“If you are coastal, you serve the world; if you are landlocked, you serve your neighbors,” contends Paul Colliers ¹. It is sensible to look at this excerpt in light of Nepal’s specific context, which is landlocked as well as poor in terms of natural resources (except inland water resources).

Nepal can be said to be molded by its geographical circumstance in almost entirety. How Nepal is perceived in the world as well as how Nepal conducts itself in international politics is largely determined by its geographical position. Relations between Nepal and its neighbors have been preoccupied mainly on trade, security and migration concerns; Nepal’s enclosed geography and its proximity to India and China being the main reason. For instance, Nepal’s two third of foreign trade is restricted with India ². A look at the Indian embargo of 1989 can be instrumental in understanding how Nepal’s enclosed geography is deterministic of its relations with the neighbors. “In the final analysis, the dispute underscored a central geopolitical reality: landlocked Nepal did not have the military, diplomatic, or economic clout to withstand an Indian blockade as long as the government in New Delhi was willing to risk international opprobrium and press its case against the kingdom”³.  A landlocked country is one which does not have any self-access to the seas because it is surrounded by external land from all sides. Even the UN has considered special provisions for landlocked developing countries due to this inherent spatial disadvantage. By and large, it is not too far stretched to say that Nepal’s economic wellbeing to a very large extent is contingent on the kind of relations with its transit neighbors, mainly India. Nepal’s most basic needs come from and through India.

Of course, simply having direct access to sea is not a panacea for all economic predicaments. There are many countries that have access to sea but still are not very well off as expected. It is beyond doubt that landlocked countries are disadvantaged in terms of trade openness, but it also circumvents possibilities to learn from wider experiences of the world. India is the only country through which Nepal connects with the outer world (as the transit country); giving the former an upper hand in negotiations in terms of how can its trade routes be used.

The most important obstacle that a landlocked country faces is hindrance to trade openness. Lack of direct access to important international markets result in supplementary transit costs; hence, export and imports come at a dear price. Even if they might not be facing tariff barriers, exports or imports in or out of the country become expensive. For instance, “The success or failure of trade of landlocked developing countries is largely determined by the availability and cost of transit transport“⁴.

A good example is the tax rate on automobiles in Nepal. At 238 per cent, Nepal has one of the highest tax rates on automobiles ⁵. Similarly Nepal’s exports do not compete very well because its products become relatively expensive by the time it reaches the international market. This is determined not only by the exorbitantly expensive transport facilities within the borders of Nepal, but also India’s mediocre transportation infrastructure. The latter determining efficiency of transportation and subsequent costs, that moves goods from land to the seas. 

With most of the countries in the world reaping the benefits of globalization, the plight of landlocked countries (with some exceptions) seem pessimistic. It is not too far stretched also to claim that some of South East Asian countries had similar economic conditions in the post-war period as Nepal’s. But the former countries benefited by direct access of the seas; not ignoring the government policies and the liberalization process that resulted in their economic growth.

Trade has been the magic mantra for most of the countries to prosper. Once trade reaches a certain level of maturity, proficiency automatically develops. This is exhibited by the comparative advantage theory. For instance, induced by proper incentives, increased output of production leads to cost advantage on one hand and better quality goods on the other hand. This increases the competitive ability of the producer. To an extent, one has to face global competition to become globally competent. Nepal neither faces global competition, nor is it globally competitive. This has led to lack of incentives for the producer.

Landlocked countries usually are subject to the prevailing condition of the immediate coastal country. The spillover effect- “With each additional 1 percent that the neighbors grow raises their growth by 0.7 %”⁶. Paul Collier contends that being landlocked is one of the four traps that hinder likelihood of economic prosperity in a country via ripping the benefits of a globalized world economy. Moreover, Nepal and India have open borders which facilitate movement of tens of thousands of people from both sides to the border to travel to and fro; especially India provides millions of job opportunities that the Nepali people would have otherwise not received in the home country.

Due to poor transportation infrastructure, the Terai has not been able to supply food deficits in the hills; rather it has to export to India. The Treaty of Trade 1991 governs bilateral trade between Nepal and India which was further revised in 1999, with a treaty of transit. “These provide that: (i) India allows freedom of transit for Nepalese third-country trade across its territories, through routes mutually agreed upon; (ii) permission is granted for the movement of Nepalese trucks to and from the nearest railway stations to pick up transit cargo; (iii) traffic in transit is exempted from customs duty and all charges excluding transportation and service charges; and (iv) ware- housing/storage facilities are provided for goods awaiting customs clearance before transport to Nepal” ⁷. Moreover, there is a recent amendment to the Protocol to the Treaty of Transit of 1999 which allows Nepal to re- export goods through India which can have third country origins ⁸. But despite such concession- from India, Nepal has not been able to fully utilize the market access provided to it. This is mainly ascribed to Nepal’s poor export performance. Regardless of these facilities provided by trading partners, Nepal’s incapacitated supply constraints have rendered it pointless.

Why neighbor matters

It is suggested no matter how far or near a landlocked country is situated from the closest shore of the neighbor; the cost of exporting is usually extremely high. The coastal country’s expenditure on transport infrastructure determines the transport cost for a landlocked country. “If you are landlocked with poor transport links to the coast that are beyond your control, it is very difficult to integrate into global markets for any product that requires a lot of transport, so forger manufacturing- which to date has been the most reliable driver of rapid development” ⁹. This means, if the coastal neighbor has extremely efficient transportation system, it is favorable for landlocked country’s exports.

A quick look at the trade provisions will be helpful in this context; and also how Nepal's economic fate is 'pegged' with India's. “This was to be achieved by levying an export duty that ensured that the landed price of imports from Nepal into India should not be less than the price of equivalent Indian manufacture.” “If the members of a customs union have different levels of development, there is a greater likelihood of gains going to the member country which is more advanced in economic development and far bigger in size and resource.” “Further, there is also the fear of the emergence of economic dualism in that the advanced country with a head start in industrialization may dominate the less advanced member country in manufacturing and reduce it to the level of being a supplier of primary goods.”

The sovereignty of a dependent country is always a question that yields uncertain answers. Paul Collier claims, resource less landlocked countries which are very far off from transit coastlines should have ceased to exist in the first place, because it creates harsh dependency conditions for the landlocked country ¹⁰. For instance, former landlocked countries of Tibet and Sikkim seized to exist because of their particular landlocked landscape and history. While Tibet was annexed by China in 1959 and Sikkim’s integration into the Republic of India took place in 1975.