The Duck of Minerva

The Duck Quacks at Twilight

The Transit Trade Agreement

July 21, 2010

Although the story has garnered relatively little attention in the US, the Afghanistan-Pakistan Transit Trade Agreement (APTTA) is probably one of the most important developments impacting the medium-term economic and political health of Afghanistan. As the US State Department correctly noted,

“This agreement is one of the most important, concrete achievements between the two neighbors in 45 years and represents the most significant bilateral economic treaty ever signed between Afghanistan and Pakistan. It will undoubtedly bring great benefit to the people of both countries and is also a major milestone in promoting regional trade.”

The 2010 APTTA, which has been in the works for several years, was pushed through with strong pressure from the US last Sunday. Basically, in exchange for Pakistan’s cooperation, the US has provided Pakistan with…

“… significant investments in health, water, agriculture, government-to-government partnerships, support for the private sector, energy, security, gender equality, and a wide range of programs to help those who have been displaced by the ongoing fighting in Pakistan.”

The 2010 APTTA replaces an “outdated” agreement from 1965. Under international law, states bordering landlocked countries are required to provide transit facilities, however legitimate Pakistani fears of smuggling corroded the 1965 agreement. The new agreement is actually a reciprocal agreement that permits Afghanistan to export products duty-free through Pakistan to India, while allowing Pakistan to conduct transit trade through Afghanistan to states in Central Asia. Pakistan objected to Afghanistan’s request to be allowed to import products overland from India via Pakistan (nominally because India has not extended Pakistan transit rights to landlocked Nepal). Nevertheless, Afghanistan is permitted to import products from India (and any other country) via Pakistani seaports. Of course, India will soon have the ability to transit its exports to Afghanistan via Iran. So Pakistan’s objection to Indian exports to Afghanistan will become largely irrelevant as road (and some rail) links from Iran’s Chabahar port to Delaram are completed.

The new APTTA is carefully designed to limit opportunities for smuggling which corroded the old agreement. In the past, imported duty free goods (e.g. tea, tires) that were supposed to be sold in Afghanistan ended up flooding the Pakistani market. Smuggling of duty free goods resulted in major losses of customs revenue for the Pakistani government. Hence, the new agreement lays down precise measures to counteract those practices. According to the Associated Press of Pakistan,

“… Afghan trucks will be allowed to carry Afghan Transit Export Cargo on designated routes to Pakistani seaports and [one of the only India-Pakistan border crossing points at] Wagah.

The Afghan transport units, on return, will be permitted to carry goods from Pakistan to Afghanistan under the same expeditious procedures and conditions as Pakistani transport units.

It was also decided that all Afghan transit goods will be exported in containers of international specifications. For a period of three years, the cargo will be allowed to be transported in internationally acceptable and verifiable standards of sealable trucks while the oversize and bulk cargo which is not imported in containers – shipload will be transported in open trucks or other transport units. It was also agreed that export of perishable goods in transit will be transported in open trucks or other transport units.

According to the record note signed, the drivers and cleaners will be allowed to enter/exit the two countries on permits, identified by the biometric devices installed at the entry points.

It was also agreed that an arbitrator tribunal will be established bilaterally. In case of failure to agree on a common name of third arbitrator, two names of non-nationals and non- residents will be proposed by each side and the third arbitrator will be selected by drawing lots from the four proposed names.

To tackle the issue of unauthorized trade, it has been agreed that tracking devices on transport units will be installed and a mechanism for custom to custom information sharing (IT data and others) will be established. In this context, it has also been agreed that financial guarantees equal to the amount of import levies of Pakistan have to be deposited by authorized brokers/custom clearing agents to check the unauthorized trade and these deposits will be released after the goods exit the country.

In case, the goods do not exit the country within specified time, the guarantees will be encashed by the custom authorities.”

The agreement is significant for Afghanistan because it provides Afghans with access to a vital emerging market and reduces its economic and hence political dependency on Pakistan. The government of Pakistan’s exercise of hegemony over Afghanistan prior to 2001 and its clear preference for shielding certain Taliban elements even after 2001 provide ample reason for Afghanistan to seek to break free of its dependence on Pakistan.

The government of Pakistan potentially also benefits from the agreement for two reasons. First, the new agreement may reduce some smuggling of duty free goods into Pakistan. Second, Pakistan gains access to the landlocked states and resource rich states of Central Asia via Afghanistan.

Given the massive corruption in both Afghanistan and Pakistan, one must remain skeptical that this new agreement with its high tech tracking and biometric provisions will successfully curb smuggling over the long run. Nevertheless, the agreement can be seen as a medium-term “win-win” for both countries and for South Asia as an artificially divided economic region.

Any long term solution for sustainable transit trade would require building stronger states in South Asia that are less dependent on customs duties for revenue and capable of generating greater revenue from their better-off citizens. Although tax reform initiatives have been seriously debated (for example in India), unifying and widening the tax base to cover the emerging middle class (and thus creating space for lowering customs duties on imports) in South Asia will probably take many years. Faithfully ratifying and implementing the South Asian Free Trade Area (SAFTA) agreement would also be a major prerequisite. At the moment the political will and mutual trust necessary for removing barriers to intra-regional trade are weak, but the APTTA is a step in the right direction.

[Cross-posted from my Afghan Notebook]

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Vikash is an Associate Professor of Political Science and Asian Studies at Hobart and William Smith Colleges in Geneva, NY. His main areas of academic interest are (post-) globalization, economic development, and economic freedom, with a regional focus on South Asia