Bangladesh–Nepal Trade Relations: Understanding the Influence of Economic Diplomacy

Introduction

Bangladesh and Nepal, countries of South Asia having different ecological conditions, social systems, and historical and cultural backgrounds, are perceived to have a sound and smooth progress of their bilateral relations. It is apparent that, in the context of fast-changing global structure, it needs more creative and courageous steps to protect and promote the interest of smaller economies and also for maximizing the mutual interest. What we have observed, despite excellent bilateral relations between Bangladesh and Nepal, is that one is struck by the fact that over the years our economic relations remained at a less than desirable level (Abdul Matin 2010). Our goal should be modifying the direction and introducing new dynamism in our economic relations according to the priority set for economic diplomacy by the Government of Bangladesh. Bangladesh–Nepal bilateral relations, featuring equal and sincere treatment, mutual support and friendship for generations, can be an example for relations between two countries. Nepal’s relationship with Bangladesh is unique. It is noticeable that since the very beginning of the establishment of diplomatic relations, Bangladesh–Nepal relations were characterized by ties at the people’s level.

The relations have improved and the major stake in the relationship lies in strengthening the border areas and in improving people-to-people contact and furthering economic relations and trade. For example, in the recent past India and Bangladesh have opened immigration offices on their respective sides of the Fulbari–Banglabandha border point enabling Nepal and Bangladesh to expedite their trade exchange. The setting up of the offices has enabled passenger movement through the route—so far being used only for cargo movement. The article presents the prevailing trade relations between two countries with particular focus on challenges and opportunities. The article concludes with a number of recommendations deepening economic diplomacy for well-meaning trade relations between Bangladesh and Nepal.

Economic Diplomacy: Conceptual Discussion

It is believed that economic diplomacy has evolved from trade diplomacy. Traditional trade diplomacy was the domain of government officials/diplomats and there was not much involvement of the private sector and the civil society except in some developed countries. With ever-expanding economic globalization and associated complexities, economic diplomacy has become an intrinsic part and determinant of the process of formulating and implementing a country’s foreign policy. A significant result of the evolution of traditional trade diplomacy into economic diplomacy is that the private sector and the civil society are now even more involved in decision-making, and it influences the negotiating position of a country (Abdul Matin 1998). The involvement of the civil society results from the imperative to get views of common stakeholders, while private sector involvement stems from the need to remain competitive in relevant markets. This process factored into negotiating positions to imbue the position with their concerns, and thus both engagements result in wider national ownership.

Economic diplomacy is concerned with economic policy issues, for example, work of delegations at standard setting organizations such as the World Trade Organization (WTO). Economic diplomats also monitor and report on economic policies in foreign countries and give the home government advice on how to best influence them. Economic diplomacy employs economic resources, either as rewards or sanctions, in pursuit of a particular foreign policy objective. This is sometimes called ‘economic statecraft’. Economic diplomacy is functional at three levels: bilateral, regional, and multilateral. Bilateral economic diplomacy plays a major role in economic relations. It includes bilateral trade and treaty; agreements on investment; employment or avoidance of double taxation; and range of formal and informal economic issues between two countries. Bilateral Free Trade Agreements (BFTAs) have been the order of the day and they are being implemented by many countries around the world.

Nonetheless, economic diplomacy requires special skills and capabilities from the people who engage in it. Priorities must first be identified that proceed from criteria established by national interests. In this respect, both the economic and the political and socio-cultural contexts of common interests are very important (Hocking 2000). This is achieved by creating a semantic field that is common for all the entities participating in the coordinated interaction. This common field of interaction emerges under the influence of the common goals of its participants, without which their single economic motivation loses its bearing and they no longer have a basis for coordinating their activities in the global expanse. This primarily requires precise designation of the macro-objective parameters of national interests. These are within the framework of which economic entities can interact in terms of resource, factor, and institutional values, as well as find an established market, a steady source of income, and, finally, state and legal guarantees of right protection (Lampton 2001).

The country’s economic whole serves as the target of national economic interests, which is primarily developed by the efforts of domestic manufacturers. It is supported in their interests by the state’s economic and social policy. Only with this kind of mechanism of interaction, it is possible to ensure economic self-development based on an identified economic model, which is the highest and natural goal of the national economy. However, an interest aimed at developing both the whole and the parts of the national economy in the contemporary world cannot be realized by means of unilateral protectionism and require comprehensive economic cooperation on the international arena (Leifer 2000).

Economic diplomacy promotes a more profitable solution to international problems by reinforcing the instruments of traditional diplomatic work with economic factors. At the beginning of the twenty-first century, ideological contradictions in relations among states have been receding into the background, while the role of the economic component in foreign policy is increasingly rising. In the context of globalization, diplomacy is being made economic by countries taking a more active part in the international division of labor and by greater integration of their national economies in the world economy (Olins 1999). The main task of economic diplomacy is to achieve optimal, from the viewpoint of achieving national interests, focusing on the interests of these centers on the country’s economic potential and geo-economic position. In other words, economic diplomacy is needed for realistically evaluating one’s own opportunities and elaborating methods for handling the competitive advantages that are available. These are primarily factor advantages, among which raw material sources and production potential consequently come forward as interchangeable priorities for countries with a transition economy.

Globalization has augmented the importance of economic interdependence among countries. The emergence of an expanding rules-based global trading system under the WTO and bilateral/regional trade agreements has opened the door for new opportunities in the sphere of world trade. This has spurred countries into engaging in negotiating a large number of international agreements through bilateral, regional, and multilateral fora. These negotiations have generated the need for better understanding of the science and skills of economic diplomacy (Rana 2000). Economic diplomacy is concerned with anticipating and influencing the outcomes of future economic policy regimes of other countries. This requires a need for better understanding of the working of market forces in different countries in the given dynamic global economic environment. The process of continuous engagement through economic diplomacy helps a country in advancing its economic interests and, equally importantly, those of its partners. A crucial pre-condition for the successful conduct of economic diplomacy is the existence of a critical pool of skilled personnel in the government, private sector, and civil society. This pre-condition is to understand and negotiate trade, as well as investment and other economic issues from the national development perspective after taking into account a country’s strengths, limitations, opportunities, and threats.

The narrow perspective of economic diplomacy defines it as the conduct by government officials/diplomats in the context of negotiations and other relations between nations—the art and science of conducting such relations, skills in managing negotiations, public relations, etc. so that there is little or no ill-will. In other words, negotiations must end as a positive sum game. The broader perspective of economic diplomacy rests on the management of international relations through negotiations by government officials/diplomats; the skills required for such management; adroitness in personal relations; tact and engagement with private sector and civil society, etc. In other words, economic diplomacy deals with articulation of foreign policy in the real world of economic relations between nations to flesh out and implement the principles and objectives which are set out in the policy. It involves the application of skills and tact in the conduct of official relations, particularly trade and investment, and in engaging the private sector and civil society constructively by governments of sovereign states. National economic success in today’s world depends crucially on the skill of negotiators in forging effective and beneficial economic relationships (Weber 2005). Learning new skills and acquiring new knowledge are no longer just desirable; they have become an imperative.

Trade agreements between two or more countries can be known as either a Free Trade Agreement (FTA), Closer Economic Partnership (CEP), or Strategic Economic Partnership (SEP). The names reflect the preferred terminology of different countries. Trade agreements make international trade easier and more efficient by improving access for exporters and investors to other countries’ markets, reducing any barriers to trade, and ensuring existing access is maintained. Trade agreements establish a set of rules. They make participating countries’ regulators and officials work more closely together to create a secure trading relationship. The negotiating process itself brings trading relationships into sharper focus, boosting the visibility and desirability of a market to partner countries’ businesses and investors.

Portrait of Historical Relations between Bangladesh and Nepal

Nepal established diplomatic relations with Bangladesh on April 8, 1972. With full of pride, it should be pointed out that Nepal was the seventh country to extend recognition of Bangladesh’s sovereign rights and independence soon after its independence. Since the establishment of diplomatic ties, the bilateral relations between Nepal and Bangladesh are characterized by cordiality, goodwill, mutual understanding and shared values, and aspirations of the people. Nepal and Bangladesh share similar views on various issues of common interests and work closely in various regional and international forums, including the United Nations (UN), Non-Aligned Movement (NAM), South Asian Association for Regional Cooperation (SAARC), and Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Nepal and People’s Republic of Bangladesh enjoy excellent bilateral relations since the establishment of diplomatic relations on April 8, 1972. A bilateral relation between the two countries is on a regular and wide-ranging base (Abdul Matin 2005).

On the contrary, the Federal Democratic Republic of Nepal traditionally maintains a non-aligned policy and enjoys friendly relations with neighboring countries. As a small, landlocked country wedged between two larger and far stronger powers, Nepal maintains good relations with both the People’s Republic of China and India. Constitutionally, foreign policy of Nepal is guided by the principles of the UN Charter, nonalignment, international law, and the value of world peace. Without doubt, Nepal’s most substantive international relations are perhaps with international economic institutions, such as the Asian Development Bank (ADB), the International Monetary Fund (IMF), the World Bank (WB), and the SAARC a multilateral economic development association as well as UN on the top.

Economic relationships have a strong impact on political diplomacy. The end of the Cold War, emerging democracy, and development are the products of economic diplomacy. For instance, many Eastern European states joined the European Union in the 1990s to fulfill a larger economic interest among European nations. Economic diplomacy is functional at three levels: bilateral, regional, and multilateral. Bilateral economic diplomacy plays a major role in economic relations. It includes bilateral trade and treaty, agreements on investment, employment or avoidance of double taxation, and a range of formal and informal economic issues between two countries. BFTAs have been the order of the day and are being implemented by many countries around the world.

Nepal–Bangladesh Trade Relations: Challenges and Opportunities

In an effort to present the scenario of trade relations between two neighboring countries, the reader should learn about the turning point in Nepal–Bangladesh relations. The two countries signed four agreements in April 1976 relating to trade, transit, civil aviation, and technical cooperation. Nepal–Bangladesh commercial and economic relations are increasingly growing to our mutual benefits, and exchanges at the people-to-people level have been expanded. Bangladesh Government has permitted Nepal to use the port facilities at Mongla Port since September 1997, following the opening of Kakarbhitta–Phulbari–Banglabandha transit route. Both the countries are keen on working together for strengthening economic ties.

Nepal–Bangladesh Joint Economic Commission (JEC) was set up in 1978 at the level of finance ministers. Since activation of JEC, both countries are keen on working together to further strengthening economic ties. The areas of such cooperation have been joint venture sectors like banking, finance, and insurance. It is now evident that Nepal’s exports stood at ₹2.14 billion last year, down from ₹2.73 billion in the previous year. Examples of joint venture initiatives are in the areas of banking (Nepal–Bangladesh Bank), finance, and insurance. New initiatives are being undertaken in the field of readymade garments, leather goods, pharmaceuticals, and PVC pipes. Commerce secretaries of both countries held a discussion at Kathmandu in July 29–30, 2012, as a regular meeting. It was agreed to bind a timeframe for the conclusion of operation modalities for the carriage of transport between two countries.

Economic and commercial relations between Nepal and Bangladesh have been growing steadily over the years (Lakshmanan 2001). However, the volume of bilateral trade has not seen much improvement, despite tremendous potentials for expanding and diversifying trade between the two countries. Nepal mainly exports lentils, oil cakes, cardamom, wheat, vegetable seeds, noodles, and so on to Bangladesh. Imports from Bangladesh include industrial raw materials, chemicals, fabrics and textile materials, jute products, electric and electronic items.

Birth of the SAARC in December 1985 unearthed an immense opportunity to embark upon bilateral and multilateral relations among the South Asian countries. Bangladesh has served in the chairmanship of SAARC and has participated in a wide range of ongoing SAARC regional activities. Evidence from the recent past agreement in principle by Bangladesh and Nepal to facilitate land transit between the two countries speaks about Bangladesh’s endeavor to expand relationship with SAARC countries (Abdul Matin 1998). SAARC provisioned for bilateral trade relationship among its member states which is pointed out further (Rashid 2004b). In order to expand cooperation in trade and further deepen the integration of the regional economies, the SAARC agreement on trade in services was signed at the Sixteenth SAARC Summit held in Thimphu in April 2010. The agreement entered into force on November 29, 2012 after ratification by all SAARC member states with the issuance of a notification by the Secretary General of SAARC. Since the signing of the agreement, the Expert Group on the SAARC Agreement on Trade in Services has been engaged in negotiating Schedules of Specific Commitments. Besides, cooperation in avoidance of double taxation, SAARC trade fairs and SAFTA protocol trigger expansion of trade relations between Bangladesh and Nepal.

Nepal–Bangladesh share commonalities in many aspects to foster bilateral relations as it is evident from the previous discussion. The prevailing relations between two neighboring countries are also guided by the SAARC mandate and diplomatic affiliation with the regional force, India. Significant challenges enumerated from the discussion are as follows: India has agreed to allow Nepal to trade with Bangladesh through its territory, but bureaucratic hurdles and lack of infrastructure have not allowed the arrangement to work. On the top, political unwillingness of Delhi Government also set barrier in this regard. Perhaps the India–Bangladesh memorandum of January 2010 indicates New Delhi’s commitment to force compliance by its bureaucracy and kick-start a process on infrastructure building. Bangladesh and Nepal have a very good bilateral trade relation. Nepal imports about 90 per cent goods to meet local demands. The market is dominated by India, but Bangladesh has a big opportunity to grab market share. Consumer goods, plastic products, battery, construction materials, furniture, electronic goods including refrigerator, television and home appliance, motorcycle, melamine products, and footwear are being exported here.

The need for regional integration is especially urgent when we compare South Asia with Southeast Asia. Whereas 25 per cent of trade of ASEAN countries is with each other, in South Asia this figure stands at a dismal 4 per cent. This statistic represents a colossal inefficiency, and an on-going failure on the part of policymakers and entrepreneurs. Bangladesh needs to ensure that its imports are not held hostage to the monopoly of a select few producers, but are instead received through rigorous international competition. Even though the economic logic in strengthening trade and transit relations between Nepal and Bangladesh is clear enough, little has happened so far other than policy concessions that seem out of touch with the ground reality. For example, the two countries have exchanged a list of 146 products for tariff negotiation without a clear understanding as to which of those had real trade potentials, nor did they consider non-tariff barriers preventing trade.

Nepal is separated from Bangladesh by only 22 km of Indian Territory between them. The interactions between the people of Bangladesh and Nepal go back to thousands of years. Discussion and concurrence of both countries in principle for use of Mongla port in Bangladesh for transporting goods to and from Nepal at a concession rate would help promote tourism, travel agents, and tour operators of both countries would jointly coordinate necessary steps. Positive attitude of both countries to give the final shape to a deal on operational modalities for goods-carrying vehicles in order to ease transit facility to Chittagong and Mongla port remains an assenting sign in strengthening trade relations. People-to-people contact has increased. Cultural and technological cooperation have developed between the two countries. A few bilateral cooperation agreements have been concluded. Both countries have proposed bus service between Dhaka and Kathmandu to facilitate trade, tourism, and contacts among people. The official and institutional ties are endless and grow as time passes. The relation between Bangladesh and Nepal is based on mutual trust and respect.

What we have observed in the recent past is that Nepal and Bangladesh have been able to finalize the list of products that would be provided preferential market access in their respective countries. For example, Nepal has agreed to provide preferential market access for fifty Bangladeshi goods, while Bangladesh has given consent to provide similar treatment for 108 Nepali goods. They are bound to grow as both countries have similar goals, which could be achieved through cooperative efforts. There appears to be a solid basis on which to build on a wide range of relationship for benefit to both countries (Rashid 2004a). Both countries need to reflect on the direction which their great potentials will take in the twenty-first century. Proximity between two countries remains an opportunity to exchange more trade in future. In 2010, a joint communiqué issued by India and Bangladesh assured giving Nepal and Bhutan access to Bangladeshi ports.

The tranquility after the general election in the country will help boost business. The new government will concentrate on building the nation and undertake development projects to improve the living standard of the people. As a result, economic activities will increase and people’s purchase power will go up. Bangladesh can take advantage as its products are becoming familiar to the consumers. Moreover, the South Asian countries produce similar goods, and India by virtue of the economies of scale has an edge over others. India, despite the many arm twists with Nepal or Bangladesh, has moved into a bigger picture—from a bilateral to a regional trader. As Bangladesh is exploring market in Nepal, the export earnings will see a sharp rise. Efforts on regional connectivity have been apparent, such as Bangladesh, India, Bhutan, and Nepal are set to sign an agreement which will ensure seamless travel of transports between the borders of these countries.

Conclusion

The emergence of democracy and globalization has transformed the role of political diplomacy toward economic diplomacy. There is a growing realization that economic relationships have a strong impact on political diplomacy. The end of the Cold War, emerging democracy, and development are the products of economic diplomacy. Economic diplomacy includes bilateral trade and treaty, agreements on investment, employment or avoidance of double taxation, and a range of formal and informal economic issues between two countries. BFTAs have been the order of the day and are being implemented by many countries around the world (Prasai 2011). For Nepal, economic diplomacy is not a new phenomenon. In the eighteenth and nineteenth centuries, Nepal had established business ties and an effective trade system with Tibet and British India. It was created as a result of strategic alliance and was based on economic interest rather than political gain.

The focus of Nepali diplomacy has to shift from mere political relations and foreign aid to trade, tourism, investment, joint ventures, and employment generation. Foreign policy needs a stronger and broader national consensus, as it is linked with national interest and sovereignty. Nepal’s foreign policy is guided by the Charter of the UN. It includes the principles of Panchsheel, co-existence, non-interference, and respect for sovereignty of its neighbors, and solidarity with other small, least developed, and landlocked developing nation. Being a sandwiched and landlocked country, Nepal’s bilateral trade agreements with India and China are of paramount importance.

Nepal should always be aware of its geographic reality, national interest, socio-cultural settings, and economic dimension. Regional cooperation is of growing importance in economic diplomacy. National interest and economic liberalization are easily accepted when it is confounding to a particular region. Opening of borders and markets become easier within a regional framework. Multilateral economic diplomacy takes place within the framework of the WTO, WB, IMF, UN agencies, and others.

With the establishment of WTO, there has been a policy shift in global trading system to promote economic activities (Sarup 2005). Foreign policy needs a stronger and broader national consensus, as it is linked with national interest and sovereignty. Bangladesh’s foreign policy is guided by the Charter of the UN, the principles of co-existence, non-interference, and friendship toward all malice toward none and respect for sovereignty of its neighbors and solidarity with other small, least developed, and developing nations. The success of political diplomacy is a reflection of economic dimension. Bangladesh, at the beginning of twenty-first century, is striving hard to attain its maximum economic benefit through instigation of economic diplomacy, which is evident from closer relations of the government of Bangladesh with different global and regional economic forums.

Nepal and Bangladesh also need to review the administrative structures and procedures in place for customs clearance at checkpoints. It can be argued that it is unfair to compare landlocked Nepal with India and Bangladesh, who have their own ports, but this added challenge further necessitates rigorous administrative reform. Nepal and Bangladesh now need to work to bring India fully on board in helping to develop new trade and transit routes. They also need to follow up any trilateral agreement with a comprehensive package that combines infrastructure-building with customs and administrative reforms. In this, sector-specific trade policies are a necessary component if Nepal is to truly pursue export competitiveness. Despite challenges ahead, there is some hope in that the obvious merits of the argument to open new and more trade and transit routes are slowly gaining ground.

Today, Bangladesh has emerged as a regional hub for ready-made garments (RMG), ¹

The Nepalese business community should not miss out on excellent investment opportunities there, which could multiply benefits. Bangladesh is a good investment venue, with a variety of sectors to invest, such as cement, ceramics, electronics, electrical items, pharmaceuticals, fertilizer, food processing, and garments, among others. Export processing zones in Bangladesh are success stories. Nepal and Bangladesh have to keep friendly relations with India because of our similar cultural religious traditions and geographical attachment. The foreign policy analysts view that both countries should maintain friendly relations with India for promotion of bilateral trade relations positioning economic diplomacy in place. People-to-people contact gained momentum between the two countries, which has to be consolidated in the coming years.

Foreign investors, particularly from Nepal, from the moment they arrive in Dhaka, must be encouraged to feel that in Bangladesh they can look forward to receiving the full support of the government. For that the Board of Investment can take care of all their problems promptly and efficiently. Thus attracting foreign investment, promoting exports, and, in the case of Bangladesh, helping to find employment opportunities for our nationals, would be considered as priority tasks. This is where there is a compelling need for efficient coordination between our missions abroad and the private sector. The decision-makers must be pro-active rather than reactive in their action. Despite having otherwise promising potential to grow, Bangladesh continues to lag behind its competitors for missing out the opportunities and because of indecision of the policy-makers. Private sector should have a lead role in economic activities. Economic diplomacy is best carried out through public–private partnership forum.

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Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.