 100 2.2

Nepalese Customs Agents 27.3 45.5 9.1 9.1 9.1 100 2.3

Chinese Trade Agents 0.0 40.0 30.0 20.0 10.0 100 3.0

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Overall assessment of services and facilities at the China border-point (% ofresponses)

RespondentsExcel(%)

Good(%)

Avg(%)

Weak(%)

Worst(%)

Total(%)

Weightedcoefficient

Exporters 28.8 43.9 18.2 6.1 3 100 2.1

Importers 10 45 31.7 10 3.3 100 2.5

Nepalese Customs 5.7 34.3 54.3 5.7 0.0 100 2.6

Nepalese Customs Agents 0.0 0.0 100 0.0 0.0 100 3

Chinese Trade Agents 0.0 25 33.3 41.7 0.0 100 3.2

Assessment of Business Services (transportation, storage,insurance, banking, and exchange rate (% of responses)

RespondentsExcel(%)

Good(%)

Avg(%)

Weak(%)

Worst(%)

Total(%)

Weightedcoefficient

Exporters 0.0 6.9 58.6 31.0 3.5 100.0 3.3

Importers 0.0 20.8 54.2 25.0 0.0 100.0 3.0

Chambers &Informed Public

4.5 13.6 31.8 45.5 4.5 100.0 3.3

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Review of Nepal-China Trade-Related TreatiesAgreements Entered with China and TAR

• Trade and Payments Agreements between the Government of Nepal and the Government of thePeople’s Republic of China, 22 November 1981, Kathmandu

• Agreement between the Government of Nepal and the Government of the People’s Republic ofChina concerning Bilateral Road Transportation, 6 May 1994, Beijing

• Agreement between the Government of the People’s Republic of China and the Government ofNepal on Trade and Other Related Matters Between the Tibet Autonomous Region of China andNepal, 10 July 2002, Beijing

• Agreement of Cooperation for Industrial Product Inspection between General AdministrationQuality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ) andNepal Bureau of Standards and Metrology (NBSM), 6 Oct 2005, Kathmandu

• Memorandum of Understanding Between the Ministry of Commerce and Supplies, Government ofNepal, and Government of Tibet Autonomous Region of the People’s Republic of China on theEstablishment of Nepal-China’s Tibet Trade Facilitation Committee, 2 Sept 2009, Shigatse, TAR

• Letters of Exchange on Granting Special Preferential Tariff Treatment to Certain Goods Originatedin Nepal and Exported to China, 14 May 2010 (Annex I- List of Products, Annex II-Rules of Originand Related Procedures on Goods Eligible for Duty-free Treatment: Section I- Rules of Origin,Section II-Operational Procedures related to Origin)

Trade and Payments Agreement, 1981: Proposed Amendments

Agreement Existing Provisions of theAgreements

Proposed Amendments tothe Provisions of the

Agreements

Reasons forAmendments

i) TradeDevelopment

(Article I)

Two contracting partiesshall provide each other all

possible facilities for thedevelopment of trade.

Two contracting partiesshall facilitate each otherto promote overseas and

traditional trade overland.

To avoid ambiguity andmisinterpretation and

also to put more thruston trade expansion.

ii) Exchange ofgoods (Article II)

The two contacting partiesshall provide each otherfacilities in respect of the

issuance of import andexport licenses for thecommodities traded

between the two countries.

Import and export of goodsbetween the two countriesshall be conducted on the

basis of letters of creditopened through the banks.

To minimize thehurdles in licensing

procedures.

Iii) Principle ofequilibrium (Article

IV)

Trade shall be based andregulated as far as possible

on the principle ofequilibrium.

Trade shall be based onpreferential trading

arrangements.

Principle of equilibriumneeds to be changed

with preferentialtrading arrangement

with a view to providespecial and differentialtreatment for Nepal.

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Trade and Payments Agreement, 1981…

Agreement Existing Provisions of theAgreements

Proposed Amendments tothe Provisions of the

Agreements

Reasons forAmendments

iv) Provisionsrelated to stateownedenterprises(Article V)

Trade may be conductedthrough state trading

organization as well as otherimporter and exporter.

Trading by state-ownedenterprises shall be

conducted on commercialconsideration.

To promote competition

v) MFN treatment(Article VI)

The two contracting parties shallgrant MFN treatment in customs

duties, rules and formalities.

China shall providedifferential treatment for

Nepalese goods in customsduties, taxes and customsformalities including ROO.

To promote trade andreduce tradeImbalances

vi)Implementationand disputesettlement(Article XII)

At the request of eithercontracting party, the

representative shall meet forthe supervision of

implementation of thisagreement and settle problemsthrough friendly consultations.

Representatives of bothcontracting parties shallmeet regularly every sixmonths to supervise the

implementation and resolvedispute arising, if any, from

the agreement throughfriendly consultation.

To establish permanentmechanism for

Implementation anddispute settlement

vii) Tenure of theAgreement(Article XIV)

This agreement remains in forcefor a period of three years.

This agreement remains inforce for a period 10 years.

To ensure stability andreduce uncertainties

Agreement on Trade and Other Related Matters with TAR, 2002: ProposedAmendments

Agreement Existing Provisions of theAgreements

Proposed Amendments to theProvisions of the Agreements

Reasons forAmendments

i) Movement ofpersons (Article I)

Provisions related tomovements of persons acrossthe border Including border

inhabitants mentioned inArticle I of the agreements.

The provisions are clumsy, sothe procedures need to be made

simple.

To facilitatetraders and

borderinhabitants

ii) Payments(Article v)

Encourage and supportpayments through banks by

letter of credit. Take pragmaticattitude and facilitate border

trade when conditions are notripe for trade by letters of

credit.

Trade payments shall beconducted through banking

channels. However, thetraditional border trade shallcontinue in its customary wayuntil the banking systems inboth sides are not adequate.

To streamline thepayment system

Iii) DisputeSettlement(Article 5)

The local officials of two partiesshall try to settle debt dispute

arising from border trade,through consultations.

Trade disputes arising fromborder trade shall be settled by

the officials of localrepresentative bodies through

consultations. If the localofficials are unable to settle thedisputes they shall refer them to

the NTFFC.

To provideauthority beyond

debt issue tolocal officials and

NTFFC

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Recommendations: GON• Support increased production of export-potential products, as listed

before• Ensure provision of necessary infrastructures like roads, transport

arrangements, container yards, quarantine facilities, and technologicalimprovements

• Make arrangements for reducing delays and hassles and increase requiredcooperation from the border officials

• Check-post hassles along the Araniko highway need to be reduced forensuring convenient, smooth, and efficient trade transit

• Request for reducing the arbitrary, non-transparent, discretionary, andvague processes at the China border

• Request China to upgrade infrastructures at the transport depot, storage,and customs in Khasa

• Increase the legal, institutional, and procedural systems and capacitiesincluding improvements of NBSM, DFTQC, laboratories, etc.

Recommendations: GON…• Acquaint Nepalese businesspersons about Chinese quarantine and SPS

requirements• Request China for extending a low criterion of value addition, a special

treatment for the Nepalese products, so as to help promote Nepal’s tradeprospects

• Declare the list of industrial products for inspection as well as compliance withthe other provisions as per the Agreement of Cooperation for IndustrialProduct Inspection

• Give emphasis on concluding a substantive bilateral trade agreement (BTA)accompanied with special and differential treatment for Nepal, given Nepal'slimited export capacity and the pressing need for ensuring trade balance

• A separate agreement to address the problems in quarantine and qualityassurance for plants, agricultural products, and food items to be concluded inview of the difficulties and hassles faced by the Nepalese exporters

• Make periodic review of exchange rate to avoid large misalignments andensure that the benefits of such adjustments remain durable through makingthe monetary policy effective in its mandated responsibility of maintainingprice stability as a means for improving Nepal's terms of trade

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Recommendations: GON…• Encourage the use of L/C as a means for ensuring transparency, reliability, and

efficient regulation of transactions relating to international payments• Increase the present draft/TT limit of US$ 25,000 to US$ 50,000 to avoid the

need for making more than one draft/TT even for the sameconsignment/container In view of the reluctance of the Chinese banks toaccept L/C payment for the overland trade

• Encourage the establishment of export and import houses• Request China to provide Nepalese businesspersons or their representatives

with multiple visas for up to one year• Provide Chinese businesspersons or their representatives with multiple visas

with a duration of stay up to one year• Expedite construction of dry port at Larcha and make Rasuwagadhi route

operational• Request China for early construction of dry port at Rasuwagadhi as the

prospective route for China-India trade transiting Nepal

Recommendations: Private Sector

• Private sector to keep abreast of trade requirements, procedures to be compliedwith, and facilities and incentives available

• intensify contacts, cooperation, and collaboration between the private sectorrepresentative bodies in both the countries for promoting trade relations andfostering the mutuality of interests

• Raising the quality levels of the products so as to comply with the quarantine/SPSstandards as specified by the Chinese regulations

• Transparency, efficiency, and credibility of the private sector to be enhancedthrough improvements in the regulatory, procedural, governance, andinfrastructural areas

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THANK YOU