China connection

  • Deeper economic integration with China is a key to build a prosperous and strong Nepal
Even though Nepal is positioned right on China’s doorstep, it chose to live under a rock while China was advancing at an unprecedented pace in the last 30 years

Jan 12, 2016-Nepal’s failure to integrate with China economically—in trade, foreign direct investment (FDI), and labour mobility—has magnified the economic costs that Nepal faces as a landlocked country. By not establishing reliable road networks with China and not adopting similar policies with China and India for economic integration, Nepal itself created barriers to its trade and economic development. Deeper economic integration with China is a key to build a prosperous, strong and dynamic Nepal. 

Economic integration with the Chinese neither should be perceived as an ideological or political tilt, nor playing the ‘China card’—it is just common sense. The oft-heard claim that economic integration with our northern neighbour is a costly affair is not true. The benefits from such an arrangement will outweigh the costs. Similarly, the claim that linking with China is delinking from India and vice versa is also wrong. A Nepal deeply integrated with both of its neighbours will have a faster pace of economic growth. 

Economic rationales

Economic integration occurs between two countries not because they share the same ideology or political system but for mutual economic benefits. China has been the largest supplier of goods to the US since 2007, replacing Canada. In 2014, 20 percent of total US imports came from China. The largest supplier of goods for the European Union (EU) is also China, contributing 18 percent of their imports. There are numerous other countries for which China is a prominent trading partner, an impossible achievement if the rationales for integration were only political.

In all three forms of economic integration, China has emerged as a force that is second to none. Since 2008, replacing the US, China has been the largest global exporter of goods and services. In 2014, China contributed 12 percent of the global exports worth $18.7 trillion, followed by 8.7 percent from the US. Similarly, China was the second largest global importer, absorbing 10 percent of global exports. 

China is becoming a stellar player in capital market as well. In 2014, China became the most favoured nation for FDI, replacing the US as the largest FDI receiving country. Out of $1.3 trillion global FDI flows, China received 10.5 percent and supplied nine percent of it to other countries.

Similarly, China has been the world’s top tourism spender since 2012. Last year alone, Chinese travellers spent $165 billion, compared to $111 billion by US citizens.

It is  unbelievable that despite sharing borders with such an economic powerhouse, Nepal continues to hesitate to integrate with it. All the developed countries have been  reformulating their policies to reap the benefits of expanded markets in China. Even though Nepal is positioned right on China’s doorstep, it chose to live under a rock while China was advancing at an unprecedented pace in the last 30 years. All political parties were equally neglectful, whether they call themselves communists, socialists, social democrats, monarchists, or libertarians.

Lopsided trade triangle

Nepal’s level of economic integration with China is minuscule. Take goods trade for instance: in 2014, India exported goods worth $5 billion to Nepal and Nepal exported goods worth $0.6 billion to India, with per day trade of $15.5 million between the two countries. Similarly, Chinese exports to Nepal were worth $1 billion and Nepali exports to China were worth $0.05 billion, with per day trade of $2.9 million. Hence, Nepal’s trade with India was more than five times its trade with China. Nepal-India linkages will be even higher when we consider other important linkages such as services trade, peoples’ mobility (remittances), FDI etc., as these flows with China are almost non-existent.

Research confirms that the main determinants of trade between any two countries are their sizes (GDP), per person income, distance and trade policies between them—size, wealth and freer policies affecting trade positively and distance affecting it negatively. China, with the GDP of $10 trillion is five times larger than India (also an average Chinese is five times richer than an average Indian), indicating that China’s trade would be about five times that of India’s with any country that is similarly distanced and that has similar policies with China and India. Indeed, in 2014, China’s global trade (exports plus imports) was 5.5 times higher than that of India’s. US-China trade was nine times higher than US-India trade; EU-China trade was four times higher than EU-India trade. 

This global trend suggests that if Nepal had reasonable infrastructure in the north and symmetric policies with both of its two neighbours, Nepal-China trade would have been five times that of Nepal-India trade, not one-fifth as it presently is. Given the present level of export to India at $0.6 billion, Nepal’s exports to China in 2014 should have been about $3 (not $0.05) billion. Moreover, export expansion creates more and better paying jobs, and in a country like Nepal, where employment is a huge problem, expanding its trade with China can help on this front as well. With labour productivity (per employee production) of about $1,400 in Nepal, it would mean creating 2.1 million jobs, which is about the number of unemployed in Nepal today. If the export content can be made mostly country based, then the GDP would increase by $3 billion, a whopping 16 percent. There cannot be a better silver bullet for Nepal that is riddled with chronic unemployment and stagnation. Considering that in 2014, China’s goods import was equal to $1.8 trillion, it would not have much difficulty absorbing additional exports from Nepal.

Delete the distance

These are just the tip of the iceberg of the potential benefits that integration with China may bring. In fact, the benefits are phenomenal and multifaceted. It will bring more investment, more tourists, cheaper imports and better technology to Nepal. More importantly, it will create a new wave of dynamism in Nepal’s political, social and economic institutions. Integration with China is essential to fight the four enemies that Nepal has: landlockedness, institutional degradation, unemployment and poverty.

Nepal will be a prosperous country only if a voluntary migration occurs from the Tarai, which is densely populated, to the hill and mountain regions, which are almost deserted and bordered with China. For that to happen, hill and mountain districts must be turned into vibrant economic regions, with jobs for the people from Tarai as well. Nepal needs to connect with China through road networks. Furthermore, Nepal must strive to integrate with both its neighbouring countries by providing level playing field for both of them through similar trade and investment policies.

The mountains that block the free flow of goods between Nepal and China are not impenetrable. The resilient people of Nepal want to make this happen. The political parties need to support this goal.

Acharya is an economist

Published: 12-01-2016 08:56

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