The problem in context

Nepal is a small landlocked country situated between China and India. Access to sea is only through India, and India is also Nepal's major trading partner. Trade with India constitutes 55.9% of total trade, according to 2003 data. A bilateral trade treaty between Nepal and India governs the trade between these two countries, and similarly the transit treaty between two countries provides Nepal with access to the sea.

The treaties could not be renewed in 1989, when they lapsed, due to certain disputes, and the impasse resulted in a serious shortage of goods in Nepal, including critical inputs to the manufacturing sector and goods meeting basic needs. The difficulties that Nepal had to face because of bilateralism compelled it to seek entry into the multilateral trading system. Thus shortly after the trade and transit treaties with India lapsed, Nepal applied for accession to the General Agreement on Tariffs and Trade (GATT – the WTO's predecessor).

The impasse with India lasted for fifteen months. In 1990, there were political changes in Nepal; a multiparty system was restored and a new government came to power, which successfully renegotiated the Nepal – India trade and transit treaties. After this, the urgency for Nepal to accede to GATT, to be protected under Article V on transit rights, lessened and its interest in accession waned.

Until the mid-1980s, Nepal had adopted heavily inward-looking development strategies.