Exchange of goods and services between different persons is called trade. Such an exchange between the people of different countries is called foreign trade. So, foreign trade means the exchange of goods and services between two or more countries. Foreign trade creates a specialization in production and provides benefits of specialization. All countries cannot produce all goods efficiently. So they engage in foreign trade. Foreign trade plays a vital role in the economic development of a country. An important aspect of foreign trade is an efficient allocation of scarce resources among different countries. Some countries like Singapore, South Korea, Malaysia, Thailand and Hong Kong (China) have achieved economic prosperity through foreign trade.

Balance of trade:
Export and import are two components of foreign trade between export and import are called trade balance. If the export is greater than import then, it is called surplus trade balance. If import exceeds export then, it is called deficit trade balance.

Balance of payments:
It refers to a comprehensive record of economic transactions of a country with other countries during a given period of time. If the income from abroad exceeds the payments, it is called favorable or surplus balance of payments. If the amount of payments made to abroad exceeds the amount of income earned from a foreign country, it is called unfavorable or deficit balance of payments.

Growth and Trend of Nepalese Foreign Trade
Nepal’s foreign trade was limited only to India and Tibet in the past. At that time Nepal faces so many problems in foreign trade. After the establishment of democracy in 2007 B.S., Nepal has been gradually initiated trade relation with other countries. Nepal adopted a liberal trade policy in 2046/ 2047 B.S. Now Nepal has trade relation with more than 100 countries. Growth and trade of Nepalese foreign trade can be shown as the following table.

Growth and Trend of Nepalese Foreign Trade (In millions)

Source: Economic Survey, 2011/12 A.D.

Composition of Foreign Trade in Nepal
Composition of foreign trade gives a real picture of an economy, especially on trade. The commodities traded in foreign countries are classified according to SITC (Standard International Trade Classification). The SITC includes ten types of export and import commodities. The composition of foreign trade by SITC is presented in the table below:

Commodity Trade by SITC Group in 2009/2010 (In millions)

Source: Economic Survey, 2010/2011 A.D.

Direction of Foreign Trade in Nepal
The foreign trade of Nepal is being directed towards a wide range of countries in the world after the membership of WTO 2004 and integrated to the Global economy. But in the past, foreign trade was limited only to India and Tibet. Now Nepal has trade relation with more than 100 countries. The direction of foreign trade in Nepal can be presented in the following table.

Direction of foreign trade of Nepal (RS in millions)

Source: Economic Survey, 2010/2011 A.D.

Problems of Foreign Trade In Nepal
Nepal is facing a problem of ever-increasing trade deficit. Import is rapidly increasing but the increase in export is very low. Nepal is unable to take advantage of Globalization. Due to some internal and external reasons, it is very difficult to maintain trade balance here. The followings are the main problems of foreign trade in Nepal:

1. Landlocked country:
Nepal is a landlocked country. It is surrounded by India on three sides and by China on one side. Most of the transport facilities have to depend on India’s will. So, Nepal has to depend entirely on India while making export to and import from other countries. Hence, land locked has been the obstacles in foreign trade in Nepal.

2. Illegal trade between India and Nepal:
Nepal has a long open border with India. Due to this long and open border, various types of illegal trade are taking place. It increases corruption, black marketing, reduced tax, etc. which create problem in foreign trade.

3. Top competition with foreign goods:
Nepal has implemented free trade policy. So, foreign goods enter into Nepal without any barrier. The flow of foreign goods has highly dominated the products of Nepal in terms of price, quality, and quantity. As a result, Nepalese products are losing their position both in international as well as domestic market.

4. Underdeveloped industrial sector:
The industrial sector of Nepal is still in under-developed condition. Established industries are not functioning smoothly due to lack of capital, lack of fuel, electricity, etc. The exported oriented industries are not fully reliable and durable but they are mostly seasonable in nature which creates difficulties in Nepalese foreign trade.

5. Internal problems:
Nepal is facing internal problems like political instability, strike, crime, etc. which badly affects the production of exportable goods. Irregularity of electricity and shortage of fuel are also the internal problems of Nepal.

6. Lack of advertisement:
Advertisement is necessary to promote foreign trade. Nepal has not advertised its products. Therefore, foreigners are unknown about Nepalese products which hamper the Nepalese foreign trade.

There are other problems of foreign trade in Nepal like lack of trade diversification, defective government policy, high cost of production, lack of capital, etc.