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Transit trade

November 14, 2017

IT’S home to almost a quarter of the world’s population and has been one of the fastest-growing regions on earth. A young, enterprising population living here is eager to find its place in the world and could deliver a historic demographic dividend. Yet for all its potential, South Asia continues to be one of the least integrated places.

Inter-regional trade, says the World Bank, accounts for barely five per cent of South Asia’s total trade. Compare this to Asean, where inter-regional trade accounts for over a quarter of total trade. This isn’t surprising: South Asia is plagued by geopolitical tensions and a history of distrust and disputes, particularly between India and Pakistan, that stymie any progress towards greater economic integration.

The myopia of this region’s policymakers is showcased in the impasse between Afghanistan and Pakistan on providing the former greater access to the Indian market through a land route. While Pakistan allows Afghanistan land access to India for its exports, it does not allow Indian goods to make their way to Afghanistan via the same route — Indian exports to Afghanistan must be routed via Pakistan’s seaports.

This policy has skewed Afghanistan’s trade ties with India and has become a major sticking point of late. According to data made public by Kabul, Afghanistan’s exports to India have increased by 227pc, from $70 million in 2011 to $230m in 2016. However, its imports from India in this same period have grown by only 47pc, from $103m in 2011 to $152m in 2016. During the same period Afghanistan’s exports to Pakistan increased by 57pc, from $180m in 2011 to $283m in 2016, while imports from Pakistan have increased by 37pc, from $877m in 2011 to $1.2 billion in 2016.

Politics should not obstruct regional trade.

The curbs on Afghanistan’s imports from India mean that trucks crossing Wagah with Afghan exports to India must return empty, thereby increasing transportation costs for the country’s exporters. Secondly, the restrictions make it more expensive for Afghanistan to purchase Indian goods. Finally, these limitations bolster anti-Pakistan sentiment in Afghanistan. Last month, the Afghan government banned Pakistani trucks from entering Afghanistan, after claiming that Pakistan had stopped allowing Afghan trucks from crossing the Durand Line.

To circumvent these barriers, India and Afghanistan announced an air corridor, which was followed by the first shipment of Indian wheat to Afghanistan via the strategic Chabahar Port in Iran. These alternative routes will increasingly play a major role in bolstering Afghanistan-Iran-India trade ties, while isolating Pakistan from lucrative trade networks. It is worth mentioning that Iranian exports to Afghanistan have increased by 118pc, going from $581m to $1.3bn in 2016.

By not giving India access to the land route via Wagah, Pakistan also risks its plans to use CPEC as a gateway to Central Asia. That route must go through Afghanistan. President Ashraf Ghani recently said his country won’t be a part of CPEC unless it is given access to India via a land crossing. Unless a deal is reached, the billions of dollars of transit fees, essential for meeting CPEC repayment obligations, will be at risk.

While elites in Pakistan view Chabahar as a competitor to Gwadar, the Chinese are less keen to view this as a zero-sum game. In fact, Chinese officials are on the record as saying that they see Iran as a key plank in the One Belt, One Road (Obor) initiative. With Pakistani policymakers unable to generate sufficient momentum to meet Kabul’s demands on the land route, one can expect the Chinese to hedge their bets, especially if billions of dollars of goods begin to go through Chabahar and into Afghanistan and Central Asia.

Sceptics will argue that China is an all-weather friend and would not undercut Pakistan, that Chabahar is India’s pet project and that India has been vehemently opposing Obor. While that may be true, it would be prudent to look at the fact that China is India’s largest trading partner, with annual bilateral trade amounting to more than $70bn. This summer, Indian and Chinese forces came face to face in Doklam, but trade continued to grow at the height of the crisis. Further, India is a founding member of the Asian Infrastructure Investment Bank.

China’s goal is to foster greater regional trade and cooperation by developing essential infrastructure that facilitates this trade. India is one of the largest economies in the region and the Chinese recognise that it has a role to play in promoting greater regional trade. These trade routes can run through Pakistan, allowing it to earn revenue through the transit trade, or through alternative routes via Iran. To become a conduit for goods flowing to Central Asia, Islamabad must provide full access to India’s markets via a land route.

The writer is a South Asia analyst at Albright Stonebridge Group in Washington D.C.

Published in Dawn, November 14th, 2017