FTAs: Help or hindrance?

With the single-minded national focus on the live discussions going on all through last week in the media over the on-going process of change of guard at the General Headquarters (GHQ), an essentially strategic geo-economic two-day conference held almost at the same time in Ashgabad, Turkmenistan on Global Sustainable Transport passed by almost unnoticed in Pakistan.

What was more, even the economic significance of the announcement of Prime Minister Nawaz Sharif who attended the conference that Pakistan was all set to join the Ashgabad Agreement and the Lapis Lazuli Corridor did not seem to have aroused the level of interest it should have at least amongst our business community. The conference had discussed the role of an integrated and sustainable transport including rail, aviation, ferry and maritime in supporting the achievements of Sustainable Development Goals.

Pakistan has been keen on improving connectivity with Central Asian States by establishing transport and communication links. These links are expected to be conducive to tap the potential of trade, economic interaction, people-to-people contacts and tourism in a vast region economically highly important for Pakistan.

The Lapis Lazuli Route is proposed as a critical transit and trade co-operation arrangement among Afghanistan, Turkmenistan, Azerbaijan, Georgia, and Turkey. It is intended to reduce barriers for transit and trade and develop a Custom Integration Procedure in the region.

The corridor connects Afghanistan, Turkmenistan, Azerbaijan, Georgia, and Turkey via road and rail, providing an appropriate transit trade route across Central Asia, the Caucasus, the Balkans, and Central Europe, while also connecting South Asia to European countries. Pakistan’s joining of the LL Corridor would certainly further deepen the Afghan Transit Trade Agreement.

The Lapis Lazuli route begins from Aqina in northern Faryab province and Torghundi in western Herat province of Afghanistan, and continues to Turkmenbashi of Turkmenistan; after passing the Caspian Sea, it continues on to Baku, the Azerbaijan’s capital, and then connects Baku to Tbilisi, Georgia’s capital, as well as to the ports of Poti and Batumi of Georgia; finally it connects on to the cities of Kars and Istanbul of Turkey, ending in Europe.

The “Lapis Lazuli” is derived from the historic export route that Afghanistan’s lapis lazuli and other semi-precious stones were exported along to the Caucasus, Russia, the Balkans, Europe and North of Africa over 2000 years ago. The objective of the revival of the route is to remove trade barriers, harmonise customs systems, and improve trade and transit between Afghanistan, Turkmenistan, Azerbaijan, Georgia, and Turkey. The initiative is expected to link up with other investment plans to maximise multipliers and develop a more effective route for exports and imports.

By operationalizing the modern Lapis Lazuli Route, trade barriers are expected to be reduced while joint customs operations are to be developed, facilitating greater trade and transit, lowering transaction costs, and expanding market access. Key services created by the corridor therefore include: Lowered trade barriers; Reduced transaction costs; improved cross-border governance through harmonisation; increased trade and transit; and, enhanced regional co-operation.

The corridor is expected to be governed by the five parties (if and when Pakistan links up, by six parties), and would require partite agreement and perhaps a secretariat, to guarantee operations and maintenance across borders. The project could be linked with the customs modernisation process and the adoption of Automated System for Customs Data (ASYCUDA).

ASYCUDA is a computerised customs management system, which covers most foreign trade procedures, handles manifests and customs declarations, accounting procedures, transit and suspense procedures and generates trade data that can be used for statistical economic analysis. The software is developed in Geneva by UNCTAD. It operates on micro in a client server environment under UNIX and DOS operating systems and RDBMS Software taking into account the international codes and standards developed by ISO (International Organisation for Standardisation), WCO (the World Customs Organisation) and the United Nations. It can be configured to suit the national characteristics of individual Customs regimes, National Tariff, legislation and provide for Electronic Data Interchange (EDI) between traders and Customs using EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) rules.

The impact of LLC project is expected to be considerable not only because most of the infrastructure is already in place, (therefore value addition) but also because most of the investment will focus on improving policy and governance, not on infrastructure. Economic Rate of Return (ERR) and Net Present Value(NPV) still need to be established, but with a discount rate applied at 12% the overall returns are expected to be positive.

The first action to be taken in this regard is the source identification of finances for construction of Afghanistan-related infrastructure, following feasibility studies and consideration of long-term infrastructure maintenance (O&M). If and when Pakistan links up Islamabad too would need to look into these aspects.

Other actions include (i) Improvement of road conditions and transit facilities along major highways (ii) expanding rail links between Afghanistan and Turkey and beyond (iii) improving management in the Lapis Lazuli Route countries and (iv) undertake a Cost-Benefit Analysis on establishing Cross-Border Economic (Tax Free) Zones between the Lapis Lazuli Route countries.

LLC actually represents a modified institutionalization of the Northern Distributional Network (NDN), the de-facto conceptual successor to moving goods in/out of Afghanistan via trans-Caspian and trans-Caucasus shipping. Having at one time represented the US’ logistical sprawl during the main years of the Afghan War, it’s now poised for a resurgence of importance in becoming the US’ lifeline of influence into the region.

The US believes that LLC’s geography dictates that it touches upon the US’ key security constellation in the Caucasus (Azerbaijan-Georgia-Turkey) through which the Baku-Tbilisi-Ceyhan oil pipeline, the South Caucasus gas pipeline, and the Baku-Tbilisi-Kars railroad already traverse.

All three projects also serve fundamental American strategic goals, and it’s expected that the LLC will complement this existing infrastructure and serve to integrate the three countries even more. While Uzbekistan and Kazakhstan are not explicitly mentioned as members of this new framework, considering the fact that they already have the road and rail infrastructure necessary to facilitate the movement of various goods (and have a tried-and-true record of doing so through the NDN in the past), it’s likely they may also become conduits along this route, especially in the event that chaos envelops the Turkmen-Afghan frontier.

Furthermore, to the US this alternate (or complementary) route appears even more likely as the Germans are still basing 300 soldiers in Termez, Uzbekistan, right on the Afghan border and at the beginning of Central Asia’s NDN rail route. The US believes this force could be used to safeguard the path in the event of massive domestic destabilization concentrated in the country’s more populated eastern regions. Should it come under fire during the conflagration or perhaps even by Taliban or other terrorist insurgents that have found their way into the country, then the 12,000 Nato soldiers remaining in Afghanistan could rapidly come to their ‘aid’ and bolster their presence along the Uzbek portion of the railroad.

Both the LLC and Central Asia South Asia (CASA) 1000 MW power project are US promoted infrastructure projects. The US is banking on Turkey and Iran being its Lead From Behind partners in order to indirectly deepen its strategic influence over Central Asia.

One could clearly see that the US is definitely planning to reengage Central Asia like never before, as the construction of state-of-the-art embassies all over the region attest. A new era of relations between the US and Central Asia is being seen as becoming a reality.

Perhaps mindful of the development taking place in the Central Asian region and Pakistan’s own linkage in CASA-1000 Prime Minister Nawaz Sharif used the opportunity provided by the LLC conference in Ashgabad to hold on the side-lines a one- on- one meeting on Saturday last with the Afghan President Ashraf Ghani. The premier reaffirmed Pakistan’s firm commitment to the efforts for peace and stability in Afghanistan. He stressed on the need for enhancing bilateral political interaction, security co-ordination, trade and transit, connectivity and people to people exchanges.

In view of the fact that LLC is an US sponsored Corridor, it is very much in the strategic and economic interests of Pakistan that the country did link up with this trade Route as well to present the CPEC as a universally accepted co-operative venture and not a project of confrontation characterising the perceived China-US trade rivalry.

Before venturing the LLC linkage Pakistan needs to negotiate with the US the revival of the proposed Reconstruction Opportunity Zones (ROZs) on Pakistan-Afghanistan border facilitating Pak-Afghan joint textile manufacturing units exporting duty-free their produce to the US. Also we need to bring in the US, now that it appears to be thinking of extending its stay in Afghanistan for at least the next many decades, and seek its co-operative assistance for setting up a Free Trade Area across Durand Line.

Also, in order to get Afghanistan to buy the idea of agreeing to let Pakistan link up with the LLC, Islamabad would need to make an offer in return to Kabul that it cannot refuse. Such an offer should essentially need to cater to Afghanistan’s eagerness to trade with India over land route passing through Pakistan. This offer would surely be considered too out of tune with the time on the part of Pakistan in the backdrop of current jingoism of Modi’s India. But being a business minded regime, one cannot rule out the possibility of Indian government considering a trade- off between its futile war cries and taking a closer look at the offer. Remember the US movie-The Situation Room!