Nepal's Regional and Bilateral Trade Agreements

Final Report
Nepal's Regional and Bi-lateral Trade Agreements:

Performance and Prospects
Report Submitted by:

Uma Shankar Prasad
E-mail: us_prasad@hotmail.com
Submitted to:
Ministry of Industry, Commerce and Supplies
Government of Nepal
Enhancing Nepal’s Trade-Related Capacity (ENTReC)
(NEP/05/006)
December 2007
0
ACKNOWLEDEMENTS
I am grateful to several officials of Ministry of Industry, Commerce and Supplies,

Government of Nepal who supported me directly or indirectly to accomplish this study
particularly to Rajendra Mahto, former Minister, and Purusottam Ojha, Secretary. I am
thankful to Prachandaman Shrestha, former Joint Secretary of Ministry of Industry,
Commerce and Supplies and Jibraj Koirala, National Programme Director of ENTReC
project. My heartily thanks also go to Bijendraman Shakya, former Natrional Programme
Manager and Shiv Raj Bhatta, Trade Analyst, and other staffs of ENTReC project who
offered his help at different stages of this work by providing research materials, scholarly
comments and suggestions. My sincere acknowledgements are also due to Navin Dahal
and other staff at SAWTEE who supported me during various stages of this work. I was
also benefited from the discussion with business community especially with Chandi Raj
Dhakal, president of Federation of Nepalese Chambers of Commerce and Industry and
Diwakar Golcha, an industrialist. Last but not the least, I am indebted to the staff of
Trade Promotion Centre and Nepal Transit and Warehousing Company Limited for
providing data set and relevant information to complete the study.
December 23, 2007 Uma Shankar Prasad
Kathmandu.
1
Contents
Content Page Number
Acknowledgements 1
List of Tables 3
List of Boxes 3
Abbreviations 4-5
Executive Summary 6 -10
Chapter I: Introduction 11 - 15
Chapter II: Trade Liberalization Initiatives 16 - 19
Chapter III: Nepal’s Trade Performance 20 - 32
Chapter IV: Review of Bi-lateral and Regional Trade Agreements 33 - 45
Chapter V: New Dimensions and Future Prospects 46 - 53
Annexes 54 – 94
References 95 - 97
2
List of Tables
Table
No. Title Page
3.1 Direction of Nepal’s Foreign Trade (Rs. in million) 21
3.2 Major Export Trade Partners of Nepal 24
3.3 Nepal's Export to SAARC/BIMSTEC Member Countries 25
3.4 Exports of Major Commodities to India 26
3.5 Exports of Major Commodities to Other Countries 27
3.6 Major Import Trade Partners of Nepal 28
3.7 Nepal's Import from SAARC/BIMISTEC Member Countries 29
3.8 Imports of Major Commodities from India 30
3.9 Imports of Major Commodities from Other Countries 31
4.1 TRQ on Nepal’s Exports 39
5.1 Country-wise Foreign Employment 49
5.2 Income from Remittance in Nepal, 1985 – 2003 50
5.3 Major Importers of Nepalese Tea 51
Box
Box
No. Title Page
4.1 Trade Liberalization Programme under SAFTA: Major Elements 34
3
ABREVIATIONS AND ACRONYMS
ASEAN - Association of South East Asian Nations

BIMSTEC Bay of Bengal Initiative for multi-sectoral Technical and
Economic Cooperation
BOP - Balance of Payment
CTH - Changes in Tariff Heading
ESAF - Enhanced Structural Adjustment Facility
EU - European Union
FTA - Free Trade Agreement
FY - Fiscal Year
GATT - General Agreement on Tariffs and Trade
GDP - Gross Domestic Product
GoN - Government of Nepal
GoP - Government of Pakistan
HMG - His Majesty’s Government
ICD - Inland Clearance Depot
ICT - Information and Communication Technology
IMF - International Monetary Fund
ISI - Import Substituting Industrialization

LDC - Least Developed Countries
MFN - Most Favoured Nation
MoF - Ministry of Finance
NEFAS - Nepal Foundation for Advance Studies
NEP - New Economic Policy
NPC - National Planning Commission
NRB - Nepal Rastra Bank
NRs. - Nepalese Rupee
NTBs - Non-Tariff Barriers
OGL - Open General Licensing
QR - Quantitative Restrictions
RoO - Rules of Origin
SAARC - South Asian Association for Regional Cooperation
4
SAFTA - South Asian Free Trade Area
SAL - Structural Adjustment Loan
SAP - Structural Adjustment Policy
SAPTA - SAARC Preferential Trading Arrangement
SAWTEE - South Asia Watch on Trade, Economics & Environment
TBs - Tariff Barriers
TPC - Trade Promotion Centre
TRQ - Tariff Rate Quota
UNDP - United Nations Development Programme
VAT - Value Added Tax

WTO - World Trade Organization
5
Executive Summary
Trade liberalization means integration of the national economy with the global economy
in terms of easier/free flow of goods and services, technology and information. The
politics of trade policy reform displays well-known forms of contradiction between the
advocates and the sceptics. Although, the impact of trade liberalization on country’s
development has been a highly controversial topic and a concern of debate among the
economists around the world, particularly in developing countries, most of the countries
around the world are moving towards trade liberalization initiatives and Nepal cannot be
an exception.
Nepal was characterized by the interventionist approach of economic policies for a

prolonged period of time. Government regulation and large-scale public investments
were major policies followed in the 1960s, 1970s, and early 1980s. The basic emphasis
was on import substitution and export pessimism was widely prevalent. The trade policy
was highly protectionist and regulated through quantitative restrictions on imports. The
tariff rates were very high. It was believed that restricted imports would save foreign
exchange and stimulate domestic output.
Nepal initiated its economic integration process in mid 1980s. After restoration of multi-
party democracy in 1990, Nepal accelerated the process of economic globalization. Trade
policy was changed with the new trade policy 1992. The Import Substituting
Industrialization (ISI) was replaced by an export led economic growth and imports were
made free to assist exports. Following the ideology of New Economic Policy (NEP) to
integrate Nepalese economy with world economy, Nepal became the member of the
World Trade Organization (WTO) in the fifth ministerial conference of WTO held on 10-
14 September 2003 at Cancun, Mexico. Along with the wave of liberalization, Nepal has
dismantled trade barriers and has opened the economy to international competition at a
fast pace in recent years.
Slow progress in the WTO negotiations, developing countries’ aspirations and

advantages of Regional Trade Agreements (easy and quick handling, trade creation, less
dispute and less diverse interest etc.) pushed countries to adopt a two-pronged strategy
(bi-lateral and regional) of economic integration simultaneously.
As of 2007, Nepal has signed bi-lateral trade agreements with 17 countries including
India and Bangladesh with whom it has also bi-lateral transit agreements. These countries
include: Bangladesh (1976), Bulgaria (1980), China (1981), Czech Republic (1982),
Egypt (1975), India, Democratic People's Republic of Korea (1970), Republic of Korea
(1971), Mongolia (1992), Pakistan (1982), Poland (1992), Romania (1984), Sri Lanka
(1979), UK (1965), USA (1947), Russia (1970), and Yugoslavia (1965). All the treaties,
except with India, are static and perpetual in nature based on Most Favoured Nation
(MFN) treatment.
The United States of America, which is the second largest trade partner of Nepal in terms
of export and among the ten top countries in terms of import in 2006, has bi-lateral
6
friendship and commerce agreement dates back to April 1947 (Annex IV) in the Rana
regime, at the time even the General Agreement on Tariffs and Trade (GATT) agreement
was not signed. The agreement is diplomatic rather than trade and commerce. The treaty
was aimed at strengthening the friendly relations existing between the two countries,
further mutually advantageous commercial relations between their peoples, and to
maintain MFN principle in its unconditional and unlimited form as the basis of their
commercial relations. The treaty also provided unconditional navigation facility between
the two nations.
The trade treaties between Nepal and India have been renewed, modified and reviewed
from time to time. The major elements included in all the treaties between Nepal and
India are: exemption from basic custom duties and quantitative restrictions on imports of
primary products on reciprocal basis, Nepali manufactured goods (excluding some items
on the negative list) are granted duty free access to Indian market without quantitative
restrictions on the basis of non-reciprocity, and manufacturing goods imported from India
is granted preferential entry to Nepal, without quantitative restrictions.
Apart from bi-lateral trade agreements, Nepal is a member of two regional trade
agreements- South Asia Free Trade Area (SAFTA) which came into force on 1 January,
2006 and the Bay of Bengal Initiative for multi-sectoral Technical and Economic
Cooperation (BIMSTEC).
SAFTA was signed without agreements on issues like sensitive list, rules of origin,
mechanism for compensation on revenue losses for the (Least Developed Countries)
LDCs, and technical assistance. The non-tariff barriers in the region are inconsistent with
the WTO provisions. Quantitative Restrictions (QRs) were to be replaced by tariff
equivalents but countries of this region are still maintaining them. This shows that South
Asian region might have compelled to accept the policy against their willingness and
therefore it might be difficult to achieve the goal of SAFTA.
In 2004, BIMSTEC member countries agreed to establish the BIMSTEC Free Trade Area
Framework Agreement for a free trade in goods, in services and investments. This
includes economic cooperation in Mutual Recognition Agreements, Customs
Cooperation, Trade Finance, E-Commerce, and Business and Personal Visa Facilitation.
The First Summit level meeting held in July 2004 identified and covered six broad
sectors for cooperation, i.e., trade and investment, technology, tourism, transport and
communication, energy, and fisheries.
The basic objective of this study is to review and analyze Nepal’s existing trade treaties
and suggest new countries and dimensions that has to be covered in future trade
agreements with a view to make Nepal’s export trade competitive and sustainable. The
data on Nepal’s export and import trade has been examined to assess trade effects of
existing regional and bi-lateral trade agreements, new dimensions to be covered in
existing bi-lateral trade agreements, and to suggest name of new countries and
dimensions that has to be covered in future agreements to make them beneficial for
Nepal.
7
Available data and Nepal’s existing trade agreements show that the leading export
partners of Nepal are India, USA, Germany, United Kingdom, Belgium, France, Japan,
Bangladesh, Peoples’ Republic of China, Hong Kong, Switzerland, Spain, Italy and
Canada over the last few years. As of 2005/06, around 85 per cent of its exports go to
India, the United States, and Germany. Nepal imports its commodity requirements from
various countries. India, Peoples’ Republic of China, Singapore, Indonesia, Thailand,
Malaysia, Saudi Arabia, Japan, Germany, Republic of Korea, Hong Kong, and New
Zealand have been the major import trade partners of Nepal. However, like exports, India
has been the country from where Nepal imports its major part. Nepal’s exports as well as
imports to SAARC/BIMSTEC countries, except India, have accounted for less than one
per cent of its total exports/imports.
Nepal’s major export products have been readymade garments, woollen carpets, woollen
and pashmina goods, vegetable ghee, toothpaste, jute and jute goods, pulses, polyester
yarns, hide skins and handicrafts. Manufactured exports are concentrated in garments,
carpets, and pashmina. Woollen carpets used to be the prime export and readymade
garments have been another major export.
Nepal’s imports are diversified compared to its export. Nepal’s major import has been
manufactured goods, which constitute around 30 per cent of its total import. Machinery
and transport equipment stands as the second largest group to import, which constitutes
about 15 per cent. Similarly, minerals, fuel and lubricants, food and live animals,
chemical and drugs, animals and vegetable oil and fats have been the major products and
items being imported by Nepal.
The main conclusions and recommendations drawn from empirical evidences can be
summarized as follows:
Nepal has no bi-lateral trade agreement with Canada, Japan, Singapore, Malaysia,
Saudi Arabia, Hong Kong, Thailand, and the other many major trade partners.
Therefore, it is an urgent need for Nepal to initiate bi-lateral trade agreement with
these countries in the present integration-oriented context. The agreement should
not be limited to merchandise trade. It should include trade in services,
investment, intellectual property and labour mobility.
Several EU Member States are long-standing development partners of Nepal. In
the fiscal year 2005/06, Nepal's export to European Union region was about 16
percent of country's total national export. Many countries of EU like Germany,
France, Italy have been major trade partner of Nepal. Nepal does not have trade
agreement with EU. Therefore, it is an urgent need for Nepal to make a trade
agreement arrangement with EU in present context by covering both the
merchandize as well as trade in services.
As of 2007, Nepal had signed bi-lateral trade agreements with 17 countries. But
almost all the treaties, except with India, were signed quite back, i.e., before 1980.
Hence, it is essential for Nepal to review these treaties in the present context.
8
Nepal’s exports to Bhutan are increasing over the current years and there is more
or less similar situation with Bangladesh as well. Nepal enjoys comparative
advantage for uncooked pasta, soaps, and cereal products with Bhutan and for
lentils, weaning foods, and vegetable seeds with Bangladesh. It is recommended
that Nepal can gain by FTA arrangement with Bhutan and Bangladesh in recent
years. Hence, priority should be given to these two countries for FTA
arrangement. Nepal should also take initiatives for FTA with Sri Lanka. These
initiatives towards FTA would make Nepalese trade diversified instead of India-
centred.
Remittances play an important role in improving living standards of households in
Nepal. Given its importance to the economy, fresh bi-lateral initiatives between
Nepal and the new destination countries regarding liberal labour mobility policy
(labour market liberalization) particularly with Middle East countries are crucial
and should be included in trade agreements.
Tea, herbs, and leather are major export potential products for Nepal. However,
these products face tariff and non-tariff barriers in the international market.
Identification and removal of such barriers are essential to realize its export
potential. Bi-lateral, regional, and multi-lateral trade negotiations can be utilized
to address these barriers. However, this is not possible without a well-coordinated
negotiation strategy with a sound capacity team.
The increasing trend of trade deficit, informal trade between the two countries and
imposition of Tariff Rate Quotas (TRQs) by India on some Nepalese exports are
the major issues in Indo-Nepal Trade Treaty. These issues need to be addressed.
Energy and services, i.e., Information and Communication Technology (ICT),
tourism, education, healthcare, are most necessary sectors to be included, in future
trade negotiations to benefit both the countries. Nepal could exploit its vast
amount of untapped hydroelectricity to fulfil the high demand of energy in Indian
market.
Several issues need to be addressed to realize the potential benefits of tariff free
access under SAFTA. These are: safeguard measures-sensitive lists and Rules of
Origin (RoO), para-tariff and non-tariff barriers, trade facilitation, and transit and
transport logistics. The fact is that most of the highly-traded and potential items
are in sensitive list. However, the 1996 Indo-Nepal bi-lateral agreement has
substantially reduced the sensitive list to only few items. Nepal’s bi-lateral
agreement with India is more attractive to Nepal than SAFTA because of non-
reciprocal and zero tariff access for Nepalese manufactured products to Indian
market. Unless the number of goods from the sensitive lists is reduced in SAFTA,
Nepal will benefit little from SAFTA. Similarly, if SAFTA does not compensate
financially for customs revenue losses, Nepal would prefer to continue trading
with India under bi-lateral agreement.
Trade in services is inseparable from trade in goods. Service sector especially
tourism is the most important for employment generation and foreign exchange
earning for Nepal. Further, foreign investment in hydroelectricity, tourism,
education, health etc. is necessary for Nepal’s economic development. Therefore,
Nepal should negotiate to include services and investment liberalization in
SAFTA as well as other bi-lateral trade negotiations.
9
Although, liberalization of services and investment is included in BIMSTEC
Agreement, it is essential to make it to work more effective. Nepal's potential
feasible hydroelectricity power capacity of around 83,000 MW (currently only
around 1 per cent is being exploited) could be a large net power producer and
exporter to SAARC/BIMSTEC countries and especially to India where power
demand has steadily increased over the years, if liberalization of services and
investment within the region is fully materialized.
10
Chapter One
Introduction
1.1 Background
in terms of easier/free flow of goods and services, technology and information. The
WTO, formed in 1994 as a successor of GATT, is an institutional foundation of the
multi-lateral trading system to provide the fundamental principle of trade liberalization,
i.e., non-discriminatory trade among trading partners.
Trade liberalization has become the cornerstone of economic reform strategies

throughout the world. The process of trade liberalization involves the phasing out of
barriers to trade by the conversion of non-tariff barriers into tariff equivalents
(tariffication), reduction of tariff rates, export promotion and devaluation of the currency.
In spite of many international and regional commitments to multilateralism in the
international trade regime through the support of the WTO and several regional trading
blocks in different parts of the world, the politics of trade policy reform displays two
well-known forms of contradiction between the advocates and the sceptics.
Impact of trade liberalization on country’s development has been a highly controversial

topic and a concern of debate among the economists around the world, particularly in
developing countries. The proponents of trade liberalization claim that openness and free
trade enhances the efficiency of resource allocation, international competitiveness and
increases the volume of trade. It enhances a country’s income by forcing resources to
move from less productive uses to more productive uses, i.e., utilizing comparative
advantage. Therefore, trade liberalization is an important component of any strategy
seeking to increase growth. Interventions in trade diminish the efficiency of resource
allocation, reduce competitiveness and exacerbate macroeconomic imbalances (Krueger,
1995; Rodrik, 1997; Khattry, 2003; and Bhagwati, 2004).
The sceptics, on the other hand, argue that freer trade would adversely affect the poor in
both short and long run because of internal contradictions in the NEP packages. They
argue that growth in employment will slow down because massive investment will take
place in urban areas with higher profit motive. As a result, growth rate will be higher in
urban areas compared to rural areas and the regional disparity will widen. The quality of
employment would deteriorate by effecting wage rates. Trade liberalization through tariff
reduction tends to decline revenues affecting the pace of economic development. (Amin,
1997; Chossudovsky, 2001; Kumar, 2002; and Stiglitz, 2002).
The detractors argue that today’s globalization is not a new concept but it is only a new
phase of globalization, i.e., one-way globalization dominated by the developed countries.
Its philosophy of economic development is based on marketization of the structures of
the economy and pushing it into all aspects of social functioning. Many claim that
globalization has neither succeeded in reducing poverty nor has it succeeded in ensuring
stability in the developing countries. The supporting institutions are working on the
11
behalf of the wealthiest industrial countries of the West. The social impact of devaluation
is brutal and immediate. The domestic prices of food staples, essential drugs, fuel and
public services increase overnight.
The explicit goal of trade liberalization strategy was to create a major shift in the growth
rate of exports. It was argued that export pessimism was a basic cause of lack of
economic development in the developing countries. It was expected that export incentives
to the domestic producers would reflect economies of scale and substantial improvement
in export performance. Another goal of trade liberalization was to lower import prices
through tariff reductions and trade competition which would benefit the poor consumers.
But this perception misses the basic point that ability to consume depends upon income,
which in turn depends upon employment opportunities. If a particular enterprise closes
down because of losses due to competition from imports and more open trade strategy,
the real income of workers decline and consumers cannot be benefited from even cheaper
imported goods (Chandrasehkar and Ghosh, 2000).
The Preferential Trade Agreements (PTAs) and Free Trade Agreements (FTAs),
Regional Trade Agreements (RTAs) and multilateralism are the supporting elements of
trade liberalization. Although trade liberalization for developing countries is one of the
most controversial issues among the economists, most of the countries around the world
are moving towards trade liberalization initiatives and Nepal cannot be an exception.
RTAs have become in recent years a very prominent feature of the global trading system.
This second trend1 in the global trading system is rapidly gaining momentum and
establishing a very different set of rules2. As a result, the number of RTAs has more than
quadrupled since 1990s. Some 368 RTAs have been notified to the GATT/WTO up to
December 2006. Moreover, if we take into account RTAs which are in force but have not
been notified, those signed but not yet in force, those currently being negotiated, and
those in the proposal stage, we arrive at a figure of close to 400 RTAs which are
scheduled to be implemented by 20103. The scope and coverage of bi-lateral and regional
trade agreements is expanding rapidly and now they are covering the issues of services,
investment, intellectual property and labour mobility, apart from the merchandise trade.
As a complement to the multi-lateral trading system, the WTO allows RTAs (an
exception to its basic principle of MFN stipulating that the RTA must comply with two
main requirements outlined in the GATT Article XXIV. First, the agreement must lower
trade barriers within the regional groups. Second, the agreement cannot raise trade
barriers for non-participating members.
Slow progress in the WTO negotiations, developing countries’ aspirations and

advantages of RTAs (easy and quick handling, trade creation, less dispute and less
diverse interest etc.) pushed countries to adopt a two-pronged strategy (bi-lateral and
1
Multi-lateralism is the first trend in global trading system, while second (new) trend is the proliferation of
regional (including bi-lateral) trade agreements (RTAs).
2
The World Bank, Global Economic Prospects 2005.
3
http://www.wto.org/english/tratop_e/region_e/region_e.htm
12
regional) of economic integration simultaneously. Nepal also adopted the same strategy.
Nepal initiated its economic integration process in mid 1980s.4 The process was further
boosted after the restoration of multiparty democracy in the 1990s.5 In addition to the
unilateral reforms, Nepal entered into bi-lateral, regional and multi-lateral trade
agreements to further consolidate its reform process and integrate with the world
economy. As of 2007, Nepal has signed bi-lateral trade agreements with 17 countries.
These countries include: Bangladesh, Bulgaria, China, Czech Republic, Egypt, India,
Democratic People’s Republic of Korea, Republic of Korea, Mongolia, Pakistan, Poland,
Romania, Sri Lanka, UK, USA, Russia, and Yugoslavia.
Apart from bi-lateral trade agreements, Nepal is a member of two regional trade
agreements- SAFTA which came into force on 1 January, 2006 and BIMSTEC. The fact
is that while increasing in the last few years, intra-SAFTA/BIMSTEC trade has not
expanded significantly faster than total trade in this relatively open set of economies.
However, Nepal's bi-lateral trade agreements are static6 in nature. The trade agreements
have never been reviewed and assessed with any of these countries except India7. It is
now realized that a system to review/assess and update these trade treaties is necessary, if
the trade partners want to reap the benefits of such treaties in the rapidly changing global
and national context. The political and economic dimensions vis-à-vis priorities of the
countries are changing. Therefore, it is now necessary for Nepal to review and assess
trade treaties and explore potential countries and areas to be covered in the future trade
treaties.
With the adoption of new economic policy and in the light of WTO and SAFTA, the
concept of bi-lateral trade relation has gradually changed to regional and global trade
framework. The concept of bi-lateral FTAs along with regional and multi-lateral free
trade arrangements is becoming more and more crucial.
India and China are the traditional trading partners of Nepal. Before 1950, Nepal's
foreign trade was confined only to India. Nepal's trade with India formed 98 per cent of
its total foreign trade in the mid 1960s. Trade diversification policy began in early 1960s.
In subsequent years, more comprehensive measures were taken to achieve the objective
of diversification policy.
Economists believe that any country should first acquire the much-needed comparative
advantage before entering into free trade agreements. FTAs reflect the development
divide: it is the more advanced countries which have the capacity to negotiate and
4
A new Commerce Policy aimed at transforming the trade sector to make it open, competitive and market
oriented was formulated and implemented during the Eighth Plan of Nepal (1987-1992).
5
The Ninth Plan (1997-2002) sets a long-term goal of integrating the trade sector into the globalization
process by making it fully competitive and market oriented.
6
Never reviewed and updated.
7
The treaty of trade and transit between Nepal and India has been renegotiated in 2006.
13
implement such agreements. The poor and predominantly agricultural economies face
inflexible internal political pressure against liberalization. The fact remains that unless
and until a country improves its capacity to export more at competitive prices, there
would be little scope for it to benefit from bi-lateral, regional or multi-lateral free trade
arrangements.
In the post-liberalization era, Nepal's competitiveness in export has eroded considerably.

One of the major objectives of current trade policy has been to diversify trade by
identifying, developing, and producing new exportable products through identification of
new markets and making export trade competitive and sustainable. The government has
adopted the strategy of improvements in the existing trade treaties and transit transport
network. Special efforts to reduce transit costs are focused in its import policy.
Still Nepal's major trading partner for export is India followed by USA, Germany, Japan,
UK and so on. In import side too, India is the biggest partner followed by Singapore, UK,
Hong Kong, Saudi Arabia, Thailand and others. Unfortunately, Nepal has no bi-lateral
trade agreement with Germany, France, Canada, Italy, Japan, Singapore, Malaysia, Saudi
Arabia, Hong Kong, Thailand, and the other many major trade partners. On the other
hand, almost all the treaties, except with India, were signed quite back, i.e., before 1980.
1.2 Objectives
The basic objective of this study is to review and analyze Nepal’s existing trade treaties
and suggest new countries and dimensions that has to be covered in future trade
agreements with a view to make Nepal’s export trade competitive and sustainable. The
specific objectives of the study are as follows:
Review and analyze all the agreements (bi-lateral and regional) in which Nepal is
a contracting party,
Assess trade effects of existing regional and bi-lateral trade agreements on Nepal.
Suggest improvements/measures needed, in existing bi-lateral trade agreements,
to make them beneficial for Nepal,
Suggest new dimensions that has to be covered while updating or negotiating on
existing trade agreements,
Suggest name of new countries, on the basis of trade potentials, Nepal should sign
trade agreements,
Suggest the content/dimensions that has to be covered in new (future) agreements,
and
Document benefits and weaknesses of bi-lateral, regional and multi-lateral trade
arrangement and suggest the best way to follow.
1.3 Methodology and Data Base

The study is an analytical study based on secondary data. The published as well as
unpublished relevant literature has been used to review the regional and bi-lateral trade
14
agreements. Data published by various government and non-government organizations
has been used to analyze the situation. Economic surveys, budget speeches and plan
documents published by Ministry of Finance and statistical year book and other reports
published by Central Bureau of Statistics and National Planning Commission are the
major sources of statistical information. Quarterly Economic Bulletin published by Nepal
Rastra Bank (Central Bank of Nepal) is another source. Apart from this, reports published
by international organizations like the World Bank, the IMF, UNDP etc. are also used. To
make the study more relevant, discussions have been held with the appropriate
representatives of the government (e.g. Ministry of Industry, Commerce and Supplies and
Nepal Rastra Bank etc.); private business (e.g. FNCC); and international organizations.
1.4 Organization of the Chapters

The study is divided into five chapters. It begins with a brief picture of trade
liberalization and its theoretical debate at various levels multi-lateral, regional, and bi-
lateral along with Nepalese experience. Chapter two analyzes the historical background
of trade liberalization particularly in the context of developing countries and Nepal. It
further includes the various policy instruments introduced under trade liberalization by
the government. Nepal’s export and import trade performance by composition, partners,
and direction has been analyzed in chapter three. Chapter four reviews the various bi-
lateral and regional trade and transit agreements. Finally, chapter five examines the new
dimensions and future prospects of Nepal’s bi-lateral and regional trade agreements.
15
Chapter Two
Trade Liberalization Initiatives
2.1 Trade Liberalization: Historical Background
in terms of free flow of goods and services, technology and information. The ideology of
the global spread of market relations, in the real sense, is not something new. Adam
Smith had laid the theoretical basis for modern market economy or liberalism in his work
The Wealth of Nations in 1776. He provided profound basis for limiting the role of
government and promoting private economic activities to maximize national wealth.
From then on libertarian economists assiduously put forward the case for elimination of
whatever restrictions the governments had placed on free operation of markets. It was
only because of the shock of the Great Depression in the early 1930s that the libertarians
were dumbfounded. As a consequence Keynesian liberalism with its insistence on public
investment found takers even amongst the orthodox economists. Keynesianism had its
heyday for a quarter of a century after the end of the Second World War.
The developing countries faced serious economic difficulties on account of mainly

external factors related to the two oil price shocks in 1973 and 1979. To cope with crises
of macro-economic imbalances: rising fiscal deficits, balance of payment deficits and
repressed inflation in developing countries, the IMF and the World Bank prescribed their
Stabilization and Structural Adjustment (SAP) program in 1980s to assist member
countries. These programmes bolstered up the strength of the ideology of globalization,
that is, the long-term market-oriented policy. As a result, deregulation of domestic goods
market by withdrawal of price control, liberalizing the trade regime, i.e., deregulation of
the economy by lowering all types of tax and tariff rates, reducing the government
expenditure by phasing out of all kind of subsidies, privatization of state-owned
enterprises, etc., are taken as the mechanism of liberalization and globalization.
Trade liberalization has become the cornerstone of economic reform strategies

throughout the world. The process of trade liberalization involves the phasing out of
barriers to trade by the conversion of non-tariff barriers into tariff equivalents
(tariffication), reduction of tariff rates, export promotion and devaluation of the currency.
2.2 Nepalese Context
Economic globalization of Nepal is synonymous with the advent of the New Economic
Policies (NEP) and may be defined as the integration of the national economy with the
global economy in terms of free flow of ideas, goods and services, technology and
information. Actually, the Nepalese economy has been globalizing for a long time. Nepal
virtually had free trade policy even before 1935. There was no intervention in trade and
investment activities before an agency called Udyog Parishad was created in 1935 to
16
develop the basic industries. Another attempt at opening up the Nepalese economy was
initiated in 1950. This was the period of Rana regime when the country was thrown open
to tourists and merchandise imports from overseas countries were allowed. International
trade relation was established with India and China. Nepal began to accept foreign aid, in
terms of grants and loans, for the purpose of development. Nepal started developing and
expanding international relations and became a member of a number of multi-lateral
institutions.
The Panchayat government after the political referendum of 1980 followed an

expansionary fiscal policy to accelerate the pace of economic growth in the country. As a
result, Nepal suffered three consecutive years of BOP deficits around early 1980s. The
budget deficit reached as high as 12 per cent of GDP. It was largely financed by printing
money. This process accelerated the inflation. The foreign exchange reserves started to
decline. To improve the situation, the government approached IMF for support in 1985.
In December 1985, the IMF suggested the implementation of stabilization programme
and subsequently a series of measures were undertaken.
Nepal was characterized by the interventionist approach of economic policies for a

prolonged period of time. Government regulation and large scale public investments were
major policies followed in the 1960s, 1970s, and early 1980s. The basic emphasis was on
import substitution and export pessimism was widely prevalent. The trade policy was
highly protectionist and regulated through quantitative restrictions on imports. The tariff
rates were very high. It was believed that restricted imports would save foreign exchange
and stimulate domestic output.
During that period, Nepal's trade region was more or less free with India and controlled
with rest of the world. Imports from overseas countries were restricted through tariff
walls and quantitative restrictions but exports were more or less free. In the early 1990s,
after the restoration of democracy, trade policy was changed with the new trade policy
1992. After that, the trade policy became freer. The ISI was replaced by an export led
economic growth and imports were made free to assist exports. Following the ideology of
NEP to integrate Nepalese economy with world economy, Nepal became the member of
the WTO in the fifth ministerial conference of WTO held on 10-14 September 2003 at
Cancun, Mexico.
First the government started its NEP programme with a three-year loan agreement with
the IMF and contracting for a structural adjustment credit, popularly known as Structural
Adjustment Loan (SAL I), from the World Bank covering the period from 1986/87 to
1988/89. The purpose of SAL I was to accelerate the growth rate, stabilize the price
levels and correct the balance of payment. Following this, the World Bank provided a
SAL II of Rs. 4.1 billion (US$ 60 million) for a three year period effective from August
1989. Its main purpose was to improve the allocation of public and financial resources
and increase the participation of private sector.
After restoration of multi-party democracy in Nepal in 1990, Nepal accelerated the

process of economic globalization. The newly elected government of the Nepali Congress
17
implemented NEP with a new arrangement with the IMF and the World Bank under
Enhanced Structural Adjustment Facility (ESAF) in 1992 which is generally known as
“Second Generation of Economic Reform”. After that the government has been launching
a comprehensive programme of NEP in almost all the sectors of the economy as
advocated by Washington Consensus.
Effective from July 1993, the government abolished the system of foreign exchange
auction for merchandise imports of industrial raw materials and put everything under
Open General Licensing (OGL) system except for a few contraband items. Prior to the
OGL, Nepal controlled imports to protect domestic industries especially from overseas
countries through QR and tariff rates. With adoption of economic stabilization
programme of the IMF in 1985, the Nepali currency was devalued by 14.7 per cent
against US dollar on November 30, 1985. QRs have been completely abolished.
Nepal used to impose high tariff rates to control imports with the aim to raise government
revenue, protect infant industries, and reduce consumption of luxury commodities and to
check BOP deficits. Under NEP, Nepal started to reduce the tariff rates. Additional duties
were also eliminated. Earlier peak tariffs rates were as high as 300 per cent. The rate was
reduced to 80 per cent in the fiscal year1997-98. Now the tariffs rates have been brought
down to 5-20 per cent (Ministry of Finance, 2005-06).
Before adoption of NEP, Nepal had taken many measures to boost export such as export
subsidy, dual exchange rate system and bonus system. With the implementation of NEP,
these measures were withdrawn and new measures were introduced. The new measures
are: export duty drawback system and bonded warehouse scheme. Both the measures are
believed to benefit carpet and garment industry.
The export duty drawback system was introduced in 1987. Under this system, both
import tax and sales tax paid on imported inputs will be refunded to the exporters. The
bonded warehouse scheme introduced in 1980 has also the provision to refund the taxes
imposed on imported raw materials. Recently Nepal has introduced VAT in which
exports are zero-rated. Taxes level on inputs of goods and services used in the production
of exportable commodities are refunded.
2.3 Liberalization Outcomes
Along with Sri Lanka, Nepal has the most liberalized trade policy in South Asia.
Following trade liberalization in the early 1990s, Nepal’s exports grew at an average
annual rate of 15 per cent throughout the decade. Despite significant structural changes in
its merchandise exports over the last two decades, Nepal’s narrow export basket and
concentration of exports to only a few countries has made it more vulnerable. A further
challenge is posed by the phasing out of the Multi-Fibre Arrangement (MFA) in 2005,
whose quotas enabled significant growth of ready-made garments exports. Weak demand,
quality problems, and concern in importing countries over child labour in certain
18
factories adversely affected Nepal’s major carpets export. Exports of ready-made
garments, which benefited from preferential treatment under the Multi-fibre Arrangement
(MFA), suffered due to international trade regulations changed and the industry’s
inability to compete with exporters from other South Asian countries.
Despite a rigorous efforts by Nepal in the 1970s to diversify its foreign trade partners,
Nepal’s dependence on India has recently increased sharply due to the preferential trade
treaty signed in December 1996, a slowdown in exports to other key markets and limited
success in penetrating regional markets.
While the renewed Nepal-India Trade Treaty 2007 continues Nepal’s customs duty-free
access to India in principle, it also continues the restrictive provisions imposed in 2002:
more stringent RoO, TRQs, clear specification of safeguard clauses etc. This change in
policy, from virtual free trade to one with a number of restrictions, has had an immediate
negative effect on Nepal’s export performance with India. Nepal’s increased dependence
on India has elevated risks arising from Indian policy shifts.
Nepal’ exports have played a positive role since the 1986-90 period. During this period,
their contribution to economic growth increased to 10 per cent, from 2 per cent for the
previous period (1976-85). Exports were an engine of economic growth during the 1990s,
particularly during the period after economic reforms, 1991-95 (MoICS, 2003).
Nepal has comparative advantage in a number of labour-intensive manufacturing and

agricultural products. Despite economic liberalization and growth of trade in the 1990s,
the competitiveness of Nepal’s economy is very low. Three key factors contribute to low
price competitiveness and productivity in Nepal’s economy: inadequate mechanisms and
incentives for firms to acquire new technology, weak infrastructure, and an unfavourable
business climate. Nepal’s geography is a major constraint to realizing its trade potential.
However, there is considerable scope to improve its competitiveness.
19
Chapter Three
Nepal’s Trade Performance

A significant consequence of Nepal’s land-locked position is its special trading
relationship with India and lack of convenient access to any third country. The
relationship has many advantages for Nepal but has constrained Nepal’s ability to pursue
an independent trade policy. It compels Nepal to depend on India for transit route and
many essential commodities of day-to-day needs. India is the only country which
provides transit facilities to Nepal. The nearest port for Nepal is the Indian port at
Calcutta which is 890 Kms. away from Kathmandu.
Nepal is situated between two giant countries, India in the south, east and west and China
in the north. Being a land-locked country, anything Nepal wants to import or export must
pass either through India or by air. A road connection with the peoples’ Republic of
China exists but extensive trade contacts are inhibited by the high costs and seasonal
nature of road transport through Himalayas. Like many other land-locked countries,
transport cost of Nepal’s overseas exports as well as imports is very high. Therefore,
trade and transit facilities offered by India play a significant role in making Nepal’s
external trade viable.
3.1 Direction and Composition of Nepal’s Foreign Trade
For a long time, Nepal’s foreign trade has largely been confined to India because of close
proximity, similar socio-economic condition and availability of transport facilities. The
volume of Nepal’s foreign trade with India in terms of both exports and imports has been
increasing enormously. It is because of the increasing demand of various types of
industrial raw materials, machinery and petroleum products in order to run various types
of developmental works and consumer goods to fulfil the requirements of fast growing
population.
20
Table 3.1
Direction of Nepal’s Foreign Trade (Rs. in million)
Fiscal Exports Imports Trade Deficit
Year
Total To India % to Total From % Total With %
India India from India with
India India
1960-61 209.7 209.2 99.8 398.0 375.1 94.2 188.3 165.9 88.1
1965-66 375.1 370.5 98.8 782.0 763.5 97.6 406.9 393.0 96.6
1970-71 400.5 395.2 98.7 699.1 61,6.8 88.2 298.6 221.6 74.2
1975-76 1,185.8 893.7 75.4 1,981.7 1,227.1 61.9 795.9 333.4 41.9
1980-81 1,608.7 992.4 61.7 4,428.2 2,179.0 49.2 2,819.5 1,186.6 42.1
1985-86 3,078.0 1,241.1 40.3 9,341.2 3,970.9 42.5 6,263.2 2,729.8 43.6
1990-91 7,387.5 1,552.2 21.0 23,226.5 7,323.1 31.5 15,839.0 5,770.9 36.4
1995-96 19,881.1 3,682.6 18.5 74,454.5 24,398.6 32.8 54,573.4 20,716.0 38.0
1996-97 22,636.5 5,226.2 23.1 93,553.4 24,853.3 26.6 70,916.9 19,627.1 27.7
1997-98 27,513.5 8,794.4 32.0 89,002.0 27,331.0 30.7 61,488.5 18,536.6 30.1
1998-99 35,676.3 12,530.7 35.1 875,23.3 32,119.7 36.7 51,847.0 19,589.0 37.8
1999-00 49,822.7 21,220.7 42.6 108,504.9 39,660.1 36.5 58,682.2 18,439.4 31.4
2000-01 55,654.1 26,030.2 46.8 115,687.2 45,211.0 39.1 60,033.1 19,180.8 31.9
2001-02 46,944.8 27,956.2 59.5 107,388.9 44,117.1 41.1 60,444.1 16,160.9 26.7
2002-03 59.8
49930.6 26430.0 52.9 124352.1 70924.2 57.0 74421.5 44494.2
2003-04 58.2
53910.7 30777.1 57.1 136277.1 78739.5 57.8 82366.4 47962.4
2004-05 54.8
58705.7 38916.9 66.3 149473.6 88675.5 59.3 90767.9 49758.6
2005-06 66.4
60074.8 41012.6 68.3 162840.7 109305.9 67.1 102765.9 68293.3
Source: Quarterly Economic Bulletin, Nepal Rastra Bank and Trade Promotion Centre
Table 3.1 summarizes the direction of the foreign trade from 1960-61 to 2005-06. The
Table reveals that in the end of the first plan (1960-61), Nepal’s export to India was 99
per cent of its total exports and imports from India was 94 per cent of its total imports.
Nepal’s trade with India formed 98 per cent of its overall foreign trade in the mid-1960s.
Till the 1960s, Nepal was importing almost all of its requirements from India and exports
all of its exportable items to India.
21
To remove the over-dependence on India, Nepal introduced various policies and schemes
to diversify its trade to overseas countries. Nepal’s exports as well as imports from India
started declining significantly from the year 1970-71. By 1975-76, Nepal’s exports to
India decreased to 75 per cent of its total exports and its imports from India to 62 per
cent. Further, share of Nepal’s exports to India declined to 18 per cent in 1995-96 and
share of imports from India declined to 26 per cent by 1996-97.
The direction and structure of Nepalese trade has changed significantly during the last
decade. The reversal trend was experienced in the Nepal’s trade with India since 1997-
98. India is again emerging as the top destination of Nepalese trade. Nepal’s export to
India has recorded over 26 fold jump during the period of one and half decade from
1990-91 to 2005-06. Nepal’s export to India has increased from 21 per cent to 68 per cent
during the period. Nepal’s import from India, as well, has recorded 15-fold jump during
the same period of one and half decade. It has steadily gone up from 31 per cent in 1990-
91 to 67 per cent in 2005-06. This heavy jump in external trade of Nepal with India might
be associated with the regional process of trade liberalization and the reforms in the
foreign trade regime in the both countries.
Nepal’s trade deficit with India increased almost 412 fold from Rs. 166 million in 1960-
61 to Rs. 68 billion in 2005-06 (Table 3.1). The important factors in Nepal’s ever
increasing balance of trade deficit with India are: an emerging system of unequal
exchange, importing expensive items like cement, steel, petroleum products, cotton
textile, machinery and transport equipments and exporting cheaper items like ghee, jute
goods, raw agricultural products etc. However, to control its trade deficit, there is vast
scope of expanding the exports of Nepalese products like hydroelectricity, horticulture
and floriculture products, jute products, forest products, handicrafts etc.
Nepal has been trapped in trade deficit not only with India but also with overseas
countries. An increasing trend of trade deficit is a serious issue for Nepal. Without
increasing export capabilities and controlling the import of luxury goods, it is difficult to
overcome the problem of trade deficit of the country.
Nepal has been exporting and importing variety of goods and services of their
requirement to and from many countries for long time. Before nineteenth century,
Nepal’s foreign trade was largely confined to India. Nepal’s imports from India consisted
of main items like tobacco, spices, metals etc. and some luxury items like Malmal and
Dopatta (then high quality textile). Nepalese exports consisted mainly of agricultural and
forest products. The composition of Nepalese exports even today has not been diversified
except few products while composition of import has changed tremendously.
The growth rate of Nepalese exports and imports has been fluctuating quite significantly.
Growth rate of exports has been exceeding growth rate of imports since 1993-94. The
22
year 1995-96 has again reversed that trend. Growth rate of imports has been faster than
the growth rate of exports in general. This observable fact shows the fragile export
performance and mounting import requirement of Nepalese economy. Low level of
development is mainly responsible for this type of situation in the trade matters.
There have been major structural changes in Nepal’s merchandise exports in the past two
decades but it still depends on a few goods and a few markets. The export share of
primary products has fell down from about 70 per cent in 1980s to around 15 per cent in
2006 and the share of manufactured products has increased from 30 per cent to above 75
per cent during the same period. On the other side, no significant changes have occurred
in Nepal’s import structure. Machinery and transport equipments, intermediate goods and
food and fuels are the major imports.
3.2 Nepal's Export Trade: Partners and Commodities
The leading export partners of Nepal have been India, USA, Germany, United Kingdom,
Belgium, France, Japan, Bangladesh, Peoples’ Republic of China, Hong Kong,
Switzerland, Spain, Italy and Canada over the last few years. As of 2005/06, around 85
per cent of its exports go to India, the United States, and Germany. India has been the
major country to import from Nepal from the very beginning. The USA stands to be the
second country in Nepal’s export followed by Germany and other countries for the last
couple of years.
23
Table 3.2
Major Export Trade Partners of Nepal
S. Countries Value in Million Rs. %

N 2001/02 2002/03 2003/04 2004/05 2005/06 01/02 02/03 03/04 04/05 05/06
1 India 27,956 26,430 30,777 38,917 41,013 59.0 52.9 57.0 66.6 68.3
2 U.S.A 9,378 12,686 9,696 7,571 6,993 19.8 25.4 18.0 13.0 11.6
3 Germany 4,043 3,555 3,567 3,122 2,844 8.5 7.1 6.6 5.3 4.7
4 France 473 454 582 618 1,297 1.0 0.9 1.1 1.1 2.2
5 U.K 809 1,071 1,677 1,051 1,184 1.7 2.1 3.1 1.8 2.0
6 Italy 567 531 589 583 712 1.2 1.1 1.1 1.0 1.2
7 Canada 306 384 546 529 645 0.6 0.8 1.0 0.9 1.1
8 Japan 493 474 526 535 572 1.0 0.9 1.0 0.9 1.0
9 Singapore 146 86 57 44 322 0.3 0.2 0.1 0.1 0.5
10 Switzerland 383 263 306 316 318 0.8 0.5 0.6 0.5 0.5
11 Belgium 295 230 261 319 309 0.6 0.5 0.5 0.5 0.5
12 Spain 154 200 206 223 283 0.3 0.4 0.4 0.4 0.5
13 Turkey 12 89 264 233 278 0.0 0.2 0.5 0.4 0.5
14 Bhutan 27 52 78 150 238 0.1 0.1 0.1 0.3 0.4
15 Bangladesh 237 411 421 291 234 0.5 0.8 0.8 0.5 0.4
16 Netherlands 182 240 286 242 229 0.4 0.5 0.5 0.4 0.4
17 Pakistan 62 74 278 229 186 0.1 0.1 0.5 0.4 0.3
18 U.A.E 127 58 81 154 165 0.3 0.1 0.2 0.3 0.3
19 Australia 60 82 97 101 154 0.1 0.2 0.2 0.2 0.3
20 Hongkong 61 87 77 129 112 0.1 0.2 0.1 0.2 0.2
21 China P. R. 19 31 117 53 108 0.0 0.1 0.2 0.1 0.2
22 Austria 122 60 89 102 100 0.3 0.1 0.2 0.2 0.2
23 Sweden 52 53 97 56 98 0.1 0.1 0.2 0.1 0.2
24 Denmark 25 27 128 88 81 0.1 0.1 0.2 0.2 0.1
25 Taiwan 44 46 51 67 70 0.1 0.1 0.1 0.1 0.1
26 Thailand 56 82 102 78 40 0.1 0.2 0.2 0.1 0.1
27 Norway 18 15 17 32 30 0.0 0.0 0.0 0.1 0.0
28 Mexico 16 27 17 35 26 0.0 0.1 0.0 0.1 0.0
29 Korea R. 59 53 62 36 25 0.1 0.1 0.1 0.1 0.0
30 Portugal 32 414 29 438 13 0.1 0.8 0.1 0.7 0.0
Sub Total 46,214 48,265 51,081 56,342 58,679 97.5 96.5 94.7 96.4 97.7
Other
Countries* 1,171 1,742 2,804 2,104 1,393 2.5 3.5 5.2 3.6 2.3
Grand 47,385 50,007 53,949 58,446 60,072
Total 100.0 100.0 100.0 100.0 100.0
Note: - Trade with India for the F.Y. 2005/06 is provisional.
*Including Exports to Tibet, Autonomous Region of People's Republic of China
Source: Trade Promotion Centre
In past few years, Nepal’s exports to India have increased significantly (Table 3.2). This
rise is due to long open border leading to free movement of people and capital, the
preferential trade treaty and special payments regime between the two countries,
slowdown in exports to other key markets, and limited success in penetrating other
regional markets (Karmacharya, 2005).
24
Table 3.3
Nepal's Export to SAARC/BIMSTEC Countries (Value in Million NRs.)
Country 2001/02 2002/03 2003/04 2004/05 2005/06
Value % Value % Value % Value % Value %
India 27,956 97.7 26,430 96.5 30,777 95.7 38,917 85.9 41,013 93.4
Bangladesh 237 0.8 411 1.5 421 1.3 291 0.6 234 0.5
Bhutan 27 0.1 52 0.2 78 0.2 150 0.3 238 0.5
Maldives 1 (.) (.) (.) (.) (.) (.) (.) (.) (.)
Pakistan 62 0.2 74 0.3 278 0.9 229 0.5 186 0.4
Sri Lanka 261 0.9 325 1.2 505 1.6 5,612 12.4 2,207 5.0
Afghanistan (.) (.) 12 (.) 15 (.) 6 (.) (.) (.)
Thailand 56 0.2 82 0.3 102 0.3 78 0.2 40 0.1
Myanmar (.) (.) (.) (.) (.) (.) (.) (.) (.) (.)
Total Export to
SAARC/BIMS
TEC
28,600 100.0 27,386 100.0 32,176 100.0 45,283 100.0 43,918 100.0
Total Export 47,385 50,007 53,949 58,446 60,072
Export to
SAARC/BIMS 59.0 52.9 57.0 66.6 68.3
TEC (In %)
Note: (.) means negligible
The share of Nepal’s export to SAARC/BIMSTEC member countries was 59 per cent of
the total export trade in 2001-02. The share gradually increased over the last few years
and stood at 68 per cent in 2005-06 (Table 3.3). Among the SAARC/BIMSTEC member
countries, India has been the major country to import, i.e., importing more than 90 per
cent of its total export to SAARC/BIMSTEC countries. Thailand has been the second
after India to import from Nepal in this region. Besides, Nepal also imports from
Pakistan, Sri Lanka and Bhutan at a very low scale. In recent years, Maldives has also
started to import from Nepal. However, Nepal’s export to other SAARC/BIMSTEC
countries have accounted for only about 10 per cent of its exports to SAARC/BIMSTEC
countries and about 1 per cent of is total exports.
Nepal’s export products include various goods. The major export products have been
readymade garments, woollen carpets, woollen and pashmina goods, vegetable ghee,
toothpaste, jute and jute goods, pulses, polyester yarns, hide skins and handicrafts (Table
3.4 and 3.5). Manufactured exports are concentrated in garments, carpets, and pashmina.
Woollen carpets used to be the prime export and readymade garments have been another
major export. The other commodities include: cotton, hide and skins, gold and silver
ornaments, pulses, handicrafts, tea, cardamom, herbs, ginger seeds and perfume oil.
25
Table 3.4
Exports of Major Commodities to India
S. Major Value in Million Rs. %
N Items 2001/02 2002/03 2003/04 2004/05 2005/06 01/02 02/03 03/04 04/05 05/06
1 Aluminim
Section 220 255 381 879 894 0.8 1.0 1.2 2.3 2.2
2 Cardamom 360 470 451 607 608 1.3 1.8 1.5 1.6 1.5
3 Chemicals 87 149 610 1,408 1,058 0.3 0.6 2.0 3.6 2.6
4 G.I. Pipe 166 357 556 424 519 0.6 1.4 1.8 1.1 1.3
5 Ghee
(Vegetable) 7,081 3,812 2,959 4,636 3,862 25.3 14.4 9.6 11.9 9.4
6 Juice 453 600 787 1,091 1,140 1.6 2.3 2.6 2.8 2.8
7 Jute
Goods 1,630 1,899 1,883 2,694 2,637 5.8 7.2 6.1 6.9 6.4
Plastic
8 Utensils 771 808 1,192 1,362 808 2.8 3.1 3.9 3.5 2.0
9 Polyester
Yarn 1,070 657 1,115 1,896 3,475 3.8 2.5 3.6 4.9 8.5
10 Pulses 1,006 880 579 667 637 3.6 3.3 1.9 1.7 1.6
11 Readymade
Garment 214 399 627 366 1,137 0.8 1.5 2.0 0.9 2.8
12 Textiles 563 878 1,781 2,997 2,155 2.0 3.3 5.8 7.7 5.3
13 Thread 847 1,235 1,637 2,214 1,898 3.0 4.7 5.3 5.7 4.6
14 Tooth
Paste 1,607 1,003 1,479 1,283 731 5.7 3.8 4.8 3.3 1.8
15
Wire 252 151 711 1,221 1,504 0.9 0.6 2.3 3.1 3.7
16 Zinc sheet 13 971 2,785 1,663 2,409 0.0 3.7 9.0 4.3 5.9
Sub Total 16,339 14,524 19,532 25,407 25,472 58.4 55.0 63.5 65.3 62.1
Other
Items 11,617 11,906 11,245 13,510 15,541 41.6 45.0 36.5 34.7 37.9
Total 27,956 26,430 30,777 38,917 41,013 100.0 100.0 100.0 100.0 100.0
Note: Data for fiscal year 2005/06 is provisional
Source: Quarterly Economic Bulletin, Nepal Rastra Bank
Primary products constitute an overwhelming share of Nepalese exports to India. These

are limited to pulses, live animals, jute, ginger, ghee and herbs. Although the share of
manufactured goods has been increasing, it is still limited. In last few years it is increased
significantly.
The traditional Nepal’s exports to India consisted of agricultural and forest products, i.e.,
rice, ghee, animals, foodstuffs and wood have been declining because of the increasing
demand of food items at home for domestic consumption (according to population census
2001, the rate of population growth is 2.25 per cent per annum (CBS, 2001) whereas the
rate of growth of food production is below 2 per cent), the rapid deforestation and
destruction of forest resources, and Nepal’s inability to compete with products of other
countries in Indian market.
26
Table 3.5
Exports of Major Commodities to Other Countries
S. Major Items Value in Million Rs. %
N 2001/ 2002 2003/ 2004/ 2005/ 01/02 02/03 03/04 04/05 05/06
02 /03 04 05 06
1 Handicraft (Metal and
Wooden) 234 352 626 644 333 1.2 1.5 2.7 3.3 1.7
2 Herbs 25 33 48 55 13 0.1 0.1 0.2 0.3 0.1
3 Nepalese Paper & Paper
Products 201 262 280 240 256 1.1 1.1 1.2 1.2 1.3
4 Nigerseed 13 11 9 0 7 0.1 0.0 0.0 0.0 0.0
5 Pashmina 1,245 1,158 1,064 1,050 1,576 6.6 4.9 4.6 5.3 7.8
6 Pulses 216 215 281 107 191 1.1 0.9 1.2 0.5 0.9
7 Readymade Garments 7,833 11,890 9,550 6,125 6,170 41.3 50.6 41.3 30.9 30.6
8 Readymade Leather
Goods 56 33 31 30 14 0.3 0.1 0.1 0.2 0.1
9 Silverware and
Jewelleries 274 348 369 363 282 1.4 1.5 1.6 1.8 1.4
10 Tanned Skin 465 227 309 236 286 2.4 1.0 1.3 1.2 1.4
11 Tea 26 45 114 107 107 0.1 0.2 0.5 0.5 0.5
12 Woolen Carpet 6,213 5,320 5,678 5,869 5,825 32.7 22.6 24.5 29.7 28.9
Other Items 2,188 3,607 4,776 4,965 5,095 11.5 15.4 20.6 25.1 25.3
Total 18,989 23,501 23,134 19,789 20,155 100.0 100.0 100.0 100.0 100.0
3.3 Nepal Import Trade: Partners and Commodities

Nepal imports its commodity requirements from different countries. India, Peoples’
Republic of China, Singapore, Indonesia, Thailand, Malaysia, Saudi Arabia, Japan,
Germany, Republic of Korea, Hong Kong, and New Zealand have been the major import
trade partners of Nepal. However, like exports, India has been the country from where
Nepal imports its major part.
27
Table 3.6
Major Import Trade Partners of Nepal
S. Countries Value in Million Rs. %
N 2001/02 2002/03 2003/04 2004/05 2005/06 01/02 02/03 03/04 04/05 05/06
1 India 56,622 70,924 78,739 88,675 109,306 52.1 55.3 58.0 59.8 67.1
2 China P.R. 4,316 4,760 5,434 8,254 6,635 4.0 3.7 4.0 5.6 4.1
3 Indonesia 2,878 3,977 3,254 5,223 5,648 2.6 3.1 2.4 3.5 3.5
4 Singapore 7,347 9,039 8,699 7,747 3,375 6.8 7.0 6.4 5.2 2.1
5 Germany 1,670 2,278 1,978 1,571 2,762 1.5 1.8 1.5 1.1 1.7
6 Thailand 3,278 2,989 4,320 3,118 2,602 3.0 2.3 3.2 2.1 1.6
7 Malaysia 4,818 4,010 3,676 2,821 2,475 4.4 3.1 2.7 1.9 1.5
Saudi
8 Arabia 3,655 2,364 2,548 3,138 2,330 3.4 1.8 1.9 2.1 1.4
9 Japan 2,179 1,891 1,690 2,565 1,935 2.0 1.5 1.2 1.7 1.2
10 Korea R. 2,501 3,380 3,081 2,784 1,789 2.3 2.6 2.3 1.9 1.1
11 U.S.A 2,526 1,708 1,433 1,764 1,677 2.3 1.3 1.1 1.2 1.0
12 Australia 671 721 1,271 1,521 1,415 0.6 0.6 0.9 1.0 0.9
13 Brazil 150 19 293 839 1,166 0.1 0.0 0.2 0.6 0.7
14 U.A.E 381 583 408 772 1,096 0.4 0.5 0.3 0.5 0.7
New
15 Zealand 929 1,422 1,284 1,230 1,019 0.9 1.1 0.9 0.8 0.6
16 Argentina 443 919 1,115 950 1,005 0.4 0.7 0.8 0.6 0.6
17 U.K. 837 1,065 1,035 1,452 961 0.8 0.8 0.8 1.0 0.6
18 Hongkong 2,461 2,277 1,641 1,286 931 2.3 1.8 1.2 0.9 0.6
19 France 706 1,590 675 668 910 0.6 1.2 0.5 0.5 0.6
20 Russia 548 240 227 672 900 0.5 0.2 0.2 0.5 0.6
21 Canada 263 407 688 277 715 0.2 0.3 0.5 0.2 0.4
22 Ukraine 64 64 55 696 611 0.1 0.0 0.0 0.5 0.4
23 Taiwan 713 1,267 1,175 826 568 0.7 1.0 0.9 0.6 0.3
24 Switzerland 452 555 242 222 491 0.4 0.4 0.2 0.1 0.3
25 Qatar 84 119 162 234 482 0.1 0.1 0.1 0.2 0.3
26 Denmark 322 342 339 246 306 0.3 0.3 0.2 0.2 0.2
27 Netherlands 192 254 229 377 304 0.2 0.2 0.2 0.3 0.2
28 Guatemala 8 259 310 284 252 0.0 0.2 0.2 0.2 0.2
29 Belgium 398 1,444 1,126 824 240 0.4 1.1 0.8 0.6 0.1
30 Hungary 4 61 212 243 9 0.0 0.0 0.2 0.2 0.0
Sub Total 101,416 120,928 127,339 141,279 153,915 93.4 94.3 93.7 95.3 94.5
Other 7,219 7,297 8,497 7,015 8,925
Countries* 6.6 5.7 6.3 4.7 5.5
Grand 108,635 128,225 135,836 148,294 162,840
Total 100.0 100.0 100.0 100.0 100.0
Note: - Trade with India for the F.Y. 2005/06 is provisional.
*Including Exports to Tibet, Autonomous Region of People's Republic of China
28
Table 3.7
Nepal's Import from SAARC/BIMISTEC Member Countries
Value in Million NRs.
Country 2001/02 2002/03 2003/04 2004/05 2005/06
Value % Value % Value % Value % Value %
India 56,622 92.9 70,924 95.1 78,739 93.6 88,675 96.1 109,305 97.2
Bangladesh 643 1.1 335 0.4 671 0.8 206 0.2 105 0.1
Bhutan 85 0.1 36 (.) 22 (.) 32 (.) 127 0.1
Maldives (.) (.) (.) (.) (.) (.) (.) (.) (.) (.)
Pakistan 133 0.2 153 0.2 191 0.2 167 0.2 191 0.2
Sri Lanka 161 0.3 105 0.1 140 0.2 34 (.) 52 (.)
Afghanistan (.) (.) (.) (.) (.) (.) (.) (.) (.) (.)
Thailand
3,278 5.4 2,989 4.0 4,320 5.1 3,118 3.4 2,602 2.3
Myanmar 17 (.) 7 (.) 11 (.) 6 (.) 18 (.)
Total Import
from
SAARC/BIM
STEC 60,939 100.0 74,549 100.0 84,094 100.0 92,238 100.0 112,400 100.0
Total Import 108,635 128,225 135,836 148,294 162,840
Import from
SAARC/BIM
56.1 58.1 61.9 62.2
STEC (In %)
69.0
Note: (.) means negligible
Nepal’s imports from SAARC/BIMSTEC countries have increased over the years. The
major country among SAARC/BIMSTEC region to import has been India from where
more than 95 per cent of its requirements are fulfilled. Apart from India, commodities are
imported from Bangladesh and Pakistan too but the percentage of imports from these
countries is very low. Imports from other SAARC/BIMSTEC countries constitute less
than 1 per cent of its total imports.
Nepal’s imports are diversified than its exports. Nepal’s major import has been
manufactured goods, which constitute around 30 per cent of its total import. Machinery
and transport equipment stands as the second largest group to import, which constitutes
about 15 per cent. Similarly, minerals, fuel and lubricants, food and live animals,
chemical and drugs, animals and vegetable oil and fats have been the major products and
items being imported by Nepal.
29
Table 3.8
Imports of Major Commodities from India
N 2001/ 2002/ 2003/ 2004/ 2005/ 01/02 02/03 03/04 04/05 05/06
02 03 04 05 06
1 Agri. Equip. &
Parts 351 690 498 431 663 0.6 1.0 0.6 0.5 0.6
2 Baby Food & Milk
Products 399 509 428 493 567 0.7 0.7 0.5 0.6 0.5
3 Cement 2,750 2,935 2,319 2,457 1,857 4.9 4.1 2.9 2.8 1.7
4 Chemical Fertilizer 92 184 563 778 1,052 0.2 0.3 0.7 0.9 1.0
5 Chemicals 1,042 1,907 2,564 2,395 3,239 1.8 2.7 3.3 2.7 3.0
6 Coal 634 695 783 1,402 1,186 1.1 1.0 1.0 1.6 1.1
7 Coldrolled Sheet in
Coil 1,149 1,393 3,333 4,085 798 2.0 2.0 4.2 4.6 0.7
8 Cosmetics 133 410 423 512 869 0.2 0.6 0.5 0.6 0.8
9 Electrical
Equipment 801 998 1,106 1,237 1,561 1.4 1.4 1.4 1.4 1.4
10 Fruits 216 285 337 380 606 0.4 0.4 0.4 0.4 0.6
11 Hotroiled Sheet in
Coil 928 2,639 2,060 569 1,145 1.6 3.7 2.6 0.6 1.0
12 M. S. Billet 3,177 3,573 4,202 3,394 3,883 5.6 5.0 5.3 3.8 3.6
13 M. S. Wire Rod 834 939 1,339 1,537 1,065 1.5 1.3 1.7 1.7 1.0
14 Medicine 2,980 3,226 3,341 3,436 4,388 5.3 4.5 4.2 3.9 4.0
15 Other Machinery
and parts 1,723 2,572 3,295 3,956 3,472 3.0 3.6 4.2 4.5 3.2
16 Petroleum products 13,906 13,812 20,170 26,054 33,656 24.6 19.5 25.6 29.4 30.8
17 Readymade
Garments 422 445 490 809 1,027 0.7 0.6 0.6 0.9 0.9
18 Rice 226 745 556 655 2,157 0.4 1.1 0.7 0.7 2.0
19 Textiles 3,233 4,186 3,276 2,095 1,966 5.7 5.9 4.2 2.4 1.8
Thread 757 1,106 1,004 2,821 2,159 1.3 1.6 1.3 3.2 2.0
Vegetables 685 773 738 900 968 1.2 1.1 0.9 1.0 0.9
Vehiles and Spare
Parts 4,259 3,858 4,948 5,357 5,204 7.5 5.4 6.3 6.0 4.8
Sub Total 40,697 47,880 57,773 65,753 73,488 71.9 67.5 73.4 74.2 67.2
Other Items 15,925 23,044 20,966 22,922 35,818 28.1 32.5 26.6 25.8 32.8
Total 56,622 70,924 78,739 88,675 109306 100.0 100.0 100.0 100.0 100.0
30
Table 3.9
Imports of Major Commodities from Other Countries
N 2001/ 2002/ 2003/04 2004/0 2005/ 01/02 02/03 03/04 04/05 05/06
02 03 5 06
1 Aircraft Spare Parts 987 996 2,301 1,205 1,071 1.9 1.9 4.0 2.0 1.6
2 Betelnut 755 600 768 551 807 1.5 1.1 1.3 0.9 1.2
3 Computer Parts 1,771 1,420 1,274 1,122 1,320 3.5 2.7 2.2 1.8 2.0
4 Copper Wire Rods,
Scrapes & Sheets 2,095 874 969 1,249 2,089 4.1 1.6 1.7 2.1 3.2
5 Crude Palm Oil 5,821 5,056 5,277 3,582 4,051 11.5 9.5 9.2 5.9 6.2
6 Crude Soyabean Oil 1,229 1,614 2,079 1,925 1,573 2.4 3.0 3.6 3.2 2.4
7 Electrical Goods 1,572 1,444 1,616 1,300 2,580 3.1 2.7 2.8 2.1 3.9
8 M. S. Billet 0 2 68 499 917 0.0 0.0 0.1 0.8 1.4
9 Medicine 681 620 583 702 1,107 1.3 1.2 1.0 1.2 1.7
10 Other Machinery &
Parts 2,176 1,936 2,460 2,778 2,799 4.3 3.6 4.3 4.6 4.3
11 Palm Oil 289 236 309 3,035 2,788 0.6 0.4 0.5 5.0 4.2
12 Polythene Granules 2,025 2,800 2,834 2,207 3,697 4.0 5.2 4.9 3.6 5.6
13 Raw Wool 1,011 1,605 2,018 1,841 1,156 2.0 3.0 3.5 3.0 1.8
14 Telecommunication
Equip. Parts 1,066 2,359 2,484 2,510 1,686 2.1 4.4 4.3 4.1 2.6
15 Textile Dyes 11 10 11 1,329 2,096 0.0 0.0 0.0 2.2 3.2
16 Textiles 1,816 2,032 2,752 3,071 2,264 3.6 3.8 4.8 5.1 3.4
17 Threads 1,871 1,456 1,978 3,091 1,275 3.7 2.7 3.4 5.1 1.9
18 Transport Equip. &
Parts 1,814 1,685 1,626 1,908 2,124 3.6 3.2 2.8 3.1 3.2
19 Zink Ingot 596 932 1,264 1,235 2,327 1.2 1.7 2.2 2.0 3.5
Sub Total 27,586 27,677 32,671 35,140 37,727 54.3 51.8 56.8 57.8 57.3
Other Items 23,181 25,751 24,867 25,658 28,075 45.7 48.2 43.2 42.2 42.7
Total 50,767 53,428 57,538 60,798 65,802 100 100 100 100 100
Nepal’s imports from India are highly diversified and have achieved a high degree of
diversification during the last thirty years. It is because of increase in the production of
variety of manufactured goods in Indian economy. Besides certain food items and other
consumer products, electrical goods, machineries and transport equipments are added to
the import list of Nepal. The import of non-traditional goods like engineering goods,
chemical and allied products, iron ore, cement, transport equipment and machineries,
petroleum products have been increasing in order to boost the economic development of
the country while there has been decline in the share of traditional goods like livestock,
cereals, spices etc.
It is significant to mention here that there is little scope for Nepal to cut its imports from
India. At present, Nepal is importing developmental and construction goods and basic
consumer goods. Cuts in imports of fertilizer and development goods at this stage would
be damaging. Cuts in imports of petroleum products would effect the implementation of
developmental projects and the usefulness of existing road network. In the long run,
31
substitution of petroleum products by hydropower can reduce the import of petroleum
products. Therefore, Nepal has to pay more attention for the maximum exploitation of
hydropower and the production of basic consumer goods.
3.4 Unauthorized Trade
While discussing export-import aspects of Indo-Nepal trade, it is important to mention

that the volume of trade between the two countries is much bigger than the official figure
because of the 500 mile long open boarder and unrestricted movement of the people
between the two countries.
No authentic data exists in Nepal, except occasional newspaper reports, to demonstrate

the volume and extent of unauthorized trade in Nepal-India boarder. It is quite difficult to
fix up the value range since the value fluctuates frequently depending on the risks.
Studies estimate that the two-way informal trade ranges between US$368 million
(Nepalese estimate) and US$408 million (Indian estimate) in 2000-01 (Karmacharya,
2005). This growth has also been facilitated by the complete freedom of currency
movement between the two countries.
Many Indian and Nepalese citizens are responsible, either directly or indirectly, for the
growth of unauthorized trade. The effect of unauthorized trade has given rise to extensive
corruption and black marketing. There exists the administrative inefficiency and
weakness which have played instrumental roles by letting the smugglers free. The dual
citizenship of most smugglers has created problems for the administration.
32
Chapter Four
Review of Bi-lateral and Regional Trade Agreements
Trade liberalization takes place at various levels: unilateral, bi-lateral, regional and multi-
lateral. The proponents of trade liberalization claim that WTO-style liberalization is
economically the first best solution and the advantages of regional co-operation lie on the
basis of negotiation. WTO coordinates the efforts to liberalize the trade on multi-lateral
level. On regional level NAFTA, LAFTA, SAFTA aim at trade liberalization within their
regions. Presently, the European Union (EU), composed of twenty-five member states, is
the most successful and most advanced model of regional integration. It is a single
market with a common trade, agricultural, and regional policy. The union currently has a
common single market but it took time, i.e., over fifty years to remove trade barriers and
create a genuine single market in which goods, services, people, and capital move around
the member states freely and adopting a common currency. On regional level NAFTA,
LAFTA, SAFTA aim at trade liberalization within their regions. ASEAN is moving
towards establishing an ASEAN Community by 2020.
Since the initiation of trade liberalization in the mid 1980s, Nepal has continuously been
in the process of integrating the economy with the world economy through various multi-
lateral, regional, and bi-lateral trade agreements. In the recent past, the Government of
Nepal has made significant efforts to integrate the economy with global and regional
trading system. Following the ideology of NEP to integrate Nepalese economy with
world economy, Nepal became the 147th member of the WTO in the fifth ministerial
conference of WTO held on 10-14 September, 2003 at Cancun, Mexico. After that, the
trade policy became freer. Recently, Nepal has signed two regional free trade agreements:
SAFTA which came into force on 1 January 2006 and BIMSTEC free trade area
framework agreement. However, SAFTA/BIMSTEC has to work towards bridging the
development gaps among its member countries for its success as EU has done.
4.1 Regional Trade Agreements
4.1.1 SAFTA
South Asian Association for Regional Cooperation (SAARC) emerged in 1985 with the
objective to accelerate the process of economic and social development in their respective
countries through the optimal use of their human and material resources so as to promote
the welfare and prosperity of their people and to promote their life. Although the
acceleration of economic growth was incorporated in SAARC charter, the need for
entering exclusively into South Asian Economic Co-operation was recognized by
SAARC leaders in 1987 summit in Kathmandu. The Colombo Summit in 1991 declared
33
commitment to the gradual liberalization of trade in the region so that all the countries in
the region would share the benefits of trade expansion equitably.
The SAARC Preferential Trading Arrangement (SAPTA) was established in April 1993
in the seventh summit held in Dhaka and became operational in December 1995, exactly
a decade after establishment of SAARC, with the objective of liberalizing the trade
gradually in the region. The twelfth SAARC summit, held in Islamabad in 2004, has
decided to establish South Asian Free Trade Area (SAFTA, Annex II) with effect from 1st
January 2006 for a ten year period for full-fledged implementation. The agreement
contains many provisions under trade liberalization programme (Box 4.1 and Annex II).
SAFTA has to be converted into South Asian Custom Union (SACU) by the year 2015
and finally into South Asian Economic Union (SAEU) by the year 2020.
SAFTA envisages to dismantling of all tariff and non-tariff barriers to intra-regional

trade. The member countries are also agreed to harmonize tariff lines along the
internationally accepted harmonized system. The ranges of tariff concessions are 5 to 50
per cent in case of the relatively developed economies and 10 to 100 per cent in case of
the least developed economies of the region. India has unilaterally withdrawn almost all
non-tariff barriers in case of import from the members of SAARC in 1998.
Box 4.1
Trade Liberalization Programme under SAFTA: Major Elements
The tariff reduction by the Non-Least Developed Contracting States from

existing tariff rates to 20 per cent shall be done within a time frame of 2
years, from the date of coming into force of the agreement.
The tariff reduction by the Least Developed Contracting States from
existing tariff rates will be to 30 per cent within the time frame of 2 years,
from the date of coming into force of the agreement.
The subsequent tariff reduction by the Least Developed Contracting States
from 30 per cent or below to 0-5 per cent shall be done within a second
time frame of 8 years beginning from the third year from the date of coming
into force of the agreement.
Contracting parties shall eliminate all quantitative restrictions, except
otherwise permitted under GATT 1994, in respect of products included in
the trade liberalization programme.
The contracting states shall notify the SAARC Secretariat all non-tariff and
Para-tariff measures to their trade on an annual basis.
However, SAFTA was signed without agreements on issues like sensitive list, rules of
origin, mechanism for compensation on revenue losses for the LDCs, and technical
assistance. The non-tariff barriers in the region are inconsistent with the WTO provisions.
QRs were to be replaced by tariff equivalents but countries of this region are still
maintaining them. This shows that South Asian region might have compelled to accept
34
the policy against their willingness and therefore it might be difficult to achieve the goal
of SAFTA.
The SAARC Transport Minister Level meeting recently held on 31 August 2007 in New
Delhi has recommended to launch nine various roads, rail, sea, and air projects to link
SAARC member countries. The projects are recommended on the basis of the report
prepared by the Asian Development Bank (ADB) on SAARC Regional Multimodal
Transport Report. Among these nine projects, two road projects are expected to link
Nepal with India and Bangladesh. These two road projects are: Birganj-Kathiyar-
Shihabad-Rohanpur-Chatgaun and Kathmandu-Kolkata which are 1,362 and 1,323 KM
long respectively (Kantipur, 2007).
4.1.2 BIMSTEC
Nepal has become the member of another RTA, the Bay of Bengal Initiative for Multi-
Sectoral Technical and Economic Cooperation (BIMSTEC) in February 2004. BIMSTEC
is a forum for sub-regional grouping of some geographically adjoining countries in the
Bay of Bengal consisting of five SAARC member countries (Bangladesh, Bhutan, India,
Nepal, and Sri Lanka) and two member countries of ASEAN (Myanmar and Thailand).
The idea of this regional cooperation was first mooted by Bangladesh, India, Sri Lanka,
and Thailand. The purpose and principles were contained in Bangkok Declaration of 6th
June 1997 on the establishment of Bangladesh-India-Sri Lanka-Thailand Economic
cooperation (BIST-EC). The same year on December 22, 1997, Myanmar was included
to the grouping where it was decided to rename as BIMSTEC (Bangladesh-India-
Myanmar-Sri Lanka-Thailand Economic cooperation). Nepal has been participating in
various meetings of the BIMSTEC as an observer since 1998. The Sixth Ministerial
Meeting of the forum held in February 2004 in Thailand, Bhutan and Nepal were
welcomed as new members.
Article 3 of the agreement provides that products, except those included in the Negative
List, are subject to tariff reduction or elimination on the basis two tracks, i.e., fast track
and normal track. In 2004, BIMSTEC member countries agreed to establish the
BIMSTEC Free Trade Area Framework Agreement for a free trade in goods, in services
and investments (Annex III). This includes economic cooperation in Mutual Recognition
Agreements, Customs Cooperation, Trade Finance, E-Commerce, and Business and
Personal Visa Facilitation. The First Summit level meeting held in July 2004 identified
and covered six broad sectors for cooperation comprises trade and investment,
technology, tourism, transport and communication, energy, and fisheries.
The objectives of the Framework Agreement on the BIMSTEC Free Trade Area are to
strengthen and enhance economic, trade and investment and technical cooperation among
the member countries with the liberalization and promotion of trade in goods and services
creating transparent, liberal and facilitative investment regime. It also aims at exploring
new areas, develop appropriate measures for closer cooperation and facilitate more
effective economic integration of the least developed countries in the region.
35
The potential of intra-regional trade among BIMSTEC countries remain untapped
because of tariff and non-tariff barriers, poor communication and transport links, lack of
information about the supply capabilities, and so on. Similarly the intra-regional
investment is negligible despite tremendous potential both for market as well as
efficiency seeking. These hidden potential could be exploited for mutual benefit through
regional economic cooperation. The grouping could move towards the formation of
Custom Union and eventually to a Bay of Bengal Economic Community (RIS, 2004).
In BIMSTEC, each of the member countries exhibits differential capabilities in many

areas. The members have also different natural resource endowments. There is a great
scope for learning and sharing from each other in development experiences. For instance,
Bangladesh's experiments in micro-credit and in population management, Thailand's
experiences in managing globalization, Sri Lanka's experiences in social sector
development, India's development in prudent management of banking and capital markets
and in rural telecommunications and others could be exchanged for mutual advantage.
Similarly, Nepal's potential feasible hydroelectricity power capacity of around 83,000
MW (currently only around 1 per cent is being exploited) could be a large net power
producer and exporter to BIMSTEC countries and especially to India where power
demand has steadily increased over the years.
Implementation of transport linkages and physical connectivity among the member

countries would generate huge benefits. Member countries should also work towards
short route sea shipping and highway linkages and exploitation of its massive potential of
hydroelectricity. Discussions have already been held to build a trans-Asia Highway
linking the member countries and also setting up a BIMSTEC Airline connecting the
capitals and important cities of the member countries.
The Ninth BIMSTEC Ministerial Meeting held in New Delhi on 9 August 2006 has
concluded to enhance cooperation in trade and investment, tourism, and energy. The
delegates agreed to work towards the establishment of BIMSTEC Tourism Information
Centre and the BIMSTEC Tourism Fund. The delegates also agreed to establish the
BIMSTEC Energy Centre in India for strengthening cooperation in the energy sector
among the member countries.
Asia-Pacific Trade Agreement (formerly known as Bangkok Agreement), which was

signed in November 2005 by the member countries, has come into force with effect from
1st July 2006. The Bangkok Agreement is one of Asia’s oldest regional preferential
trading arrangements designed to liberalize and expand trade in the Economic and Social
Commission for Asia and the Pacific (ESCAP) region. In July 1975, seven countries
namely, Bangladesh, India, Laos, Republic of Korea, Sri Lanka, the Philippines and
Thailand met in Bangkok and agreed to a list of products for mutual tariff reduction. This
resulted in the signing of the first agreement on trade negotiations among developing
member countries of ESCAP, known as the “Bangkok Agreement” which was ratified by
five of the seven countries except the Philippines and Thailand. The People’s Republic of
China joined the Bangkok Agreement in 2001. The objectives of the Bangkok Agreement
are to promote Economic Development through a continuous process of trade expansion
36
among the developing member countries of ESCAP and to further enhance international
economic cooperation through the adoption of mutually beneficial trade liberalization
measures consistent with their respective present and future development and trade needs.
Nepal has been participating as an observer in APTA. Nepal can also get benefit by
joining this regional group.
4.2 Bi-lateral Trade Agreements

Nepal has bi-lateral trade agreements with 17 countries including India and Bangladesh
with whom it has also bi-lateral transit agreements. As of 2007, Nepal had signed bi-
lateral trade agreements with 17 countries. These countries include: Bangladesh (1976),
Bulgaria (1980), China (1981), Czech Republic (1982), Egypt (1975), India, Democratic
People's Republic of Korea (1970), Republic of Korea (1971), Mongolia (1992),
Pakistan (1982), Poland (1992), Romania (1984), Sri Lanka (1979), UK (1965), USA
(1947), Russia (1970), and Yugoslavia (1965). All the treaties, except with India, are
static and perpetual in nature. However, Nepal's trade and transit agreement with India
has been reviewed many times since the first trade agreement of 1950.
4.2.1 Indo-Nepal Trade Agreement

Due to close proximity, quite long back socio-economic and cultural relation, free border
between the two countries, India has been the largest trading partner of Nepal from the
ancient time. Trade relations between the two countries are governed by bi-lateral trade
and transit agreements and other agreements for cooperation to control unauthorized
trade. Due to its geo-situational characteristics, bi-lateral trade and treaties with India
play a significant role in the trade pattern and economic development process of Nepal.
There was no formal agreement between the two countries till 1923. Since more than 95
per cent of Nepal's trade was confined to India alone, the first trade treaty between Nepal
Government and British-India Government was signed in 1923. Although the article VI
of the treaty had the provision to use the British-Indian ports for the development of
Nepal-British trade freely, Nepal was restricted to import goods from other overseas
countries. Therefore, this treaty had an unfavourable impact on Nepalese industries
because instead of encouraging exports, Nepal was compelled to purchase goods
manufactured in Britain.
After the restoration of democracy in India and immediately after the signing of the
Treaty of Peace and Friendship in1950 between the two countries, the Treaty of Trade
and Commerce between Nepal and India signed in Kathmandu on July 31, 1950 can be
seen as the landmark towards the external trade of Nepal. It was agreed to remain the
treaty for a period of ten years and continue in force for a further period of ten years
unless terminated by either party by giving notice of not less than one year in writing.
This Treaty was modified and renewed on May 19, 1961 and August 15, 1971
respectively. The treaty incorporated provisions regarding transit facilities extended by
India for Nepal’s trade with a third country, as well as on cooperation to control
37
unauthorized trade. The treaty provided freedom of transit through the territories of the
either country without making any distinction of flag of vessels, the place of origin, entry,
exits etc.
In 1971 Treaty of Trade, the Government of India was agreed to provide access to the
Indian market free of basic custom duty and quantitative restrictions for all primary
products produced in Nepal with a Nepalese/Indian material content requirement of 90
per cent. The provision was a discouraging component for Nepal's export sector. This
was gradually reduced when the Trade Treaty was periodically renewed and in 1993, it
was brought down to 50 per cent of Nepalese/Indian material content and Nepalese
labour content. The Treaty of Trade, 1971 provided the facility of reimbursement of
excise duties and other duties levied on goods exported from India to Nepal. India
provided Haldia - another port facility for Nepalese cargos.
On March 25, 1978 in New Delhi, a new treaty with a broad objective was signed
between the two countries. Instead of a single Treaty, three different agreements were
signed: Treaty of Trade, Treaty of Transit and Agreement of Cooperation to Control
Unauthorized Trade. The treaty made the provision to exempt from basic custom duty as
well as from quantitative restrictions of primary products on a reciprocal basis with 12
primary products for preferential treatment.
In treaty of 1978 Nepal was provided an opportunity to conduct trade with third countries
through Bangladesh. Twenty one routes were made available by India to Nepal in order
to conduct trade between the two countries. Similarly, the Treaty of Transit provided for
Nepal's cargo at the ports of Calcutta and Haldia to remain there free of charge for seven
days instead of three days previously arranged. The treaty of 1978 was renewed in New
Delhi on March 21, 1983 for another five years with some modifications. The validity of
1978 Treaties of Trade and Transit expired in March 1989 leading to the termination of
all trade and transit relations to India for 15 months.
After so-called restoration of democracy and the advent of democratic government in

Nepal, these treaties have been renewed, modified and reviewed from time to time
particularly on December 6, 1991 (New Delhi), on December 3, 1996 (Kathmandu), on
March 6, 2002 (New Delhi, Annex I) and finally on March 4, 2007. The major elements
included in all the treaties between Nepal and India are:
Exemption from basic custom duties and quantitative restrictions on imports of

primary products on reciprocal basis.
Nepali manufactured goods (excluding some items on the negative list) are
granted duty free access to Indian market without quantitative restrictions on the
basis of non-reciprocity.
Manufacturing goods imported from India is granted preferential entry to Nepal,
without quantitative restrictions.
Preferential access for Nepalese manufactured exports to India is provisioned by the

Rules of Origin (RoO) that have changed over time. The 90 per cent value addition
38
requirement of the 1960 trade treaty was reduced to 50 per cent in the trade treaty of 1992
and further it was reduced to 40 per cent of ex-factory prices. Furthermore, the treaty of
trade, 1996 provided that the following articles are not being allowed under preferential
entry from Nepal to India on the basis of Certificate of Origin, i.e., the negative list of
product imported to India were shortened from seven to three items:
a. Alcoholic Liquors/Beverages and their concentrates except industrial spirits,

b. Perfumes and Cosmetics with non-Nepalese/non-Indian Brand names,
c. Cigarettes and Tobacco.
In the treaty of 2002, several restrictions were introduced consisting of more rigid RoO,
tariff rate quotas and safeguard clauses. New provisions for RoO cover domestic content
value addition requirement of 30 per cent of ex-factory prices and changes in tariff
heading (CTH) at the four-digit level of the harmonized system code. The treaty also
provided for the imposition of Tariff Rate Quotas (TRQs) for Nepalese exports. The
following Nepalese articles were allowed to get entry into India with free of customs
duties on fixed quota basis:
Table 4.1
TRQ on Nepal’s Exports
S. No. Nepalese Article Quantity in MT Per Year
1 Vegetable Fats (Vanaspati) 100,000

2 Acrylic Yarn 10,000
3 Copper Products 10,000
4 Zinc Oxide 2,500
The treaty states that imports of the above four commodities into India in excess of the
fixed quota will be permitted under normal MFN rates of duty.
The Indo-Nepal treaty was renewed in March 2007 without any revision on the
restrictions imposed by the 2002 treaty. The renewal of the treaty did not address some
key issues, such as that of non-tariff barriers that Nepal faces. It will be beneficial for
Nepal to revise some restrictions of the treaty such as stringent RoOs, quotas, and
specification of safeguard clauses. In addition, new areas of cooperation should be
explored. Since Nepal has vast amount of untapped hydroelectricity and India's steady
and high level of GDP growth is creating demand for huge amount of energy, trade in
energy, thus, is most potential to benefit both the countries. Similarly, new opportunities
in the field of services like information technology, tourism, education and health care
could be explored (SAWTEE, 2007).
39
4.2.2 Trade Arrangement with SAARC Countries
Nepal has diplomatic relations with all seven SAARC countries but has trade agreements
with only four member countries: India, Bangladesh, Pakistan and Sri Lanka. Trade
agreements with these countries were initiated after the adoption of trade diversification
policy by Nepal, especially after the establishment of Trade Promotion Centre in 1971,
only one trade promotion agency of the government of Nepal. Nepal has no trade
agreements with Bhutan and Maldives.
Among the above mentioned four member countries, Nepal has both trade and transit
agreements with India and Bangladesh. In addition, Nepal has an agreement of
cooperation with India to control unauthorized trade. Among these agreements, Treaties
of Trade and Transit with India have to be considered more important since Nepal is
bordered by India in west, east and south, and India accounts for the dominant part in
total trade of Nepal. The pattern of trade with other countries is also determined largely
by the trade relation and understanding with India. With Sri Lanka, Nepal has only trade
agreement.
Trade and payments agreement and transit agreement were signed between Nepal and
Bangladesh in Kathmandu on April 2, 1976. The objectives of the agreement were both
to promote trade between the two countries and to facilitate Nepal's foreign trade with
third countries through the ports of Bangladesh. In the protocol related to the article first
of the Transit Agreement, the government of Bangladesh has agreed to provide six
points8, i.e., two ports and four other territories of entry and exit for movement of traffic-
in-transit of Nepalese cargos by all means of transportation (TPC, 1999).
The trade agreements were signed between the governments of Nepal and Pakistan in
Islamabad and between Nepal and Sri-Lanka in Kathmandu on April 3, 1979 and on July
28, 1982 respectively. The agreements have granted provisions of MFN treatment in
respect of issuance of licenses, custom formalities, customs duties and taxes and other
charges for the import and export of goods and commodities and provision of fostering
trade delegations and fairs. All payments resulting from the deliveries of goods and
services as well as other payments can be done on any convertible currency mutually
agreed upon.
4.2.3 Trade Agreement with China
Like India, Nepal maintains trade relationship with China from primeval ages being its
northern neighbour. As of 2006, China is the second largest exporter to Nepal. Trade
agreements with former Tibetan Kingdom (presently Tibet Autonomous Region of
Peoples’ Republic of China) date back to more than thousand years entailed by formal
trade agreement (during 1960s) after the establishment of Communist regime in China
(Sharma, 2007). The Trade and Payments Agreement between People's Republic of
China and His Majesty's Government of Nepal were signed in Kathmandu on November
8
Khulna-Chalna Port, Chitagong port, Biral, Banglabandh, Chilhati and Benapole
40
22, 1981. The agreement provides three trading points9 (further Olangchung Gola/Riwo
route was opened) to utilize along their border in order to develop the trade between two
countries. The provision is subjected to revision from time to time agreed upon between
the two governments. With a view to improve the economic life of the border inhabitants,
the two countries were also agreed to carry on the traditional trade on barter basis within
an area of 30 Kilometres from the border for the border inhabitants of the two countries.
The agreement of Trade and Other Related Matters, especially aimed to support the
movement of persons, between Nepal and the Tibet, an autonomous region of China was
signed in Beijing on July 10, 2002 with a view to enhance the traditional friendly
relations between the two countries, particularly with Tibet. The agreement provides the
provision of travel to the border districts for the border inhabitants of either country for
the purpose of pilgrimage, small fairs or border trade in small volumes, visiting relatives
or friends with exit-entry passes of the border districts through the existing routes and
entry points until such routes and entry points are specified.
China, upon the request of Nepal, has taken initiatives to improve the Nepal’s terms of
trade in recent years. A preliminary trade negotiation between Nepal and China was
concluded in the beginning of 2006. It was realized to provide duty and quota-free access
of Nepalese product to China and China has offered only a little more than 200 products
(mostly of less important from Nepalese export concerns) for the preferential treatment
but there is little progress in this direction so far (Sharma, 2007).
4.2.4 Trade Agreements with Other Countries
The trade treaties of Nepal with all the seventeen countries, except with the Government
of India, are based on the MFN treatment in all matters relating to custom duties, fees and
charges to be levied on exportation and importation of commodities and with respect to
the methods of levying such duties, and charges and to the applicable rules, formalities
and charges in connection with customs management, and to the applications of internal
taxes or other charges of any kind imposed on or in connection with imported goods.
The United States of America, which is the second largest trade partner of Nepal in terms
of export and among the ten top countries in terms of import in 2006, has bi-lateral
friendship and commerce agreement dates back to April 1947 (Annex IV) in the Rana
regime, at the time even the GATT agreement was not signed. The agreement is
diplomatic rather than trade and commerce. The treaty was aimed to strengthen the
friendly relations existing between the two countries, further mutually advantageous
commercial relations between their peoples, and to maintain MFN principle in its
unconditional and unlimited form as the basis of their commercial relations. The treaty
also provides unconditional navigation facility between the two countries.
9
Kodari/Nyalam, Rasuwa/Kyerong, Yari (Humla)/Purang
41
The European Union (EU) is a political and economic community of 27 independent
sovereign countries primarily located in Europe which are collectively known as member
states: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia,
Spain, Sweden, and the United Kingdom.
The EU has a single market by a system of laws which apply in all member states,
guaranteeing the freedom of movement of people, goods, services and capital. It has also
common trade policy. In 1999, the EU introduced a common currency, the euro, which
has been adopted by 13 member states.
Several EU Member States are long-standing development partners of Nepal. In the fiscal
year 2005/06, Nepal's export to European Union region was about 16 percent of country's
total national export. Many countries of EU have been major trade partner of Nepal.
Nepal does not have trade agreement with EU. Therefore, it is an urgent need for Nepal
to make a trade agreement arrangement with EU in present context by covering both the
merchandize as well as trade in services.
4.3 Nepal's Treaty of Transit
The international trade traffic mostly moves through sea transport which is far cheaper
than other mode of transport. The lack of seaports in the inland country inflates the prices
of imports by increasing the transit costs and makes exports less competitive in the
international market. As a result, the overall performance of trade declines and the
economy deteriorates considerably.
4.3.1 Indo-Nepal Treaty of Transit
Recognizing the fact that Nepal is a land-locked country and its need to have access to
and from the sea to promote its international trade, the Indo-Nepal Treaties of Transit
(signed, renewed and reviewed from time to time in 1950, 1956, 1960, 1971, 1978, 1996,
and 1998) have made the provision to ‘traffic in transit’ freedom of transit across their
respective territories through routes mutually agreed upon. The treaties provisioned that
no distinction shall be made which is based on flag of vessels, the places of origin,
departure, entry, exit, destination, and ownership of goods or vessels.
As Nepal's trade with overseas was negligible, Article I of the 1950 Treaty provided
Nepal with 'full and unrestricted right' to use all Indian territories and ports. After the
expiry of the 1950 Treaty, a new bi-lateral Treaty of Trade and Transit was signed in
1960, which spelled out detailed transit procedures and documentation. Despite the
growing need for more free access to the sea on account of Nepal's starting of planned
development in 1956, the Treaty of 1960 restricted the movement of transit only to the
port of Kolkata. This was subsequently replaced with another Treaty of Trade and Transit
42
in 1971, which provided Nepal with covered and open space storage facilities at the port,
and specified 11 border points for the passage of transit traffic.
The Transit Treaty of 1978 provided the then newly developed port of Haldia, which is
located 120 km southwest of Kolkata, under administration of the same Kolkata Port
Trust (KPT). More importantly, the 1978 Treaty also allowed Nepal to use the
Radhikapur-Birol transit route for the regular movement of trade with and through
Bangladesh. The Radhikapur-Birol is a meter gauge rail route connecting Chittagong port
with all the meter gauge rail terminals at the India-Nepal border without requiring any
trans-shipment between railway gauges. But the distance to the Chittagong port is longer
by over 300 km in compared to the Kolkata port from Nepal border.
The 1978 Treaties of Transit and Trade expired in March 1989 leading to the termination
of all trade and transit relations to India for 15 months. During the stalemate period, only
two border points of Jogbani and Raxaul were in operation. The setback was created by
the political misunderstanding between the two countries and Nepal was pushed into
economic blockade during the period. The Radhikapur-Birol route was also kept open for
the passage of Nepal's bi-lateral traffic with Bangladesh.
The renewal of the Treaty of Trade on December 1996 which had brought notable
changes in the bi-lateral trade relations also coincided with an import change in Transit
Treaty that introduced a new system of a mere examination by the Indian Customs of
one-time-lock of containerized cargo without physical verification of the contents. On
September 1, 1997, India also allowed the additional road transit route of Kakarvitta-
Phulbari-Banglabandh for Nepal's trade with and through Bangladesh.
This Treaty was signed on January 5, 1999 between the Government of India and His
Majesty’s Government of Nepal in which 22 entry/exit points were opened along with
India-Nepal border for mutual trade.
Recently, the Government of Nepal has preliminarily negotiated with the Government of
India to use the Jawaharlal Nehru port, Mumbai as the second transit route for Nepal’s
international trade. It is estimated that the route will save around 40 per cent transit cost
of Nepalese exports and imports. The formal negotiation is in process (The Kantipur,
2007).
In consideration to the growing containerization of the world trade, development of

multimodal transport to achieve trade efficiency and the need to reduce transaction cost
in trade, Nepal implemented 'Nepal Multimodal Transit and Trade Facilitation Project'
with an objective to create three 'Inland Clearance Depot' (ICD) or Dry Port at
Biratnagar, Birgunj and Bhairahawa in 1996. The Birgunj ICD is rail-based and
connected with the Indian broad-gauge railway network.
After the conclusion of the Rail Services Agreement between Nepal and India, the
Birgunj ICD formally began to operate in July 2004 by receiving a full rake of
containerized cargo from Kolkata port. It was closed for three and half years because of
prolonged negotiations on custom procedures and management of the facility. The
43
efficient operation of the Birgunj ICD is expected to reduce the transit overhead costs by
about 30 per cent to 40 per cent. As the Birgunj ICD is designed to handle all types of
cargo, containerized, break bulk and bulk for both the bi-lateral and third country trade,
the smooth operation of the ICD is projected to enhance export competitiveness, and
reduce import prices. However, it is not operating at full capacity for various reasons: low
frequency of cargo train (twice a week), inadequate information in the schedule of cargo
etc.
The following problems are significant in the corridor between Nepal and India transit
routes:
Long transit from Kolkata to Raxaul
Higher hauling costs
Inefficiency of Kolkata/Haldia port
Administrative decentralization in India and bribes.
4.3.2 Nepal-Bangladesh Treaty of Transit
Nepal and Bangladesh have signed two separate bi-lateral agreements on Trade and
Payment and on Transit on 2 April1976. The Transit agreement and its Protocol specify
ports and entry points along with the procedural and documentation requirements for the
movement of Nepal's trade with third countries via Bangladesh. The following six entry
points have been allowed for the movement of traffic-in-transit through the ports and
other territory by all means of transportation:
1. Khulna-Chalna port,
2. Chittagong Port,
3. Biral,
4. Banglabandh,
5. Chilhati, and
6. Benapole
Khulna-Chalna and Chittagong are the sea ports and the other four places are the border
entry points located at the Bangladesh-India border. Nepal is currently using two border
crossings points at Biral and Banglabandh.
Biral, a meter gauge rail point at Bangladesh border was brought under regular use for
moving Nepal's trade traffic to and through Bangladesh after Government of India (GoI)
owed the rail connection from its border meter gauge station at Radhikapore from 1978.
Though it is longer than the Kolkata route, the chief advantage of the route is the through
movement of railway wagons between Chittaagong port of Bangladesh and the rail
terminals at the India-Nepal border without any trans-shipment on route. The rail distance
from Jogbani to Chattagong is 958 Km where as the rail distance to Kolkata is only 771
km via Katihar-Barauni, and 530 km via Katihar-New Farakka.
Nepal's long standing request to India to allow an additional short road route to
Bangladesh was realized on September 1, 1997 when GoI agreed to allow the road
44
connection from its border point of Phulbari to the Bangladesh border point of
Banglabandh. A bi-lateral agreement was signed between Government of Nepal (GoN)
and GoI on the day for the opening of Kakarvita (Nepal border), Panitanki (India border
with Nepal), Phulbari (India border with Bangladesh), and Banglabandh (Bangladesh
border with India) for the road movement of Nepal's trade with and through Bangladesh.
This border point is only 44 km from Nepal border at Kakarvita. The road route of
Phulbari-Banglabandh is allowed only for one Nepal-India border crossing point of
Kakarvita-Panitanki with the application of a separate set of transit procedures.
4.4 Agreement of Cooperation to Control Unauthorized Trade
An Agreement of Cooperation to Control Unauthorized Trade was signed between the

GoI and His Majesty’s Government of Nepal on December 6, 1991 and was further
renewed in 1996. Article I of the Agreement recognized that there is a long and open
border between the two countries and there is free movement of persons and goods across
the border. It further notes that they have the right to pursue independent foreign trade
policies. In order to protect the interest of both the countries the Article made the
provision of taking all such measures that are necessary to ensure that the economic
interests of the other party are not adversely affected through unauthorized trade between
the two countries. As per the Article II of the Agreement, both the countries agreed to
cooperate effectively with each other to prevent infringement and circumvention of the
laws, rules and regulations of either country in regard to matters relating to customs,
narcotics and psychotropic substances, foreign exchange and foreign trade.
45
Chapter Five
New Dimensions and Future Prospects

The scope and coverage of bi-lateral and regional trade agreements is expanding rapidly
in current years. Apart from merchandise trade, now the policymakers and trade
negotiators have turned their attention to cover the issues of services, investment,
intellectual property and labour mobility in PTAs, FTAs and RTAs. Agreements on these
issues are becoming common because it is argued that they have the greatest potential for
affecting incomes and trade in developing countries.
The trade policy of Nepal envisaged enhancing the contributions of trade sector to
national economy by promoting internal and international trade with the increased
participation of private sector through the creation of an open and liberal atmosphere. It
further states to diversify trade by identifying, developing and producing new exportable
products through the promotion of backward linkages for making export trade
competitive and sustainable. In order to materialize these goals, following basic policies
have been formulated:
The role of public sector will be minimized and used as a catalyst to expand the
role of private sector in trade.
A dynamic and liberal trade policy will be pursued.
Improvement of balance of payments position by promoting exports to increase
foreign exchange earnings as well as by fulfilling internal demand of economic
and quality products.
Production of quality goods and services for internal consumption as well as for
exports through effective and appropriate utilization of economic resources.
Modernizing management and technology, on promoting market and on attracting
direct foreign investment in order to identify and develop new products as well as
raise the production and quality of the traditional products.
Public sector trading corporations will gradually be privatized taking into
considerations the development and efficiency of the private sector.
Institutional development and information network as well as monitoring system
and quality improvement for the promotion of foreign trade.
Similarly, the export policy underlines the following fundamental provisions:
Production and quality of exportable products to make them competitive in the

international market
Increase and diversify exports of goods and services with objective of increasing
foreign exchange earnings.
More emphasis on the export of profitable but processed and finished products.
For the export promotion of these products, new markets will be identified.
Increase service-oriented activities to promote foreign exchange earnings.
Export of hydro-electricity on a profitable basis.
46
Export promotion will be provided on an institutionalized basis
5.1 Export Potential for Nepal
5.1.1 Carpets
The carpet/rug industry is a major source of foreign exchange and employer of more than
50,000 workers, contributing to rural and urban household incomes and poverty
reduction. The ready-made garment sector was a leading source of growth in
manufacturing output, exports, and employment. The exports of carpets declined because
quotas were eliminated by the European Union and the U.S. at the end of 2004 under the
Agreement of Textiles and Clothing and competition from China and India intensified.
Nepalese exporters also now face competition from the preferences granted to selected
African and Caribbean countries in the U.S. market.
Nepalese garment exporters have advantages, particularly low-labour costs, which may
enable them to exploit existing and emerging market opportunities. But current garments
quota allocation rules need to be changed to support efficient producers. Nepal also needs
the presence of foreign investors to increase its market access.
5.1.2 Agriculture and Forest Products
Nepal’s comparative advantage extends to a variety of Agricultural (e.g., beans, peas,

lentils, other legumes, cardamom, and nutmeg) and forest products, including medicinal
herbs and aromatics. Comparative advantage extends to a range of other areas as well like
honey, horticulture, livestock, fisheries, fibre, and off-season vegetables. However, large-
scale subsidization of agriculture in neighbouring Indian states affects border prices of
produce adversely.
5.1.3 Tourism
With huge amount of foreign exchange earnings and a high value-added component,
tourism is a key service export for Nepal. The Himalayan landscape, a wide diversity of
flora and fauna, and a rich heritage of cultural and religious sites give Nepal inherent
advantages. In the last two years, the sector has experienced a severe downturn due to
internal security concerns.
5.1.4 Tea
The tea processing industry, though currently small, is seen as a potential growth industry
for employment generation and poverty reduction to rural people in Nepal. Large areas
are suitable for tea plantations. The quality of Nepal’s tea trees is regarded to be high
leading tea to be a potentially important export. However, significant obstacles to
investment and expansion remain. These relate to weak capacity of the Tea Board
resulting from lack of clarity of its role, inadequate funding, staffing, and inadequate
47
participation of the private sector, unwieldy investment processes, and land
fragmentation. The limited transport infrastructure and underdeveloped marketing
channels further constrain tea’s potential (MoICS, 2003).
.
5.1.5 Hydropower
The potential market for selling hydropower from Nepal to India is large. India has
estimated a shortage of roughly 10,000 MW in the Northern Region at the end of the
Tenth Five-Year Plan 2007. At the same time, Nepal has a significant hydro resource
base. By 2020, Nepal’s total domestic power demand is estimated at around 1,650 MW,
compared to a hydro potential of about 83,000 MW. But the present level of exchange
between Nepal and India is limited in capacity to 50 MW per annum.
The power sector suffers from high costs. Despite a doubling of generating capacity,
supply and demand remain unbalanced, both regionally and seasonally. The generation,
transmission, and distribution of Nepal’s power utility can increase efficiency by private
sector participation. Despite much discussion, large-scale power exports to India have yet
to occur due to lack of large capital investments and inadequate regulatory framework for
private sector participation.
To achieve the above mentioned trade policy goals and export potentialities, Nepal needs
to explore new opportunities and to identify new dimensions in future trade negotiations
at various levels: multi-lateral, regional, and bi-lateral. Some of the issues which need to
be raised at regional and bi-lateral levels are discussed below.
5.2 Regional/Bi-lateral Level
5.2.1 Foreign Employment and Remittances

The trend of foreign employment is increasing in recent years due mainly to the limited
employment opportunities and widespread conflict in the country. India has been the
most popular destination for Nepalese migrants. However, migration, in recent years, has
increased dramatically with the opening up of newer markets for Nepali labour in the
Republic of Korea, Malaysia, Qatar, Saudi Arabia and other Middle Eastern countries.
Most of the workers have been sent to the Gulf countries where risk is very high and
working environment is dangerous because most of those workers are of low quality
having no suitable skills and experience. Export of quality manpower with appropriate
training is still lacking. On the other side, the access of poor people to foreign
employment is very limited as it demands huge investment which is beyond their
affordability.
48
Table 5.1
Country-wise Foreign Employment
S. Country 2001-02 2002-03 2003-04 2004-05 % Change
N. 2001/02-2004/05
1 Saudi Arabia 83,459 101,449 118,324 131,683 57.8
2 Qatar 55,222 82,072 106,200 148,152 168.3
3 U. A. E. 25,672 38,322 51,082 63,585 147.7
4 Bahrain 3,171 3,989 4,595 4,853 53.0
5 Kuwait 2,973 3,880 7,074 8,760 194.7
6 Oman - 380 453 758 -
7 Hong Kong 1,753 2,317 2,989 3,167 80.7
8 Malaysia 64,643 108,445 154,215 220,505 241.1
9 Korea 3,119 3,831 5,155 5,480 75.7
10 Brunei - 4,22 - - -
12 Other Countries 1,993 1,945 3,635 4,457 123.6
Total 242,005 347,062 453,722 591,400 144.4
Source: Economic Survey, Various Issues
The Table 5.1 shows that people going abroad for foreign employment from Nepal has
increased sharply. Foreign employment has increased by 144 per cent between the period
of 2001-02 and 2004-05. The people going to Malaysia from Nepal for employment has
increased by 241 per cent during the same period. It is argued that remittances received
from foreign employment have reduced the incidence of poverty in Nepal.
Labour migration and remittances comprise a crucial component of income for many less
fortunate and less-endowed Nepalese people who perform their work at a place distant
from their house. Most of the workers are sent to the Gulf countries where risk is very
high and working environment is dangerous. For example, 12 Nepalese workers were
taken hostage and killed in Iraq by a Muslim extremist group in 2004. People going
abroad for foreign employment from Nepal have increased sharply.
India has been a most important destination for Nepalese workers due to its physical
proximity and labour markets in India are comparatively easily accessible. The number of
migrants to India for work are generally estimated about 1 million to 3 million based on
different studies (Graner and Seddon, 2005).
The Table 5.2 shows that a remittance received from foreign employment has increased
sharply in Nepal. The total amount of remittances received through official channel
increased from Rs. 657 million in 1985 to Rs. 54235 million in 2004, i.e., from 1.5 to
12.4 per cent of GDP. There has been massive increase after 2000. The remittance/GDP
ratio increased from 2.8 per cent in 1999 to 9.5 per cent in 2000.
49
Remittances play an important role in improving living standards of households in Nepal.
Given its importance to the economy, fresh bi-lateral initiatives between Nepal and the
new destination countries, particularly Middle East countries are crucial which could be
included in trade agreements. Formal bi-lateral agreements encourage legal migration and
the use of formal remittance channels.
Table 5.2
Income from Remittance in Nepal, 1985-2003
Year Remittance Income (Rs. % of GDP
Million)
1985 657 1.5
1986 709 1.3
1987 1223 2.0
1988 1594 2.2
1989 1372 1.6
1990 1533 1.5
1991 1749 1.5
1992 2122 1.5
1993 2858 1.7
1994 3274 1.7
1995 4545 2.2
1996 3711 1.6
1997 4378 1.6
1998 5220 1.8
1999 9183 2.8
2000 34919 9.5
2001 45783 11.6
2002 45565 11.2
2003 51971 11.9
2004 54235 12.4
Source: IPRAD and CBS, 2005
5.2.2 Barriers to Trade: Issues of Rules of Origins, Negative List, and NTBs
The rules of origin in SAFTA are one-dimensional, i.e., only on the percentage of value
addition criterion. Setting rules of origin is problematic in South Asia because all the
South Asian countries currently export asymmetrical type of goods like agricultural
commodities (tea, coffee, sugar etc.) and textiles and garments.
Another drawback of SAFTA is that it does not set a deadline for phasing out the
negative list, but provides only for a review of the list every four years. It is not desirable
to put the agriculture, agro-processing sector, textile and garments on the negative list
because these items offer great potential for regional trade in South Asia.
50
Tea, herbs, and leather are export potential products for Nepal. However, these products
face tariff and non-tariff barriers in the international market. Identification and removal
of such barriers are essential to realize its export potential. Bi-lateral, regional, and multi-
lateral trade negotiations can be utilized to address these barriers. However, this is not
possible without a well-coordinated negotiation strategy with a sound capacity team.
Table 5.3
Major Importers of Nepalese Tea
S. N. Country Export (Tons) Unit Value (US$/Tons) Total Export (US$)

1 India 2869 1,290 3,701,010
2 Pakistan 631 1,154 728,174
3 Germany 77 8,777 675,829
4 Holland 13 5,538 71,994
5 Japan 3 15,252 45,756
6 Belgium 2 5,000 10,000
7 United States 1 12,000 12,000
Source: SAWTEE, 2007
The above Table reflects that India and Pakistan are the major importers of Nepalese tea
followed by Germany, Holland, Japan, Belgium and the United States. However, per unit
value of tea exported to India and Pakistan is much lower compared to other countries.
Nepalese tea faces market access barriers, both the TBs and NTBs, in the international
markets. It faces high tariffs, except in Canada, the US and Australia, ranging from
around 17 per cent in Japan to 200 per cent in Bangladesh (SAWTEE, 2007). It has been
estimated that there was a 100 per cent incidence of NTBs in exports of all types of green
tea to India, Pakistan, Canada, Australia, and Korea (Adhikari and Adhikari, 2005).
Exports of herbs, particularly medicinal herbs, are another export potential for Nepal and
its export has been increasing over the years. It is estimated that every year between ten
to fifteen thousand tones of non-timber forest products are harvested and exported to
India and overseas countries (SAWTEE, 2007). However, Adhikari and Adhikari (2005)
estimated that there was 100 per cent incidence of NTBs in the exports of Liquorices and
Ginseng roots to Pakistan, Canada, and Australia and 25 per cent for China. Similarly, for
other medicinal plants, the incidence is 100 per cent for Pakistan, Japan, and Australia
and 21 and 20 per cent for Canada and the US respectively.
Another export potential, raw or processed leather, also face both the tariff as well as
non-tariff barriers in the international markets. It was estimated that a minimum of 10
million square feet of tanned leathers would be exported from Nepal in 2005/06 worth
about NRs 600 million. The export has shifted from Europe to Asia, especially to India.
The applied tariff rates on major leather products ranges between 0 to 30 per cent in
major market destinations and bound tariff rates are higher than applied rates in most
cases. Similarly, NTBs comprised of customs and administrative procedures are also
faced by Nepalese leather products (SAWTEE, 2007).
51
5.3 Bi-lateral Level
The increasing trend of trade deficit, informal trade between the two countries and
imposition of TRQs by India on some Nepalese exports are the major issues in Indo-
Nepal trade treaty. These issues need to be addressed. Energy and services, i.e., ICT,
tourism, education, healthcare, are most necessary sectors to be included in future trade
negotiations to benefit both the countries. Nepal could exploit its vast amount of
untapped hydroelectricity to fulfil the high demand of energy in Indian market.
Therefore, Nepal should propose these new areas of opportunities in the Comprehensive
Economic Partnership Agreement which is already proposed by the Indian delegation in
India-Nepal Inter-Governmental Committee on Trade, Transit, and Cooperation meeting
held in 2006. The proposed FTA with Bangladesh, Bhutan, Sri Lanka, and Pakistan as
well as trade agreements with other countries has to be included by broad coverage of
economic cooperation extending beyond tariff and non-tariff measures and should cover
other areas of cooperation such as investment and trade in services.
5.4 Regional Level

Several issues need to be addressed to realize the potential benefits of tariff free access
under SAFTA. These are: safeguard measures-sensitive lists and RoO, Para-tariff and
non-tariff barriers, trade facilitation, and transit and transport logistics. Sensitive lists and
RoO are not finalized. The fact is, most of the highly traded and potential Nepalese
export items are in sensitive list but the 1996 Indo-Nepal bi-lateral agreement has
substantially reduced the sensitive list to only few items. Nepal’s bi-lateral agreement
with India is more attractive to Nepal than SAFTA because of non-reciprocal and zero
tariff access for Nepalese manufactured products to Indian market. Unless the number of
goods from the sensitive lists is reduced in SAFTA, Nepal will benefit little from
SAFTA. Similarly, if SAFTA does not compensate financially for customs revenue
losses, Nepal would prefer to continue trading with India under bi-lateral agreement.
Trade in services is inseparable from trade in goods. Service sector especially tourism is
the most important for employment generation and foreign exchange earning for Nepal.
Further foreign investment in hydroelectricity, tourism, education, health etc. is necessary
for Nepal’s economic development. Therefore, Nepal should negotiate to include services
and investment liberalization in SAFTA. Although, liberalization of services and
investment is included in BIMSTEC Agreement, it is essential to make it to work more
effective.
5.5 Agenda for Free Trade Agreement: Costs and Benefits
The Government of Nepal has been initiating to explore the possibilities of bi-lateral
FTAs with South Asian countries in recent years. If there were a bi-lateral agreement
between Nepal and South Asian countries, there would be economic costs and benefits
for various groups for the both governments. Changes in economic welfare resulting from
an FTA are treated as the sum of changes in consumers’ surplus, producer’ surplus and
government revenue from custom duties. The economic cost may fall on poorer section
52
of the society as fall in government revenue resulted from tariff cuts will negatively affect
the government expenditure on social sector including health care and education.
Nepal’s trade with India has increased sharply over recent years particularly after 1997-
98. Nepal’s export to India increased from 59 per cent in 2001-02 to 68.3 per cent in
2005-06 and its import from India increased from 52.1 per cent to 67.1 per cent during
the same period (Table 3.2 and 3.4). Nepal’s over-dependency on India in terms of both
export as well as import may be a political sensitive issue for Nepal in future.
Diversification of Nepal’s trade to other countries has become an essential policy
implication.
The concept of bi-lateral FTA is increasing around the globe in recent years. Nepal does
not have any FTA experience. It will not be beneficial for Nepal to make FTA
arrangements with developed countries in initial stage.
Although, Nepal’s trade with SAARC countries except India is only about one per cent of
its total trade, Nepal’s exports to Bhutan have been increasing and there is more or less
similar situation with Bangladesh and Sri Lanka as well. The major exports of Nepal to
Bhutan are uncooked pasta, soaps, and cereal products. Similarly, Bangladesh imports
mainly lentils, weaning foods, and vegetable seeds from Nepal. Nepal enjoys
comparative advantage for all these goods as these items are not imported by Nepal from
Bhutan and Bangladesh. Nepal can increase its competitiveness by investing in these
items and can acquire benefit by exporting these items. It is recommended that Nepal can
gain by FTA arrangement with Bhutan and Bangladesh in recent years. Hence, priority
should be given to these two countries for FTA arrangement. Nepal should also take
initiatives for FTA with Sri Lanka. These initiatives towards FTA would make Nepalese
trade diversified instead of India-centred. Furthermore, Nepal can also take advantage by
investing, producing and exporting its untapped hydropower to SAARC countries.
53
ANNEX - I
TREATY OF TRADE BETWEEN HIS MAJESTY’S GOVERNMENT OF NEPAL
AND THE GOVERNMENT OF INDIA
March 6, 2002
His Majesty’s Government of Nepal and the Government of India (hereinafter

referred to as the Contracting Parties),
Being conscious of the need to fortify the traditional connection between the markets of
the two countries,
Being animated by the desire to strengthen economic cooperation between them,
Impelled by the urge to develop their economies for their several and mutual benefit, and
Convinced of the benefits of mutual sharing of scientific and technical knowledge and
experience to promote mutual trade,
Have resolved to conclude a Treaty of Trade in order to expand trade between their
respective territories and encourage collaboration in economic development, and
Have for this purpose appointed as their Plenipotentiaries the following persons, namely,
For His Majesty’s Government of Nepal

Shri Gopal Man Shrestha,
Minister of Commerce
For the government of India

Shri P. Chidambaram,
Minister of State for Commerce
Who, having exchanged their full powers and found them good and in due form, have
agreed as follows:
54
ARTICLE I
The Contracting Parties shall explore and undertake all measures, including technical
cooperation, to promote, facilitate, expand and diversify trade between their two
countries.
ARTICLE II
The Contracting Parties shall endeavour to grant maximum facilities and to undertake all
necessary measures for the free and unhampered flow of goods, needed by one country
from the other, to and from their respective territories.
ARTICLE III
Both the Contracting Parties shall accord unconditionally to each other treatment no less
favourable than that accorded to any third country with respect to (a) customs duties and
charges of any kind imposed on or in connection with importation and exportation, and
(b) import regulations including quantitative restrictions.
ARTICLE IV
The Contracting Parties agree, on a reciprocal basis, to exempt from basic customs duty
as well as from quantitative restrictions the import of such primary products as may be
mutually agreed upon, from each other.
ARTICLE V
Notwithstanding the provisions of Article III and subject to such exceptions as may be
made after consultation with His Majesty’s Government of Nepal, the Government of
India agree to promote the industrial development of Nepal through the grant on the basis
of non-reciprocity of specially favourable treatment to imports into India of industrial
products manufactured in Nepal in respect of customs duty and quantitative restrictions
normally applicable to them.
ARTICLE VI
With a view to facilitating greater interchange of goods between the two countries, His
Majesty’s Government shall endeavour to exempt, wholly or partially, imports from India
from customs duty and quantitative restrictions to the maximum extent compatible with
their development needs and protection of their industries.
ARTICLE VII
Payment for transactions between the two countries will continue to be made in
accordance with their respective foreign exchange laws, rules and regulations. The
55
Contracting Parties agree to consult each other in the event of either of them experiencing
difficulties in their mutual transactions with a view to resolving such difficulties.
ARTICLE VIII
The Contracting Parties agree to co-operate effectively with each other to prevent
infringement and circumvention of the laws, rules and regulations of either country in
regard to matters relating to foreign exchange and foreign trade.
ARTICLE IX
Notwithstanding the foregoing provisions, either Contracting Party may maintain or

introduce such restrictions as are necessary for the purpose of:
(a) protecting public morals,
(b) protecting human, animal and plant life,
(c) safeguarding national treasures,
(d) safeguarding the implementation of laws relating to the import and export of gold
and silver bullion, and
(e) safeguarding such other interests as may be mutually agreed upon.
ARTICLE X
Nothing in this treaty shall prevent either Contracting Party from taking any measures
which may be necessary for the protection of its essential security interests or in
pursuance of general international conventions, whether already in existence or
concluded hereafter, to which it is a party relating to transit, export or import of particular
kinds of articles such as narcotics and psychotropic substances or in pursuance of general
conventions intended to prevent infringement of industrial, literary or artistic property or
relating to false marks, false indications of origin or other methods of unfair competition.
ARTICLE XI
In order to facilitate effective and harmonious implementation of this Treaty, the

Contracting Parties shall consult each other regularly.
ARTICLE XII
(a)*This Treaty shall remain in force **for a period of five years from 6th March, 2002
to 5th March, 2007 and shall be automatically extended for further periods of five (5)
years at a time, unless either of the parties gives to the other a written notice, three
months in advance, of its intention to terminate the Treaty.
56
(b)*This Treaty may be amended or modified by mutual consent of the parties. Done in
duplicate in Hindi, Nepali and English languages, all the texts being equally authentic, at
New Delhi on 6th December 1991. In case of doubt, the English text will prevail.
(P. CHIDAMBARAM) (GOPALMAN SHRESTHA)

Minster of State for Commerce Minister of Commerce
For the Government of India Government of Nepal
*As modified through exchange of letters dated 3rd December, 1996 between the
Commerce Secretaries of India and Nepal.
**As modified through exchange of letters dated 2nd March, 2002 between Commerce
Secretaries of India and Nepal.
57
TREATY OF TRANSIT BETWEEN HIS MAJESTY’S GOVERNMENT OF
NEPAL AND THE GOVERNMENT OF INDIA
March 6, 2002
His Majesty’s Government of Nepal and the Government of India (hereinafter

also referred to as the Contracting Parties),
Animated by the desire to maintain, develop and strengthen the existing friendly
relations and cooperation between the two countries,
Recognizing that Nepal as a land-locked country needs freedom of transit, including

permanent access to and from the sea, to promote its international trade,
And recognizing the need to facilitate the traffic-in-transit through their territories,
Have resolved to extend the validity of the existing Treaty of Transit, with
modifications mutually agreed upon, and
Have for this purpose appointed as their plenipotentiaries the following persons,
namely,

Shri Purna Bahadur Khadka
For the Government of India

Shri Ramakrishna Hegde
Who, having exchanged their full powers, and found them good and in due form,
have agreed as follows:
ARTICLE I
The Contracting Parties shall accord to “traffic-in-transit” freedom of transit

across their respective territories through routes mutually agreed upon. No
distinction shall be made which is based on flag of vessels, the places of origin,
departure, entry, exit, destination, and ownership of goods or vessels.
ARTICLE II
(a) Each Contracting Party shall have the right to take all indispensable
measures to ensure that such freedom, accorded by it on its
58
territory, does not in any way infringe its legitimate interests of any
kind.
(b) Nothing in this Treaty shall prevent either Contracting Party from
taking any measures which may be necessary for the protection of
its essential security interests.
ARTICLE III
The term “traffic-in-transit” means the passage of goods, including

unaccompanied baggage, across the territory of a Contracting Party when the
passage is a portion of a complete journey which begins or terminates within the
territory of the other Contracting Party. The trans-shipment, warehousing,
breaking bulk and change in the mode of transport of such goods as well as the
assembly, dis-assembly or re-assembly of machinery and bulky goods shall not
render the passage of goods outside the definition of “traffic-in-transit” provided
any such operation is undertaken solely for the convenience of transportation.
Nothing in this Article shall be construed as imposing an obligation on either
Contracting Party to establish or permit the establishment of permanent facilities
on its territory for such assembly, dis-assembly or re-assembly.
ARTICLE IV
Traffic-in-transit shall be exempt from customs duties and from all transit duties
or other charges, except reasonable charges for transportation and such other
charges, as are commensurate with the costs of services rendered in respect of
such transit.
ARTICLE V
For convenience of traffic-in-transit, the Contracting Parties agree to provide at

point or points of entry or exit, on such terms as may be mutually agreed upon
and subject to relevant laws and regulations prevailing in country, warehouse or
sheds, for the storage of traffic-in-transit awaiting customs clearance before
onward transmission.
ARTICLE VI
Traffic-in-transit shall be subject to the procedure laid down in the Protocol hereto
annexed and as modified by mutual agreement. Except in cases of failure to
comply with the procedure prescribed, such traffic-in-transit shall not be subject
to avoidable delays or restrictions.
59
ARTICLE VII
In order to enjoy the freedom of the high seas, merchant ships sailing under the
flag of Nepal shall be accorded, subject to Indian laws and regulations, treatment
no less favourable than that accorded to ships of any other foreign country in
respect of matters relating to navigation, entry into and departure from the ports,
use of ports and harbour facilities, as well as loading and unloading dues, taxes
and other levies, except that the provisions of this Article shall not extend to
coastal trade.
ARTICLE VIII
Notwithstanding the foregoing provisions, either Contracting Party may maintain

or introduce such measures or restrictions as are necessary for the purpose of :
i) Protecting public morals;

ii) Protecting human, animal and plant life;
iii) Safeguarding of national treasures;
iv) Safeguarding the implementation of laws relating to the
import and export of gold and silver bullion; and
v) Safeguarding such other interests as may be mutually
agreed upon
ARTICLE IX
Nothing in this Treaty shall prevent either Contracting Party from taking any
measures which may be necessary in pursuance of general international
conventions, whether already in existence or concluded hereafter, to which it is a
party, relating to transit, export or import of particular kinds of articles such as
narcotics and psychotropic substances or in pursuance of general conventions
intended to prevent infringement of industrial, literary or artistic property or
relating to false marks, false indications of origin or other methods of unfair
competition.
ARTICLE X
In order to facilitate effective and harmonious implementation of this Treaty the

60
ARTICLE XI
The revalidated and modified Treaty shall enter into force on the 6th January,
1999. It shall remain in force up to the 5th January, 2006 and shall, thereafter, be
automatically extended for a further period of seven (7) years at a time, unless
either of the parties gives to the other a written notice, six months in advance, of
its intention to terminate the Treaty provided further that the modalities, routes,
conditions of transit and customs arrangement, as contained in the Protocol and
Memorandum to the Treaty shall be reviewed and modified by the Contracting
Parties every seven years, or earlier if warranted, to meet the changing conditions
before the automatic renewal and such modifications shall be deemed to be the
integral part of the Treaty.
his Treaty may be amended or modified by mutual consent of the Contracting

Parties.
Done at Kathmandu on 5th January, 1999.
(RAMAKRISHNA HEGDE)
For the Government of India
(PURNA BAHADUR KHADKA)

61
AGREEMENT OF CO-OPERATION BETWEEN GOVERNMENT OF INDIA AND
HIS MAJESTY’S GOVERNMENT OF NEPAL TO CONTROL UNAUTHORISED
TRADE
The Government of India and His Majesty’s Government of Nepal (hereinafter also
referred to as the Contracting Parties).
KEEN to sustain the good neighbourliness through mutually beneficial measures at their
common border which is free for movement of persons and goods.
Have agreed as follows:
Article I
The Contracting Parties, while recognizing that there is a long and open border between the
two countries and there is free movement of persons and goods across the border and
nothing that they have the right to pursue independent foreign trade policies, agree that
either of them would take all such measures as are necessary to ensure that the economic
interests of the other party are not adversely affected through unauthorised trade between
the two countries.
Article II
The Contracting Parties agree to co-operate effectively with each other, to prevent
infringement and circumvention of the laws, rules and regulations of either country in
regard to matters relating to Customs, Narcotics and Psychotropic Substances, Foreign
Exchange and Foreign Trade and shall for this purpose assist each other in such matters as
consultation, enquiries and exchange of information with regard to matters concerning
such infringement or circumvention..
Article III
Subject to such exceptions as may be mutually agreed upon each Contracting Party shall
prohibit and co-operate with the other to prevent:
(a) re-exports from its territory to third countries of goods imported from the other
Contracting Party without manufacturing activity;
62
(b) re-exports to the territory of the other Contracting Party of goods imported from
third countries without manufacturing activity.
Provided that (a) and (b) above shall not be applicable in the case of the export of
the Nepalese goods into India under the procedure set out in Protocol V to the
Treaty of Trade between His Majesty’s Government of Nepal and the Government
of India.
Article IV
Each Contracting Party will:
(a) prohibit and take appropriate measures to prevent import from the territory of the
other Contracting Party of goods liable to be re-exported to third countries from its
territory and the export of which from the territory of the other Contracting Party to
its territory is prohibited;
(b) in order to avoid inducement towards diversion of imported goods to the other
Contracting Party, take appropriate steps through necessary provisions relating to
Baggage Rules, gifts and foreign exchange authorisation for the import of goods
from third countries.
Article V
The Contracting Parties shall compile and exchange with each other statistical and other
information relating to unauthorised trade across the common border. They also agree to
exchange with each other regularly the lists of goods the import and export of which are
prohibited, or restricted or subject to control according to their respective laws and
regulations.
Article VI
The respective heads of the Border Customs Offices of each country shall meet regularly
with his counterpart of appropriate status at least once in two months alternately across the
common border:
(a) to co-operate with each other in the prevention of unauthorised trade:
(b) to maintain the smooth and uninterrupted movement of goods across their
territories;
63
(c) to render assistance in resolving administrative difficulties as may arise at
the field level.
Article VII
In order to facilitate effective and harmonious implementation of this Agreement, the

Article VIII
This Agreement shall remain in force up to 5th March, 2007. It may be renewed for further
periods of five years, at a time, by mutual consent subject to such modifications as may be
agreed upon (As amended on 5th March, 2002).
Done in duplicate in Hindi, Nepali and English languages, all the texts being equally
authentic, at New Delhi on the 6th December 1991. In case of doubt, the English text will
prevail.
(P. CHIDAMBARAM) (GOPALMAN SHRESTHA)

Minster of State for Commerce Minister of Commerce
For the Government of India His Majesty’s Government of Nepal
64
ANNEX – II
AGREEMENT ON SOUTH ASIAN FREE TRADE AREA (SAFTA)
The Governments of the SAARC (South Asian Association for Regional Cooperation)
Member States comprising the People's Republic of Bangladesh, the Kingdom of Bhutan,
the Republic of India, the Republic of Maldives, the Kingdom of Nepal, the Islamic
Republic of Pakistan and the Democratic Socialist Republic of Sri Lanka hereinafter
referred to as "Contracting States"
Motivated by the commitment to strengthen intra-SAARC economic cooperation to

maximise the realization of the region's potential for trade and development for the
benefit of their people, in a spirit of mutual accommodation, with full respect for the
principles of sovereign equality, independence and territorial integrity of all States;
Noting that the Agreement on SAARC Preferential Trading Arrangement (SAPTA)

signed in Dhaka on the 11th of April 1993 provides for the adoption of various
instruments of trade liberalization on a preferential basis;
Convinced that preferential trading arrangements among SAARC Member States will act
as a stimulus to the strengthening of national and SAARC economic resilience, and the
development of the national economies of the Contracting States by expanding
investment and production opportunities, trade, and foreign exchange earnings as well as
the development of economic and technological cooperation;
Aware that a number of regions are entering into such arrangements to enhance trade
through the free movement of goods;
Recognizing that Least Developed Countries in the region need to be accorded special
and differential treatment commensurate with their development needs; and
Recognizing that it is necessary to progress beyond a Preferential Trading Arrangement

to move towards higher levels of trade and economic cooperation in the region by
removing barriers to cross-border flow of goods;
Have agreed as follows:
Article I
Definitions
For the purposes of this Agreement:
1. Concessions mean tariff, para-tariff and non-tariff concessions agreed under the Trade
Liberalisation Programme;
65
2. Direct Trade Measures mean measures conducive to promoting mutual trade of
Contracting States such as long and medium -term contracts containing import and
supply commitments in respect of specific products, buy-back arrangements, state
trading operations, and government
and public procurement;
3. Least Developed Contracting State refers to a Contracting State which is designated

as a "Least Developed Country" by the United Nations;
4. Margin of Preference means percentage of tariff by which tariffs are reduced on

products imported from one Contracting State to another as a result of preferential
treatment.
5. Non-Tariff Measures include any measure, regulation, or practice, other than "tariffs"
and "paratariffs".
6. Para-Tariffs mean border charges and fees, other than "tariffs", on foreign trade
transactions of a tariff-like effect which are levied solely on imports, but not those
indirect taxes and charges, which are levied in the same manner on like domestic
products. Import charges corresponding to specific services rendered are not
considered as para-tariff measures;
7. Products mean all products including manufactures and commodities in their raw,
semi-processed and processed forms;
8. SAPTA means Agreement on SAARC Preferential Trading Arrangement signed in

Dhaka on the 11th of April 1993;
9. Serious injury means a significant impairment of the domestic industry of like or

directly competitive products due to a surge in preferential imports causing
substantial losses in terms of earnings, production or employment unsustainable in the
short term;
10. Tariffs mean customs duties included in the national tariff schedules of the
Contracting States;
11. Threat of serious injury means a situation in which a substantial increase of

preferential imports is of a nature to cause "serious injury" to domestic producers, and
that such injury, although not yet existing, is clearly imminent. A determination of
threat of serious injury shall be based on facts and not on mere allegation, conjecture,
or remote or hypothetical possibility.
66
Article II
Establishment
The Contracting States hereby establish the South Asian Free Trade Area (SAFTA) to
promote and enhance mutual trade and economic cooperation among the Contracting
States, through exchanging concessions in accordance with this Agreement.
Article III
Objectives and Principles
1. The Objectives of this Agreement are to promote and enhance mutual trade and
economic cooperation among Contracting States by, inter-alia:
a) eliminating barriers to trade in, and facilitating the cross-border movement of

goods between the territories of the Contracting States;
b) promoting conditions of fair competition in the free trade area, and ensuring
equiTable benefits to all Contracting States, taking into account their respective
levels and pattern of economic development;
c) creating effective mechanism for the implementation and application of this

Agreement, for its joint administration and for the resolution of disputes; and
d) establishing a framework for further regional cooperation to expand and enhance

the mutual benefits of this Agreement.
2. SAFTA shall be governed in accordance with the following principles:
a) SAFTA will be governed by the provisions of this Agreement and also by the
rules, regulations, decisions, understandings and protocols to be agreed upon
within its framework by the Contracting States;
b) The Contracting States affirm their existing rights and obligations with respect to
each other under Marrakesh Agreement Establishing the World Trade
Organization and other Treaties/Agreements to which such Contracting States
are signatories;
c) SAFTA shall be based and applied on the principles of overall reciprocity and
mutuality of advantages in such a way as to benefit equitably all Contracting
States, taking into account their respective levels of economic and industrial
development, the pattern of their external trade and tariff policies and systems;
67
d) SAFTA shall involve the free movement of goods, between countries through,
inter-alia, the elimination of tariffs, para tariffs and non-tariff restrictions on the
movement of goods, and any other equivalent measures;
e) SAFTA shall entail adoption of trade facilitation and other measures, and the
progressive harmonization of legislations by the Contracting States in the
relevant areas; and
f) The special needs of the Least Developed Contracting States shall be clearly
recognized by adopting concrete preferential measures in their favour on a non-
reciprocal basis.
Article IV
Instruments
The SAFTA Agreement will be implemented through the following instruments:-
1. Trade Liberalisation Programme

2. Rules of Origin
3. Institutional Arrangements
4. Consultations and Dispute Settlement Procedures
5. Safeguard Measures
6. Any other instrument that may be agreed upon.
Article V
National Treatment
Each Contracting State shall accord national treatment to the products of other
Contracting States in accordance with the provisions of Article III of GATT 1994.
Article VI
Components
SAFTA may, inter-alia, consist of arrangements relating to:
a) tariffs;
b) para-tariffs;
c) non-tariff measures;
d) direct trade measures.
68
Article VII
Trade Liberalisation Programme
1. Contracting States agree to the following schedule of tariff reductions:
a) The tariff reduction by the Non-Least Developed Contracting States from existing
tariff rates to 20 per cent shall be done within a time frame of 2 years, from the date
of coming into force of the Agreement. Contracting States are encouraged to adopt
reductions in equal annual instalments. If actual tariff rates after the coming into
force of the Agreement are below 20 per cent, there shall be an annual reduction on
a Margin of Preference basis of 10 per cent on actual tariff rates for each of the two
years.
b) The tariff reduction by the Least Developed Contracting States from existing tariff
rates will be to 30 per cent within the time frame of 2 years from the date of coming
into force of the Agreement. If actual tariff rates on the date of coming into force of
the Agreement are below 30 per cent, there will be an annual reduction on a Margin
of Preference basis of 5 per cent on actual tariff rates for each of the two years.
c) The subsequent tariff reduction by Non-Least Developed Contracting States from

20 per cent or below to 0-5 per cent shall be done within a second time frame of 5
years, beginning from the third year from the date of coming into force of the
Agreement. However, the period of subsequent tariff reduction by Sri Lanka shall
be six years. Contracting States are encouraged to adopt reductions in equal annual
instalments, but not less than 15 per cent annually.
d) The subsequent tariff reduction by the Least Developed Contracting States from 30
per cent or below to 0-5 per cent shall be done within a second time frame of 8
years beginning from the third year from the date of coming into force of the
Agreement. The Least Developed Contracting States are encouraged to adopt
reductions in equal annual instalments, not less than 10 per cent annually.
2. The above schedules of tariff reductions will not prevent Contracting States from
immediately reducing their tariffs to 0-5 per cent or from following an accelerated
schedule of tariff reduction.
3. a) Contracting States may not apply the Trade Liberalisation Programme as in

paragraph 1 above, to the tariff lines included in the Sensitive Lists which shall be
negotiated by the Contracting States (for LDCs and Non -LDCs) and incorporated
in this Agreement as an integral part. The number of products in the Sensitive
Lists shall be subject to maximum ceiling to be mutually agreed among the
Contracting States with flexibility to Least Developed Contracting States to seek
derogation in respect of the products of their export interest; and
69
b) The Sensitive List shall be reviewed after every four years or earlier as may be
decided by SAFTA Ministerial Council (SMC), established under Article 10, with
a view to reducing the number of items in the Sensitive List.
4. The Contracting States shall notify the SAARC Secretariat all non-tariff and para-
tariff measures to their trade on an annual basis. The notified measures shall be
reviewed by the Committee of Experts, established under Article 10, in its regular
meetings to examine their compatibility with relevant WTO provisions. The
Committee of Experts shall recommend the elimination or implementation of the
measure in the least trade restrictive manner in order to facilitate intra SAARC trade1.
5. Contracting Parties shall eliminate all quantitative restrictions, except otherwise

permitted under GATT 1994, in respect of products included in the Trade
Liberalisation Programme.
6. Notwithstanding the provisions contained in paragraph 1 of this Article, the Non-Least

Developed Contracting States shall reduce their tariff to 0-5% for the products of
Least Developed Contracting States within a timeframe of three years beginning from
the date of coming into force of the Agreement.
Article VIII
Additional Measures
Contracting States agree to consider, in addition to the measures set out in Article 7, the
adoption of trade facilitation and other measures to support and complement SAFTA for
mutual benefit.
These may include, among others: -
a) harmonization of standards, reciprocal recognition of tests and accreditation of testing

laboratories of Contracting States and certification of products;
b) simplification and harmonization of customs clearance procedure;
c) harmonization of national customs classification based on HS coding system;
d) Customs cooperation to resolve dispute at customs entry points;
e) simplification and harmonization of import licensing and registration procedures;
f) simplification of banking procedures for import financing;
g) transit facilities for efficient intra-SAARC trade, especially for the land-locked
Contracting States;
h) removal of barriers to intra-SAARC investments;
i) macroeconomic consultations;
j) rules for fair competition and the promotion of venture capital;
k) development of communication systems and transport infrastructure;
l) making exceptions to their foreign exchange restrictions, if any, relating to payments
for products under the SAFTA scheme, as well as repatriation of such payments
without
70
prejudice to their rights under Article XVIII of the General Agreement on Tariffs and
Trade (GATT) and the relevant provisions of Articles of Treaty of the International
Monetary Fund (IMF); and
m) Simplification of procedures for business visas.
Article VIV
Extension of Negotiated Concessions
Concessions agreed to, other than those made exclusively to the Least Developed
Contracting States, shall be extended unconditionally to all Contracting States.
Article X
Institutional Arrangements
1. The Contracting States hereby establish the SAFTA Ministerial Council (hereinafter
referred to as SMC).
2. The SMC shall be the highest decision-making body of SAFTA and shall be
responsible for the administration and implementation of this Agreement and all
decisions and arrangements made within its legal framework.
3. The SMC shall consist of the Ministers of Commerce/Trade of the Contracting States.
4. The SMC shall meet at least once every year or more often as and when considered
necessary by the Contracting States. Each Contracting State shall chair the SMC for a
period of one year on rotational basis in alphabetical order.
5. The SMC shall be supported by a Committee of Experts (hereinafter referred to as

COE), with one nominee from each Contracting State at the level of a Senior
Economic Official, with expertise in trade matters.
6. The COE shall monitor, review and facilitate implementation of the provisions of this
Agreement and undertake any task assigned to it by the SMC. The COE shall submit
its report to SMC every six months.
7. The COE will also act as Dispute Settlement Body under this Agreement.
8. The COE shall meet at least once every six months or more often as and when
considered necessary by the Contracting States. Each Contracting State shall chair the
COE for a period of one year on rotational basis in alphabetical order.
9. The SAARC Secretariat shall provide secretarial support to the SMC and COE in the
discharge of their functions.
71
10. The SMC and COE will adopt their own rules of procedure.
Article XI
Special and Differential Treatment for the Least Developed Contracting States
In addition to other provisions of this Agreement, all Contracting States shall provide
special and more favourable treatment exclusively to the Least Developed Contracting
States as set out in the following sub-paragraphs:
a) The Contracting States shall give special regard to the situation of the Least
Developed Contracting States when considering the application of anti-dumping
and/or countervailing measures. In this regard, the Contracting States shall provide an
opportunity to Least Developed Contracting States for consultations. The Contracting
States shall, to the extent practical, favourably consider accepting price undertakings
offered by exporters from Least Developed Contracting States. These constructive
remedies shall be available until the trade liberalisation programme has been
completed by all Contracting States.
b) Greater flexibility in continuation of quantitative or other restrictions provisionally

and without discrimination in critical circumstances by the Least Developed
Contracting States on imports from other Contracting States.
c) Contracting States shall also consider, where practical, taking direct trade measures
with a view to enhancing sustainable exports from Least Developed Contracting
States, such as long and medium-term contracts containing import and supply
commitments in respect of specific products, buy-back arrangements, state trading
operations, and government and public procurement.
d) Special consideration shall be given by Contracting States to requests from Least

Developed Contracting States for technical assistance and cooperation arrangements
designed to assist them in expanding their trade with other Contracting States and in
taking advantage of the potential benefits of SAFTA. A list of possible areas for such
technical assistance shall be negotiated by the Contracting States and incorporated in
this Agreement as an integral part.
e) The Contracting States recognize that the Least Developed Contracting States may
face loss of customs revenue due to the implementation of the Trade Liberalisation
Programme under this Agreement. Until alternative domestic arrangements are
formulated to address his situation, the Contracting States agree to establish an
appropriate mechanism to compensate the Least Developed Contracting States for
their loss of customs revenue. This mechanism and its rules and regulations shall be
established prior to the commencement of the Trade Liberalisation Programme
(TLP).
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Article XII
Special Provision for Maldives
Notwithstanding the potential or actual graduation of Maldives from the status of a Least
Developed Country, it shall be accorded in this Agreement and in any subsequent
contractual undertakings thereof treatment no less favourable than that provided for the
Least Developed Contracting States.
Article XIII
Non-application
Notwithstanding the measures as set out in this Agreement its provisions shall not apply
in relation to preferences already granted or to be granted by any Contracting State to
other Contracting States outside the framework of this Agreement, and to third countries
through bi-lateral, plurilateral and multi-lateral trade agreements and similar
arrangements.
Article XIV
General Exceptions
a) Nothing in this Agreement shall be construed to prevent any Contracting State from
taking action and adopting measures which it considers necessary for the protection
of its national security.
b) Subject to the requirement that such measures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination between
countries where the similar conditions prevail, or a disguised restriction on intra-
regional trade, nothing in this Agreement shall be construed to prevent any
Contracting State from taking action and adopting measures which it considers
necessary for the protection of:
(i) public morals;
(ii) human, animal or plant life and health; and
(iii) articles of artistic, historic and archaeological value.
Article XV
Balance of Payments Measures
1. Notwithstanding the provisions of this Agreement, any Contracting State facing

serious balance of payments difficulties may suspend provisionally the concessions
extended under this Agreement.
2. Any such measure taken pursuant to paragraph 1 of this Article shall be immediately
notified to the Committee of Experts.
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3. The Committee of Experts shall periodically review the measures taken pursuant to
paragraph 1 of this Article.
4. Any Contracting State which takes action pursuant to paragraph I of this Article shall
afford, upon request from any other Contracting State, adequate opportunities for
consultations with a view to preserving the stability of concessions under SAFTA.
5. If no satisfactory adjustment is effected between the Contracting States concerned

within 30 days of the beginning of such consultations, to be extended by another 30
days through mutual consent, the matter may be referred to the Committee of Experts.
6. Any such measures taken pursuant to paragraph 1 of this Article shall be phased out
soon after the Committee of Experts comes to the conclusion that the balance of
payments situation of the Contracting State concerned has improved.
Article XVI
Safeguard Measures
1. If any product, which is the subject of a concession under this Agreement, is imported
into the territory of a Contracting State in such a manner or in such quantities as to
cause, or threaten to cause, serious injury to producers of like or directly competitive
products in the importing Contracting State, the importing Contracting State may,
pursuant to an investigation by the competent authorities of that Contracting State
conducted in accordance with the provisions set out in this Article, suspend
temporarily the concessions granted under the provisions of this Agreement. The
examination of the impact on the domestic industry concerned shall include an
evaluation of all other relevant economic factors and indices having a bearing on the
state of the domestic industry of the product and a causal relationship must be clearly
established between "serious injury" and imports from within the SAARC region, to
the exclusion of all such other factors.
2. Such suspension shall only be for such time and to the extent as may be necessary to
prevent or remedy such injury and in no case, will such suspension be for duration of
more than 3 years.
3. No safeguard measure shall be applied again by a Contracting State to the import of a

product which has been subject to such a measure during the period of
implementation of Trade Liberalization Programme by the Contracting States, for a
period of time equal to that during which such measure had been previously applied,
provided that the period of non-application is at least two years.
4. All investigation procedures for resorting to safeguard measures under this Article
shall be consistent with Article XIX of GATT 1994 and WTO Agreement on
Safeguards
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5. Safeguard action under this Article shall be non-discriminatory and applicable to the
product imported from all other Contracting States subject to the provisions of
paragraph 8 of this Article.
6. When safeguard provisions are used in accordance with this Article, the Contracting
State invoking such measures shall immediately notify the exporting Contracting
State(s) and the Committee of Experts.
7. In critical circumstances where delay would cause damage which it would be difficult
to repair, a Contracting State may take a provisional safeguard measure pursuant to a
preliminary determination that there is clear evidence that increased imports have
caused or are threatening to cause serious injury. The duration of the provisional
measure shall not exceed 200 days, during this period the pertinent requirements of
this Article shall be met.
8. Notwithstanding any of the provisions of this Article, safeguard measures under this
article shall not be applied against a product originating in a Least Developed
Contracting State as long as its share of imports of the product concerned in the
importing Contracting State does not exceed 5 per cent, provided Least Developed
Contracting States with less than 5 per cent import share collectively account for not
more than 15 per cent of total imports of the product concerned.
Article XVII
Maintenance of the Value of Concessions
Any of the concessions agreed upon under this Agreement shall not be diminished or
nullified, by the application of any measures restricting trade by the Contracting States,
except under the provisions of other articles of this Agreement.
Article XVIII
Rules of Origin
Rules of Origin shall be negotiated by the Contracting States and incorporated in this
Agreement as an integral part.
Article XIX
Consultations
1. Each Contracting State shall accord sympathetic consideration to and will afford
adequate opportunity for consultations regarding representations made by another
Contracting State with respect to any matter affecting the operation of this
Agreement.
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2. The Committee of Experts may, at the request of a Contracting State, consult with
any Contracting State in respect of any matter for which it has not been possible to
find a satisfactory solution through consultations under paragraph 1.
Article XX
Dispute Settlement Mechanism
1. Any dispute that may arise among the Contracting States regarding the interpretation
and application of the provisions of this Agreement or any instrument adopted within
its framework concerning the rights and obligations of the Contracting States will be
amicably settled among the parties concerned through a process initiated by a request
for bi-lateral consultations.
2. Any Contracting State may request consultations in accordance with paragraph 1 of

this Article with other Contracting State in writing stating the reasons for the request
including identification of the measures at issue. All such requests should be notified
to the Committee of Experts, through the SAARC Secretariat with an indication of
the legal basis for the complaint.
3. If a request for consultations is made pursuant to this Article, the Contracting State to
which the request is made shall, unless otherwise mutually agreed, reply to the
request within 15 days after the date of its receipt and shall enter into consultations in
good faith within a period of no more than 30 days after the date of receipt of the
request, with a view to reaching a mutually satisfactory solution.
4. If the Contracting State does not respond within 15 days after the date of receipt of
the request, or does not enter into consultations within a period of no more than 30
days, or a period otherwise mutually agreed, after the date of receipt of the request,
then the Contracting State that requested the holding of consultations may proceed to
request the Committee of Experts to settle the dispute in accordance with working
procedures to be drawn up by the Committee.
5. Consultations shall be confidential, and without prejudice to the rights of any

Contracting State in any further proceedings.
6. If the consultations fail to settle a dispute within 30 days after the date of receipt of
the request for consultations, to be extended by a further period of 30 days through
mutual consent, the complaining Contracting State may request the Committee of
Experts to settle the dispute. The complaining Contracting State may request the
Committee of Experts to settle the dispute during the 60-day period if the consulting
Contracting States jointly consider that consultations have failed to settle the dispute.
7. The Committee of Experts shall promptly investigate the matter referred to it and
make recommendations on the matter within a period of 60 days from the date of
referral.
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FATHULLA JAMEEL
Minister of Foreign Affairs
Republic of Maldives
DR. BHEKH B. THAPA

Ambassador-at-large
for Foreign Affairs
His Majesty's Government of Nepal
KHURSHID M. KASURI
Islamic Republic of Pakistan
TYRONNE FERNANDO
Democratic Socialist Republic of Sri Lanka
1. The initial notification shall be made within three months from the date of coming into
force of the Agreement and the COE shall review the notification in its first meeting
and take appropriate decisions.
79
ANNEX – III
Framework Agreement on the BIMST-EC Free Trade Area

February 8, 2004
PREAMBLE
THE GOVERNMENTS of the kingdom of Bhutan, the Peoples’ Republic of
Bangladesh, the Republic of India, the Union of Myanmar, the Kingdom of Nepal, the
Democratic Socialist Republic of Sri Lanka and the Kingdom of Thailand, the Member
States of BIMST-EC (Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic
Co-operation), hereinafter referred to collectively as “the Parties” and individually as “a
Party”;
TAKING NOTE of the Agreed Conclusions of the BIMST-EC Economic Ministerial

Retreat held in Bangkok, Thailand, on 7th August 1998, that BIMST-EC should aim and
strive to develop into a Free Trade Arrangements and should focus on activities that
facilitate trade, increase investments and promote technical cooperation among member
countries:
MOTIVATED by the need for strengthening economic cooperation in the region to fully
realize the potential of trade and development for the benefit of their people.
RECOGNIZING the need to harmonize with the changing global economic

environment and the catalytic role that regional trading arrangements can play towards
accelerating global liberalization as building blocks in the framework of the multi-lateral
trading system.
CONVINCED that a BIMST-EC Free Trade Area will act as a stimulus to the
strengthening of economic cooperation among the parties, lower costs, increase intra-
regional trade and investment, increase economic efficiency, create a lager market with
greater opportunities and larger economics of scale for the businesses of the parties, and
enhance the attractiveness of the parties to capital and talent.
REAFFIRMING the rights, obligations and undertakings of the respective parties under
the World Trade Organization (WTO) and other multi-lateral, regional and bi-lateral
agreements and arrangements, and
RECOGNIZING that the least developed countries in the region need to be accorded
special and differential treatment commensurate with their development needs;
HAVE AGREED AS FOLLOWS:
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ARTICLE I
Objectives
The objectives of this Agreement are to:
(a) strengthen and enhance economic, trade and investment cooperation among
the parties;
(b) progressively liberalize and promote trade in goods and services, create a
transparent, liberal and facilitative investment regime;
(c) explore new areas and develop appropriate measures for closer cooperation
among the Parties, and
(d) acilitate the more effective economic integration of the least developed
countries in the region, and bridge the development gap among the Parties.
ARTICLE II
Measures for Comprehensive Free Trade Area (FTA)
The parties agree to negotiate expeditiously in order to establish a BIMST-EC FTA to

strengthen and enhance economic cooperation through the following.
(a) progressive elimination of tariffs and non-tariff barriers in substantially all

trade in goods;
(b) progressive liberalization of trade in services with substantial sectoral

coverage;
(c) establishing an open and competitive investment regime that facilitates and
promotes investments within the BIMST-EC FTA;
(d) provision for special and differential treatment and flexibility to the least
developed countries in the region;
(e) flexibility to the parties in the BIMST-EC FTA negotiations to address their
sensitive areas in the goods, services and investment sectors based on agreed
principles of reciprocity and mutual benefits;
(f) establishing effective trade and investment facilitating measures, including,

but not limited to, simplification of customs procedures and development of
mutual recognition arrangements;
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(g) expanding economic cooperation in areas as may be mutually agreed among
the parties that will complement the deepening of trade and investment links
among the parties and formulating action plans and programmes in the agreed
sectors/ areas of cooperation and
(h) establishing appropriate mechanisms for implementation of this Agreement.
ARTICLE III
Trade in Goods
1. The parties agree to enter into negotiations for eliminating the tariffs and non-
tariff barriers in substantially all trade in goods between the parties, except,
where necessary, those permitted under Article XXIV(8) (b) of the General
Agreement on Tariffs and Trade (GATT) 1994.
2. The products, except those included in the Negative List, shall be subject to
tariff reduction or elimination on the following two tracks.
(a) Fast Track : Products listed in the Fast Track by a party on its own
accord shall have their respective applied MFN tariff rates gradually
reduced/ eliminated in accordance with specified rates to be mutually
agreed by the parties, within the following timeframe:
Countries For Developing Country For LDC Parties

Parties
India, Sri Lanka & Thailand 1 July 2006 to 30 June 2009 1 July 2006 to 30 June 2007
Bangladesh, Bhutan, Nepal 1 July 2006 to 30 June 2011 1 July 2006 to 30 June 2009
& Myanmar
(b) Normal Track : Products listed in the Normal Track by a party on its
own accord shall have their respective applied MFN tariff rates
gradually reduced/ eliminated in accordance with specified rates to be
mutually agreed by the parties, within the following timeframe:
Countries For Developing Country For LDC Parties

Parties
India, Sri Lanka & Thailand 1 July 2007 to 30 June 2012 1 July 2007 to 30 June 2010
Bangladesh, Bhutan, Nepal 1 July 2007 to 30 June 2017 1 July 2007 to 30 June 2015
& Myanmar
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(c) The number of products in the Negative List shall be subject to a
maximum ceiling to be mutually agreed among the parties, with
flexibility to the LDC parties to seek derogation, in one form or the
other, in respect of products of their export interest.
3. Negotiations among the parties to establish the BIMST-EC FTA covering

trade in goods shall also include, but not be limited to the following:
(a) detailed modalities governing the tariff reduction or elimination

programmes as well as any other related matter, including ( a
possibility of establishing a mechanism for compensation of
possible revenue losses that may occur to LDC parties due to tariff
preferences and) principles governing reciprocal commitments not
provided for in the preceding paragraphs of this Article :
(b) Rules of Origin:
(c) Treatment of out-of-quota rates:
(d) Modification of a party’s commitments under the agreement on trade

in goods based on Article XXVIII of the GATT 1994;
(e) Non-tariff measures/ barriers imposed on any product covered under

this Agreement, and
(f) Detailed procedures for safeguards based on GATT principles:
ARTICLE IV
Trade in Services
With the view to expediting the expansion of trade in services, the parties agree to enter
into negotiations to progressively liberalise trade in services with substantial sectoral
coverage through a positive list approach. Such negotiations shall be directed to:
(a) progressive elimination of substantially all discrimination between or among

the parties and/or prohibition of new or more discriminatory measures with
respect to trade in services between the parties, except for measures permitted
under Article V(1)(b) of the WTO General Agreement on Trade in Services
(GATS).
(b) expansion in the depth and scope of liberalization of trade in services beyond
those undertaken by the Parties under the GATS;
83
(c) enhance cooperation in services among the Parties in order to improve
efficiency and competitiveness, as well as to diversify the supply and
distribution of services of the respective service suppliers of the Parties.
ARTICLE V
Investment
To promote investments and to create the facilitative, transparent and competitive

investment regime, the parties agree to:
(a) provide for the promotion and protection of investments;
(b) strengthen cooperation in investment, facilitate investment and improve

transparency of investment rules and regulations; and
(c) enter into negotiations in order to progressively liberalize the investment

regime through a positive list approach.
ARTICLE VI
Areas of Economic Cooperation
1. The parties agree to strengthen cooperation in the already identified sectors of

technology, transportation and communication, energy, tourism and fisheries.
2. The parties further agree to enhance trade facilitation in areas, including but
not limited to, the following:
(a) Mutual Recognition Arrangements (MRAs), conformity assessment,

accreditation procedures, and standards & technical regulations.
(b) Customs cooperation;
(c) Trade finance;
(d) E-commerce; and
(e) Business Visa and travel facilitation.
3. The parties agree to implement capacity building programmes and technical

assistance, particularly for the least developed countries of the BIMST-EC, in
order to adjust their economic structure and expand their trade and investment
with other parties.
84
4. The parties further agree to provide technical support, to the extent possible, to
the LDC parties in their efforts to comply with the SPS and TBT requirements
of the BIMST-EC countries. For this purpose, bi-lateral negotiations for fast
tracking the process of MRAs, conformity assessment, accreditation
procedures or any other necessary arrangements will be carried out in parallel
with negotiations for FTA in goods.
ARTICLE VII
Timeframes
1. The negotiations for tariff reduction/ elimination and other matters as set out in
Article 3 of this Agreement shall commence in July 2004 and be concluded by
December 2005.
2. For trade in services and investments, the negotiations on respective agreements

shall commence in 2005 and be concluded by 2007. The identification,
liberalization, etc, of the sectors of services and investments shall be finalized for
implementation subsequently in accordance with the timeframes to be mutually
agreed; (a) taking into account the sensitive sectors of the parties; and (b) with
special and differential treatment and flexibility for the LDC parties.
3. The parties shall continue to build upon existing or agreed programmes, develop
new economic cooperation programmes and conclude agreements on various
areas of economic co-operation. The parties shall do so expeditiously for early
implementation in a manner and at a pace acceptable to all the parties concerned.
ARTICLE VIII
General Exceptions
Subject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between or among the
parties where the same conditions prevail, or a disguised restriction on trade within the
BIMST-EC, nothing in this Agreement shall prevent any party from taking action and
adopting measures for the protection of its national security or the protection of articles of
artistic, historic and archaeological value, or such other measures which it deems
necessary for the protection of public morals, or for the protection of human, animal or
plant life, health and conservation of exhaustible natural resources.
85
ARTICLE IX
Dispute Settlement Mechanism
1. The parties shall establish appropriate formal dispute settlement procedures

and mechanism for the purpose of this Agreement by December 2005.
2. Pending the establishment of the formal dispute settlement procedures and

mechanism under paragraph 1 of this Article, any dispute arising between the
parties regarding the interpretation, application or implementation of this
Agreement shall be settled amicably through mutual consultations.
ARTICLE X
Institutional Arrangements
1. BIMST-EC Trade Negotiations Committee (BIMST-EC TNC) shall be

established to carry out the programme of negotiations as set out in this
Agreement.
2. The BIMST-EC TNC may involve other exports or establish any working
group as may be necessary to assist in their negotiations, as also to coordinate
and implement any economic cooperation activities undertaken pursuant to
this Agreement.
3. The BIMST-EC TNC shall regularly report to the BIMST-EC Trade/

Economic Ministers through the Senior Trade and Economic Officials
Meeting on the progress and outcome of its negotiations.
ARTICLE XI
Amendments
The provisions of this Agreement may be modified through amendments mutually agreed
upon in writing by the parties.
ARTICLE XII
Miscellaneous Provisions
1. Any subsidiary agreement or arrangement, which may be concluded by the

parties pursuant to the provisions of this Agreement, shall form an integral
part of this Agreement and be binding on the parties.
86
2. Except as otherwise provided in this Agreement, any action taken under it
shall not affect or nullify the rights and obligations of a party under other
agreements or arrangements to which it is a party.
3. The parties shall endeavour to refrain from increasing restrictions or

limitations that would affect the application of this Agreement.
ARTICLE XIII
Withdrawal from the Agreement
1. A party may withdraw from the Agreement by giving a six months’ notice in
writing to the other parties.
2. Subject to the dispute settlement procedures and mechanisms to be

established pursuant to Article 9, the rights and obligations of a party which
has withdrawn from this Agreement shall cease to apply six months after the
date of such notice.
ARTICLE XIV
Accession
1. This Agreement shall be open for accession to any new member country of
BIMST-EC which notifies its intention in writing to the parties.
2. Accession shall be subject to acceptance by that country of all the rights and
obligations accrued as on the date of accession, and such other terms and
conditions as may be agreed by the parties.
3. The acceding country may become a party to this Agreement by submitting an

instrument of accession through diplomatic channels to the parties.
ARTICLE XV
Entry into Force
1. This Agreement shall enter into force on 30th June 2004, by which time the
parties undertake to complete their internal procedures required for this
purpose.
2. A party shall, upon the completion of its internal procedures for entry into
force of this Agreement, notify all other parties in writing through diplomatic
channels.
87
IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their
respective Governments, have signed this Framework Agreement on BIMST-EC Free
Trade Area.
Done at Phuket, Kingdom of Thailand, on 8th February 2004 in Six (6) originals in
the English Language.
For the Government of People’s Republic of Bangladesh
(…………………………)
For the Government of the Kingdom of Bhutan
(…………………………)
For the Government of Republic of India
(…………………………)
For the Government of Union of Myanmar
(…………………………)
For the Government of Democratic Socialist Republic of Sri Lanka
(…………………………)
For His Majesty's Government of Nepal
(…………………………)
For the Government of the Kingdom of Thailand
(…………………………)
88
ANNEX – IV
FRIENDSHIP AND COMMERCE AGREEMENT BETWEEN THE UNITED

STATES OF AMERICA AND THE KINGDOM OF NEPAL
Agreement effected by exchange of notes Signed at Kathmandu
Entered into force April 25, 1947
The Chief of the United States Special Diplomatic Mission

To the Prime minister and Supreme
Commander-in-Chief of Nepal
United States Special Diplomatic

Mission to the Kingdom of Nepal,
Kathmandu, April 25, 1947
Your Highness:
I have the honour to make the following statement of my Government's understanding of

the agreement reached through recent conversations held at Kathmandu by
representatives of the Government of United States of America and the Government of
the Kingdom of Nepal with reference to diplomatic and consular representation, juridical
protection, commerce and navigation. These two Governments, desiring to strengthen the
friendly relations happily existing between the two countries, further mutually
advantageous commercial relations between their peoples, and to maintain in most
favoured-nation principle in its unconditional and unlimited form as the basis of their
commercial relations agree to the following provisions:
1. The United States of America and the Kingdom of Nepal will establish diplomatic
and consular relation at a date which shall be fixed by mutual agreement between
the two Governments.
2. The diplomatic representatives of each party accredited to the Government of the
other party shall enjoy in the territories of such other party the rights, privileges,
exemptions and immunities accorded under generally recognized principles of
international law. The consular officers each party who are assigned to the
Government of the other Party, and are duly provided with exequaturs, shall be
permitted to reside in the territories of such other party at the places where
consular officers are permitted by the applicable laws to reside; they shall enjoy
the honorary privileges and the immunities accorded to officers of their rank by
general international usage; and they shall not, in any event, be treated in a
manner less favourable than similar officers of any third country.
3. All furniture, equipment and supplies intended for official use in a consular or
diplomatic office of the sending state shall be permitted entry into the territory of
the receiving state free of all customs duties and internal revenue or other taxes
whether imposed upon or by reason of importation.
89
4. The baggages and effects and other articles imported exclusively for the personal
use of consular and diplomatic officers and employees and the members of their
respective families and suites, who are national of the sending state and are not
the nationals of the receiving state and are not engaged in any private occupation
for gain in territory of the receiving state, shall be exempt from all customs duties
and internal revenue or other taxes whether imposed upon or by reason of
importation. Such exemption shall be granted with respect to property
accompanying any person entitled to claim and exemption under this paragraph
on first arrival or on any subsequent arrival and with respect to property
consigned to any such person during the period the consular of diplomatic officer
or employees for through whom the exemption is claimed, is assigned to or is
employed in the receiving state by the sending state.
5. It is understood, however, (a) that the exemptions provided by paragraph 4 of this
Agreement shall be accorded in respect of employees in a consular office only
when the names of such employees have been duly communicated to the
appropriate authorities of the receiving state; (b) that in the case of the
consignments to which paragraph of this Agreement refers, either state may, as
condition to the granting of exemption provided, require that a notification of any
such consignment be given in such manner as it may prescribe; (c) that nothing
herein shall be construed to permit the entry into the territory of either state of any
article the importation of which is specifically, prohibited by law.
6. Nationals of the Kingdom of Nepal in the United States of America and nationals
of the United States of America in the Kingdom of Nepal shall be received and
treated in accordance with the requirements and practices of generally recognized
international law. In respect of their persons, possessions and rights, such
nationals shall enjoy the fullest protection of the laws, and authorities of the
country, and shall not be treated in any manner less favourable than the nationals
of any third country.
7. In all matters relating to customs duties and charges of any kind imposed on or in
connection with importation or exportation or otherwise affecting commerce and
navigation, to the method of levying such duties, to all rules and formalities in
connection with importation or exportation, and to transit, warehousing and other
facilities, each Party shall accord unconditional and unrestricted most favoured
nation treatment to article the growth, produce or manufacture of the other Party,
from whatever place arriving, or to article destined for exportation to the
territories of such other Party, by whatever route. Any advantage, favour,
privilege or immunity with respect to any duty charge or regulations affecting
commerce or navigation now or hereafter accorded by the United States of
America or by the Kingdom of Nepal to any third country shall be accorded
immediately and unconditionally to the commerce and navigation of the Kingdom
of Nepal and of the United States of America, respectively.
8. There shall be expected from the provisions of paragraph 7 of this Agreement
advantages now or hereafter accorded: (a) by virtues of a customs union of which
either party may become a member: (b) to adjacent countries in order to facilitate
frontier traffic: (c) to third countries which are parties to a multi-lateral economic
agreement of general applicability, including a trade areas of substantial size,
90
having as its objective the liberalization and promotion of international trade or
international economic intercourse and open to adoption by all the United
Nations., and (d) by the United States of America or its territories or possessions
to one another, to the Republic of Cuba, to the Republic of the Philippines, or to
the Panama Canal Zone. Clause (d) shall continue to apply in respect of any
advantages now or hereafter accorded by the United States of America or its
territories or possessions to one another irrespective of any change in the political
status of any such territories or possessions.
9. Nothing in this Agreement shall prevent the adoption or enforcement by either
party: (a) of measures relating to fissionable materials, to the importation or
exportation of god and silver, to the traffic in arms, ammunition and implements
of war, or to such traffic in other goods and materials as is carried on for the
propose of supplying a military establishment., (b) of measure necessary in
pursuance of obligations for the maintenance of international peace and security
necessary for the protection of the essential interests of such Party in time of
national emergency; or (c) of status in relation to immigration.
10. Subject to the requirement that, under like circumstances and conditions, there
shall be no arbitrary discrimination by either party against the nations, commerce
or navigation of the other Party in favour of the nations, commerce or navigation
of any third country, the provisions of this Agreement shall not extend to
prohibitions or restriction; (a) imposed on moral or humanitarian grounds, (b)
designed to protect human, animal, or plant life or health, (c) relating to prison-
made goods., or (d) relating to the enforcement of police or revenue laws.
11. The provisions of this Agreement shall apply to all territory under the sovereignty
or authority of either of the parties except the Panama Canal Zone.
12. This Agreement shall continue in force until superseded by a more comprehensive
commercial agreement or until 30 days from the date of a written notice of
termination given by other Party to the other Party, whichever is the earlier.
Moreover either Party may terminate paragraphs 7 and 8 on thirty days written
notice.
If the above provisions are acceptable to the Government of the Kingdom of Nepal this
note and the reply signifying assent there to shall if agreeable to the Government, be
regarded as constituting an agreement between the two Governments which shall become
effective on the date of such acceptance.
Please accept. You Highness, the renewed assurance of my highest consideration.
Joseph C. Satterthwaite
His Highness
The Maharaja
Padma Shum Shere Jung Bahadur Rana
Prime Minister and Supreme Commander-in-chief
Nepal
91
The Prime Minister and Supreme Commander-in-chief of Nepal to the Chief of the
United States Special Diplomatic Mission.
Your Excellency,
I have the honour to acknowledge the receipt of your not dated 25th April 1947, in which
there is set forth the understanding of your Government of the agreement reached through
recent conversations held at Katmandu between the representatives of the Government of
the United States of America and the representatives of the Government of Kingdom of
Nepal, in the following terms.
The Government the United States of America and the Government of the Kingdom of
Nepal, desiring to strengthen the friendly relations happily existing between the two
countries, to further mutually advantageous commercial relations between their peoples,
and to maintain the most-favoured-nation principle in its unconditional and unlimited
form as the basis of their commercial relations agree to the following provisions.
1. The United States of America and the Kingdom of Nepal will establish diplomatic
and consular relations at a date which shall be fixed by mutual agreement between
the two Governments.
2. The diplomatic representatives of each party accredited to the Government of the
other party shall enjoy in the territories of such other party the rights. Privileges,
exemptions and immunities accorded under generally recognized principles of
international law. The consular officer of each Party who are assigned to the
Government of the other party, and are duly provided which exequaturs, shall be
permitted to reside in the territories of such other party at the places where
consular officers are permitted by the applicable laws to reside: they shall enjoy
the honorary privileges and the immunities accorded to officers of their rank by
general international usage, and they shall not in any event, be treated in a manner
less favourable than similar officers of any third country.
3. All furniture, equipment and supplies intended for official use in a consular or
diplomatic office of the sending state shall be permitted entry into the territory of
the receiving state free of all customs duties and internal revenue or other taxes
whether imposed upon or by reason of importation.
4. The baggage and effects and other articles imported exclusively for the personal
use of consular and diplomatic officers and employees and the member of their
respective families and suits, who are national of the sending state and are not
nationals of the receiving state, shall be exempt from all customs duties and
internal revenue or other taxes whether imposed upon or by reason of importation.
Such exemption shall be granted with respect to property accompanying any
persons entitled to claim an exemption under this paragraph on first arrival or on
any subsequent arrival and with respect to property consigned to any such person
during the period the consular or diplomatic officer or employee, for or through
whom the exemption is claimed, is assigned to or is employed in the receiving
state by the sending state.
92
5. It is understood, however (a) that the exemptions provided by paragraph 4 of this
Agreement shall be accorded in respect of employees in a consular office only
when the names of such employees in a consular office only when the names of
such employees have been duly communicated to the appropriate authorities of
the receiving state: (b) that in the case of the consignment to which paragraph 4 of
this Agreement refers, either state may, as a condition to the granting of the
exemption provided, require that a notification of any such consignment be given
in such manners as it may prescribe: and (c) that nothing herein shall be construed
to permit the entry into the territory of either state of any article the importation of
which his specifically prohibited by law.
6. Nationals of the Kingdom of Nepal in the United States of America and Nationals
of the United States of America in the Kingdom of Nepal shall be received and
treated in accordance with the requirements and practices of generally recognized
international law. In respect of their persons, possessions and rights, such national
shall enjoy the fullest protection of the laws and authorities of the country, and
shall not be treated in any manner less favourable than the national of any third
country.
7. In all matters relating to customs duties and charges of any kind imposed on or in
connection with importation or exportation or otherwise effecting commerce and
navigation, to the method of levying such duties and charges and to all rules and
formalities in connection with importation or exportation, and to transit,
warehousing and other facilities each party shall occur unconditional and
unrestricted most-favoured-nation-treatment to articles the growth, produce or
manufacture of the other party, from whatever place arriving, or to articles
destined for exportation to the territories of such other party, by whatever route.
Any advantages, favour, privilege or immunity with respect to any duty, charge or
regulation, effecting commerce or navigation now or hereafter accorded by the
United States of America or by the Kingdom of Nepal to any third country shall
be accorded immediately and unconditionally to the commerce and navigation of
the Kingdom of Nepal and of the United States of America, respectively.
8. There shall be excepted from the provisions of paragraph 7 of this Agreement
advantages now or hereafter accorded., (a) by virtue of customs union of which
either party may become a member., (b) to adjacent countries in other new
facilitate frontier traffic., (c) to third countries which are parties to a multi-lateral
economic agreement of general applicability, including a trade area of substantial
size, having as its objective the liberalization and promotion of international trade
or other international economic intercourse and open to adoption by all the United
Nations and (d) by the United States of America or its territories or possessions to
one another to the Republic of Cuba, to the Republic of the Philippines or to the
Panama Canal Zone. Clause (e) shall continue to apply in respect of any
advantages now or hereafter accorded by the United States of America or its
territories or possessions to one another irrespective of any change in the political
status of any such territories or possession.
9. Nothing in this Agreement shall prevent the adoption or enforcement by either
party; (a) of measure relating to fissionable materials, to the importation or
exportation or gold and silver to the traffic in arms, ammunition and implements
93
of war, or to such traffics in other goods and materials as is carried on for the
purpose of supplying a military establishment; (b) of measure necessary in
pursuance of obligations for the maintenance of international peace and security
or necessary for the protection of the essential interests of such party in time of
national emergency; or (c) of status in relation to immigration.
10. Subject to the requirement that under like circumstances and conditions there
shall be no arbitrate discrimination by either party against the nationals,
commerce or navigation of the other party in favour of the nationals, commerce or
navigation of any third country, the provision of this agreement shall not extent to
prohibitions or restrictions (a) imposed on moral or humanitarian grounds., (b)
designed to protect human, animal or plant life or health., (c) relating to prison
made goods., or (d) relating to the enforcement of police or revenue laws.
11. The provisions of this Agreement shall apply to all territory under the sovereignty
or authority of either of the parties, except the Panama Canal Zone.
12. This Agreement shall continue in force until superseded by a more comprehensive
commercial agreement, or until thirty days from the date of a written notice of
termination given by either party to the other party, whichever is the earlier.
Moreover either party may terminate paragraph 7 and 8 on 40 days written notice.
The Government of the Kingdom of Nepal approves the above provisions and is
prepared to give effected there to beginning with the date of this reply note.
Please accept your Excellency the renewed assurance of highest consideration
94

Nepal&#39;s Regional and Bilateral Trade Agreements

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Nepal&#39;s Regional and Bilateral Trade Agreements

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Final Report

Nepal's Regional and Bi-lateral Trade Agreements:

Report Submitted by:

I am grateful to several officials of Ministry of Industry, Commerce and Supplies,

December 23, 2007 Uma Shankar Prasad

Executive Summary 6 -10

Chapter II: Trade Liberalization Initiatives 16 - 19

Chapter III: Nepal’s Trade Performance 20 - 32

Chapter IV: Review of Bi-lateral and Regional Trade Agreements 33 - 45

Chapter V: New Dimensions and Future Prospects 46 - 53

ASEAN - Association of South East Asian Nations

ISI - Import Substituting Industrialization

VAT - Value Added Tax

Nepal was characterized by the interventionist approach of economic policies for a

Slow progress in the WTO negotiations, developing countries’ aspirations and

Trade liberalization has become the cornerstone of economic reform strategies

Impact of trade liberalization on country’s development has been a highly controversial

Slow progress in the WTO negotiations, developing countries’ aspirations and

In the post-liberalization era, Nepal's competitiveness in export has eroded considerably.

1.3 Methodology and Data Base

1.4 Organization of the Chapters

Trade Liberalization Initiatives

2.1 Trade Liberalization: Historical Background

The developing countries faced serious economic difficulties on account of mainly

Trade liberalization has become the cornerstone of economic reform strategies

2.2 Nepalese Context

The Panchayat government after the political referendum of 1980 followed an

Nepal was characterized by the interventionist approach of economic policies for a

After restoration of multi-party democracy in Nepal in 1990, Nepal accelerated the

2.3 Liberalization Outcomes

Nepal has comparative advantage in a number of labour-intensive manufacturing and

Nepal’s Trade Performance

3.1 Direction and Composition of Nepal’s Foreign Trade

3.2 Nepal's Export Trade: Partners and Commodities

S. Countries Value in Million Rs. %

Primary products constitute an overwhelming share of Nepalese exports to India. These

3.3 Nepal Import Trade: Partners and Commodities

Total Import 108,635 128,225 135,836 148,294 162,840

3.4 Unauthorized Trade

While discussing export-import aspects of Indo-Nepal trade, it is important to mention

No authentic data exists in Nepal, except occasional newspaper reports, to demonstrate

Review of Bi-lateral and Regional Trade Agreements

4.1 Regional Trade Agreements

SAFTA envisages to dismantling of all tariff and non-tariff barriers to intra-regional

Trade Liberalization Programme under SAFTA: Major Elements

The tariff reduction by the Non-Least Developed Contracting States from

In BIMSTEC, each of the member countries exhibits differential capabilities in many

Implementation of transport linkages and physical connectivity among the member

Asia-Pacific Trade Agreement (formerly known as Bangkok Agreement), which was

4.2 Bi-lateral Trade Agreements

4.2.1 Indo-Nepal Trade Agreement

After so-called restoration of democracy and the advent of democratic government in

Exemption from basic custom duties and quantitative restrictions on imports of

Preferential access for Nepalese manufactured exports to India is provisioned by the

a. Alcoholic Liquors/Beverages and their concentrates except industrial spirits,

S. No. Nepalese Article Quantity in MT Per Year

1 Vegetable Fats (Vanaspati) 100,000

4.2.3 Trade Agreement with China

4.2.4 Trade Agreements with Other Countries

4.3 Nepal's Treaty of Transit

4.3.1 Indo-Nepal Treaty of Transit

In consideration to the growing containerization of the world trade, development of

4.3.2 Nepal-Bangladesh Treaty of Transit

Nepal's Regional and Bilateral Trade Agreements

Nepal's Regional and Bilateral Trade Agreements