Unit-6 2. Free market economies: Globalization is based on free market mechanism.

It is
Global Business Environment
Concept of globalization:
Globalization is an important force in modern business environment. Business
enterprises should either manage globalization or let the globalization manage
them. The global business environment is changing rapidly. It is driven by
international trade, investment, information technology and free market
economic system. It is the market of capitalism, open market and free trade.
Globalization is the trend toward greater economic, cultural, political and
technological interdependence among national institution and economies. Thus
globalization means increase in world trade exchanges in an increasingly open,
integrated and borderless economy.
“Globalization is the process by which an activity or undertaking becomes
worldwide in scope.” Sundaram and Black
Globalization is a process that promotes:
 Economic interdependence of all the countries in the world.
 Integration of national economies into one global market.
 Free movement of products across borders. World as a single market with
no trade barriers and control regime.
 Free flow of capital, labour, management, information and technology
across borders.
Nature/Characteristics of Globalization:
not possible in state controlled economies. Liberalization, privatization and open
market economies are essential for Globalization.
3. Free movement of products: There is free movement of goods and services
across borders. There are no trade barriers and control regime. Trade, tariff and
non tariff barriers are absent.
4. Free flow of factors of production: Globalization requires free flow of capital,
labour, technology and management across borders. Liberalized flow of foreign
direct investment is allowed. Necessary legal, economic and environmental
conditions are provided for this purpose.
5. Standardized technology: Standardized technology is adopted. Product quality
standards are maintained in all countries. The technology transfer is friendly to
the local environment.
6. Information and communication: Globalization requires extensive use of
information communication technology and networks. Transportation and
communication facilities are available for Globalization to succeed.
7. Global corporations with global image: Global corporations emerge and they
possess a global image. Promotion strategies focus on promotion of image.
Examples are: Sony, Philips, Toyota, Honda, Coca cola, Unilever and the like.
Global corporations have worldwide manufacturing units linked by common
ownerships. They draw on a common pool of resources consisting of technology,
information, finance, patents, trademarks, management and control system. All
the units respond to a common strategy. They think globally but act locally.

 Integration through interdependence Forms of Globalization:

 Free market economies
 Free movement of products 1. Economic Globalization: It is global inter linkages of markets in goods, services
 Free flow of factors of production and finance. It is integration with the world economy through liberalization,
 Standardized technology privatization and deregulation. Trade barriers are removed. Currency is made
 Information and communication fully convertible. The flow of foreign direct investment increases and global
 Global corporations with global image enterprises emerge.

1. Integration through interdependence: Globalization implies integration of 2. Political Globalization: It is many nations joining hands through political union
national economies into one global economy through economic interdependence. or regional groupings. It aims at a macro political framework. It involves exchange
Business is viewed in a global perspective with a global outlook. World is viewed of ideas, views and experiences on government, legal system, women’s rights,
as a single market. human rights and sustainable development.
3. Cultural Globalization: It is assimilation of cultural values and beliefs
worldwide. It involves international exchange of ideas for mutual understanding,
peaceful co-existence and learning from each other. It can be through media,
tourism, communication, technologies and consumption patterns. Individual
cultural identities disappear. Music, movies, fashion and life styles becomes
globalized.
4. Environmental Globalization: It aims at protection of global ecology. It aims at
addressing the problems of global warming, ozone layer depletion, loss of
biodiversity and growing population. It aims at conservation of environment,
afforestation and rational use of resources. It also deals with international laws to
protect world environment. It advocates global actions to protect environment.
d. Increased employment opportunities: This is facilitated by cross movement of
labour. Foreign exchange remittances help increase income in recipient countries.
The number of Nepalese labour force going to foreign countries is increasing.
e. Emergence of newly industrialized countries: Economic miracles of South
Korea, Singapore, Hong Kong, Taiwan, Malaysia and Thailand were facilitated by
globalization.
Negative impact of Globalization:
a. Erosion of national sovereignty: Global corporations possess considerable
economic power. This possesses threat to national sovereignty.

Impact of Globalization: b. Inequitable distribution of benefits: Globalization widens the gap between the
developed and developing countries. For example: 50% of FDI in Africa has gone
Globalization has both positive and negative impacts. to only three countries. Only 15 countries account for 80% of developing country
Positive Impact Negative Impact exports.
 Enhanced productivity and  Erosion of national sovereignty
income  Inequitable distribution of c. Increased job and income insecurity: Labour based industries suffer adversely
 Transfer of capital, technology benefits due to cheap imports. Insecurity is created in jobs and income.
and management  Increased job and income
 Growth in trade insecurity d. Competition: Global competition proves a threat to domestic industry and
 Emergence of newly  Competition agriculture in developing countries. Global corporations capture domestic
industrialized countries  Exchange rate uncertainties markets and kill domestic industries. Nepal Lever has killed most soap producing
 Increased employment  Threat to social and cultural industries of Nepal.
opportunities values
 Environmental degradation e. Exchange rate uncertainties: Uncertain and depreciating currency exchange
rates in developing countries result from speculative short term capital flows.
 Unequal partnership
f. Threat to social and cultural values: Globalization increases crime, drug
Positive impact of Globalization:
trafficking, international terrorism, money laundering and women trafficking.
They pose threat to traditional social and cultural value systems of developing
a. Enhanced productivity and income: This results from specialization and
countries.
economies of scale. Productivity increased result in income increase, and standard
of living of people increases.
g. Environmental degradation: Damage to environment results due to fast
exploitation of natural resources to cater the needs in the developed countries.
b. Foreign direct investment: Transfer of foreign capital, technology and
management increases to accelerate the rate of growth. China receives almost
h. Unequal partnership: Globalization does not provide a level playing field to
50% of total FDI in Asia.
developing nations. Greater benefits are reaped by developed nations. What is
promised in theory does not happen in practice.
c. Growth in trade: Trade becomes liberalized, export increases from developing
countries to developed countries. Imports freely enter into markets. Market
expands and quality goods are produced at low price.
Nepal and Globalization:
Globalization has emerged in Nepal. It is likely to grow in future. The only viable
option Nepal has is to get the most out of it and to limit the risk it brings.
Nepal should safeguard for negative effects of Globalization by:-
 Creating legal safeguards for biodiversity, genetics and protection of
domestic industry and farmer’s rights. Agriculture faces threats from
Globalization.
 Developing domestic market and industrial capacity, concentrate on core
areas like tourism, service, hydropower and the like.
 Promoting export of products in which has sustainable comparative
advantage. Take advantage of growth in China and India.
 Permitting flow of appropriate technology and selective foreign direct
investment.
 Constructing a social safety net in the country.
 Controlling cultural invasion and social evils especially those related to
women, child and drug trafficking.
 Promoting and strengthening regional economic blocs especially SAARC
and other groups of developing countries. This is essential to improve the
negotiation power with the developed countries.
 Educating citizens with relevant skills which are in high demand
nationally as well as internationally. Information technology presents an
example. Human resource development is emphasized.
 Above all, Nepal needs a lot of homework to cope with globalization. Long
term sustainable opportunities from globalization should be carefully
identified. Threats of globalization should be effectively managed. Nepal
should gradually integrate itself with the world economy.
Regional Grouping:
Regional grouping is economic alliance among countries of a particular
geographic region in a regional grouping. Regional Grouping basically relies on
the idea of creating a larger economic unit from smaller economies. Countries join
to regional grouping because they may have common objectives of accelerating
economic growth, strengthening collective self reliance and promoting active
collaboration for mutual benefits. Most of the regional groupings have common
history, similar socio-culture, and similar problems.
Advantages of Regional Grouping:
From Regional Grouping, member countries can gain the following benefits:
a) Trade creation: These agreements create more opportunities for countries to
trade with one another by removing the barriers to trade and investment.
b) Employment opportunities: By removing restrictions on labour movement,
economic integration can help expand job opportunities.
c) Consensus and cooperation: Member nations may find it easier to agree with
smaller number of countries. Regional understanding and similarities may also
facilitate closer political cooperation.
Disadvantages of Regional Grouping:
From Regional Grouping, member countries suffer from following threats:
a) Employment shifts and reduction: With each new round of discussions and
agreements within a regional bloc, nations may find that they have to give up
more of their political and economic rights.
b) Loss of national sovereignty: Countries may move production to cheaper labour
markets in member countries. Similarly, workers may move to gain access to
better jobs and wages.
c) Trade diversion: Member countries may trade more with each other than with
non member nations.
Important Regional Groupings:
There are more than hundred regional trade agreement in place, a number that is
continuously evolving as countries reconfigure their economic and political
interests and priorities. Some of the most common or important regional
grouping that have worked for the cause of regional integration and cooperation
are given below:-
EU = European Union
NAFTA = North American Free Trade Agreement
SAARC = South Asian Association for Regional Cooperation
OPEC = Organization of the Petroleum Exporting Countries
BIMSTEC = Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation
SAFTA = South Asian Free Trade Area
APEC = Asia Pacific Economic Cooperation
 Year Member Countries
EU 1985 Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and
APEC NAFTA Srilanka
2007 Afghanistan

Observer Countries of SAARC:

Regional Grouping ASEAN Australia, China, European Union, Japan, Iran, Mauritius, Myanmar, South Korea,
SAFTA
USA

SAARC
BIMSTEC
OPEC
SAARC:
The south Asian Association for Regional Cooperation (SAARC) is an economic
and political organization of 8 countries in Southern Asia. Its secretariat is
headquartered in Kathmandu, Nepal. The idea of regional, political and
economical cooperation in South Asia was first coined in 1980 and the first
summit held in Dhaka on 8th December in 1985 led to its official establishment by
the Governments of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and
Srilanka. Afghanistan was added to the regional grouping at the behest of India on
April 2007.
Additionally, Myanmar has expressed interest in upgrading its status from an
observer to a full member of SAARC.
The SAARC policies aim to promote welfare economics, collective self reliance
among the countries of South Asia, and to accelerate socio cultural development
in the region. The area of cooperation between SAARC members are agriculture,
education, culture, sports and health, population and child welfare, environment
and meteorology, rural development, tourism, transport, science and technology,
communication.
Member Countries of SAARC:
Objectives Of SAARC:
The objectives and the aims of the Association as defined in the Charter are:
 to promote the welfare of the people of South Asia and to improve their
quality of life;
 to accelerate economic growth, social progress and cultural development
in the region and to provide all individuals the opportunity to live in
dignity and to realize their full potential;
 to promote and strengthen selective self-reliance among the countries of
South Asia;
 to contribute to mutual trust, understanding and appreciation of one
another's problems;
 to promote active collaboration and mutual assistance in the economic,
social, cultural, technical and scientific fields;
 to strengthen cooperation with other developing countries;
 to strengthen cooperation among themselves in international forums on
matters of common interest; and
 to cooperate with international and regional organisations with similar
aims and purposes.
 to maintain peace in the region
Principles of SAARC:
 respect for the principles of sovereign equality
 territorial integrity
 political independence of member states
 non interference in the internal affairs of other states
 mutual benefits
Structure of SAARC:
The structure of SAARC consists of:
 1. Summit: Consisting of heads of state or government.
2. Council of ministers: Consisting of foreign ministers.
3. Standing committee: Consisting of foreign secretaries.
4. Technical committee: Consisting of representatives from member states.
5. Secretariat
6. Regional Centres
1. Summit:
It is the highest authority of SAARC. It consists of head of states or government of
member states. They meet annually at summit level and issue a Declaration. Such
declarations provide directions to SAARC. A total of 18 SAARC summits were held
till 2014.
2. Council of Ministers: It comprises the foreign ministers of member states. It
meets twice a year. Its functions are:-
 Formulates policies of SAARC.
 Review progress of regional cooperation.
 Identify new areas of cooperation.
 Establish additional mechanisms that may be necessary.
 Decide on other matters of general interest of SAARC.
3. Standing Committee: It comprises the foreign secretaries of member states. It
meets as often as deemed necessary. Its functions are:-
 Monitor and coordinate programmes of cooperation.
 Approve projects and the modalities of their financing.
 Determine inter-sectoral priorities.
 Mobilize regional and external resources.
 Identify new areas of cooperation.
The standing committee reports to council of ministers. It has power to set up
Action committees for implementation of projects.
4. Technical Committees:
They comprise representatives from member states. They formulate programmes
and prepare projects in their respective fields which make up the Integrated
Programme of Action (IPA) under SAARC. Their functions are:-
 Determine potential and scope of regional cooperation in agreed areas.
 Formulate specialized programmes and projects in their respective fields.
 Determine financial implications of programmes; make recommendations
for cost apportionment.
 Monitor and implement programmes and projects.
There are 7 technical committees. They are:-
a. Agriculture and Rural Development
b. Health and population activities
c. Women, Youth and Children
d. Environment and Forestry
e. Science and Technology
f. Transport
g. Human Resource Development
5. SAARC Secretariat:
It is the headquarter of SAARC. It was set up in Kathmandu in January 1987. Its
functions are:-
 Coordinate and monitor implementation of SAARC activities.
 Service the meetings of SAARC.
 Serve as a channel of communication and linkages with other
international organizations.
 The Secretary General is the head of the Secretariat. This position rotates
alphabetically among member states every three years.
6. SAARC Regional Centres:
It consists of the following regional centres:
(i) Agricultural Information Centre: It is located in Dhaka, Bangladesh and
established in 1988. It serves as central information centre to exchange technical
information for strengthening agricultural research and development activities.
(ii) Tuberculosis and HIV/AIDS Centre: It is located in Bhaktapur, Nepal. It was
established in 1992. It works towards prevention and control of Tuberculosis (TB)
and AIDS in the SAARC region.
(iii)Documentation Centre: It is located in New Delhi, India. It was established in
1994. It provides ready access to information and databases.
(iv)Meteorological Research Centre: It is located in Dhaka, Bangladesh. It was
established in 1995. It focuses on research aspects of weather forecasting and
monitoring.
(v) Human Resource Development Centre: It is located in Islamabad, Pakistan. It
aims to undertake research, training and dissemination of information on human
resource development issues.
(vi) Coastal Zone Management Centre: It is in Male. It focuses on management of
coastal zones.
(vii) Information Centre: It is located in Kathmandu, Nepal. This centre deals with
all aspects of information related to SAARC.
2. SAPTA Agreement (April 1993): South Asian Preferential Trading Arrangements
3. SAFTA Agreement (Jan 2004): South Asian Free Trade Area
4. Agreement on Mutual Administrative Assistance in custom matters (Nov 2005)
5. Agreement on Avoidance of Double Taxation and Mutual Administrative
Assistance in Tax matters (Nov 2005)
6. Agreement on establishing SAARC Food Bank (April 2007)
7. Agreement on establishment of South Asian University (April 2007)
18th SAARC Summit:

(viii) Disaster Management Centre: It is located in New Delhi. It deals with all
aspects of disaster management.
(ix) Energy centre: It is located in Islamabad. It deals with all aspect of energy.
(x) Forestry Centre: It is located in Thimpu. It deals with all aspects of forestry.
Regional Convention and Agreements:
Regional Conventions:
1. Convention on suppression of terrorism: It was signed on November 1987. It
commits states to extradite or prosecute alleged offenders. It gives regional focus
to establish international laws related to terrorist offences.
Declaration of 18th SAARC Summit was made during SAARC Summit 2014 in
Nepal. The 18th SAARC summit was held in Kathmandu, Nepal from 26 to 27
November 2014. The state heads of eight SAARC member countries along with
their delegations had meeting during the Summit and discussed the agendas of
SAARC. The discussions on previous implementations were made by the
delegations before the summit. They Recognized that after nearly thirty years of
their existence, it was time to reinvigorate SAARC's regional cooperation and
revitalize SAARC as an effective vehicle to fulfill the developmental aspirations of
the peoples of South Asia; Determined to deepen regional integration for peace
and prosperity by promoting mutual trust, amity, understanding, cooperation and
partnership; the 18th SAARC summit Declaration was made.
The declarations were made on the following topics:

2. Convention on Narcotic Drugs and Psychotropic substances: It was signed in o Regional cooperation
November 1990. It promotes regional cooperation in law enforcement and o South Asian Economic Union (SAEU)
demand reduction relating to narcotic drugs and psychotropic substances. o SAFTA and Trade Facilitation
o SAARC Development Fund
3. Convention on Preventing and Combating trafficking in women and children for o Connectivity
prostitution: It was signed on January 2002. It calls for cooperation amongst o Energy
member states to effectively deal with the various aspects of prevention and o Poverty Alleviation
suppression of trafficking in women and children for prostitution.
o Post-2015 Development Goals
o Agriculture and Food Security
4. Convention on regional arrangements for the promotion of child welfare in
South Asia: It was signed in January 2002. Its objectives include facilitating and o Environment
helping the development and protection of full potential of the South Asian child. o Blue Economy
o Health
5. Convention on Mutual assistance in criminal matters (2008) o Education
o Youth
SAARC Agreements: o Women and Children
o Social Protection
1. Agreement on establishing SAARC Food Security (Nov 1987) o Migration
 o Science and Technology objectives of the organization. The best example is of the differences between
o Telecommunication India and Pakistan over the Kashmir issue. Lives are still lost every other day on
o Tourism the borders of these nations. SAARC took no sensible step to solve this matter on
o Culture their level. The failures of SAARC are making it more of a defunct group in
o Media comparison to EU and ASEAN. It is high time that SAARC should take some major
o Combating Terrorism and trans-national Crimes steps towards retaining its liability else member nations would regard it as
o Governance nothing more than an impractical organization.
o Strengthening SAARC processes
SAARC summits should operate as a medium where member states converse not
only matters of provincial significance but also the essential causes of
Nineteenth SAARC Summit:
apprehension in mutual relations amongst member nations. To maintain its
authority and significance SAARC should abstain from impractical economic and
The Leaders welcomed the offer of the Government of Islamic Republic of
social objectives. It should rather focus to be successfully used as an intermediate
Pakistan to host the Nineteenth Summit of SAARC in 2016. The summit will take
to talk about issues of peace, defence and development with international
place in Islamabad.
organisations and agencies to encourage welfare of the member nations.
SAARC Overview:
Although SAARC has been working towards enhancing its regional trade, it
The SAARC was created with an objective to promote welfare economics,
certainly requires a structural revival. There are several steps that should be
collective self-reliance among the countries of South Asia, and to accelerate socio-
incorporated in the working process of SAFTA and SAARC on the whole to
cultural development in the region. The South Asian Association for Regional
improve the conditions of trade and to completely tap the potentiality that exist in
Cooperation has seen success around the year of its creation but in present time it
the region. SAFTA experiences high trade deficit in terms of its global trade, thus
has become more of a failure than a success in achieving its aims. There have
more emphasis could be given to boost the exports of this region especially at this
been drawbacks and failures that have raised questions on the functioning of the
juncture of the crisis recovery stage instead of depending on the developed
organization.
western economies as potential source for markets the members of the regional
group can take up a combined effort to act as markets for each other to tap the
SAARC has brought no major changes in the economic conditions of the nations
mutual potentialities for their mutually gain.
or for improving the quality of lives. Majority of the population in its member
nations are below poverty line and nothing has been done from the organization
SAARC countries are mainly exporting agricultural commodities and agro-based
towards their benefit. .
products. With trade being competitive and identical, more diversification of
goods is extremely essential to tap the untapped market potentialities. The SAARC
The South Asia Preferential Trading Agreement (SAPTA) was signed in the 7th
countries have effected reduction in tariff levels; it can be reduced even further to
summit at Dhaka in April 93, but it has not yet come to effect. A proposal was
increase the benefits of the trade bloc in the near future.
made to establish South Asian Food Reserve and South Asian Development Fund
which is also yet to be put into effect. Same can be said about the declarations on
Adequate steps could also be implemented to attract more FDI into the region
improving political collaboration and endorsement of reciprocated reliance and
from other sources by strengthening the infrastructural facilities and building a
understandings restated again and again in each summit have seen no success or
strong supply chain network.
advancement.
Finally, strengthening of economic relations can be used to reinforce improving
No major step has been taken to promote peace and trust amongst member
political relations in the region, for instance, the relations between India and
nations that are still in conflict. Promotion of trade and economy can only be
Pakistan, as economic ties could help to improve the political relations between
possible if relations amongst member nations are on a stable ground. SAARC has
the two which could further intensify the growth momentum in these economies.
failed to incorporate trust among its nations in a way that could help achieve the
SAFTA (South Asian Free Trade Area): d. Non tariff measures: Rules, regulations, quotas, subsidies, antidumping
requirements, local content requirements, quality checks, registration
1. History of SAFTA: fees.
e. Direct trade measures: Promoting mutual trade and contracts for imports
Free trade area is an arrangement in which each member country retains tariff and supply.
systems vis-aà -vis third countries. Members of free trade area eliminate tariffs, non
tariffs and other restrictions on products of member countries. There is free flow 5. Tariff reduction requirements under SAFTA:
of goods and services among member countries without barriers.
a. Non least developed state: (after SAFTA comes into force)
SAFTA was conceived by the meeting of council of Ministers at New Delhi in  Tariff reduction to 20% within 2 years
December 1995. SAFTA is a leap forward in promoting free trade in SAARC region.  Tariff reduction to 0 – 5% by 2016
The agreement was signed on January 6, 2004. It came into force into January, b. Least developed states: (after SAFTA comes into force)
2006.  Tariff reduction to 30% within 3 years
 Tariff reduction to 0 – 5% by 2016
2. Objectives of SAFTA: Objectives of SAFTA are to promote and enhance mutual SAFTA eliminates all quantitative restrictions except those permitted by GATT
trade and economic cooperation by:- 1994. Products included in sensitive lists are not required to reduce tariffs.
 Eliminating barriers to trade in, and facilitating the cross border Currently SAFTA is working for elimination of non tariff barriers.
movement of goods.
 Promoting conditions of fair competition in the free trade area, and Impact of SAFTA on South Asian regional Trade and Joint Ventures:
ensuring equitable benefits to all members.
 Creating effective mechanism for the implementation and application of SAFTA aims to liberalize trade in the South Asian Region. It has both positive and
this agreement for its joint administration and for the resolution of negative impacts on regional trade and joint ventures.
disputes.
 Establishing a framework for further regional cooperation to expand and Positive Impact Negative Impact
enhance mutual benefits.  Intra region trade expansion  Increased competition
 Low cost of transactions  Limited capital and technology
3. Principles of SAFTA:  Special measures for LDCs  Smuggling
 Rule based functions  Comparative advantage  Transit problems
 Reciprocity and mutuality of advantages  One SAARC voice  Poor mobility of people
 Emphasis on trade facilitation  Increased joint ventures
 Free movement of products
 Trade without discrimination A. Positive Impacts of SAFTA:
 Compatibility with WTO and other agreements
1. Trade Expansion: The removal or reduction of tariffs, para tariffs and non tariff
4. Components of SAFTA: They consists of:- barriers will increase intra region trade. Member countries will get increased
accessibility to a market. Free trade will facilitate the development of South Asian
a. National treatment: A member is required to give national treatment for Economic Union. The total volume of South Asian trade will increase. Trade will
products of other member states. be diversified.
b. Tariffs: Custom duties
c. Para tariffs: Border charges and fees other than tariffs 2. Low cost of transactions: All SAARC members are geographically near to each
other. Nearness reduces costs of transactions for trading purposes. Lower
transportation and transaction costs will attract members to increase trade
within the region.
3. Special Measures for Least Developed Countries: SAFTA provides special
measures for LDCs in terms of material content for exports, compensation for
revenue loss, prevention of injuries to industries, and technical assistance to
develop productive sectors of economy. Small countries like Nepal, Bangladesh
and Bhutan will benefit from such provisions for trading purposes.
4. Comparative advantages: Member countries can focus on development,
production and training of products that provide them sustainable comparative
advantages. For example, Nepal and Bhutan can focus in tourism and hydropower.
Bangladesh can focus on natural gas and fisheries.
5. One SAARC voice in Trade Matters: SAFTA will help SAARC members to present
one voice in multilateral negotiations in international organizations, such as WTO,
UN etc.
6. Increased Joint Ventures: Joint Venture is ownership sharing. It can be
contractual arrangement for sharing assets or equity capital sharing. SAFTA will
facilitate promotion or joint ventures among member countries. The development
of Hydropower is a prime case for setting joint ventures of Nepal, India and
Bangladesh.
Global companies located outside the SAARC region will be attracted by the huge
market potential to set up joint ventures with SAARC countries. They can use one
member as platform to serve the whole region.
B. Negative Impacts of SAFTA:
1. Increased competition: Smaller member countries will have increased
competition from larger member countries, such as India and Pakistan. They may
kill domestic industries in small countries.
2. Limited capital and technology: Primary commodities dominate the intra region
trade in SAARC. Lack of capital and technology for processing and manufacturing
may limit the benefits of SAFTA.
3. Smuggling: The smuggling across borders in SAARC countries has adversely
affected the flow of formal trade within the region. Cheap manufactured products
of China easily get smuggled across borders in SAARC countries. Smuggling at
Nepal borders is rampant.
4. Transit problem: Land locked Nepal and Bhutan suffer from geographical
disadvantage. They have access to sea via India. There are several transit related
problems for increasing trade. They add to the cost of products.
5. Poor mobility of people: Free mobility of people is essential for promoting trade
and investment. The intraregional movement of people is constrained by various
formalities and control problems. Political crisis of confidence between India and
Pakistan further makes the mobility of people difficult.
Possible benefits of SAFTA to Nepal:
 Nepal’s accessibility to huge markets of SAARC members will increase for
trade expansion.
 Nepal’s overdependence on India for exports and imports is likely to
decrease. Cost of transaction will also be lower.
 Nepal can develop and promote products with sustainable competitive
advantages to tap the market potential of SAARC.
 Joint ventures with SAARC countries will flourish in Nepal. Foreign direct
investment from SAARC countries will also increase.
 Nepal can be a part of SAARC regional position relating to multilateral
negotiations in World Trade Organization (WTO), World Customs
organization (WCO), and World Intellectual Property Organizations
(WIPO).
 Nepal can become a part of SAARC efforts to promote markets in
developed countries.
 Nepal will benefit under special treatment of SAFTA for least developed
countries, especially the compensation for revenue loss.
Despite benefits of SAFTA, Nepal will also face serious challenges. Competition
will be everywhere. SAARC global companies may kill Nepalese Domestic
Industries. Moreover, Nepal may face difficulty to reap the benefits of SAFTA
effectively in practical terms because of low competitive strength.
SAPTA: ( South Asian Preferential Trading Arrangement)
The Agreement on SAARC Preferential Trading Arrangement (SAPTA) which
envisages the creation of a Preferential Trading Area among the seven member
states of the SAARC, namely Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka was signed in Dhaka in April 1993. The idea of liberalizing trade
among SAARC countries was first coined by Sri Lanka at the sixth Summit of the
South Asian Association for Regional Co-operation (SAARC) held in Colombo in
December 1991. It was agreed that SAPTA is a stepping stone to higher levels of
trade liberalization and economic co-operation among the SAARC member  Create favourable environment for economic development through
countries. identification and implementation of special assistance projects. The
areas are trade, investment, tourism, agriculture, energy, infrastructure
Objective and transport.
The objective of the SAPTA is to promote and sustain mutual trade and the  Promote social and economic progress through joint efforts based on
economic co-operation among the member states through exchange of trade equality and partnership.
concessions. SAPTA therefore is the first step towards higher levels of trade and  Promote active collaboration and mutual assistance in economic, social,
economic co-operation in the region. technical and scientific fields of common interest.
 Provide cooperation to one another for the provision of training and
The basic principles research facilities in educational, vocational and technical fields.
 Establish close and advantageous cooperation with international and
. Overall reciprocity and mutuality of advantages regional organizations with similar aims and purposes.
. Step by step negotiations and periodic reviews so as to improve and extend the
preferential trade arrangement, in stages Structure of BIMSTEC:
. Special and favourable treatment to Least Developed Contacting States
BIMSTEC functions through the following institutional arrangements:
Main components 1. Summit: It consists of heads of state or government. It is the policy
. Tariff making body.
. Para Tariff 2. Ministerial Meetings: They are held annually. They can be at the level of
. Non Tariff foreign ministers or finance and commerce ministers.
. Direct Trade Measures 3. Senior official meetings: They consist of commerce secretaries of member
countries. It is an operational body and it monitors progress.
BIMSTEC: 4. Bangkok based working group: It consists of ambassadors of member
countries. It is the coordinating point.
Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation 5. Specialized task force: It consists of experts in specific areas of
(BIMSTEC) is an Asian Region Cooperation grouping. It was created on 6 th June cooperation.
1997 at Bangkok. It consists of 7 members. Nepal joined BIMSTEC in February
2004. Functions of BIMSTEC:
The seven members of BIMSTEC are:-  To administer and implement agreements reached by member countries.
 Bangladesh: Original member since June 1997 For example, free trade area agreement.
 India: Original member since June 1997  To act as a forum for promotion of cooperation among member countries
 Sri Lanka: Original member since June 1997 in specified areas.
 Thailand: Original member since June 1997  To provide cooperation to one another among members.
 Myanmar: Admitted in December 1997  To increase cooperation with international and regional organizations
 Nepal: Admitted in February 2004 with similar aims and purposes.
 Bhutan: Admitted in February 2004
Areas of cooperation of BIMSTEC:
BIMSTEC works as a bridge between SAARC and ASEAN. The members are rich in
resource endowments. Substantial complementarities exist in economies of The 13 areas of cooperation and lead country for BIMSTEC are:-
member countries. Lead Country Areas of cooperation (Sectors)
1. Bangladesh - Trade and Investment
Objectives of BIMSTEC:
 2. Bhutan - Cultural cooperation
3. India - Transport and communication 5. Prospects of tourism: Cooperation among members will increase in tourism
- Tourism matters. Nepal can reap the advantages of Buddhist pilgrimage tourism.
- Environment and Disaster Management
- Counter terrorism and transnational crimes B. Negative Impact:
4. Myanmar - Energy
- Culture 1. No special privileges: BIMSTEC does not provide special privileges to least
5. Nepal - Poverty Alleviation developed countries.
6. Sri Lanka - Technology
7. Thailand - Fisheries 2. Increased competition: Nepal has to face competition from strong countries,
- Public Health especially India and Thailand in the region.
- People to people contact
3. Limited factors of production: Nepal has limited factors of production in terms
The lead country is responsible for planning and implementation of programmes of skilled human resources, capital and technology. This may limit the benefits of
in the designated area and to hold expert group meetings. cooperation.

BIMSTEC free trade area agreement was signed in February 2004. It provides for 4. Transit problems: Landlocked country Nepal may face transit related problems.
free trade in goods from July 2006. It provides for free trade in services and Cross border smuggling can increase.
investment from July 2007. Tariffs will be eliminated by 2017. It is still an
evolutionary stage. Foreign Direct Investment: (FDI)

Intra regional trade volume among BIMSTEC countries is only 10% of their total Concept: Foreign Direct Investment is investments made from one country to
trade volume. another by Multinational Companies. It can be done by:-
 Floating a subsidiary for local manufacturing or assembly. It is fully
Impact of BIMSTEC on Nepal: BIMSTEC has both positive and negative impact on owned or controlled company.
Nepal.  Purchase of existing foreign company through acquisition.
 Participation in joint venture with a local partner.
A. Positive Impact:  Portfolio investment in the shares of foreign companies.

1. Trade expansion: Cross regional trade will have both positive impact on Nepal’s Objectives of Foreign Direct Investment:
trade expansion. Market accessibility will increase.
They are:-
2. Investment expansion: BIMSTEC focuses on promotion of investment. This  Expand sales in foreign markets.
provides potential to Nepal for investment promotion through joint ventures.  Gain access to raw material supplies.
Hydropower is an important area for investment.  Take advantage of cheap labour
 Transfer of technology, management and technical skills to foreign
3. Infrastructure development: BIMSTEC is working on feasibility of trans-asian countries
highway. It is also working on possibility BIMSTEC airlines to connect capital Countries create enabling environment for FDI by offering packages of incentives
cities of member countries. They will be helpful in Nepal’s development. and concessions.

4. Low cost of transactions: Geographic nearness and harmonized trade rules will Contribution of Foreign Direct Investment in Nepalese Economy:
reduce the cost of trade transactions for Nepal.
The contributions of FDI in Nepalese Economy are:-
a. Capital transfer: Nepal lacks capital resources. FDI is an important means of
capital inflows.
b. Productivity improvement: FDI facilitates technology transfer in Nepal.
Technological up gradation results in productivity improvements. Economic
growth improves.
c. Management Development: Local managerial people get trained in foreign
firms. They acquire new concepts, tools and techniques of management.
Management development takes place.
d. Employment: Foreign companies generate employment in Nepal. Nepalese
workers acquire new skills.
e. Better products: Foreign companies produce branded products. They have
image. They assure quality and supply of better products in Nepal.
f. Export: Foreign companies promote and increase exports. Unilever Nepal and
Dabur are major exporters in Nepal. MNC’s helps improve balance of payment.
g. Industrialization: FDI results in the development of a variety of ancillary
industries in Nepal. Such industries develop backward linkages to supply inputs.
FDI creates competitive corporate culture for Nepal’s industrial development.
Current scenario of FDI Nepal:
Globally, foreign direct investment is growing. It is also growing in South Asia.
Nepal had a late start in FDI. Till July 2013, it had approved 2335 FDI projects.
Almost 32% of FDI is for manufacturing projects. The other important sectors are
tourism and services. The total project cost amounted to Rs.16 billion till July
2013.
46 countries have FDI in Nepal. India accounts for 26% of projects and 39% of
FDI. Other important countries are China, USA, Japan, South Korea, UK and
Germany.
Reasons for Poor inflow of FDI in Nepal:
The main reasons for poor inflow of FDI in Nepal are:-
a. Unstable government policies: They keep on changing due to political
uncertainties. Legal provisions are conflicting. Policies are not effectively
implemented. Foreign exchange regulations and tax policies are not friendly.
b. Bureaucratic hurdles: They constrain the implementation of FDI projects.
Corruption is rampant and decisions are delayed due to red-tapism and
inefficiency.
c. Political uncertainties: Unstable governments have adversely affected FDI
inflow in Nepal. During the last 20 years Nepal had 17 governments. Political
disturbances are too many.
d. Weak financial sector: Nepal’s financial sector is not properly developed.
Transaction costs are high.
e. Electricity shortage: Load shedding had badly affected FDI inflow.
f. Unsupportive environment: Investment climate in Nepal is not supportive for
FDI. Investor confidence is low with the current state of affairs. Market size of
Nepal is also small. Production base is limited.
Problems associated with Foreign Direct Investment (FDI):
The main problems associated with FDI are:-
a. Competition: Foreign companies compete intensely with domestic companies.
They command huge amount of resources to capture markets. Local industries die
and local entrepreneurship gets suppressed.
b. Dependency: FDI creates dependency on foreign capital, technology, markets
and managerial skills. Its sudden withdrawal disrupts domestic economy. It also
delays setting up of domestic industries.
c. Sovereignty: Foreign global companies tend to interfere in domestic affairs of
host countries to serve their interests. This adversely impacts on sovereignty.
d. Economic growth: Not all types of FDI generate income and employment.
Resource outflows in terms of profits, interests, royalties and fees can adversely
affect the economic stability. Outdated technologies may be transferred.
e. Corruption: FDI can encourage corruption in the country. Bribes to politicians
and bureaucrats to get undue/ excessive advantages lead to bad governance.
f. Socio-cultural disruption: FDI can create socio cultural disruptions by 6. Council for intellectual property rights: Oversees the functioning and
promoting foreign cultural values, food habits and life styles. implementation of all agreements covering intellectual property rights.

World Trade Organization: (WTO)
WTO was established on 1 January 1995. It is successor to the GATT (General
Agreement on Tariffs and Trade). It is the legal and institutional foundation of the
multilateral trading system. It is the platform in which trade relations among
countries evolve through effective debate, negotiation and adjudication. It covers
trade in goods, services and intellectual property. It is based on rules which need
to be followed by each member. They cover 98% global trade. Its main focus is on
trade liberalization. Its main function is to ensure that trade flows as smoothly,
predictably and freely as possible.
There are altogether 160 members till June 2014. The current Director General
for WTO is Roberto Azeveê do effective from September 2013 for a term of 4 years.
7. Trade in Policy Review Body (TPRB): Conducts regular reviews of trade policies
of individual WTO members.
8. Committee on Trade and Development: Concerned with trade and development
issues relating to developing countries and especially least developed countries.
9. Committee on Balance of Payment: Concerned with consultations among WTO
members to cope with balance of payment difficulties.
10. Committee on Budget, Finance and Administration: Concerned with issued
related to WTO financing, budget and administration.

Objectives of WTO:

 Raise standard of living

 Increase income
 Promote full employment
 Expand production and multilateral trade
 Protect environment through optimum utilization of world’s resources for
sustainable development.

Structure of WTO:

1. Ministerial conference: It is the highest body governing WTO. It consists of

ministerial representatives of all WTO members. It meets every two years. It is
empowered to take decisions on matters related to multinational trade
agreements.

2. General Council: It reports to ministerial conference.
3. Dispute Settlement body (DSB): It looks after dispute settlement procedures.
4. Council for Trade in Goods: Oversees the functioning and implementation of all
agreements covering trade in goods.
5. Council for trade in services: Oversees the functioning and implementation of
all agreements covering trade in services.
Functions of WTO: The functions of WTO are:-
 Administer and implement multilateral and plurilateral trade agreements
which together make up WTO.
 Act as a forum for multilateral trade negotiations
 Seek to resolve trade disputes between WTO members.
 Oversee national trade policies
  Cooperate with other international institutions involved in global
economic policy making, such as IMF and World Bank
 Maintain trade related database
 Act as a watchdog of international trade
 Provide technical assistance and training for developing countries
Principles of WTO: The principles of WTO are:-
a. Trade without discrimination: Trade should be without discrimination. No
country should give special trading advantages to member or to discriminate
against it. Every member is bound to offer national treatment for the products of
other member countries.
b. Predictability: There should be predictable trading environment and growing
access to markets. Domestic laws, regulations and practices should be
transparent. The access to market should be secure and predictable. There should
be transparency in world trade.
c. Promotion of Fair competition: There should be fair and undistorted
competition. There should be protection of consumer interests. Local products
should compete with export.
d. Encouragement to development and economic reforms: Industrial countries
should assist developing country members in their trading conditions by not
expecting reciprocity and by providing market access.
WTO encourages open trade. It permits tariffs and other forms of protection but
prohibits quota restrictions. It classifies countries deserving preferential
treatment into 4 categories:-
 Least developed countries
 Developing countries
 Net food importing countries
 Countries in the process of transformations into a market economy
Provisions of WTO: The major provisions of WTO are related to:
a. Agriculture: Trade reforms and market oriented policies in agriculture.
b. Health and safety measures: Food safety and animal and plant health
regulations.
c. Helping least developed and food importing countries: Assistance to them to
remove negative effects with regard to food supplies.
d. Textile clothing: Integrate their trade in mainstream of WTO.
e. TRIPS: Trade related aspects of Intellectual Property Rights – copyright,
trademark, patents and design.
f. GATS: The General agreement on Trade in Services
g. Antidumping measures: Promotes fair competition.
Impact of WTO on Nepal’s Economy:
Nepal is a least developed land locked country. It is engaged in enhancing
economic relations with the outside world. It has trade relations with more than
100 countries. Since 1990, Nepal’s economic reforms at creating an open
liberalised economy. Trade and tariff barriers are dismantled. Nepal became a
member of WTO in 2004.
WTO membership has both positive and negative impact on Nepalese economy:
Positive Impacts:
1. Trade expansion: WTO membership allows Nepal to globalise its trade in a
more predictable and stable trading environment. It offers duty free market
access and trading opportunities. Export volume will increase. The balance of
trade and payment will improve. Nepal will become a part of multilateral trading
system with harmonized set of rules.
2. Trade diversification: Nepal is dependent on India, Germany and USA for
exports. Carpets, readymade garments and selected agricultural products
constitute the key commodities of exports. Nepal’s integration into multilateral
trading system of WTO opens possibility for trade diversification in terms of
markets and products. Foreign direct investment will increase.
3. Freedom of transit: Nepal is a land locked country. Secure transit rights are
essential for its development. WTO rules provide freedom of transit to member
countries without unnecessary delays or restrictions. WTO membership provides
legal and secure transit rights to Nepal through India and China.
4. Industrial development: Foreign investment will increase. National treatment
and low risks will attract foreign investors to set up industries in Nepal. Exposure
to new technologies will increase.
5. Dispute settlement: The WTO regime provides common system of rules and
procedures for settling disputes related to trade. Nepal’s WTO membership
ensures access to a stronger, faster, impartial and binding mechanism for
settlement of disputes related to trade.
6. End of bilateralism: Nepal has bilateral trade agreements with 17 countries. It
has a treaty of trade and transit with India. Nepal’s membership of WTO does
away with the need for bilateral trade agreements. It provides the automatic
advantage of trade links with all the member countries of WTO.
7. Image and power: WTO membership enhances Nepal’s image. Almost three
quarters of WTO members are developing countries. Decisions of WTO are based
generally on unanimity of member views. This empowers Nepal through veto
power.
8. Special benefits: Nepal is a least developed food importing countries. WTO has
special provisions to help least developed countries. It has provisions to provide
technical assistance to food importing countries. WTO membership provides
special benefits to Nepal.
Special provisions for LDCs allow Nepal to make smaller tariff reduction
commitment and longer timeframe (3-10 years) to implement market access
measures. Nepal can also benefit from the technical assistance of ITC
(International Trade Centre).
Negative Impacts:
1. Erosion of preferences: WTO rules impose obligations for concession of tariff
rates, removal of subsidies in agriculture, and opening up of trades in services.
Quota restrictions are totally prohibited. Nepal’s WTO membership may adversely
affect the domestic industries. Nepal’s WTO membership erodes preferences
enjoyed under bilateral agreements and treaties.
2. Price hike and competition: Nepal’s WTO membership may result in steep price
hikes of food, drugs, agricultural inputs and other items of imports. Subsidies will
be reduced or eliminated. Foreign exchange outflows will increase. Competition
will increase in terms of price and quality. Domestic industries will be threateneld
by free imports.
3. Accession commitments: Nepal has agreed to accept stringent commitments by
existing members. They will have far reaching adverse impacts on trade and
economic development of Nepal. Agricultural development will suffer and cost of
compliance will be high for service industry.
WTO membership reduces Nepal’s flexibility in policy and strategy formulation
relating to trade. Revenue loss may increase for the government.
4. Institutional arrangements: Nepal lacks adequate infrastructure, efficient
institutions and competent human resources to reap the benefits of WTO
membership. Dependency on foreign firms will increase for technology and
resources. Nepal has to meet various health regulations, packaging standards and
environmental requirements.
5. Gaps in theory and practice: It is claimed that WTO is a trap set by developed
countries for developing countries to blindly walk in. WTO largely represents the
interests of developed nations. The theoretical provision of open trade for goods
produced by developing countries may not be true in practice.
WTO is neither pro-poor nor growth friendly. There is no level playing field for the
WTO regime. The burden of WTO may be too heavy for Nepal in practice.
Future Perspective: WTO is a forum for trade liberalization. Nepal cannot remain
isolated from the global economic community. Nepal must effectively prepare
itself through proper homework to cope with WTO membership. It should
maximize the benefits and minimize risks.
It should:
 Improve supply side weaknesses by increasing its production capacity,
productivity and competitive strength through quality improvements,
cost reduction and removal of supple constraints.
 Promoting export of products having sustainable comparative advantage.
Increase exportable items having price ratio advantage. They are tourism,
hydropower, herbs, flowers, silver jewellery, handicrafts and services.
Export base should be enhanced.
 Strengthen SAARC and SAFTA to improve negotiating power. Strengthen
institutional mechanism for WTO capacity building. Develop networking
between government and private sectors.
 Educate people about WTO. Address human resources constraints by
training and development programmes.
 Create legal safeguards for bio-diversity, genetics, protection of domestic
industries and farmer’s rights.
  Develop mechanism for protection of agriculture and small and medium  Nepal lobbied for priority in membership to least developed countries in
industries. the November Meeting of WTO in Doha, Qatar.
 Develop the needed institutions and infrastructures.  Nepal fulfilled the required procedures for WTO accession and became
 Amend laws to make them WTO friendly. Reform domestic policies. WTO member on April 23, 2004.
 Take advantage of trade related technical assistance of WTO.
Differences between GATT and WTO:
There will be no automatic benefits from WTO. Nepal should work hard to take
advantage of the opportunities provided by WTO. The benefits of WTO Points of difference GATT WTO
membership cannot be reaped in the short run. The road is long and winding. 1. Nature of . Multilateral agreement . Permanent international
Above all, Nepal should increase competitiveness by increasing technical and Organization with set of rules: ad hoc organization, own
financial capabilities. secretariat secretariat
2. Scope of operations . Limited to trade in goods . Covers trade in goods,
The sectoral impacts of WTO on Nepal’s agriculture, forest, education, financial services and trade
and other services, textile industry and intellectual property rights should be related aspects of
properly assessed and carefully addressed. intellectual property.
3. Legal basis . Provisional commitment by . Full and permanent
Nepal’s WTO Membership: members commitment by
members.
Nepal had applied for GATT membership in 1989. It could not succeed. It 4. Type of members . Members as contracting . Members as members
reinitiated the membership process and obtained observer status in 1993. GATT parties
was replaced by WTO in 1995. 5. Dispute settlement . Lengthy and ineffective . Faster, automatic and
. Rulings can be blocked by effective
The steps for WTO membership were: contracting parties . Rulings cannot be
 Nepal’s cabinet decided in 1996 to seek membership of WTO. The blocked by members
ministry of commerce was designated as the concerned ministry. A WTO
division was established in this ministry. Nepal’s commitment for WTO membership:
 A WTO committee was formed under the governorship of the Secretary of
the ministry of commerce to carry out the necessary preparations for 1. Commitment to 25 mandatory provisions of WTO. Transition period of 3
WTO membership. Since 1997, UNDP provided technical assistance to 10 years to comply with mandatory provisions.
through Nepal’s accession to WTO project. Discussion programmes 2. Open up 11 service sectors and 70 subsectors out of 170 classified by
related to WTO were also held in major towns outside Kathmandu. A task WTO.
force with private sector participation carried out study on WTO and 3. Tariff binding:
Nepal. a. Average of 42% in agricultural products
 Nepal submitted the memorandum on foreign trade regime in July 1998 b. Around 24% in industrial goods
to WTO. Queries raised and clarification sought over the memorandum by c. Removal of additional import duties (local taxes)
WTO member countries were answered by Nepal in April, 1999. d. 5% tariff rate for daily consumption items
 Nepal’s membership was discussed in November 1999 meeting of WTO. e. Phase out other duties and charges
Bilateral negotiations were held with selected WTO members in 4. Right to provide up to 10% subsidy on agriculture
September 2000. Suggestions were received to further reduce tariffs and 5. Legislative plan of action to enact new laws and amend existing laws
to further liberalize trade in services. TRIPS was the main hurdle to numbering about 2 dozens for WTO compliance
Nepal’s membership.