The previous studies done to identify the direction and pattern of trade generally agree that countries involved in trade and exchange mutually gain. This study aims to identify the trade (export, import, trade volume and trade balance) determinants of Nepal using extended gravity model and recommend specific trade policy to promote foreign trade for improving trade position and overall economic development of Nepal. Empirical results based on panel dataset containing 21 major trade partner countries for 6 years found that export and import of Nepal is explained by real GDP of trade partner countries. Increase in real GDP of trade partner countries increases both export and import, however export increases at higher rate than import. Nepal exports more to SAFTA countries than non SAFTA countries and imports less from the OECD countries than non-OECD countries. As per basic idea of gravity model, distance to trade partner countries is highly significant implying higher the distance lower the trade. The total trade volume (sum of export and import) follows the pattern of import of Nepal, implying trade pattern of Nepal is import dominated which is the main reason for weak trade position. Trade volume of Nepal is higher with non-OECD countries than OECD countries. The trade balance of Nepal is getting worse if real GDP of trade partner country increases. It is because Nepal is importing more than exporting to those countries in an absolute term, however opposite in terms of rate.
Improving trade position of Nepal requires increasing export and limiting import. Extending export market to non SAFTA-countries should be encouraged and importing from non-OECD countries should be discouraged to improve trade balance. Promoting export oriented industries, similarly discouraging excessive consumption of imported consumer goods through proper policy measures can help in improving trade position of Nepal. Lastly, infrastructure development creates favorable industrial base and investment friendly environment that can motivate the foreign as well as domestic investors to establish export oriented and import substituting industries.