Trade barrier

By Raza Khan

As pressure mounts on Pakistan from the United States and Afghanistan to sign a new agreement on the Afghan Transit Trade (ATT), India has figured strongly on the issue. Both India and Afghanistan have demanded Pakistan allowed Indo-Afghan trade under the mechanism of ATT. Of late, Afghanistan has been demanding of Pakistan to reconsider the 46-year old ATT agreement due to changing regional economic dynamics.

President Hamid Karzai-led Afghan government wants that under the new agreement of the ATT, Pakistan should allow Afghanistan to export all kinds of goods through its territory. This also includes goods from India through Wagah border to the Torkham crossing point in Khyber Agency. Under the ATT agreement of 1964 between Pakistan and Afghanistan the latter is allowed to import a specific list of items through Pakistan territories from other countries.

Pakistan and Afghanistan agreed last year to make a new bilateral arrangement, providing transit trade facilities to Afghanistan. Political questions have so far prevented the two neighbouring states to ink a new trade regime. Both the countries last year exchanged diplomatic drafts and also signed a Memorandum of Understanding (MoU) to arrive at the new agreement regarding the ATT by December 31, 2009.

There are different areas which need to be addressed before arriving at a new transit trade agreement between Pakistan and Afghanistan, prominent among them being massive smuggling of goods from Afghanistan into Pakistan, absence of uniform tariffs in both the countries, list of items to be included and, above all, allowing India to use the ATT arrangement to export goods to Afghanistan.

Recently, Federal Board of Revenue Chairman, Sohail Ahmed, informed the National Standing Committee on Finance and Revenue that "Indian goods coming from Wagha to Afghanistan is not likely to happen under the fresh ATT agreement." He also informed that Afghanistan and Pakistan are presently engaged in negotiations but nothing has been finalised. So, one should not take it for granted that India will not be allowed permission to export goods to Afghanistan and beyond through the ATT.

According to the Chairman FBR, Afghanistan has been demanding inclusion of Indian exports under the umbrella of ATT. Moreover, Americans have also been putting a lot of pressure on Pakistan to go for the new ATT and that India should also be included in the arrangement. The MoU signed between Afghanistan and Pakistan in the presence of US Secretary of State Hillary Clinton, was termed "historic". Pakistan government seems to favour allowing India export goods to Afghanistan though Pakistan territory.

Political considerations have so far prevented it from doing so. It is important to note that on January 26 Punjab Assembly passed a unanimous resolution asking the federal government not to give India access through Pakistan to reach Afghanistan and Central Asian markets. The reason given by the Punjab legislators to deny India trade route is the Kashmir and water disputes between Pakistan and India. The MPs contended that India could only be given a trade corridor through Pakistan for Afghanistan and Central Asia once India solves Kashmir issue and restores the agreed-upon quantity of water to Pakistan rivers.

According to one view, allowing India to export goods under the new ATT mechanism will be detrimental to Pakistan in a number of ways. At the moment, mostly Pakistani industries are fulfilling the demands of Afghanistan for consumer items. Since 2001, when multi-billion dollar foreign-funded reconstruction began in Afghanistan, a large part of the demand for consumer items in the war-ravaged country has been met by Pakistan.

On Afghanistan’s part, it is understandable that as the process of reconstruction and rehabilitation has gained some speed, demand of various goods in the Afghan society has risen. ATT is the key mechanism by which the world could export consumer items to the landlocked Afghanistan through Pakistan. However, as far as the Afghanistan demand for importing every kind of goods under ATT, it is a colossal demand. If Pakistan accedes to the new ATT agreement and if Indian companies are allowed to send goods to Afghanistan, Pakistani companies and businessmen will lose billions of dollars.

At present, Afghan imports are dominated by Pakistan and the balance of trade between the two countries is in favour of Pakistan. The official trade between the two countries is more than one billion dollars. However, according to a study of Area Study Centre for Afghanistan, University of Peshawar, the total volume of trade (official and unofficial) between the two countries is around a $12 billion. In comparison to Pakistan, Indian exports are quite diversified and include highly value-added products. That will give Pakistan exporters a tough time.

Under the ATT, Afghanistan has been smuggling Pakistani goods back into Pakistani markets. The practice has inflicted huge losses in terms of revenue on Pakistan economy. According to FBR figures, the value of total smuggled goods into Pakistan stands at $4 to $5 billion, out of which the revenue losses are around $2 to $ 2.5 billion. According to one estimate, 70 to 75 percent of the revenue losses to the country have been due to the smuggled items in Pakistani markets.

So, if Indian goods are allowed entry into Afghanistan through a new ATT agreement there are ample chances that Pakistani markets will flood with Indian goods. This would increase the revenue losses in terms of ATT, resulting in further shrinking of the country’s revenue base. One of the reasons why the industrial infrastructure of NWFP and Balochistan collapsed is the smuggled goods from Afghanistan.

Keeping in view all these realities the Afghan government should not press Pakistan for allowing India to export goods to Afghanistan under the ATT. In order to protect the interest of domestic businessmen and industrialists, and also to keep alive to the international economic realities of interdependence, Indians goods could not be given a trade corridor by Pakistan but after levying of adequate custom duties.

Still, the best policy for Pakistan could be to go for a qualified mechanism to allow Indian goods entry into its borders for Afghanistan. This is because Pakistan is in a situation where it cannot estrange its neigbour Afghanistan. The opposition leader in Punjab, Chuadhry Zaheer-ud-Din Khan, said on the floor of Punjab Assembly that "doors of trade should not be closed on Afghanistan since it will be equivalent to strangulating the Afghan brothers." In order to give a boost to Confidence Building Measures (CBMs) between India and Pakistan the latter has to provide some economic incentives to India, despite whatever opposition it might face at home for doing so.

The writer is a political analyst