Nepal is poised to sign a trade agreement with Bhutan in a bid to expand the volume of commerce between the two countries.

According to the Ministry of Industry, Commerce and Supplies, Nepal and Bhutan will be holding a series of joint secretary-level meetings starting on August 29 to discuss a trade protocol. “For this purpose, a team of Bhutanese delegates is scheduled to visit Nepal on that date,” said an anonymous ministry official.

The two countries are members of a number of multilateral trade initiatives—South Asian Association for Regional Cooperation (SAARC), Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation and Bangladesh-Bhutan-India-Nepal—but they have not signed any bilateral trade agreement till date.

According to the ministry source, the two sides will discuss ways to simplify trade barriers and finalise the rules of origin before signing a trade protocol. “Nepal will ask Bhutan to provide duty-free access to local products with a value addition of 25 percent and above under the rules of origin,” said the source.

Currently, Nepal receives preferential treatment from a number of countries on exportable goods that have a minimum 30-40 percent value addition.

Nepal has signed trade agreements with 17 countries including India, China, Bangladesh, South Korea, Pakistan, Sri Lanka, the US and Mongolia. Nepal has a bilateral preferential treatment arrangement with India while it receives preferential treatment from China, the US and European countries.

China provides duty-free, quota-free access to more than 8,000 Nepali products. The US offers access to 77 tariff lines under the Trade Preference Programme while the European Union provides duty-free access to products imported from the least developed countries including Nepal under the Everything but Arms scheme.

Despite receiving preferential treatment, Nepal has not been able to maximise the benefits from trading with these countries due to its small basket of exportable items. Trade analysts do not expect Nepal to benefit much by signing a trade agreement with Bhutan either.

“Bhutan is a small market which sells mainly goods imported from India and Bangladesh. This means Nepal needs to compete with these products that are relatively cheaper compared to Nepali goods,” said Purushottam Ojha, former commerce secretary.

Ojha stressed the need for consensus for a transport agreement with Bhutan to benefit from bilateral trade. According to him, Nepal will also have to provide similar facility to Bhutanese products on a reciprocal basis after signing a trade agreement with Bhutan. “This might not be in Nepal's favour as it has been facing a widening trade deficit even with this SAARC member country,” said Ojha.

For the past few years, Nepal has been facing a growing trade deficit with Bhutan. According to the Trade and Export Promotion Centre, Nepal exported goods worth Rs162 million to Bhutan against imports of Rs1.67 billion, resulting in a trade deficit of Rs1.51 billion. In the fiscal year 2014-15, the trade deficit with Bhutan stood at Rs284.41 million.

Nepal imports gypsum, coal, heavy equipment, boring machinery, juice and industrial equipment, among others, from Bhutan. Iron rods and alloy of aluminium, transformer, snack, soap, furniture, woollen carpet, farm products, jute bag and cooking appliances are among the major export items to Bhutan.