Nepal signed the Agreement on Transit Transport with China during Prime Minister KP Sharma Oli’s recent visit to the country. Coming on the heels of the Indian blockade, this treaty has been hailed as a major turning point for Nepal. Mukul Humagain and Anil Giri spoke with Purushottam Ojha, a former secretary at the Ministry of Commerce and Supplies, about the significance of the treaty, the challenges in its implementation, its impact on Nepal’s transit agreement with India, and other agreements with China.

From a strategic point of view, how significant do you consider the recent  Transit Transport Agreement with China?

The Transit Transport Agreement with China is an important step in Nepal’s trade history. In 1923, British India guaranteed Nepal limited transit rights. In 1950, another treaty was signed between Nepal and independent India, which provided transit rights to Nepal, including access to all the ports in India. However, through another treaty in 1960, port access was limited to the Haldia port in Calcutta. The treaty of trade and transit was part of a single treaty until 1978, when Nepal signed three different treaties—treaty of trade, treaty of transit, and agreement of cooperation to control unauthorised trade—with India. These three treaties are still applicable today. Various international treaties also accord transit rights to landlocked countries like Nepal.

We have a transit agreement with Bangladesh as well, but it depends on transit through India since we do not share a border with Bangladesh. Hence, till now our transit facility was purely limited to India. In that sense, the Transit Transport Agreement with China marks an important milestone in the transit history of Nepal.

What challenges do you foresee in the implementation of this agreement?

First, the nearest port in China—Tianjin—is almost four times far from the Nepal border than the port in Kolkata. Movement of trucks in the north is virtually impossible; train is the only viable means of transportation. The station closest from Nepal where Chinese trains arrive is in Shigatse, which is almost 540km away from the Nepal-China border in Rasuwagadi. So due to these problems, it is very difficult to implement the Transit Transport Agreement with China.

Second, we do not know about the modality and the procedure of the movement of cargo between the ports in China and the Nepal border. There are a lot of hassles—red tape and other complex procedures for example—even now in the transit treaty with India. Therefore, how simplified the procedures and the customs control mechanisms are counts a lot.

Third, it is not only about the movement of goods; it has to be associated with the movement of people as well.

Application of information and communication technology is also crucial. Transit is not only about the movement of goods, but also about the movement of information.  

So the current agreement just offers a broad framework; a lot needs to be worked out to make it operational.

What benefits do you think the agreement offers to Nepal?

Given the history of blockades by India, the agreement with China gives some assurance and confidence to the Nepalis. It will strengthen Nepal’s economic linkages with China, help attract more investment into Nepal, thereby enhancing its business climate, and draw more tourists. And it opens up Nepal’s opportunities to connect with countries in Central Asia that are rich in petroleum products.

A transit hub—with storage facilities and supply centres—near Shigatse or somewhere close to the Nepal border would be helpful to import goods from China as well as from other countries. That would do away with the necessity of having to travel to far-away cities like Shanghai, Tianjin or Guangzhou.

Against the backdrop of the Chinese proposal of trilateral cooperation between Nepal, India and China, how significant is the agreement for Beijing to make inroads into the rest of South Asia?

We have to look at it from a historical perspective. During medieval times, Nepal used to be a transit country between India and Tibet. In modern times, this is something that Nepal has wanted for a long time. Nepal aspires to benefit from the growth of the two emerging economies. So long as Nepal is able to develop transport connectivity, it can be a natural bridge between the two countries.  

Highly populous Indian states like Uttar Pradesh, Bihar and West Bengal share borders with Nepal. Tibet is sparsely populated, but Sichuan, the Chinese province that is closest to Nepal after Tibet, is highly populated. The Chinese government has plans to build direct rail and road connections between Chengdu in Sichuan and Lhasa in Tibet. At present, the train to Lhasa comes all the way from Tsinghai province, compelling a traveller from Beijing or Shanghai or Chengdu to make a detour to arrive in Lhasa.

Our geographical location can potentially help us derive more economic benefits. We can also carry out entrepôt trade, where we will not be producing goods ourselves, but bringing them from outside and exporting them to other countries.  

Some allege that the treaty with China is a by-product of the Indian blockade. Do you agree?

I do not. It is a natural process. When I visited China in 2010 as the commerce secretary of Nepal, I had a long talk with the Chinese vice-minister in the ministry of commerce about the economic linkages between Nepal and China. Transit facility was one of our agendas, and he had agreed to it. Unfortunately, not much progress was made in that direction. But transit through its coastal neighbours is Nepal’s natural right. Other landlocked countries have similar transit agreements with their neighbours.

An economic blockade is not the only thing Nepal should be concerned about. There may be a natural calamity, in which case it becomes important to be able to use different ports both in India and China. Having an additional option is always desirable.

When Oli visited India last month, India agreed to provide Nepal with the port facility in Vishakhapatnam and facilitate Nepal’s trade with Bangladesh. It appears that there will now be a competition between India and China to provide transit facility to Nepal. How do you assess this development?

We have only signed an agreement with China; it will not be carried out immediately. In order to be competitive in the international market, one has to be able to reduce transit costs. As things stand now, transit costs with China are much higher than with India. The agreement with China does open up new options for us, but they are not necessarily the most cost-effective ones. I see no chances of our trade being diverted to Chinese ports in the near future.     

In your view, how long before Nepal will be able to start using Chinese ports?

It depends on how the transit procedures—connectivity, transportation costs, documentation, visa facilitation, use of technology, etc.—are going to evolve in future. The cost effectiveness of each corridor to different ports in India and China has to be analysed. Traders will naturally choose the ones that are most cost effective for them.

Sea-freight rates are cheaper than train-freight rates, which are in turn cheaper than road-freight rates. International traders calculate the cost of each leg of the journey that the goods travel and decide on the best corridor for them.

Getting into more specific areas of bilateral cooperation, how likely is energy, including petroleum, cooperation between Nepal and China?

A Memorandum of Understanding on Chinese assistance for exploration of petroleum product in Nepal has been signed, which may have some strategic meaning. But I am not sure if this will yield any result in the near future. Petroleum exploration has been tried in the past as well, but in vain. If the new venture results in something concrete, it will be good; else it will just be one more attempt.

Another area of energy cooperation is the development of cross border transmission line, which can yield a positive outcome between one to three years if the Chinese work on it seriously. In my opinion, this is not very difficult. Since the area is mostly rugged terrain, land acquisition will not be a problem like in the southern belt. Our load-shedding problem could be eased if we can import electricity from Tibet; when we produce surplus power, we can export it.

Talking about bilateral trade, what is the situation of Nepal’s trade with China?

Nepal’s trade imbalance with China is much bigger than that with India. For the last several years, we have been trying to get duty free market access for Nepali products in China. Although China has provided such access to 97 percent of the total product line for all Least Developed Countries, the potential export products of Nepal could not be included in that 97 percent. The Nepali side has submitted a new list of around 500 products that can potentially be exported to China. But unless we resolve the issue of non-tariff barriers and enhance connectivity, it will be difficult to bridge the trade gap.

The trade treaty with India is going to expire in October? Is it possible that the recent agreement with China will have repercussions on it?

The trade treaty between Nepal and India rests on the duty free market access on a reciprocal basis for the primary and agricultural products and unilateral tariff preferences for Nepali manufactured articles. This has become largely irrelevant now that the South Asian Free Trade Area provisions have become more beneficial for Nepal. So we have to revisit the overall trade regime with India.

But our agreement with China is independent of our treaty with India. We have to deal with them separately. Greater economic integration is the demand of time. It is important for Nepal to connect more deeply with both our neighbours.