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Snags in the ECO trade agreement

March 20, 2017


The joint declaration, at the conclusion of the 13th Economic Cooperation Organisation summit, resolved to “double the current level of intra-ECO trade within the next 3-5 years.”

Despite a lapse of 25 years, since its expansion in 1992, ECO’s performance has remained subpar.

Total intra-region trade is 9pc of ECO’s global trade of $650bn, compared with ASEAN’s 24pc and EU’s 61pc.

To be an effective instrument for regional trade integration the agreement needs to be renegotiated afresh

ECO Vision 2025 is optimistic that a large part of the remaining 91pc trade “can be diverted to ECO countries if the ECO Trade Agreement (ECOTA) is operationalised.”

However, a dispassionate analysis is warranted to see if ECOTAs has the strength required to achieve this target.

Firstly, the Agreement has structural flaws which have hampered its implementation. Article 39(1) of ECOTA makes its operationalisation conditional to accession by five out of ten member states.

Though Pakistan, Iran, Turkey, Afghanistan and Tajikistan agreed in 2008 to operationalise ECOTA, it has yet to be implemented due to disagreement between members on the interpretation of its core provisions and non-ratification of the agreement’s annexes by Tajikistan.

The pre-condition of a minimum of five members’ accession has hamstrung the Agreement’s implementation.

Secondly, the Agreement has textual flaws. Article 4 provides a positive list which shall constitute 80pc of tariff lines (products) actually traded between the Contracting Parties on the date of entry into force of the Agreement; tariffs on these products shall be reduced to maximum 15pc.

Disagreement emerged on the interpretation of this Article between parties. Turkey, whose MFN tariff on more than 80pc tariff lines is already below 15pc, claimed that it was free to include these products in the positive list; it meant no further tariff reduction by Turkey for its ECOTA partners.

On the other hand Pakistan, which was designated as the Coordinating Country for ECOTA, contended that 80pc of only those products can be included in the positive list which have a tariff of more than 5pc, as the inclusion of products below 15pc tariff into the positive list neutralises ECOTA’s trade liberalisation objective.

Seven rounds of circular negotiations from 2008 to 2017 have failed to break the deadlock on the interpretation.

Thirdly, in the current agreement, the three major contracting parties i.e. Turkey, Pakistan and Iran perceive inequitable costs from trade liberalisation which is contrary to the objective of ECOTA that the “Agreement shall be based and applied on the principles of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all Contracting Parties.”

Turkey, having more than 80pc of the tariff lines with tariff already below 15pc, sees ECOTA as an opportunity sans cost. Turkish interpretation of Article 4 essentially means zero tariff reduction and a free ride in case of reduction by other partners.

Iran, not being a WTO member, maintains high tariff levels and with no anticipated additional market access in Turkey — the largest ECO market — does not find the ECOTA interesting enough.

For Pakistan, ECOTA is attractive only as much as the additional market access in Turkey and Iran. Pakistan, therefore, is not keen on the Turkish proposal of operationalising ECOTA as a trilateral arrangement between Pakistan, Turkey and Afghanistan.

It would rather negotiate a bilateral agreement with Turkey based on reciprocity than granting unilateral concessions under ECOTA.

Afghanistan and Tajikistan, jointly, make only 1.97pc of the ECO region’s global trade and, therefore, don’t constitute the critical mass which can make a substantial contribution to intra-ECO trade.

Lastly, even if the agreement is implemented by consensus on the most liberal interpretation of tariff reduction modalities, the potential for trade growth under ECOTA is quite limited.

Article 3 allows the contracting parties to maintain a sensitive list of 1pc products (at six-digit level) which will be out of the ambit of the Agreement; in addition, 20pc products can be excluded from tariff reduction under Article 4.

The agreement fails to acknowledge that intra-ECO trade is concentrated in few products. For instance, Pakistan’s total imports from ECO members in 2015 were $876m against 1,373 tariff lines (at the six-digit level).

The top 1pc products constituted 57pc of Pakistan’s imports from ECO partners whereas top 20pc products accounted for 96pc of total imports. The allowance to exclude 57pc from ECOTA and 96pc from tariff reductions would render the Agreement meaningless.

To conclude, though the ECO region, constituting a consumer base of 440m people, offers significant potential for diversion of 91pc of the region’s global trade from external to internal partners, the ECOTA in its present form lacks the vitality to serve as an enabler.

The Agreement has eluded operationalisation for more than a decade due to multiple reasons.

Even operationalised, its current architecture lacks the strength to significantly stimulate intra-ECO trade and achieve the 13th ECO Summit’s target of doubling trade in 3-5 years.

To be an effective instrument for regional trade integration, the Agreement needs to be renegotiated afresh. The sooner, the better.

Published in Dawn, Business & Finance weekly, March 20th, 2017