Afghanistan Pakistan Trade Portal

    Trade replacing Terror

    In our own geopolitical interests, it is about time Islamabad closed our geo-economic ranks with Afghanistan by establishing a free trade zone (FTZ) along the Durand Line rather than erecting fences to unduly distance Pakistan from one of its closest neighbours.

    Trade and economic relations between Pakistan and Afghanistan have been the victim of historically strained political relations between the two countries. Since the independence of Pakistan in 1947, Afghanistan has not formally recognized the 2,400-kilometre-long Durand Line as the legitimate border between the two countries. More recently, cross-border infiltration, refugees, drug trafficking, militant groups, and disputes over counterterrorism policy and dialogue with terrorist networks have contributed to an entrenched trust deficit and have eroded relations.

    Illegal trade and the unauthorized movement of people and contraband across the porous common border have further contributed to tensions between Pakistan and Afghanistan.

    Strains in economic relations reflect claim by Afghanistan that Pakistan has not removed impediments to trade, while Pakistan claims that illegal trade under the cover of Afghan trade hurts Pakistani business interests and causes losses in government revenue.

    Many attempts have been made to identify the difficulties and address the grievances of the two sides but to no avail. The impediments identified in various studies relate to issues of trade facilitation, transit and transport, en route security, customs procedures, illegal trade, tariffs, banking and payments, competitiveness, and infrastructure.

    Still, it seems too preposterous for a country of over 220 million with a GDP of over $300 billion to fence itself against ‘threats to its economy’ from one of the poorest countries (more than 54% of the population lives below the poverty line) of the world having a population of just 35 million and a GDP of a mere $23 billion. Indeed, most Afghans see poverty, unemployment and government corruption as the causes of war and not the Taliban.

    Trade among nations is beneficial for job creation and fuelling economic growth. Trade helps improve living standards and promote better quality products and services at competitive prices. Thus trade remains at the top of agendas when it comes to bilateral relations among countries. However, these benefits notwithstanding, trade relations between Afghanistan and Pakistan have suffered considerably under turbulent bilateral political ties.

    As a landlocked country, Afghanistan has remained dependent on Pakistan for its transit trade while both countries are also immediate markets for each other. Unfortunately, trade relations between Afghanistan and Pakistan have continued to remain troubled.

    In the light of international conventions, arrangements like the Afghanistan Transit Trade Agreement (ATTA) 1965 and Afghanistan Pakistan Transit Trade Agreement (ATTA) 2010 did provide legal frameworks for bilateral trade and transit relations but reality has never matched the paperwork. Even, major changes like the end of the Cold War, the collapse of the Soviet Union in 1991 and later the onset of a new Afghan regime in the aftermath of the September 11th attacks could not influence the bumpy trade relations between the two neighbours.

    In spite of such major changes in the regional political economy, Pakistan is said to still maintain its 1950s attitude. The sudden closure of border crossing points, superfluous documentation at Pakistani ports, agonies in the name of security checks, and barriers on trade with India have continued to exert serious pressure on the Afghan economy. This strategy has been aimed at slowing down economic growth in Afghanistan to reinforce political pressure exerted through other channels. Pakistani authorities have also assumed that discouraging Afghan transit trade would force Afghan traders to opt for Pakistani products rather than importing them from other countries, like India. Under the same assumption, they proposed a target of $5 billion in bilateral trade. However, this approach has backfired.

    It is, therefore, imperative that the strategic policy planners in Pakistan do an urgent review of their current approach towards Afghanistan and consider some other options to improve the bilateral trade and economic relations of the two countries along with generating a significant geo-economic dividend for the benefit of the two neighbours. One such option could be the setting up of a free trade zone (FTZ) in the region which so far has remained a free terror zone. In this regard we could also get the Americans to dust up their much forgotten Reconstruction Opportunity Zones (ROZs) project they had proposed to set up along the Durand Line during mid-2000. The idea was to establish with US funding Afghan-Pakistan joint manufacturing units to fabricate items for the US market.

    With an FTZ operating within a set of rules the chances of many of the bilateral issues that come in the way of a smooth conduct of bilateral trade between Afghanistan and Pakistan are likely to disappear.

    With the disappearance of Federally Administered Tribal Area (FATA) and the extension of the borders of KP province to Durand Line (which would become largely irrelevant once the FTZ is established) a large zone comprising most of the KP and a large part of southern Afghanistan would make up the Free Trade Zone where the two countries will have roaring bilateral trade as well as set up manufacturing ventures including a number of joint ones with the aim of expanding the economies of the two countries.

    However, such free trade zones are known to have also played the role of facilitators of money laundering and terror financing as well.

    According to Isabella Chase, Anton Moiseienko and Alexandria Reid (Free Trade Zones and Financial Crime – A Faustian Bargain? published by RUSI on November 5, 2019), free trade zones (FTZs) present both opportunities and challenges for globalised trade.

    At their best, they facilitate frictionless trade and manufacturing, creating jobs and economic growth for local communities. At their worst, they enable illicit trade and the laundering of criminal proceeds.

    There are two primary reasons why FTZs fall victim to criminal exploitation: weaknesses in governance and weaknesses in information sharing-procedures.

    FTZs are typically governed by private companies or public-private partnerships that have gained a licence to operate the zone. These administrators run the FTZ according to internal policies and regulations, but the extent to which they are expected by their governments to enforce other laws and national regulations is sometimes woefully unclear.

    The Revised Kyoto Convention on the simplification and harmonisation of customs procedures defines Free Zones as part of a country’s territory ‘where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory’. Yet despite the clarification from standard setters such as the World Customs Organisation (WCO) that this should not affect the applicability of other laws, including those against money laundering and terrorist financing, the implementation and enforcement of these laws in FTZs often fall victim to the overarching objective of facilitating trade.

    The OECD has also worked hard to strengthen the governance of FTZs. In October 2019, the OECD Council formally adopted a Recommendation which provided a series of commitments to be taken at the state level to enhance the transparency of FTZs whilst not dissuading trade. Among other things, it reaffirms the need for law enforcement and customs to have direct oversight of trade conducted within an FTZ and stipulates that the administrators and businesses that operate within them must be made aware of their legal obligations.

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