A lose lose trade policy: What is a possible solution to the future of trade between Afghanistan and Pakistan?

Trade between Afghanistan and Pakistan have been subjected to various complexities over high tariffs, border closure, complicated customs procedures, illegal business, en route security, fraud in payment system, and other obstacles in imports and exports.

Afghanistan always claims that Pakistan has not removed the obstacle to trade, and Pakistan argues that “illegal trade under the cover of Afghan transit hurts Pakistani businesses.” Therefore, Pakistan unilaterally closed its border multiple times and increased its tariffs on Afghan goods in recent years. In reaction, the Afghan president Ashraf Ghani issue a decree in 2017 and banned all Pakistani trucks from entering into Afghanistan or passing through into other Central Asian countries. As result, the volume of trade between Afghanistan and Pakistan have significantly dropped from US$2.5 billion in 2013 to US$500 million in 2017.

Afghanistan-Pakistan trade balance

In 2015, the volume of bilateral trade between Afghanistan and Pakistan was estimated at US$1.5 billion. Afghanistan’s share of export to Pakistan remained at US$226 million or 15 percent only. Pakistan kept a share of 85 percent by making US$1.2 billion from exports to Afghanistan.

Afghanistan is Pakistan’s second export destination in Asia and fourth after the United States, United Kingdom and China.

Pakistan’s main items of exports to Afghanistan are construction materials, pharmaceuticals, chemicals materials, vegetables and rice, electronic and machinery, and plastics products.

In 2018, the share of Pakistani exports to Afghanistan slightly increased to reach US$720 million.

Likewise, Pakistan is Afghanistan’s second export destination in Asia after Iran. Before the tension, Pakistan was Afghanistan’s biggest trade partner. Afghanistan’s main exports to Pakistan include agriculture produce and fruits, raw cotton, rugs and carpets.

Since the volume of trade is hugely weighted towards Pakistan, Islamabad is losing more from the border closure and trade tensions than Afghanistan. However, the 2017 border closure also caused damage of up to US$90 million to Afghan traders and harmed almost half Afghan’s exports to Pakistan.

Sources of tension

Afghanistan is a landlocked country and it relies on Pakistan to facilitate the transit of its trade with other global economies.

Likewise, Pakistan relies on Afghanistan for shorter transit and access to Central Asia’s rich oil and energy markets.

However, enduring enmity, continuing mistrust, on-going border skirmishes, multiple border closures, and current insurgency on both sides of the border are major sources Afghanistan-Pakistan trade disruptions and decline.

In the early-1960s, Afghanistan lost 40 percent of its customs duties as result of border closure with Pakistan. The 1961 Afghanistan-Pakistan border closure, which lasts for two years until 1963, slashed Afghanistan’s budget by 20 percent along with its several million dollars loss of products eroded in Pakistan warehouses.

In 1965, Afghanistan and Pakistan signed the Afghan Transit Trade Agreement (ATTA) to allow the transit of Afghan exports via Pakistan to Wagah border with India and seaports of Karachi and Gwadar. Though the ATTA did not allow Pakistani trucks to enter Afghanistan, the movements of Pakistani lorries and trucks were largely seen throughout Afghanistan during the internal war of the 1990s.

In 2010, the two countries signed the Afghanistan-Pakistan Transit Trade Agreement (APTTA) to replace the 1965 ATTA and allowed the Pakistani trucks to move products to all regions of Afghanistan. In 2012, Tajikistan also became part of APTTA and the Afghan president Hamid Karzai allowed Tajikistan and Pakistan to move their imports and exports via Afghanistan. As result, Afghanistan-Pakistan transit trade increased from US$1.3 billion in 2010 to US$2.7 billion in 2014.

What is the future of trade between Afghanistan and Pakistan?

In additional to Afghanistan, Pakistan has also a huge volume of up to US$4 billion in trade with Central Asia. Therefore, Pakistan will not only lose from the current trade dispute with Afghanistan, Islamabad will also face a huge trade decline with Tajikistan and other Central Asia’s partners too.

Since Pakistan has “unilaterally” decided to close its border multiple times in the last seventeen years, Afghanistan has apparently diversified its trade and increased its imports and exports with Iran and India via Iranian Chabahar seaport.

The Indian-backed Iranian Chabahar seaport was developed as part of a “new transportation corridor” for land-locked Afghanistan to come out of dependence to Pakistan, however Trump’s new decision to re-impose sanction on Iran and penalise financial institutions for doing business with Iran is blurring the Iran Chabahar’s viability in future.

Therefore, both Afghanistan and Pakistan will face trade decline in future if they do not resolve their tensions.

Solution

Since Afghanistan and Pakistan are both losing from current trade decline, Kabul and Islamabad have to re-examine their shared interest and re-develop their trade policy to extend APTTA and include both India and Central Asia in their next agreement. By doing this, Afghanistan will reach India from Wagah border to import Indian goods and Pakistan will benefit the whole of Central Asia’s market and Russia via Afghanistan.

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