INDIA-NEPAL-CHINA: IMPLICATIONS OF THE TRADE IMPASSE

Created: 5/8/1989

OCR scan of the original document, errors are possible

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I rid la-Nepal-CMoa: Implications of the Trade iapaue U

Thtndls and Nepal over trade and tranalt Issue* Is unlikely to be resolved In the near tera. Kepal'a deterelnetion to assert Its sovereignty and India's grievances over Nepal's steal ugly "anti-Indian" polloles are hardening the attitudes of both aides1 probablyeturn to the status qua. While deaandlng Nepal eae obeisance, India le not aeeking to destabilise the Nepalrse Covernatnt, and ve see no laaedlata threat to the acnarchy froa civil unrest or free the elar,, fjjmmt-

Chinaactor In tht crlala. In ourm Delhi ateks to reaind tha Chinese that Kepal la In Itt tphere or Influence, and Beijing touts toelhi not tohe situation le go too far. aelther the Ind!sis nor the Chinese, homever, Intend to let the Issue Impede the gradual laproveetflt In their bilateral tie*.

Tensions beUeen India and Nepal, aihlch have lrtensiried over th* pes: year, lad to th* failure In lete March to resets- trade ana transit treellee. The Indians apparently concluded Nepal had been aovlng any froa tbe "special relationship" defined by econoalc and political provisions In th* Treaty or Peace and Frlendahlp Proof or thia. It their vita, eat provldtd by Kathaandu'a lapotltlonrk partita onOO Indians living in Kepal, Its erfort* to give preferential treatment to Chinese ooastrclal produeta, and Its purchaseaall amount of Chinese arts andequipment. In addition, Kef Delhi mis annoyed tilth tathmandu's

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continued lobbying efforts to Mkt Kepal an international son* or peace. Already concerned .tout trie Indians' rational Intentions following thilr Interwentlona In Sri Lanka and the Maldives, Repel evidently Interpreted dsaands regarding the treatieseans for India to gain -ore say over Hepalese affairs.

Iapllcatloni for Uepal'a Internal Stability

Nepal's eeonoey has deteriorated since the treaties eiplred. Eiport earnings have decreased because Ncpalese goods sent to India are now aubject to stiff quotas, taking ties aore eipeneive and, therefore, less ooapetltlve. esult of India's closure of all but tiro ofcrdirlinks in the overland transit of goods dsstlned forof petroleua and third-country consuser Iteas have dwindled. In addition, the output of Hepalese businesses and Industry has slowedesult of th* virtual cutoff of Indian-origin Inputs. Prices of goods In Xsthsandu have risen In anticipation of future ahortages. Revenues fro. tour!as alio have dropped, although the lapeet la aoderated soiewhat by the fact that the season peaks later In the year.

Sporadic student deaonstratlona In Katruandu have protected ahortagea of casantlal coaoodlties and perceived governaentof trie situation, but the Kepalese Covernaent haa been aDle to aanage the unrest by increasing security aeasures.

Deapite the Halted orltiolssi against his, King Birandra contlnueathe cards, In our vIck.tr.e

CoverruiBnt of Nepal Msts policyanding up to India" because few Kepalese snsnt to be criticised aa beinghe kepaleae "Hilary backs the ling's decision and shows no Inclination to aove against hia. In the unlikely event theirere toe believe it would beast resort in support of the King.

Iapacto-Indlan Palatlona

afforta to protect its relations with both sides in the lapaase Illustrate Its reluctance to sacrifice hard-wen advancea In

Slno-Indlan releticrat over the past year. China's foreign Biniatr. apcKesaan called In ild-*prll for sepal and India to reaolve their

differences and reauae ncrail trade. The Chinese probablyengthy

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Hill underelne Nfpara political and aconoalc etabillty tnd ultiaately remiturrtnd.tr of aueh or Nepal'a sovereignty to Keu Dtini. Tht raaoteness of the Slno-Ntpslete border and poor transportation links aukVt It laposslblt for Beijing to flu the void ltft by Indle'g cutoff, but China believes It aust aalntaln at leant tokenfor Nepal to underscors support foran! other South aalan

of action.

are) still planning to go ahead Hlth the flrat atetlng later tnla year of tht Joint forking Croup on tht boundary laaua.

nc significant bretithrough laoiu tneon suggests that India and China plan to workinal settlement and seant to ensure peace and stability on tha border.

The Indians probably believe that Beijing's own conatralnta for assisting Repal give then considerable latitude ln preaalng the hepalese Covernaent. Kim Delhi knous the lines of eonaun lest ion fron Hunt Autonoaoua Region (Tibet) to Nepal are poor and that overland aupply of even relatively aaall quantltlet of fuel and food lttaa has bean difficult for the Chinese. It la alao autre that road conrmicma still Morten stlth the onset of the aonsoon rains by July, and that traffic still probably be unable to get through froa then until at least October. Perhaps acre laportant, the Indiana are probably banking on the continuing unrest In Lhasa to keep Beljlrg'a troops ln Tibet focused on aalntalnlng tha order

there.

In part because they believe China will do little em Nepal's behalf. Indian leaders apparently have ordered no specialprecautions. They uould probably via- Increased troop atrength In Iliang as prltarlly rtlated to China'* Mlntarauce of tavtlal last there. Indian force deployaentt along the country's border with China have retainedlr.ee tensions with Nepal Increases.

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Prospects for Talks

Blither Indit nor Nepal appears ready to engage In serious Ulka to end the trade lepasee. "either sea as toleer understanding of -hat It or trie other smuts. Both aldea haveil Urines- to dlscuaa the problea, but their public remarks have been tore likely aede for donatio and International conauaptlon.

le no consensus about what key negotiators Mill be.raftcccra,

the aalrt agenda will cover andtht

arlll probably try to sidestep talks until it canace-savinsto deal with India. It would probably perceive any Indian Insistence that discussions begin with Blrendra as an attesspt by New Delhi to eaberrass hla and humiliate Kepal and would press for negotiationsower level. Be believe it sore likely that Uepal would agreeeeting between Blrendra and Gandhi only after aubordlnatea on each side had worked through the differences andraft treaty.

Even If India aod Nepal were to aiet in the neit few weeks, the negotiations would probably be prolonged. India see as Intent on asking Napal "squire"hile. It apparently hspes to force acceptance of its taras cn the trade and transit agreaaenU: continuing Nepal'a apesial trade atetus with India and unifying the treaties. ortant, New Delhi irants to ensure that Eathsandu will think twice about pursuing closer ties Kith China, which India amihreat te its security ephtre In the region. For Its part, lathaandu le prepared to hold cut aa long aa possible to demonstrate that It la not sucairvient to India and to underscore that it auat be treated as an "eo.ual" In Its dealings with the Ind!,ia.

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Outlook

The risk of political Instability will Increase if Wt lapasse continues fcr several asre tenths. What are aajor inconveniences no- could turn into severe hardships. The Kepalese in the vicinity ofhardest hit because rural areas of the country are far acreprobably organise tore protests.

Ve Judge that the trade lapasse would challenge Blrendraore Indirect way over the long run. The dlaputa has heightened activity against the glng by the outlawed political parties, which have longsre representative government. Blrendra has eanagsd to avoid significant liberalising reforms in the past because trese parties are uea* and divided. Although at believe these groups vould continue to lack the strength to topple thethey might gain additional aupport from Kepalese who ate the glng'j inability to end the dispute quicklyign of lntffeotive leadership. Ve see little prospectroundswsll of opposition activity that would threaten the King's staying power, but Blrendra eight concede some reforms to appease the moderate opposition. He might cose to believe that by doing ao, he could nip any concern that tore radical groups would gain strength if ha continued to ignore crltictora participatory government, mmnmg

Kepal eventually will be obliged to conclude new trade and transit agreements because of the Inescapable fact that Its econony depends on accesa through India, although therehance that tbe King could miscalculate the level of popular tolerance and Jeopardise the aonarchy, we believe the Hepeleae Government willew aconoalc treaty with India before the situation gets cut of hand, pajajamj

India, however, la unlikely to be as aoccamcdatlng to bthaandu as It was In earlier treaties. Nepal's apparent deteralnatien to cay the price of fewer Indian concessions In order to demonstrate Its sovereignty and Independence will hurt It economicallyew treaty will probably be lias favorable. LBatml

SVBJECT; Irtfla-rlepal-Chlne,: lapHeatlorui of tM Tra'e lepaase |

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DISTFIBcTTIOli:

ElTEfWAL;

l-Deputy Asa latent Secretary Ko.ardeputy Aealatant Secretary alan Urson Waffcottrcla Bernlcat

Derartaent of Defeme

1-DeputySecretaryflgeuJIer Ceneral Davidaptain Davieavid H. Shilling

Hatlorua: Sec.irlt, Cpunclj

1-Kt. Sandra L. Charlee

Defense Intelligence agency

I-Colonel waiter P. Lang

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itiair

Original document.

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