Chabahar port deal a political show that will not be executed

By Zafar Bhutta

ISLAMABAD: Will Pakistan be able to sign free trade agreement (FTA) with Iran? It is a big question that is doing rounds among relevant circles as some key hurdles stand in the way of exploiting the huge potential of trade with Tehran.

In an encouraging development, Iran has accepted Pakistan’s offer to join the China-Pakistan Economic Corridor (CPEC), paving the way for enhancing bilateral commerce. International sanctions on Iran against its nuclear programme, which were a major impediment to deepening the trade ties, have also been lifted earlier this year.

According to an official of the Iranian embassy, Iran has floated its proposals for the FTA and it is waiting for the response of Pakistan government. He acknowledged that tariff structures in Iran were high and unstable, but said free trade would bring down tariffs and duties as well as improve the trade volume.
“If Iran joins CPEC, it will help enhance bilateral trade and even clear the way for supply of Pakistani goods to Central Asian states and Russia,” he said.
The official called the Chabahar port deal among India, Iran and Afghanistan a political show in the region, which was not expected to be implemented.
He revealed that India was not investing in the development of Iran’s Chabahar port, therefore, the deal would not prevent Tehran from joining CPEC. “Iran wants to work with Pakistan and its participation in CPEC will help improve relations further.”
Hurdles to the FTA
An official of the Ministry of Commerce, however, cautioned that Iran was not a member of the World Trade Organisation (WTO) and that made it tough to engage in trade with it.
He pointed out that bilateral trade had come down because of sanctions in the past, but despite that Iran’s tariff structure was very complicated. “Iran imposes high tariffs on imports from around the world,” he said.
Pakistan’s major export product could be textile but Iran has slapped 100% duty on textile goods. On leather garments, the duty is 120% whereas rice exports face 80% duty. In addition to these, citrus export to Iran is banned.
According to the commerce ministry official, Iran increases import duties on different occasions with no stable tariff structure. In this scenario, it is hard to do business with the neighbour.
Another major hurdle is the closure of entry gates on the border by Iran at 5pm. However, entry gates remain open on the Pakistan side for 24 hours a day. Pakistani traders are also required to pay load and road taxes in the Iranian territory.
Pakistan took up the matter with an Iranian delegation in August 2015, but they argued that road conditions in Iran were quite good, which was the reason behind the collection of load and road taxes.
Being a WTO member, Pakistan can impose a maximum 25% import duty. This way, Iranian traders enjoy a level playing field but Pakistani traders encounter tax and tariff barriers in Iran.
“Trade with Iran could not be increased unless it becomes a member of the WTO,” the ministry official remarked.
Earlier, Iran was not willing to sign the FTA, but this time, it is expected to strike a deal. Some officials suggest that Delhi’s influence is quite effective in Iran, which will also be looking to tap the big market of India.
Post-sanctions scenario
After the lifting of sanctions earlier this year, Pakistan’s Ministry of Foreign Affairs endorsed plans to step up political and business relations with Iran. Bilateral ties had been at a standstill since 2011 due to tightening global restrictions.
The two countries have been pushing for the past few months for an agreement between their central banks to streamline the payment mechanism. The State Bank of Pakistan (SBP), however, argued that though sanctions had been removed, Pakistani banks were mostly unable to find international banks that could process payments in respect of Iranian banks.
To tackle this, the SBP is engaged in active coordination with the Central Bank of Iran in an attempt to establish a trade settlement mechanism to restore and encourage trade.
In the transit trade arrangement, Iran provides the shortest route to Russia and Central Asian states as it is only 90 km away from Pakistan. Iran has already the infrastructure and it is ready to join CPEC.
The positive developments come at a time when Afghanistan has no intention of signing a transit trade agreement with Pakistan if India is not allowed to transport its goods via Pakistan.

Published: December 18, 2016

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