Nepal and Its Neighbors

Historically, Nepal has always been closer to India, a reflection of their cultural and linguistic affinity, political links, and the unique open border regime that exists between the two countries. But if the growing engagement between Nepal and China, its northern neighbor, in recent years is any indication, Kathmandu may become just as close to Beijing in the near future.

Nepalese Prime Minister K.P. Sharma Oli wrapped up his seven-day official visit to Beijing at the invitation of his Chinese counterpart Li Keqiang on March 27, after signing 10 different bilateral agreements dealing with free trade, transport connectivity, financial cooperation, and transit facilities through China. The 15-point Joint Statement issued at the end of the visit charts out a number of areas of cooperation that will greatly deepen engagements between the two countries. Oli's visit to China took place against the backdrop of a four-month long “unofficial” Indian economic blockade – something India denies orchestrating.

“This is indeed a historic visit as for the first time the two prime ministers have spoken at length and agreed on the Chinese train from Shigatse to Rasuwagadhi in the Nepal border. Nepal has also for the first time been given transit rights from China,” said the director of a Kathmandu-based think tank, the Center for South Asian Studies (CSAS), Nishchal N. Pandey.

Although experts doubt its commercial viability, at least for now, the trade and transit agreement will give the landlocked Himalayan nation a right to trade with third countries through Chinese ports. This arrangement will break Nepal’s total dependence on India. The nearest Chinese port, Tianjin, is over 3,000 kilometers away from the Nepal-China border, while the distance to the nearest Indian port – Haldiya – is just 1,000 kilometers from the Indo-Nepal border. However, the expansion of the Chinese railway up to the Nepal border and beyond as agreed during Oli’s visit will be instrumental in boosting Nepal's economic interaction with China in the future. While China has already pledged to extend the Qinghai-Tibet Railway to Nepal's border in Rasuwagadhi via the Shigatse-Kerung stretch by 2020 as a part of its One Belt One Road initiative, during Oli’s visit Beijing agreed to provide financial and technical support for a feasibility study and detailed project report on the proposed Rasuwagadi-Kathmandu and Kathmandu-Pokhara-Lumbini railway projects. Whether Nepal will be able to reap the benefit of China's railway will now largely depend on its ability to develop proper infrastructures on its side of the border, and pursue appropriate policy measures to swiftly implement the deals reached.

A separate agreement to develop a 400-kV cross-border transmission line project from Arun to the Kimathanka border point is equally important as it paves the way for Nepal to export electricity to China. It is estimated that Nepal has the potential to generate at least 80,000 MW of hydroelectricity – of which it has so far generated only 776 MW. But with the end of a decade-long Maoist civil war in 2006, and the promulgation of new constitution through an elected Constituent Assembly in September 2015, the Himalayan nation is now gearing up to harness its rich hydro potential. The ongoing hydropower projects will generate an additional 2,382 MW in a few years’ time. If everything goes as planned, Nepal will have a huge energy surplus within a decade, as the current maximum domestic demand for electricity stands at about 1,300 MW.

The Chinese government also agreed to provide financial support on preferential terms to help Nepal build an international airport in the tourist city of Pokhara, develop the 434 MW Arun-Kimathanka hydropower project, and establish branches of a Chinese bank in Kathmandu, which will facilitate Nepali traders doing business with their Chinese counterparts. Among other things, China also agreed to help explore petrol and gas in Nepal, provide at least 32,000 solar panels to earthquake affected families, and build a bridge over the Karnali River at the Hilsa border point between Nepal and China. Shortly after Oli's visit, China started construction of the $30 million Tanggar International Border Trade Market on its side of the border to open Hilsa border point in western Nepal.

On returning to Kathmandu, Oli said the two countries had agreed in principle to conclude a commercial deal to import petroleum products from China in the future (India currently enjoys a monopoly on Nepal’s fuel imports). The prime minister announced that his visit not only helped consolidate Nepal's political relationship with China, but also developed a blueprint for long-term economic cooperation in transit, transport, infrastructure development, investment, energy, and tourism between the two countries. Nepal also officially joined the strategically important Shanghai Cooperation Organization (SCO) as a dialogue partner during the visit.

Landlocked to 'Land-Linked'

While it is surrounded by India to the east, west, and the south, Nepal shares a 1,236 kilometer border with China in the north. Historically, Nepali traders used to travel along difficult foot trails across high mountains and sell their products in various markets of what is the modern-day Tibet Autonomous Region (TAR) in China. But these economic interactions were limited in the latter half of the 20th century, especially after China took control of the TAR. With formidable mountains acting as a natural barrier, Nepal was virtually cut off from China when the only customs point, Tatopani was badly damaged in the April 2015 earthquake. A new customs point, Rasuwagadhi, became partially operational only a few months ago. In November 2015, China agreed in principle to open up seven more trade routes at the request of Nepal. If this agreement is implemented fully, they can transform Nepal from a land-locked (and India-dominated) to a “land-linked” country.

Nepal did not have any overland transport links with China until King Mahendra in the 1960s sought Chinese assistance to build the 113-kilometer Kodari Highway. India reportedly objected strongly to the plan, for fear that Nepal could transform into a communist state. King Mahendra countered India by saying, “Communism will not come to Nepal by riding a vehicle.”

Traditionally, India considers Nepal as its sphere of strategic influence, and the Himalayas as its natural frontier in the north. As Nepal is reliant on India for virtually all imports and exports, after King Mahendra no political leader in Nepal dared to enhance connectivity with China against India’s wishes. India and China have a series of long-standing border disputes and engaged in a brief war in 1962, which India lost. Any genuine efforts on the part of Kathmandu to enhance ties with Beijing are likely to be perceived by New Delhi as playing the “China card” against India – although Kathmandu dismisses this binary narrative.

Benefiting From China's Economic Rise

Until a decade ago, China was an alien world to most people in Nepal. This is no longer true. There is a growing Chinese engagement in Nepal and a large number of Nepalese visit China both as students and as a part of the Chinese government’s visitor program. The number of Nepalese businessmen travelling to mainland China is equally high, and there is a growing interest among Nepalese in learning the Chinese language, especially after Confucius Institutes started providing free Chinese classes in Kathmandu and other cities. “The generous Chinese grant assistance, which has been tripled, and scholarships to Nepalese students, which have increased manifold, show Chinese seriousness to help Nepal help itself,” says CSAS Director Pandey, who keeps close tabs on Nepal’s interaction with its neighbors and other countries.

Indeed, China is pumping in huge amounts of foreign direct investment in Nepal, overtaking India in recent years. According to the Central Bank of Nepal, Chinese investment in Nepal was worth $2.77 billion in the fiscal year 2012-13, but rose to $7.31 billion in investments for hydropower and other projects in the following fiscal year. FDI from India during fiscal year 2012-13 stood at a total $2.81 billion, increasing to $6.54 billion in fiscal 2013-14. Evidence of the growing Chinese investment: In July 2015 Nepal approved the single largest Chinese FDI – worth $360 million – to establish a cement plant.

Nepal is also benefiting from Chinese outbound tourists. Before 2008, perhaps a few thousand Chinese nationals a year would visit Nepal. But the number has grown each year in such a way that Chinese tourists have proven to be the savior of Nepal’s ailing tourism industry. Although the earthquake in 2015 badly affected tourism, prior to that, in 2014, Nepal welcomed a total of 123,805 visitors from China. That number stood at just 46,000 in 2010. The Nepalese government decided to waive visa fees for Chinese tourists beginning in 2016. Together with the construction of the Chinese railway up to Nepal border (and beyond), this is expected to change the dynamics of Nepal-China relations in a meaningful way in coming years.

Rising Chinese Soft Power                                           

Undoubtedly, India's soft power influence is deep in Nepal. All major political changes in Nepal since the 1950s took place with India’s active support and involvement and Nepal remains hugely dependent on India for foreign trade and economic development, as well as access to third countries. The cultural and linguistic affinity, political links, and the unique open border regime that exists between the two countries have facilitated the continuation of a very high level of people-to-people interaction. But with growing political awareness among people in Nepal, recognition of New Delhi's coercive diplomacy – both perceived and real “interference” in Kathmandu’s affairs – has given rise to growing resentment.

The recent “unofficial” economic blockade that ran for over four months beginning last September brought India’s soft power projection in Nepal to a new low. New Delhi denied there was any deliberate blockade. Instead, India cited the protest of ethnic Madhesi people on the Nepalese side of the border over the new constitution as the reason why all cargo vehicles to Nepal were suddenly restricted. The consequences of the blockade in Nepal were devastating. In the aftermath of the April 2015 earthquake, Nepal’s national economy faltered. Many Nepalese, who had just survived a massive earthquake, now had to face further severe hardships in late 2015 due to acute shortages of fuel, cooking gas, and other daily essentials as a consequence of the prolonged blockade. While people in Kathmandu and elsewhere took to the streets against the blockade, Oli complained in public that the blockade was more inhumane than war. Needless to say, it will take time to overwrite public perceptions of India as an intolerant neighbor bent on dominating a landlocked nation with the tools of economic coercion.

While resentment against India is at an all-time high among people across Nepal, there are increasingly positive feelings toward China. China has earned great admiration for its policy of noninterference in the internal affairs of other countries, as well as its unprecedented economic success. People who until a few years ago might have viewed China in a rather negative light have increasingly begun to see Beijing both as a benign power and as an opportunity. As such, local politicians and civil society members in the hilly districts adjoining China have started lobbying the government to negotiate with China to open customs points in their regions. It remains to be seen whether China will open more border points with Nepal, given its security sensitivities relating to Tibet. But this development certainly indicates China’s increasing soft power influence in Nepal.

Winning the Confidence of Both China and India

Still, no matter how bad relations get with India, Kathmandu’s near total dependence on New Delhi for trade, investment, and third-country access is not going to change anytime soon. The last thing Nepal can afford is to have hostile relations with either of its two big neighbors. Aspiring to act as a bridge between these two economic powerhouses, Nepal can best serve its interests only if it is able to maintain cordial relations with both India and China. Not surprisingly, some in New Delhi have already termed Kathmandu's recent deals with Beijing a “China card” being played against them. Much now depends on deft diplomacy on the part of Kathmandu to assuage New Delhi's concerns and restore normalcy in a bilateral relationship that remains soured even after the end of the “unofficial” blockade.

For its part, New Delhi must also get over its obsolete security paranoia about the Himalayas, and fully appreciate that Kathmandu's efforts to enhance trans-Himalayan interactions are driven by its own economic interests. To be sure, Nepal can neither afford, nor does it want, to play card games that pit one neighbor against the other. Landlocked between two giant neighbors who perceive each other as geostrategic rivals, Nepal has to pull off a delicate balancing act.

As Nepal's former Foreign Secretary and Ambassador Madhu Raman Acharya, puts it, the “success of Nepal’s foreign policy lies in developing relations with both India and China without making one suspicious of the other.”