Foreign Trade and Foreign Employment of Nepal | NEB Class 12 Economics

This chapter covers Nepal’s foreign trade, WTO and SAFTA, and foreign employment with remittance — including advantages and disadvantages.

Nepalese Foreign Trade

Nepalese foreign trade/ Foreign trade of Nepal:

Foreign tradeplays a very important role in the economic development of a country. It promotes economic development by improving competitive capacity, expanding market, and providing modern technology and machinery for the industrial and agricultural sector. Therefore, it is also considered as the vehicle of economic development. Before 1951 AD, Nepal's foreign trade was only with India and Tibet. But after 1951 AD, Nepal's trade relation expanded with many other countries of the world like Japan, USA, Germany, Malaysia, Singapore, Thailand, Kuwait, France, Bangladesh, Spain, etc. Nepal's foreign trade is rapidly increasing but the rate of increase in import is higher than export.

Growth of Nepalese foreign trade:

Before 1951 AD, Nepal‘s trade relation was only with India and Tibet. The decline of the Rana regime in 1951 AD was the turning point of Nepalese foreign trade. After this, the foreign trade of Nepal has run systematically with many countries of the world and the volume of trade has also increased. During the fiscal year 1956/57, the total export of Nepal was equivalent to Rs. 9.5 crore and the total import was equivalent to Rs. 17 crores. The total volume of trade was equivalent to Rs. 26.5 crore. But now, it has increased thousands of times. Nepal's export, import, the volume of trade, and trade deficit are increasing rapidly. But the rate of increase in import is higher, than the rate of increase in export. Consequently, Nepal's trade deficit is very high and increasing rapidly every year. The persistent deficit in foreign trade is due to the low production of export-oriented goods and higher import of consumer goods. In order to reduce this deficit, the Production of competitive goods should be increased, which will help to increase export and reduce import.

* indicates first 8 months dataSource: Economic Survey 2022/23

Composition of Nepalese foreign trade:

The composition of Nepal's foreign trade can be explained by dividing into the following two headings: 1. Composition of export:The major exportable goods of Nepal are woolen goods, carpets (hand-knotted woolen), Nepalese paper and paper products, readymade garments, handicrafts, ornaments, Pasmina, pulses, cardamom, medical herbs, etc. These goods are exported to India and other countries like USA, China, Germany, UK, etc. 2. Composition of import:The major goods imported in Nepal are various finished goods, semi-finished goods, raw materials of industry, machinery, equipment, chemical fertilizers, petroleum products, gold, electrical goods, readymade garments, etc. These goods are imported mainly from India, China, and other Asian countries.

The direction of foreign trade of Nepal:

Before 1951 AD, Nepal's foreign trade was limited only with India and Tibet The trade with India formed 95 percentages and the remaining trade was with Tibet. The trade with overseas countries was almost nil. The major reasons behind the concentration of Nepalese trade with India were: Nepal bordering by India, open border with India, and similarities in language, culture, religion, tradition, etc. But now, Nepal‘s trade relation is with many overseas countries besides India and China. But India is still a major trading partner of Nepal. Other countries include USA, Germany, Japan, UK, France, Italy, Spain, Switzerland, Belgium, etc. Besides India and China, Nepalese products are exported to USA, Germany, Japan, Bangladesh, the UK, France, Italy, Spain, Switzerland, Belgium, etc. Similarly, besides India and China, Nepal imports from Singapore, UK, UAE, Malaysia, Kuwait, etc.  Nepal has also not been successful in the commodity-wise trade diversification. Nepal has more than 90 percent of foreign exchange earnings from commodity exports that come from mere seven commodities: readymade garment, carpet, pulses, handicrafts, leather, medicinal herbs, and paper products. In recent years, the export of these products is also declining.

Problems of Nepalese foreign trade:

1. Landlockedness:Nepal is a landlocked country. It is bordered by India from three sides: east, west, and south and by China from the north. Therefore, Nepal has no direct access to the sea and it has no seaport. Goods are to be exported to different countries either using the land of India or through air transportation. Both of these are very expensive. 2. Low export and high import:The production of exportable commodities is very limited in Nepal. There are very few goods which Nepal has been exporting such as woolen carpets, ready-made garments, handicrafts, herbs and shrubs, tea, coffee, etc. But the export of these goods is declining in recent years. On the other hand, Nepal's import is very high in comparison to export. 3. Low-quality goods:The goods produced in Nepal are of low quality because of the use of inferior inputs and backward technology. Such goods cannot compete with foreign products. Therefore, it is very difficult to sell these goods in the international market. 4. Improper trade policy:Before 1990, the Government of Nepal had adopted import substitution and protectionist policy. But after 1990, the Government of Nepal adopted a liberal trade policy. But this trade policy does not seem favorable to Nepal because of the uncontrolled flow of foreign goods into Nepal. 5. The high cost of production:The cost of production in Nepal is very high in comparison to our neighboring countries: India and China. The causes behind the high cost of production in Nepal are the use of primitive technology, inefficient labor, imported raw materials, inefficient, equipment, etc. 6. Lack of publicity and advertisement:Publicity and advertisement plays a very important role in the promotion of export trade. But, Nepal is not able to publicize and advertise its products in the international market. As the domestic goods are not published in the international market in an attractive way, the speedy and satisfactory development of Nepal's export trade could not take place. 7. Low production:Low production is one of the major problems of Nepalese foreign trade. There are very limited economic activities in Nepal. The industrial base and necessary infrastructure are not well developed. There is still a lack of energy, transportation, communication, skilled and trained manpower, etc. 8. Slow industrial development:The pace of industrial development in Nepal is very slow. The industrial sector of Nepal is still in undeveloped and infant stage. Because of long political instability and transitional period, there is not smooth functioning of the industrial sector and there is also a decline in industrial production. The export-oriented industries are not fully reliable and most of them are seasonal in nature. 9. Lack of trade diversification:There is a lack of diversification of Nepalese foreign trade. It is concentrated on limited goods and countries. Nepal's more than 60 percent of trade is only with India. Nepal is also backward in commodity-wise trade diversification. 10. Tough competition with foreign goods:There is a free the flow of foreign goods in the Nepalese market. These are especially Indian and Chinese goods which are cheaper and superior in quality in comparison to Nepalese products. So, Nepalese market is highly dominated by the products of these countries.

WTO and SAFTA

World Trade Organization (WTO):

World Trade Organization (WTO) is an international organization which deals with global rules of trade between nations. Its main objective is to achieve economic prosperity through fair and free trade. It was established in January 1995. The main root of WTO is GATT (General Agreement on Trade and Tariff) which was established in 1947 with a View to liberalize and expand the world trade.

The headquarters of WTO is located at Geneva, Switzerland. At present, there are more than 164 member countries of WTO. Nepal is a 147th member and got WTO membership on April 23, 2004. Nepal's membership of WTO is very important for its economic development and integration into the multilateral trading system. It will help Nepal for country-wise and commodity-wise trade diversification.

Objectives of WTO:

1. Raising the living standard of the people:

Raising the standard of living and income, promoting full employment, expanding production and trade, and optimum utilization of the world's resources 2. Sustainable development:

Sustainable development is a concept which envisages that development and environment can go together. 3. A better share of growth in trade:

Taking positive steps to ensure that developing countries, especially the least developed countries (LDCs), secure a better share of growth in trade

Principles of WTO

1. International trade without discrimination:

The member countries of WTO can have total freedom to carry out international trade among them as the most favored nations. There will be no discrimination among them for the exchange of goods and services.

2. Free trade:

The member countries adopt free trade policy by reducing customs duties, import taxes, the quota system, red tape, exchange control, etc. in their business transactions.

3. Security guarantee:

WTO provides a security guarantee to its member countries regarding capital investment and the establishment of multinational companies.

4. Development of free trade competition:

Emphasis should be given for open, fair, healthy, and liberal competition among the member countries. It does not allow the principle of protection 5. Support for developing nations:

It also gives equal emphasis to build up the competitive capacity of the developing nations.

South Asian Free Trade Area (SAFTA):

The South Asian Free Trade Area (SAFTA) is an agreement among the SAARC member countries for the development of regional trade and cooperation in South Asia. This agreement was signed on January 6, 2004, during the 12th SAARC summit held in Islamabad, Pakistan and came into force on January 1, 2006. The main objective of SAFTA is to promote and enhance mutual trade and economic cooperation by eliminating trade barriers and facilitating cross border movement of goods.

The South Asian Association for Regional Cooperation (SAARC) is the organization of South Asian Countries founded in 1985. Its seven founding members are Nepal, Bhutan, Bangladesh, India, Maldives, Pakistan, and Sri Lanka. Afghanistan joined the organization in 2007. Thus, at present, there are eight member countries of SAARC.

Objectives of SAFTA:

1. Eliminating trade barriers:

Eliminating barriers to trade in and facilitating the cross-border movement of goods and services between the territories of the member countries

2. Promoting fair competition:

Promoting conditions of fair competition in the free trade area and ensuring equitable benefits to all the member countries, taking into account their respective levels and pattern of economic development 3. Creating an effective mechanism:

Creating an effective mechanism for the implementation and application of this Agreement for its joint administration and for the resolution of disputes and

4. Enhancing mutual benefits:

Establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this agreement

Principles of SAFTA:

1. Rule-based:

SAFTA will be governed by the provisions of the Agreement and also by the rules, regulations, understandings, and protocols to be agreed upon within its framework by The Contracting States.

2. Compatibility with WTO and other agreements:

The contracting states affirm their existing rights and obligations with respect to each other under the Marrakesh Agreement establishing the World Trade Organization and other Treaties / Agreement to which the Contracting States are signatories.

3. Reciprocity and mutuality of advantage:

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 problem of their external trade and tariff policies and systems.

4. Free movement of goods between countries:

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 other equivalent measures. 5. Trade facilitation:

SAFTA shall entail the adoption of trade facilitation and other measures and the progressive harmonization of legislation by the contracting States in the relevant areas.

6. Special preference for the least developed countries:

The special needs of the Least Developed Contracting States shall be clearly recognized by adopting concrete preferential measures in their favor on a non-reciprocal basis.

Foreign Employment and Remittance

Foreign employment and remittance

Nepal has a long history of labor migration, with Nepalese citizens seeking employment opportunities abroad for various reasons. This trend has significantly impacted the country's economy, particularly through remittances. Remittances have alleviated unemployment, reduced poverty, and contributed to the nation's Gross Domestic Product (GDP).  Nepal continues to be a significant labor-exporting country, with a substantial portion of its workforce employed abroad. According to the latest data from the World Bank's Migration and Development Brief 2023, remittances to Nepal accounted for approximately 24% of its GDP in 2022, marking a slight increase from previous years. The primary destinations for Nepalese migrant workers remain the Middle Eastern countries, Malaysia, and South Korea.

The Nepal Rastra Bank (NRB) reports that remittances have been growing at an average annual rate of 8% over the past five years. Despite global economic uncertainties, remittance inflows have remained resilient, underscoring their importance to the Nepalese economy.

Source: Economic Survey 2022/23

Importance of Remittances

1. Contribution to GDP

Remittances have a direct and significant impact on Nepal's GDP. The remittance-GDP ratio in Nepal is among the highest globally, reflecting the critical role these funds play in the national economy. The inflow of remittances helps maintain macroeconomic stability by bolstering foreign exchange reserves and supporting the balance of payments.

2. Poverty Reduction

Remittances have been instrumental in reducing poverty in Nepal. The Nepal Living Standards Survey 2022 indicates that the poverty rate has declined to 18.7%, partly due to the inflow of remittances. Households receiving remittances are better equipped to invest in education, healthcare, and housing, contributing to improved living standards and economic security.

3. Employment Opportunities and Economic Security

The foreign employment sector has created numerous job opportunities within Nepal. The demand for services related to labor migration, such as recruitment agencies, medical examinations, orientation and training centers, and money transfer services, has increased. The NRB estimates that the foreign employment sector generates approximately 350,000 jobs annually in Nepal.

4. Revenue for Government and Private Sector

Remittances contribute significantly to government revenue through various taxes and fees, including those levied on recruitment agencies, passport fees, and value-added tax. The private sector also benefits from the remittance economy, with businesses in travel, communication, and financial services thriving due to the demand created by labor migration.

5. Social Impact

Beyond economic contributions, remittances have social implications. They enable households to achieve greater social status, improve their living conditions, and invest in their children's education. The experience and skills gained by migrant workers abroad also contribute to human capital development when they return to Nepal, fostering a more productive and skilled workforce.

Policy Measures and Challenges

The Nepalese government has implemented various policies to maximize the benefits of remittances. These include encouraging remittances through official channels, providing support services for migrant workers, and promoting financial literacy to ensure effective utilization of remitted funds. However, challenges remain, such as ensuring the welfare and rights of migrant workers, managing the risks associated with volatile global labor markets, and addressing the economic dependency on remittances.

Conclusion

Foreign employment and remittances continue to be a lifeline for the Nepalese economy, contributing to GDP, reducing poverty, and creating employment opportunities. The government's efforts to support and regulate the sector are crucial in maximizing the benefits while mitigating the challenges. As global economic dynamics evolve, Nepal must adapt its policies to sustain and enhance the positive impacts of remittances on its economy and society.

Advantages and Disadvantages of Foreign Employment

Advantages of Foreign Employment in Nepal

The advantages or the role or importance of foreign employment in Nepal are as follows:

a. To solve the unemployment problem: Nepal has a severe unemployment problem. Foreign employment helps to solve the problem of unemployment in the country.

b. Remittance income: Another benefit of foreign employment is that it helps increase the country's remittance income. The amount of remittance income depends on the number of workers going abroad for foreign employment.

c. Skilled and trained human resources: The worker who returns to the home country after some years is the generally skilled and trained workforce. Their knowledge and skill can create new opportunities in the country. d. Increase standard of living: The standard of living of the members of the family living in the home country increases. This is due to the money the worker receives from a foreign country.

e. Poverty reduction: Remittance income received from foreign employment increases household income, which helps increase the consumption of low-income families. It also increases living standards and reduces poverty. Currently, there is a decrease in poverty in Nepal because of remittance.

f. Development of human resources: The remittance income from foreign employment plays a significant role in developing human resources in Nepal. A large part of remittance income is spent on education, health, and nutrition. This increases literacy rate and life expectancy, which means human resource development.

Disadvantages of Foreign Employment in Nepal

The disadvantages of foreign employment in Nepal are as follows:

a. Shortage of human resources in the country: The increase in foreign employment has brought the problem of a shortage of labour in the agriculture and industrial sector of the country. At present, Nepal is facing this problem.

b. Brain drain: The most severe cost of foreign employment is brain drain. Due to the opportunity for foreign employment, the country's most talented, skilled, and highly educated workforce is migrating to developed countries like the USA, UK, Canada, Australia, etc. Therefore, it harms the economic development of developing countries like Nepal.

c. Mismanaged family: Migration of parents can leave families of young children with inadequate guidance and an additional burden of household responsibilities, which can lead to higher school absences, school dropouts, poor nutrition and health care of children- especially younger children, and substance abuse - mainly older children.

d. Creates dependency: It is argued that remittance receipts from foreign employment can create dependency. It may reduce recipients' incentive to work and thus slow economic growth. This, along with a shortage of skilled workers in the country, may hurt the country's economic growth in the long term.

e. Human costs: Remittance may also have human costs. Migrants make significant scarifices. They have to remain separated from their families and incur risks to find work in another country. They may have to work hard to save enough to send remittances. Many Nepalese workers are suffering hardship in gulf countries. Moreover, some of them die in a foreign land due to their hard work.

f. Increase in trade deficit: In Nepal, imports are very high compared to exports. This is resulting large trade deficit in Nepal. One of the major causes of the trade deficit in Nepal is remittance income received from foreign employment because remittance causes an increase in demand for consumer goods, which is fulfilled by importing goods from other countries.