OPPORTUNITIES FOR IMPROVING ECONOMIC COOPERATION

BETWEEN PAKISTAN AND AFGHANISTAN

POLICY NOTE

The Asia Foundation has sponsored policy research studies to identify policy options for increasing economic

cooperation between Pakistan and Afghanistan. The published reports include a Political Economy Analysis; research

highlighting Afghan perspectives on Pak‐Afghan trade; and a paper presenting future perspectives on regional economic

integration. The policy input produced includes proposals to:

Encourage the two governments to adopt a roadmap for streamlining the implementation of the TIR Convention

1975, and allowing the private sector a substantial role in monitoring trade movement.

Strengthen Afghanistan ‐ Pakistan Transit Trade Coordination Authority (APTTCA) by involving a broad representation

of the private sector from both countries, to help enhance economic ties between Pakistan and Afghanistan.

Involve the multilateral development agencies, donor organizations, governments and the private sector in a

conversation to develop investment guarantee mechanisms for Afghanistan, and an export financing facility.

Progressively invite stakeholders from Central Asian Republics into the Pak‐Afghan economic cooperation dialogue

process.

Below is a summary of inferences extracted from the published studies:

Afghanistan‐Pakistan economic relations are strategic and natural but hurt by institutional weaknesses.

Trade relations between Pakistan and Afghanistan have suffered, marred by unmet expectations and implementation

problems causing distrust between the two governments. Since each dimension of cross‐border trade is governed either

by bilateral, regional or multilateral agreements or by commitments of the two countries to international charters,

untangling of the main issues and discussion of these within the relevant format could help resolve the impediments and

issues to mutual benefit.

Open sea access to the Central Asian markets could be achieved through collaboration between Pakistan and

Afghanistan.

Pakistan and Afghanistan undertaking reforms to reduce impediments to cross‐border trade will facilitate regional

integration and expansion in global trade with the region. Pakistan's proximity to Afghanistan and the Central Asian

Republics (CARs) gives Pakistan an advantage of lower transport costs over most other countries when the region is

viewed as a potential export destination. More importantly, accessing the surplus energy in the CARs is attractive for

energy‐starved Pakistan and the World in general.

Pakistan's ability and capacity to develop physical and institutional infrastructure on its own to reach markets in the CARs

and Afghanistan will remain limited in the near future. A more realistic and calibrated development strategy should

explore multilateral and bilateral donor supported regional programs like the Central Asia Regional Economic

Cooperation (CAREC) and the China‐Pakistan Economic Corridor (CPEC) for developing links with Afghanistan and Central

Asia.

The private sector in both countries can play an instrumental role in trade facilitation and promoting economic

bilateralism between Pakistan and Afghanistan.

It is suggested that the private sector, represented by an inclusive body of business constituencies from Pakistan and

Afghanistan, should lead negotiations for trade facilitation and economic cooperation and monitor the enforcement of

recommendations in coordination with the two governments. A consultative group of the private sector including The

Pakistan ‐ Afghanistan Joint Chamber of Commerce and Industry, The Pakistan ‐ Afghanistan Joint Business Council, The

Afghan Chamber of Commerce and Industry, The Federation of Pakistan Chambers of Commerce and Industry and the

Lahore Chamber of Commerce and Industry should establish a mechanism to steer a private sector led bilateral

economic agenda and monitor implementation of bilateral initiatives.

The Afghanistan ‐ Pakistan Transit Trade Coordination Authority (APTTCA) and the Afghanistan ‐ Pakistan Joint Economic

Commission (JEC) are forums which can be strengthened by providing representation to all relevant private sector

stakeholders involved in the Pak ‐ Afghan business environment. The two forums are the appropriate platforms for the

private sector to coordinate initiatives with the governments while providing feedback for improving economic

cooperation. The representation of the private sector at the forums should be determined by the consultative group

suggested above.

Establish mechanisms to facilitate Afghanistan in reducing its reliance on foreign grants.

Afghanistan has a limited agricultural export base, and a negligible industrial base. The result is a large trade deficit with

Pakistan which by 2011 had grown to over US$2 billion before declining somewhat. This was financed entirely by

external capital flows which arrived in the form of official grants from the United States, Europe and Japan. With these

flows set to decline eventually as NATO allies disengage from the country, the amount of deficit in trade will become

increasingly unsustainable. This will expectedly result in a decrease in bilateral trade which will economically hurt both

countries.

The risk can be mitigated by the two governments, backed by multilateral agencies, setting up “trade guarantee

systems” that will pick up the letters of credit for secondary finance. An alternative might be a multilateral sponsored

capital and guarantees based system possibly delivered through a trust type of vehicle for facilitating joint ventures in

manufacturing which will contribute to building up foreign exchange reserves for Afghanistan.

Promote the land‐based commerce approach for regional integration with Central Asian Republics to generate new

economic surpluses contributing to regional economic growth.

Afghanistan added to the five Central Asian states Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan have

a combined area of just below 4.7 million square kilometers, population of 100 million, and nominal GDP of $310 billion.

The economies of the landlocked countries in the area do not produce significant amounts of exportable surpluses that

could be traded with one another. And they do not have the needed physical and institutional infrastructure to support a

large amount of intercountry trade. The countries that have large trade‐to‐GDP ratios (for example the Kyrgyz Republic

and Turkmenistan) do so because of their mineral and energy resources.

There will be a large pay‐off if Pakistan, Afghanistan and the Central Asian Republics consider the rapid development of a

land‐based system of commerce. This has much greater growth potential than the continued focus on using sea

transport to access distant places. The widely accepted gravity model of trade argues in favor of the land‐based

commerce approach. This expansion in the area covered could be built on the APTTA, as the agreement has provisioned

transit corridors for carriage of goods to Central Asia through Afghanistan.

Among questions of inefficient transit procedures, ineffective border control, illegal trade … the answer lies in the

complete implementation of agreements, conventions and systems.

The United Nations Convention on the Law of the Sea 1982 (UNCOLS), also called the Constitution for the Oceans,

“provides landlocked states with the right of access to and from the seas and freedom of transit. However, the law makes

such rights subject to the agreements to be made by land‐locked and transit states. This, in turn, depends on the

prevailing relations between the concerned states”. The Convention also protects the rights of the Transit States, “in the

exercise of their full sovereignty over their territory, by recognizing their right to take all measures necessary to ensure

that the rights and facilities provided for in this Part for land‐locked States shall in no way infringe their legitimate

interests”. Article 125 (2) states that 'the terms and modalities for exercising freedom of transit shall be agreed between

the land‐locked States and transit States concerned through bilateral, sub regional or regional agreements.' By clearly

defining the transit routes and the mode and nationality of transport in these agreements together with bank

guarantees and insurance cover from traders and transporters, Pakistan has exercised its rights under the UN

Convention by ensuring that APTTA “in no way infringe(s) (on its) legitimate interests.”

Afghanistan's demand for overland access to India through Pakistan via Wagah is not rooted in the UN Convention, (the

one way export facility for fruits and perishables addresses a genuine need of Afghan exporters to save the perishable

export product).

Afghanistan‐Pakistan Transit Trade Agreement (APTTA) is a more comprehensive transit trade agreement than its

predecessor, giving both signatory countries access through each other's territory. While APTTA removed clauses like the

“Negative List” for Afghan imports, and removed the monopoly of Pakistan Railways / NLC on Afghan transit trade by

allowing Afghan trucks to carry Afghan export consignments and allowing Afghan importers to select their freight

options, APTTA also introduced significant provisions aimed at reducing illegal trade that can take place under cover of

transit trade, which followed the guidance provided by the customs procedures and trade facilitation in conformity with

the Revised Kyoto Convention.

APTTA provides Pakistan access to regional countries through designated corridors although Afghanistan has yet to

notify its customs transit rules required under the Agreement. The notification would create transparency for Pakistani

traders to use the territory of Afghanistan for transit to Central Asia. The routes agreed upon are: to Iran via Islam Qila

and Zaranj border; to Uzbekistan via Hairatan; to Tajikistan via Ai Khanum, Sher Khan Bandar; and to Turkmenistan via

Aqina and Torghundi.

Afghanistan maintains that it should be allowed return overland freight from India through Wagah, under APTTA Section

IX, Article 33a 'National Treatment' clause, 'Rules and procedures affecting transit traffic treatment applied to

transporters from the other Contracting Party shall be no less favorable than applied to their own like services and service

providers'.

APTTA is still seen to be cumbersome, time consuming and costly for Afghan traders on the one hand and failing to stop

illegal trade on the other hand. Limited success is due to the fundamental conflict of objectives related to reduction in

illegal trade and reduction in monitoring. A future policy dialogue may benefit the two countries in determining a way

forward toward developing a durable bilateral trade and investment agreement.

The Customs Convention on the International Transport of Goods under cover of TIR Carnets (TIR Convention 1975) is

the only universal and one of the most successful international transport conventions. The TIR Convention facilitates the

international carriage of goods from one customs office of departure to another customs office of destination through as

many countries as necessary. As a rule, the vehicle remains sealed throughout the TIR transport. This, of course, requires

a number of precautionary measures, such as strict customs control and secure sealing at the customs office of

departure and guarantees to cover risk of customs liability.

On 21 July 2015 the Government of Pakistan deposited its instruments of accession to the TIR Convention, 1975. The

Convention entered into force for Pakistan on 21 January 2016. With the accession of Pakistan, the TIR Convention has

sixty‐nine Contracting Parties including Afghanistan (re‐activated since 2013), Azerbaijan, Iran, Kazakhstan, Tajikistan,

and Turkmenistan. Many bordering countries in the region are also signatories to the Convention including Armenia,

Georgia, Mongolia, the Russian Federation and Turkey. China's accession is in process. Thus the Central Asian region is

poised to take advantage of the conveniences offered by the TIR Convention.

Afghanistan acceded to the TIR Convention in 1983 and its membership was re‐activated in 2013. However Afghanistan

has issued only two Carnets throughout this period, while 337 TIR terminations took place there. There are lessons in

these statistics. Mere accession to the TIR Convention does not enable the country to reap full benefits of membership;

i.e. to enable the country to send its products through other countries in its own transport (generating jobs and income)

with the ease of TIR systems.

Trade facilitation comprises provisions for expediting the movement, release and clearance of goods. Both Pakistan and

Afghanistan need to bring their customs and border procedures in conformity with international norms as adopted in

international conventions and agreements. There is also a need for better monitoring mechanisms to curtail enforcement

failures.

Afghanistan has undertaken extensive reforms of its customs procedures and border operations. Major customs reforms

implemented by 2012 in Afghanistan included the introduction of the Afghanistan National Tariff Schedule; procedures

to control and monitor exemptions; roll‐out of the Automated System for Customs Data (ASYCUDA); training of customs

officials; infrastructure at main customs stations; and the establishment of regional customs valuation and post‐

clearance control units in the major provincial centers.

Afghanistan is a member of the World Customs Organisation (WCO) but has not yet ratified the Revised Kyoto

Convention (RKC) for committing to international best practices in custom procedures. Pakistan on the other hand has

acceded to the Revised Kyoto Convention (RKC), which is the main trade facilitation Customs convention.

In addition, Afghanistan is about to become a member of the WTO; recently ministers formally approved Afghanistan's

WTO membership terms at a special ceremony held at the WTO's Tenth Ministerial Conference (MC10) in Nairobi on 17

December 2015. Afghanistan will have until 30 June 2016 to ratify the deal and would become a full‐fledged WTO

member 30 days after it notifies the acceptance of its Protocol of Accession to the WTO Director‐General. Once

Afghanistan joins the WTO, it can seek technical assistance for Trade Facilitation.

Pakistan has formally accepted the WTO Trade Facilitation Agreement (TFA) and submitted commitments under the

category “A” provisions. This means Pakistan is already moving to update its trade facilitation procedures in conformity

with the WTO requirements. The TFA will come into force once two‐thirds of the WTO membership has formally

accepted the Agreement.

Pakistan has made significant international commitments to trade facilitation. The Electronic Form‐E (EFE) module in the

Pakistan Customs' electronic system called WeBOC (Web based One Customs) has been developed in consultation with

relevant stakeholders. Furthermore, The Asian Development Bank (ADB) approved a five‐year $250 million loan in

December 2015 as part of the CAREC program, to establish a Pakistan Land Port Authority. Pakistan will streamline

transport, trade, logistics, customs, and other trade‐related border control operations.

Giving the private sector a central role in monitoring the implementation of the above international trade facilitation

frameworks will enhance the chances of overcoming trade impediments between Pakistan and Afghanistan.

Disclaimer: The contents and views expressed in this policy note are inferred from the mentioned research reports, and

do not necessarily reflect the views, opinions and positions of The Asia Foundation.