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np Economics - XI
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Foreign Trade
Meaning:
The transaction of goods and services between the people of different countries is
called foreign trade. It is also called international trade. According to G.L. Luckeet, The
purchase of goods and services by the citizens of one country from the citizens of another
country is called international trade.
Importance of foreign trade:
Foreign trade plays an important role in economic development of a country
because all countries cannot produce all goods efficiently. The role of foreign trade in
economic development are as follows:
a. Benefit of technological progress:
There should be foreign trade in order to take the benefit of specialization. The
specialization depends on availability of raw materials, geographical situation and
availability of factors of production. The specialization leads to large scale
production.
b. Availability of raw materials:
All countries dont have all kinds of raw materials. The raw materials can be
imported from other countries through foreign trade.
c. Expansion of market:
The foreign trade integrates a country with other countries. Therefore, it widens
the market for goods which is produced in a country.
d. Increase in employment opportunities:
The development of foreign trade leads to the development of export oriented
industries in the country. This increases employment opportunities.
e. Increase in fair competition:
The foreign trade destroys monopoly and it increases competition. The
competition reduces the cost of production and increases the quality of the
products. Thus, the people can get high quality goods at lower prices.
Growth and trends of foreign trade of Nepal:
Exports and Imports are the two components of foreign trade. The difference
between the value of export and value of import is called trade balance. The foreign trade
of Nepal is increasing over the years. The trend shows that there is increasing in the value
of exports, imports as well as total volume of trade. The following table shows the
growth and trends of foreign trade of Nepal.

Year Export Import Trade Balance
(Rs. In million)
2004 53910.7 136277.1 -82366.4
2005 58705.7 149473.6 -90767.9
2006 60234.1 173780.3 -113546.2

This table shows that the total export and import is increasing over the years but it also
shows that there is continuously large amount of trade deficit in Nepalese foreign trade.
Composition of foreign trade of Nepal:
The composition of foreign trade means the items of export and import between
countries. Nepals major import items are finished goods, machinery, equipments,
chemicals, mineral fuels, crude materials, drugs, etc. Similarly, Nepals major export
items are woolen carpet, ready made garments, handicrafts, gold and silver goods, paper
products, jute products, etc.


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Direction of foreign trade of Nepal:
Nepal is a landlocked and least developed country. In the past, Nepals foreign
trade was directed toward India. At that time, about 95% of the total trade was with India
and a small percentage of trade was with Tibet. The trade with overseas countries was
almost nill. But at present Nepals foreign trade is directed towards a wide range of
countries. But India is still a major trading partner of Nepal. The following table shows
the direction of foreign trade of Nepal:

Direction Export (2061/062) Import (2061/062)
India 67.4 % 63.6 %
Rest of the world 32.6 % 36.4 %

Problems of foreign trade of Nepal:
There are various problems of foreign trade of Nepal which are as follows:

a. Land-locked position:
Nepal is a land-locked country. It is surrounded by India from 3 sides and by
China from 1 side. The nearest point to reach sea from Nepal 2900 Km. It is the
major obstacle to take independent trade policy. Thus, it is difficult to freely trade
with overseas countries.
b. Concentrated on limited goods and countries:
Nepals foreign trade is concentrated on few goods and few countries. Nepals
major export items are woolen carpet and ready made garments. They together
contribute more than 80 % of Nepals export.
c. Low production:
Due to slow development of industries, production level is very low in Nepal.
Similarly, the agricultural production is also declining due to traditional method
of farming. Thus, the export of Nepal is declining and import is increasing. As a
result, Nepal is facing the problem of trade deficit.
d. Lack of Capital:
Sufficient capital investment is essential to develop foreign trade of the country.
Well developed capital market is necessary to provide sufficient amount of credit
for the export oriented industries but the capital market of Nepal is still unable to
supply sufficient amount of credit.
e. Defective Government Policy:
The Government Policy regarding foreign trade is defective. The Government
hasnt been able to provide adequate export incentives.
f. Low quality goods:
The goods produced in Nepal are of inferior quality. Therefore, these goods
cannot complete in international market.
g. Lack of studies and research:
There is lack of studies and research regarding foreign trade of Nepal. But
research is necessary for the exploration and expansion of market in foreign
countries.