Bangladesh and Nepal share common geographical, cultural, and linguistic linkages. However, trade and investment between the two countries have historically remained relatively limited. For instance, Bangladesh’s exports to Nepal remained modest from the 1980s through the early 2000s. Although a notable expansion occurred after 2014, with export volumes rising from approximately USD 20 million to USD 105.48 million in 2021, this upward trend was not sustained, as exports declined to USD 40 million in 2024, indicating underlying challenges in maintaining consistent trade growth. Similarly, imports from Nepal into Bangladesh reached a peak of USD 66.5 million in 2008 but have experienced a steady decline, thereafter, amounting to only USD 6 million in 2024. This persistent downward trajectory suggests structural constraints that hinder Nepal’s export competitiveness in the Bangladeshi market.
Agricultural products, textiles, and electrical machinery, alongside various processed foods and manufactured goods, dominated trade between Bangladesh and Nepal in 2022. However, according to the International Trade Centre (ITC) export potential map, there lies significant untapped export potential for both countries, particularly in products such as jute, cotton apparel, cardamom, and yarn. This implies that diversifying into these high-potential goods can further strengthen and broaden bilateral trade relations between Bangladesh and Nepal.
Tariffs and non-tariff barriers continue to impede trade between Bangladesh and Nepal. Additional charges and insurance requirements are imposed on traders, while the absence of efficient and direct transport links adds to logistical expenditure. This also limits people-to-people connectivity, hindering tourism and medical travel. Although Bangladesh offers concessions under the Most Favored Nations (MFN)[1] clause of the World Trade Organization (WTO) and the South Asian Free Trade Area (SAFTA), exports from Nepal continue to face a high trade cost due to tariffs coupled with Other Duties and Charges (ODCs). Bangladesh maintains an extensive list of sensitive products, which includes goods excluded from preferential tariff concessions under SAFTA when imported from member countries. Additionally, as a result of ODCs[2], products with low or zero customs duties as per the SAFTA agreement are often subjected to a high overall tax burden. Consequently, the overall tax burden remains exorbitantly high for Nepali exports, further reducing their competitiveness in Bangladesh’s market. This is particularly evident for products like cardamom, where Bhutan faces duty-free access, while Nepal is subjected to a significant tax burden. This poses an additional constraint on its export potential. Given these circumstances, Bangladesh and Nepal have initiated negotiations for a Preferential Trade Agreement (PTA), which began in 2020.
However, rather than pursuing a PTA, Bangladesh and Nepal would derive greater advantages from establishing a Comprehensive Economic Partnership Agreement (CEPA). In general, a PTA focuses on issues concerning trade, whereas a CEPA emphasizes not only trade, but also generating foreign direct investment. Trade and investment are integral components of economic growth. Therefore, a bilateral CEPA between Bangladesh and Nepal can provide an effective avenue to address the current impediments to trade in goods and trade in services, encompassing both tariff and non-tariff barriers, while also fostering a conducive business environment to generate substantial investment in both economies. For instance, the Indo-Japan CEPA, which came into effect in 2011, demonstrates how a phased reduction in tariffs can be beneficial for both economies while still ensuring that sensitive domestic sectors are protected. According to the agreement, India pledged to eliminate tariffs on approximately 90% of its imports from Japan. On the other hand, Japan committed to abolishing tariffs on approximately 97% of its imports from India by 2021. This incremental reduction in tariffs, encompassing 4,500 tariff lines, illustrates a harmonized strategy of providing significant market access while also limiting flexibility for sensitive products. A similar approach can be considered when negotiating a comprehensive agreement between Bangladesh and Nepal, where tariffs can be reduced in phases, prioritizing products with higher trade value and greater export potential that are currently subjected to high trade barriers. Strategic access to the market while safeguarding the specific sector will further ensure that trade facilitation coincides with the development objectives of both countries. Such an agreement also provides further avenues to facilitate the movement of people between the two countries, while laying the groundwork for a progressive framework that fosters conducive bilateral cooperation, enabling both countries to further integrate into regional and global value chains.
Drawing on insights from similar agreements, a CEPA between Bangladesh and Nepal could be divided into several modules, encompassing inclusive market access and regulatory principles. Ensuring expanded market access will entail reducing tariffs and para-tariffs between Bangladesh and Nepal, improving customs procedures, and promoting trade facilitation. Concurrently, this could also include stipulations to liberalize trade in services concerning sectors pertaining to tourism and hospitality, education, financial and professional services, further improving people-to-people connectivity. This will also facilitate cross-border investment opportunities while aiding a transfer of skills and knowledge. Furthermore, a comprehensive set of rules and regulations will help moderate border procedures and behind-the-border policies related to commerce, investment, production, and enterprise activities. This module will not only include prevailing rules outlined by the WTO, such as the Rules of Origin and Sanitary and Phytosanitary measures, but may also address other regulatory issues like intellectual property rights, e-commerce, competition policy, technical cooperation, and support for small and medium enterprises (SMEs). These arrangements will be particularly crucial for both Bangladesh and Nepal as they aim to diversify exports, strengthen trade, and enhance the competitiveness of the private sector in preparation for the upcoming graduation from the Least Developed Country (LDC) status.
However, to truly unlock and strengthen trade ties between Bangladesh and Nepal, it is crucial to enhance investment and streamline the business environment in both countries. Foreign direct investment (FDI) from Nepal to Bangladesh remained minimal during the early 2000s, with the first recorded positive inflow occurring in 2005 at USD 0.07 million. A substantial increase was observed in 2021, when FDI inflows rose to USD 6.82 million. By 2024, FDI increased to USD 7.03 million, marking the highest level of investment recorded between 2005 and 2024. To sustain and expand this positive trajectory of FDI growth in Bangladesh, it is essential to mitigate further barriers to investment through structured policy frameworks and foster cross-border collaboration, thereby creating avenues for mutually beneficial economic growth. Furthermore, by leveraging regulatory reforms, initiatives to build Special Economic Zones (SEZs) can facilitate investment flows between Bangladesh and Nepal, deepening bilateral economic cooperation.
It is also essential to emphasize that exporters from Nepal encounter challenges in securing advanced payments in Bangladesh, and the necessity of rerouting goods through third-country customs incurs both additional costs and delays. Therefore, the development of a cross-border digital payment system and improved infrastructure can facilitate transactions, encourage private sector participation, and increase trade volumes between Bangladesh and Nepal. It is noteworthy that Bangladesh and Nepal are members of multiple regional and subregional platforms, including the South Asian Association for Regional Cooperation (SAARC), Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), South Asia Subregional Economic Cooperation (SASEC), and Bangladesh, Bhutan, India, and Nepal (BBIN), where they often share common perspectives. More effective utilization of these frameworks could serve as a strategic means of fostering deeper bilateral trade and economic cooperation between the two countries. Addressing tariff and non-tariff barriers, improving connectivity, and diversifying export baskets could help reverse these trends and create a more stable and mutually beneficial trade relationship between the two countries.
[1] MFN refers to a fundamental principle of the WTO that prohibits member states from discriminating among their trading partners. It states that an advantage concerning trade, such as a reduced tariff or preferential treatment, granted to one member must be provided impartially to all other WTO members.
[2] ODCs or para-tariffs are additional charges such as Regulatory Duty (RD), Supplementary Duty (SD), Value Added Tax (VAT), Advance Income Tax (AIT), and Advance Trade VAT (AVAT), which increase the cost of imports.
Executive Director and Research Associate, Centre for Policy Dialogue
