Nepal-China Transit and Transport deal

Why in news?

=>Two years after signing the Transit and Transportation Agreement, Nepal and China have agreed on the text of the protocol to the agreement that will allow Nepali traders and businessmen to use Chinese sea and land ports for third country trade.

=>With this agreement, Nepal’s long dependence on India for third-country trading has ended, allowing Nepal to trade from the Chinese sea and land ports once the deal goes into effect. Prime Minister K P Oli had signed the ‘Transit and Transporation Agreement’ with China in March 2016, following months-long Indian blockade at the southern border.

Background:

=>In March 2016, when Nepal was recovering from 2015’s double-whammy of a major earthquake and the blockade at the Indian border, the Nepal government, then (and now again) under the leadership of K.P. Sharma Oli, signed the agreement ending India’s complete monopoly over Nepal’s supply system.

=>The treaty was signed with the knowledge that overdependence on one country could invite problems for a landlocked country like Nepal. Therefore, Nepal wanted to expand  its diversity its trade and transit options with other countries, mainly with China, its other neighbor.

 Terms of the agreement:

=>As per the agreement, Nepal can use four Chinese ports — Tianjin, Shenzhen, Lianyungang, and Zhanjiang.

=>Similarly, Chinese side has agreed to allow Nepal to use three dry ports located at Lanzhou, Lhasa, and Xigatse.

Why Chinese ports are not feasible for Nepal?

=>Despite the celebration concerning the agreement on the protocol for the transport and transit agreement, Chinese ports are not feasible for Nepal to use in terms of cost and distance.

=>There is a reason two-thirds of Nepal’s trade is with India: geographical proximity and a well-connected border. Even with this agreement in place, overcoming those Indian advantages will be a steep climb for China.

=>The oldest trading point with China, Tatopani border point, has remained closed since 2015, despite being the major trade crossing before then. The Rasuwagadi-Kerung is the only major trade point currently open between two countries, but due to a lack of proper road infrastructure, this crossing is not regularly used. It is mainly open in the summer season.

=>In the last couple of years, Nepal has expedited the task of widening the road toward Rasuwagadi-Kerung. There are some other border points, but two-thirds of China-Nepal trade remains dependent on the Rasuwagadi-Kerung border crossing and thus overall trade remains very low.

=>The Chinese government closed the Tatopani border soon after the April 2015 earthquake, citing anti-Chinese activities in bordering areas. There have been several rounds of talks between two countries about reopening the border at that location, but there has not been any agreement.

=>The Chinese government has reportedly proposed joint security mechanisms in order to address issues related to security. Nepal and China are also mulling over the opening of new border points, and Nepali officials say China has agreed to do so in principle.

Connectivity matters:

=>Even if more border crossings are opened, the question of distance remains. The Chinese ports that Nepal is going to use are over 3,000 kilometers away from the Nepal-China border.

=>Currently, Nepal is using Kolkata and Vishakhapatnam ports for trade with third countries. Kolkata is 742 km away from the Nepal-India border, while Vishakhapatnam is around 1,400 km from the border.

=>Under normal conditions, then, Nepali businesspeople will prefer Indian ports but even in emergency time like in 2015, it’s likely that Nepal would continue to use Indian ports.

=>However, trade with East Asian countries such as South Korea and Japan could be carried out via Chinese ports. The agreement with China is expected to be fruitful in 10 to 15 years after Nepal is well-connected with China through rail and road.

=>Nepal is thus under pressure to enhance connectivity with China in order to decrease Nepal’s overdependence on India. Officials of both Nepal and China are working on railway connectivity after an in-principle agreement during Oli’s China visit in 2018.

Kathmandu-Kerung railway line:

=>A joint team has conducted a pre-feasibility study for the Kathmandu-Kerung railway line, linking the Nepali capital to the border. The preliminary report by a Chinese company concluded that “complicated geological terrain and laborious engineering workload will become the most significant obstacles to building a cross-border railway line linking the Chinese border town of Kerung with Kathmandu”.

=>The railway line, which has to pass through the rugged Himalayan high mountains, would involve orchestrating complex construction plans, raising questions about whether the most hyped infrastructure project in Nepal will see to its end.

=>China has assured that the railway line will be made possible through the invention of new technology. It will take two years to prepare Detail Project Reports (DPR) for the project. If everything goes as planned, it will take 11 years to complete the railway line after the DPR and investment modality is concluded.

Funding issues:

=>Funding is also a potential snag. Nepal is requesting that China build the railway line as a grant, but China is offering soft loans. So far the two sides have not been able to agree on how the funding from China will be provided.

=>Funding questions are also a major reason why there has been no agreement to date about specific projects in Nepal under the Belt and Road Initiative. Nepal signed a Belt and Road framework agreement with China in May 2017, but Nepal is hesitant to choose projects, fearing debt trap.

Integrating with India:

=>As in other areas, Nepal is making efforts to balance infrastructure projects between China and India. When Indian Prime Minister was in Nepal from August 30-31 to participate in the fourth BIMSTEC Summit, Nepal and India signed a deal on the construction of the Raxual-Kathmandu railway line. According to the Memorandum of Understanding (MoU), India will carry out a preparatory survey within a year.

=>On April 7, 2018, the two Governments had issued a joint statement on expanding rail linkages, agreeing to construct a new electrified rail line, with India’s financial support, connecting the border city of Raxaul in India to Kathmandu in Nepal.

=>As a first step, it was agreed that the Government of India, in consultation with the Government of Nepal, would carry out preparatory survey work within one year, and the two sides would finalize the implementation and funding modalities of the project based on the Detailed Project Report.

=>The railway diplomacy is part of Nepal’s effort to enhance relations with China while keeping cordial relations with India. Foreign policy analysts are keenly watching to see if it can succeed.

Pic courtesy:ForumIAS Blog