C I V I L - M I L I T A R Y

F U S I O N

C E N T R E

AFGHANISTAN
November 2011

IN TRANSITION
Comprehensive Information on Complex Crises

Transit Trade in Transition: The APTTA & the Afghan Economy

Steven A. Zyck Economic Development Knowledge Manager
steve.zyck@cimicweb.org

This report highlights the relevance of the Afghanistan-Pakistan transit trade for development and its role in the ongoing transition in Afghanistan. The document also reviews the status of the Afghanistan-Pakistan Transit Trade Agreement (APTTA), which was intended to facilitate Afghan exports via Pakistan. Related information is available at www.cimicweb.org. Hyperlinks to source material are highlighted in blue and underlined in the text.

ecent months have witnessed a renewed emphasis on commercial linkages between Afghanistan and the countries of Central and South Asia. On 22 September 2011, representatives of the American, German and Afghan governments formally announced the Note: This report strictly concerns transit trade launch of the New Silk Road initiative, which, according to issues between Afghanistan and Pakistan. It does Pajhwok Afghan News, is intended to bolster transport, energy and trade cooperation among Afghanistan and its not address the movement of materials for neighbours. As part of the New Silk Road, the Afghan and international forces in Afghanistan, which are Indian governments signed a strategic agreement in October governed by agreements other than the APTTA. 2011 which is intended to strengthen commercial and security ties, reports The Washington Post. This agreement reportedly offers tremendous potential for economic growth in Afghanistan. India requires Afghanistans mineral resources to fuel its continued growth and presents a massive market for Afghan agriculture products. Expanded Indo-Afghan commerce could generate sorely-needed revenues for the Afghan government as foreign aid declines and could promote stability by generating employment. However, transporting materials from Afghanistan to India requires a stable and predictable transit trade route across Pakistan. This issue transit trade via Pakistan is taken up in this report, which addresses the development and implementation of the Afghanistan-Pakistan Transit Trade Agreement (APTTA) from the perspective of economic growth and private-sector development in Afghanistan.

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AFGHANISTAN IN TRANSITION // DEVELOPMENT & STATUS OF THE APTTA

The APTTA was signed on 18 July 2010 in Islamabad by the secretaries of commerce of Pakistan and Afghanistan in the presence of the Pakistani Prime Minister and the US Secretary of State, says the Pakistan Observer. According to the Associated Press of Pakistan, the APTTA replaced an out-dated transit trade pact established in 1965. In short, it establishes a regulatory framework in which Afghan businesses will be able to export goods easily through Pakistan to India, China and beyond via air and seaports. Under the agreement, Afghanistan will also be able to import goods with fewer delays and expenses via Pakistan. Similarly, Pakistani businesses will be able to export goods with greater ease, with regards to customs and paperwork, via Afghanistan. Other key elements of the APTTA, which have been extracted and summarised from the full text of the agreement, include the following:

Transit trade through Afghanistan and Pakistan must take place along pre-determined routes and only utilising specified ports and border crossings. Afghanistan and Pakistan are obligated to ensure that suitable infrastructure and personnel are available at border crossings. While each country remains responsible for licensing transport operators (e.g., trucking firms) registered in their territory, Afghanistan and Pakistan should seek to harmonise their standards and regulations in this area. Transport operators from Afghanistan and Pakistan which receive a temporary admission document will be able to transport goods through the other countrys territory. That is, Afghan trucks may send carry goods via Pakistan to India rather than having to re-load them onto Pakistani trucks at the Afghanistan-Pakistan border, as had previously been the case. The Afghan government shall recognise Pakistani drivers licenses and vehicle registration documents, and vice versa. In addition, Pakistan and Afghanistan shall begin to harmonise the regulations and standards for inspecting and certifying trucks used in the transit trade. The Afghan and Pakistani governments shall expedite and simplify the process for awarding multiple-entry visas to truck drivers from one anothers countries. With the exception of selected items, goods transiting through Afghanistan and Pakistan shall be stored in sealed containers which meet international specifications. Customs officials may inspect the contents of up to 5% containers at the point of entry into Afghanistan or Pakistan and may not undertake additional inspections unless signs of regulatory violations are found. The Afghanistan-Pakistan Transit Trade Coordination Authority (APTTCA), which is established under the APTTA, is responsible for monitoring and facilitating the implementation of the agreement.

Figure 1. Border Crossing/Ports in the APTTA

SostTashkurgan Peshawar-Torkham Ghulam Khan Chaman-Spin Boldak Wagah

The text of the agreement authorised a number of routes by which Afghan goods could transit via Pakistan en route to India or other international markets. These routes begin and end at the following ports and border crossings (see Fig. 1): Peshawar-Torkham, Chaman-Spin Boldak, Ghulam Khan, Sost-Tashkurgan, Port Qasim, Karachi and Gwadar port. It should be noted that the APTTA concerns only trade
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Gwadar

Karachi & Port Qasim

Source: Adapted from Hollows Foundation Map, with information from UN-HABITAT Pakistan.

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through Afghanistan and Pakistan but not trade between Afghanistan and Pakistan, which is governed by separate trade, border and customs regulations and agreements.

The Significance of the APTTA to Afghanistan

According to a number of experts and international organisations, the successful implementation of the APTTA is crucial to Afghanistan for a number of reasons. As the World Trade Organization (WTO) highlight, at least half of Afghanistans exports went either to or through Pakistan in 2010. In addition, the volume of Afghan exports to India is already high and likely to increase substantially in the coming years, as suggested by the recent IndoAfghan strategic agreement. Between 2009 and 2010, for instance, the proportion of Afghan exports destined for India increased by 35.6%. However, in order to sustain such growth, trans-Pakistan trucking must be predicable, relatively cheap and fast, according to a 2009 report on Trade Promotion in Afghanistan. Air freight may allow some high-value Afghan exports to bypass Pakistan and other neighbouring countries, but, as a report on Market Prospects in Afghanistan suggests, shipping agricultural goods via plane is not commercially viable given the prohibitively high costs involved.

Figure 2. Afghanistans Annual Export Value (in USD Millions), by Trading Partner
$1,000 $900 $800 $700
$540.1

$600 $500
$408.0 $403.4

$400 $300 $200

$67.7 $264.1 $132.0 $251.1 $76.9 $48.8 $46.6 $64.9 $76.0 $89.5 $264.3 $191.1 $17.3 $76.0

$100 $0

$54.4 $53.2

2005 Pakistan

2006 India

2007 United States

2008

2009 Worldwide

Source: International Trade Centre, Trade Competitiveness Map, accessed October 2011 Note: Data for 2010 and 2011 or for years before 2005 is not available from this source. The Worldwide figure includes Afghan exports to Pakistan, India and the United States.

Smooth and predictable exports and imports via Pakistan also appear to be important for Afghanistans most promising and strategic industries: mining and agriculture. The US and Afghan governments have recently made concerted efforts to promote Afghanistans mining sector, which The Guardian says could be decisive in moving the country out of poverty. One 2010 study of economic growth in Afghanistan, entitled Afghanistan and the

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Search for a Sustainable Economy, indicates that the mining sector could provide from USD 300 to USD 730 million per year during initial exploration and development of mining infrastructure; subsequently the Afghan government could receive up to USD 1 billion in income annually. Former US Ambassador to Afghanistan Zalmay Khalilzad wrote in Foreign Policy in October 2011 that [a]s foreign aid dries up, Afghanistan will become increasingly dependent on mineral and energy development contracts to finance its reconstruction efforts and sustain its security forces. Extraction would also produce a massive potential for employment which could stabilise Afghanistan, according to the World Bank. China first won the rights to the Aynak copper deposit in central Afghanistan in 2007, and a range of companies, primarily from India, are in the final bidding stages for the Hajigak iron ore deposit, according to the Indian Express newspaper. However, actual ore extraction has not yet begun on a large scale in Afghanistan, and growth in this sector could be jeopardised if mining firms face difficulties importing equipment into Afghanistan and, above all, in exporting the ore. The ability to export goods in a timely and predictable manner is particularly crucial for agricultural products given their perishability. Last year, licit agricultural products accounted for more than half of the total value of Afghan exports, according to the WTO. International emphasis has recently been placed on enhancing the production, marketing and export of high-value agricultural products from Afghanistan, thus making this sector poised for growth in the short-to-mid-term. For instance, MSNBC notes that international and Afghan agencies have promoted crops such as pomegranates and saffron as alternatives to poppies and as sources of future economic growth. The importance of Afghan agricultural exports to India and other foreign nations can be seen in the October 2011 establishment of the India Fresh Fruit Trade Office in Afghanistan, which was supported and highlighted by the United States Agency for International Development (USAID). This office builds upon large-scale purchases of Afghan fruits by Indian wholesalers in 2010, according to Tolo News.

Concerns Regarding the APTTA

While the APTTA is crucial to Afghanistan and to sectors such as mining and agriculture, in Pakistan the agreement encountered virulent opposition from within government and business community, says the Pakistan Observer and a variety of other Pakistani news outlets. As a US Department of Agriculture (USDA) report suggests, the APTTA would have particularly negative implications for the Pakistani National Logistics Cell (NLC), a Pakistani military run trucking and rail company with a dominant role in commercial transport. NLC trucks and NLC-bonded trucks play a major role in Afghan imports and exports. Currently, the NLC transports goods into Afghanistan from relevant ports, particularly Karachi, to their final destination, and they pick up Afghan exports at the Afghanistan-Pakistan border and bring them to locations within Pakistan or to Pakistani ports. Under the APTTA, Afghan trucks and trucking firms are allowed to carry their loads to the Indo-Pakistani border or to Karachi for export further abroad, thus reducing the role and influence of the NLC. However, according to a 2007 report from a senior Afghan Ministry of Commerce and Industries (MoCI) official, loosening the grip of trucking cartels such as the NLC may play a major role in reducing transport costs for Afghan businesses seeking to export and import goods more economically via Pakistan. One representative of the Pakistani private sector, in arguing against the APTTA, told The News that Pakistans transport sector could lose 300,000 jobs if the transit trade agreement was implemented. Furthermore, Pakistani officials and the Pakistani private sector were also concerned that the APTTA would create additional opportunities for smuggling goods into Pakistan, says the Pakistan Observer. While the APTTA has been specifically designed to prevent smuggling by enhancing the management of trade and customs data among Afghan and Pakistani institutions, some still fear that simplifying transit trade regulations would also make smuggling easier. The primary form of smuggling between Afghanistan and Pakistan, according to The News International, does not involve the clandestine transport of goods across borders. Rather, smugglers take advantage of the fact that goods passing through Pakistan en route to Afghanistan are not charged any Pakistani

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customs or taxes. As such, smugglers have simply claimed that large volumes of goods being imported into Pakistan are intended for Afghanistan. However, after leaving customs houses at major ports and airports in Pakistan, the tax-free goods are dumped on Pakistani markets rather than moving on to Afghanistan. An investigative piece by Dawn found that, of 306,267 containers transiting Pakistan between 2007 and 2010, more than half reportedly never made it to their supposed destination and were lost (i.e., smuggled) en route to Afghanistan. In a smaller number of cases, the goods are actually transported into Afghanistan under pre-APTTA transit trade regulations and later smuggled back into Pakistan in a process known as reimportation, according to a 2008 study commissioned by the UK Department for International Development (DFID). Doing so puts lawabiding Pakistani businesses at a commercial disadvantage given that they cannot compete when much cheaper and tax-free, smuggled goods are available on the market. Moreover, smuggling prevents the Pakistani government from gaining customs and tax revenues. Pakistani officials and experts have suggested that smuggling of goods into Pakistan (by taking advantage of various agreements with Afghanistan) costs the Pakistani treasury PKR 12 billion (USD 140 million, approx.) annually. Finally, and perhaps most importantly, the APTTA has also raised intense concerns within Pakistan about Indian exports crossing through Pakistani soil en route to Afghanistan, says The Express Tribune. The text of the APTTA itself says that Afghan trucks may carry goods to the Indo-Pakistani border crossing at Wagah but on return [they] will not carry Indian Exports.1 However, a Pakistani officials told The Express Tribune that Pakistan could consider allowing Indian exports to Afghanistan under the APTTA at an appropriate time in the future. Such statements raised concerns within Pakistan about the potential for the APTTA to aid Indian businesses. Capturing this sentiment, Mahfooz Elahi, President of the Islamabad Chamber of Commerce and Industry (ICCI), told the Pakistan Observer some secret clauses may be part of this agreement allowing India to use Pak territory for transit trade to Afghanistan.

Delayed Implementation of the APTTA

The concerns noted above resulted in a range of delays to the implementation of the APTTA. The agreement, heavily discussed in 2009, was signed by representatives of both countries in July 2010, just before the Kabul Conference. However, the Pakistani Federal Cabinet did not authorise Pakistans participation in the agreement until early October of that year. The APTTA was formally ratified by both countries on 27 October 2010 in a ceremony in Kabul, says The Express Tribune, a Pakistani newspaper. While intended to take effect as of 12 February 2011, implementation of the agreement was initially delayed for four months due to a series of regulatory disputes. The dispute involved a range of issues, including the proportion of Afghan containers which would be inspected, how Afghanistan-bound containers would be sealed and how truck drivers biometric data would be collected and maintained. However, the most contentious dispute revolved around the provision of customs guarantees for Afghanistan-bound goods in order to prevent the sorts of smuggling noted above. The APTTA mandated that Afghan firms transporting items via Pakistan provide what the text of the agreement refers to as customs security but which are also referred to as customs or bank guarantees. In short, Afghan businesses importing goods via Pakistan would be obliged to provide a third party, such as a bank, with a sum of money equivalent to the Pakistani customs which would normally be levied on the goods. If the Pakistani customs officials found that the goods were dumped on Pakistani markets before entering Afghanistan, the Pakistani authorities would have the right to take possession of the customs guarantee. If smuggling did not occur and the transit trade goods arrived in Afghanistan, as intended, the funds would be returned to the importer (or kept in a standing account for the importer). Such a system of financial guarantees is established in Protocol 3, Section 1, Article 9 of the APTTA, though the Afghan and Pakistani governments understood the implementation of guarantees very differently. According to the Asia Times, Pakistan wished to ensure that Afghan importers, in
1

See page 27 of the APTTA, which provides further clarifying text on Indian exports to Afghanistan under the APTTA.

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particular, provided cash guarantees with reputable Pakistani banks in order to prevent them from engaging in the sorts of smuggling discussed above. Afghan officials countered that doing so placed an unfair burden upon the Afghan business community, which may not have sufficient resources to leave as guarantee. Questions were also raised about which institutions could hold the customs guarantees on behalf of Afghan businesses. Pakistan preferred that top-tier Pakistani or international banks hold the funds, while Afghanistan pushed for Afghan banks to hold the guarantees in trust. Disagreement over this issue led implementation of the APTTA to be delayed from 12 February to 12 June 2011. During that time period, according to Pajhwok Afghan News, uncertainty over the status of the agreement led Pakistani border and customs officials, most notably in Karachi, to cease clearing goods being imported into Afghanistan via Pakistan. At any one time, several thousand Afghanistan-bound containers were held up in Pakistan. Tolo News reports that, in March 2011, as many as 10,000 trucks, many filled with agricultural products for Afghanistan had been held up in Karachi and that the shipment had begun to rot. A high-level delegation was dispatched to Pakistan in this instance and several times in the future in order to facilitate Afghan imports. Further challenges mounted. Pakistani and Afghan authorities compromised and agreed that Pakistani insurance companies, rather than banks, could hold customs guarantees for Afghan businesses, according to the Daily Times. However, this compromise quickly encountered opposition from the insurance companies themselves. Based on the past rates of smuggling between the two countries, companies were unwilling to issue such insurance guarantees, according to the Pakistani Business Recorder. Moreover, regulatory disagreements and other technical challenges complicated the agreement. While the APTTA took effect formally in mid-2011, provisions pertaining to customs guarantees were suspended for 60 days from 07 July. A further 30-day delay was issued in early September 2011, reports The Express Tribune. Amidst these delays, transit trade continued between the two countries in a regulatory grey zone, with Pakistani customs officials regularly delaying clearance of Afghanistanbound goods. While border infrastructure arrangements and other technological parts of the APTTA are still being refined and developed, the parts of the agreement pertaining to customs guarantees ultimately took effect in October 2011, says The Express Tribune. Imports into Afghanistan were subject to customs guarantees, which had to be paid to selected Pakistani insurance companies (rather than banks).2 These had to be equivalent to 100% of the customs which would normally be charged if the goods were intended for Pakistani markets (rather than for delivery to Afghanistan). Such a move was celebrated within Pakistan, though Afghanistans Minister of Finance told The Express Tribune that the requirement had pushed some Afghan businesses to increasingly rely upon Iranian rather than Pakistani ports. The extent to which Afghan imports and exports have moved from Pakistani ports to Irans Bandar Abbas port remains unclear at the time of writing.

Conclusion: Promising Indications

Initial signs have emerged that the APTTA and increased formalisation and regulation of Afghanistan-Pakistan transit trade has prevented smuggling of goods into Pakistan and, thus, reduced Pakistani discomfort with the agreement. The Business Recorder says that smuggling of goods into Pakistan has declined by 40% as smugglers prepared themselves for the implementation of the APTTA. Similarly, The Express Tribune says that commercial cargo transiting Pakistan has declined by 54%; Pakistans Federal Board of Revenue (FBR) believes that decline in smuggling. The drop in smuggling is also, according to the Pakistan Observer, reflected in sharp spikes in the licit import of goods into Pakistan. For instance, in recent months, legal and tax-able imports of tea into Pakistan have risen by 41%, according to testimony by FBR officials to the Pakistani senate. Such an increase

Public information is not currently available on why Pakistani insurance companies withdrew their earlier objections to accepting customs guarantees for transit trade goods.

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reportedly reflects the diminished availability of smuggled goods such as tea in Pakistani markets.3 While such short-term declines in transit trade are a positive indication that the APTTA has accomplished the objective of reducing smuggling, one would ultimately expect to see the volume of transit trade increase in the coming months as the agreement fulfils its primary objective of improving market access for both Pakistani and Afghan businesses. The success of initial APTTA implementation appears to have led the Pakistani government to make a number of concessions requested by Afghan customs officials and importers, wrote the South Asia News Agency (SANA) on 25 October. Containers being imported into Afghanistan under the APTTA will not need to be stamped with the words In Transit to Afghanistan, and open-air (rather than sealed) containers may be used in transporting fruits and vegetables from Pakistan to Afghanistan. In addition, the paperwork and number of licenses obtained by Afghan importers will also be simplified, says SANA. Pakistan Observer also notes that the Pakistani customs officials have allowed Afghan importers to pay customs guarantees directly to the Pakistani government rather than using insurance companies, which charge a fee. These recent decisions suggest that the APTTA may, in the future, encounter fewer obstacles than it had during the first nine months of 2011. Policymakers have recently attempted to capitalise upon the initial success of the APTTA in order to facilitate greater regional economic cooperation in the spirit of the aforementioned New Silk Road initiative. In fact, as Pakistan Today reports, the Pakistani government recently invited a number of Central Asian republics to join the APTTA or to establish similar agreements with Pakistan in order to allow Pakistani trucks to reach Central Asian markets and to cross Central Asia en route to markets further abroad. According to the Daily Times, the US Assistant Secretary of State for South and Central Asia, Robert Blake, also suggested that India should be included in the APTTA in order to increase regional commerce and cooperation. Under the current APTTA, Afghan trucks must off-load their goods at the Indo-Pakistani border crossing at Wagah, where they must be reloaded onto Indian trucks. Blakes discussion of the need for greater economic cooperation between India and Pakistan reflected ongoing negotiations between the two countries. As this report was being finalised, the Pakistani government announced that it was planning to award most favoured nation (MFN) status to India in November 2011, a move which would pave the way for an increase in cross-border trade, according to the Financial Times. The present value of trade between India and Pakistan currently stands at USD 2.7 billion, though the two countries governments hope to increase this amount to USD 6 billion within three years. Increased economic cooperation between Pakistan and India could help to remove obstacles to trade and commerce between Afghanistan and India and may help to promote economic growth in Afghanistan in the near future.

Consider the following example, which uses completely hypothetical figures. If half of every USD 100 in goods entering Pakistan under the guise of transit trade with Afghanistan was smuggled into Pakistan rather than arriving, as claimed, in Afghanistan one would expect to see the volume and value of supposed transit trade to decline if smuggling was reduced. The remaining amount would comprise the licit imports while most of the decrease could be attributed to the loss of

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Annex A.

Afghanistans Licit and Documented Agricultural Exports, by Export Value and Average Annual Increase in Exports

The following table provides the reader with an idea of the growth in agricultural exports from Afghanistan. It is included here given that agricultural products are likely to be among the most heavily exported items from Afghanistan under the APTTA. Export Value (USD 000s) in 2009 53,359.00 35,476.00 30,499.00 23,966.00 19,902.00 14,289.00 12,825.00 10,915.00 9,836.00 9,094.00 7,559.00 6,949.00 6,888.00 6,852.00 6,331.00 6,196.00 4,683.00 4,227.00 2,816.00 2,394.00 1,590.00 1,456.00 1,136.00 593.00 178.00 93.00 Average Annual Export Value (USD 000s), 2002-09 21,876.50 10,205.00 7,261.13 6,367.50 10,582.75 5,026.13 3,092.00 2,245.50 10,916.63 1,689.00 1,739.50 2,005.63 5,964.25 8,753.00 4,220.63 790.75 3,012.88 555.13 1,207.75 3,115.25 1,465.13 216.63 152.50 222.38 1,289.00 1,694.00 Average Annual Increase in Export Value, 2002-09** 50% 81% 88% 91% 87% 244% 102% 131% 108% 108% 56% 46% 106% 79% 65% 71% 549% 92% 1% 5%

Agricultural Product* Raisins Almonds Shelled Crude Materials Almonds, with shell Pistachios Sesame seed Walnuts Shelled Apricots Figs Dried Potatoes Hair Fine Fruit Fresh Nes Anise, badian, fennel, corian. Grapes Dry Apricots Plums Dried (Prunes) Apples Skinsdry Sltsheep Other melons (inc. cantaloupes) Vegetables fresh nes Fruit Dried Nes Walnuts, with shell Citrus fruit, nes Hides Wet Salted Cattle Skin Furs Pulses, nes

Source: Food and Agricultural Organization (FAO) of the United Nations, TradeSTAT Database, accessed October 2011. *Note: Refer to the FAOs TradeSTAT Database for clarification regarding the specific meaning of various agricultural product. **Note: Some year-on-year increases were high in relative terms and skewed the figures. Thus, the numbers in these columns, particularly those which appear exceptionally high, should be approached with a degree of caution.

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