In international relations it is a common axiom that a state can change its friends but it cannot replace its neighbours due to geographical compulsions. If neighbours cannot be replaced, ideally a state should enjoy at least cordial relations with its surrounding states if not the best relations. Moreover, if strategic and territorial issues between neighbouring states cannot be reconciled due to political and historical reasons, states sharing borders must have very strong economic relations, particularly trade, for the benefit of their respective populations. Geo-economics in the contemporary era is thus the underlying factor for neighbours to maintain cordial relations.
Pakistan and Afghanistan are two neighbouring states with a history of volatile relations due to geopolitical and historical factors. However, both the countries are geographically interlinked in such a way that they have no other option but to have close trade relations at least. Afghanistan is a landlocked country located on the crossroads of South Asia and Central Asia. Pakistan is a sizable country having a long coastline. Pakistan and Afghanistan share a border more than 2,600 kilometres long, mostly straddling rugged mountainous terrain. For ages, this has been a porous border till fencing of the border by Pakistan recently. This has significantly decreased the cross border illegal movement of people and goods.
There are around 18 trading points on the Pakistan-Afghanistan international border. These include two big border crossing points at Torkham and Chaman. The first is located in Khyber Pakhtunkhwa (KP) province connecting Pakistan’s Khyber district with Jalalabad, a city in Afghanistan'z Nangarhar province. The Chaman border point is located in Balochistan province connecting Pakistan's Chaman district with Afghanistan’s Kandahar province. Afghanistan also shares its border with Iran, which also has a long coastline but the length of the Afghan-Iran border is 921 km, nearly one-third of the Pakistan-Afghanistan border. Thus Afghanistan has been nearly dependent upon Pakistan for its international trade through the former seaports. This has been one of the greatest dependency of the Afghan state.
Afghanistan is relatively a smaller country with a population of around 40 million whereas Pakistan is the fifth largest country of the world, with a population of more than 230 million. Moreover, Pakistan is also far more developed in terms of the size of its economy, infrastructure and economic institutionalisation.
Current status of Pak-Afghan trade
Pakistan and Afghanistan trade relations are regulated by an interim arrangement known as Afghanistan-Pakistan Transit Trade Arrangement (APTTA) signed in 2010. Before that, trading ties between the two sides had been regulated by the Afghanistan Transit Trade Agreement of 1965. However, both Pakistan and Afghanistan had had issues with the 1965 trading arrangement. Pakistan had been complaining that, under the previous transit trade agreement, Islamabad was bound to give Kabul a trade corridor to import goods from the world through Pakistani seaports but this facility was grossly misused by Afghanistan. Pakistan argued that Afghan traders had been importing goods in excess to the needs of Afghan society, and in fact these goods imported with an aim to smuggle most of them back to Pakistan inflicted huge damages on the latter's economy. On its part, Afghanistan has been doing nothing to stop this smuggling of goods into Pakistan.
Afghanistan was not happy with the 1965 trading arrangement with Pakistan because it did not provide Afghanistan trading goods free access to other countries like India. It was also unhappy over the imposition of ‘unnecessary’ checks on import of goods meant for Afghanistan.
Under the aegis of the United States, whose forces had occupied Afghanistan since the September 11, 2001 terrorist attacks on American mainland, the 2010 APTTA addressed the concerns of Afghanistan. However, the APTTA could not address befittingly the complaints of Pakistan regarding the smuggling back of Afghan imports into Pakistan. Consequently, the trade ties between the two countries have been on the decline, particularly through the official and formal channels since the signing of the APTTA.
According to the Pakistan-Afghanistan Joint Chamber of Commerce, trade between the two countries amounted to $2.5 billion in 2010 but dropped to $1.6 billion, registering a slight increase to over $1.8 billion in 2022-23. The current balance of trade is heavily in favour of Pakistan, which is said to have an 80% share of bilateral trade volume. But, in real terms, the trade balance is equally poised due to a de facto ban imposed by Afghanistan on Pakistani imports.
Political economy and geo-strategic factors
As mentioned above, between 2010 and 2020, the trade volume between Pakistan and Afghanistan curtailed from $1.5 - $2 billion to $870 million in 2020 after staging a negligible comeback in 2023 with bilateral goods exchange amounting to $1.8 billion. The small recovery in the bilateral trade between Pakistan and Afghanistan has been due to increased Afghan exports, particularly coal to Pakistan. Islamabad has been a net loser in the bilateral trade with Afghanistan as is evident from the figures. Data for 2010 to 2020 shows that Pakistan's imports from Afghanistan increased by 62.7% and export declined drastically by 200%. There have been fundamentally strategic security and politically oriented reasons for this situation. In order to decrease dependence on Pakistan, Afghan regimes, including that of Ashraf Ghani and even after him the Taliban, focused on the alternative transit trade route through Iran, Chahbahar seaport. The Iranian seaport of Chabahar is located 172.2 km away from Gwadar. It is important to note that Pakistan’s Gwadar Seaport has its operational control with China while Chahbahar is run by India. Thus Afghanistan for its own strategic security and political reasons tried to increase its reliance upon Iran in order to curtail dependence on Pakistan. Because in Kabul’s calculation (over)reliance on Pakistan gives Islamabad ‘undue’ strategic leverage over it.
On the other hand, Iran for its own economic and political reasons offered its territory and seaports to Afghanistan so as to increase its own exports to Afghanistan and through its political influence in Kabul. India completely facilitated Afghanistan and Iran so that the latter provide an alternative trade route to Kabul because that would bypass Pakistan. India since long has been desirous of Pakistan providing the critical overland connectivity to her to Afghanistan and beyond to Central Asia. However, Pakistan has been hesitant to do so fearing that would increase further the political clout of Delhi in the region at the altar of Pakistan.
On its part Pakistan has been using its strategic geographical location vis-à-vis landlocked Afghanistan to exercise influence over Afghanistan. But historically, Afghanistan has been the country which started a kind of unnecessary rivalry with Pakistan when, in 1947, it objected to Pakistan's application for membership of the United Nations. Kabul's contention then and now is that Pakistan was in possession of ‘Afghan’ territory, referring to Pashtun-inhabited Khyber Pakhtunkhwa and Upper Balochistan. Thus in order to keep Afghanistan in check, Pakistan has been using the economic lever of Afghan transit trade through Pakistan. Nevertheless, Afghanistan has benefited immensely of its transit trade agreements with Pakistan. Pakistan's concerns about smuggling back of Afghan imports through Pakistan to its territory has been inflicting massive losses on its economy have been very genuine. Consequently, Pakistan has been imposing regulatory barriers on Afghan trade to protect its economy. These measures include occasional closing of trade routes of Torkham and Chaman. This has significantly decreased Pakistani exports to Afghanistan.
Potential for increasing trade
Pakistan and Afghanistan could greatly increase their trade and tap the potential for economic transactions by looking at it from the economic lens and not entirely from a strategic security standpoint. Once that is done there is a huge potential for increasing bilateral trade. However, this is easier said than done. Nevertheless, for both Pakistan and Afghanistan the benefits of increasing bilateral trade is so extensive that despite strategic political compulsions they have to focus on that. A Trade Development Authority of Pakistan (TDAP) study states that, for Pakistan, Afghanistan is an untapped market with the value of more than four billion US$ for Pakistani exports. This may be correct based upon the current trade potential of both countries whereas the overall potential for trade is by no means lower than $20 billion.
Here, it is important to note that the existing Pakistani exports to Afghanistan include: cereals (25%), sugar and sugar confectionary (4%); edible vegetables, roots and tubers (7%); fruits and nuts and peels of melons and citrus fruits (15%); salt; sulphur; earths stone (13%); animal or vegetable fats and oils (7%); plastics and articles thereof (5%); pharmaceutical products (13%); wood and articles of wood; wood charcoal (6%) and iron and steel (5%). It is quite evident that the share of finished and high-tech goods and items in Pakistan's current exports to Afghanistan is negligible. Pakistan is relatively a big and high-end product economy in comparison to Afghanistan. Therefore, it has a huge potential to increase its exports to Afghanistan.
Pakistani trade authorities have identified that the top potential export products are road tractors or semitrailers, medicaments, motorcycles, black tea, frozen cuts and edible offal of fowls, fresh eggs of domestic fowls, surgical instruments, blankets and travelling rugs of synthetic fibres, sanitary towels, parts of telephone sets for cellular networks, etc. The top potential imports from Afghanistan are figs, grapes, almonds, onions, cumin seeds, apples, beans and cotton and above all rough gemstones. In particular, given the existing purchase potential of Afghans and their immediate needs, Pakistani motorbikes could be immensely marketed in Afghanistan. On the other hand, Afghan gemstones are in high demand in Pakistan. Afghan gemstones are very important for Pakistan as they could be re-exported after value addition by Pakistan to earn billions of dollars of additional foreign exchange. “The demand for Afghanistan origin lapis lazuli and aquamarine is quite great in Peshawar's gemstones market in the Namak Mandi locality. Afghans and we Pakistanis could greatly benefit if Afghan gemstones are given free access to Peshawar markets where they could be finished and polished and re-exported to other countries,” said Mohib Rehman Qazi, a notable Peshawar-based gemstone dealer engaged in exporting gemstones to Germany.
What needs to be done
Apart from transformative political and policy measures, both Pakistan and Afghanistan have to take additional measures to tap the potential of bilateral trade. In this regard, the foremost policy focus of both countries should be that they consider each other as the largest bilateral trading partners without thinking of other transit corridors. For decades Afghanistan has been considering Pakistan mainly as the conduit to trade with the world without giving much attention to having vast business relations with Islamabad. Meanwhile, Pakistan has been looking at Afghanistan primarily to provide her the bridge to tap the vast potential of trade with Central Asian Republics (CARs). From Pakistan's standpoint, Afghanistan must hold more importance as a destination for its exports. The fundamental reason is that Pakistan produces many primary goods. The war-ravaged Afghanistan has been in a continual process of reconstruction and rehabilitation since 2001 amid occupation of the country by International Security & Assistance (ISAF) and North Atlantic Treaty Organization (NATO) forces also overseeing the reconstruction process. This reconstruction and institutionalisation has been going on despite simultaneous Taliban insurgency against alien forces and ultimate capturing of power by the militia in August 2021 after the withdrawal of international troops. So there is a huge need for Pakistani industrial products in particular cement, iron-steel bars, etc. In order to increase exports by taking advantage of the reconstruction process in Afghanistan, the Pakistani government has to incentivise local industry, particularly in KP, which borders Afghanistan and thus has a locational advantage in terms of trade with Afghanistan.
Extension of CPEC to Afghanistan: Although there has been an agreement among China, Pakistan and Afghanistan Taliban administration to extend China-Pakistan Economic Corridor (CPEC) to Afghanistan, little has been done so far. Pakistan must focus on the extension considering it would not only provide connectivity with CARs but also that the proposed railway-road networks under CPEC as well as infrastructure facilities would be instrumental in increasing trade volume between Islamabad and Kabul.
Trade Facilitation & Banking Integration: In order to realise the true potential of trade Pakistan and Afghanistan ought to improve trade facilitation, which at the moment is quite nebulous. The APTTA emphasises upon such facilitation. Trade facilitation could be enhanced through streamlined payments settlement and improved insurance mechanisms. For this, an integrated banking system needs to be developed. Moreover, use of bonded carriers, visa issuance, trade financing, tax collection, and documentation also need to be simplified.
Keeping in view the multiple problems the global economy is facing, economic integration through trade has become more significant for regional and neighbouring countries. The condition of Pakistan's economy is bad while that of Afghanistan is adverse. But both countries have a lot to gain from increase of exports to each other which could give both economies the much-needed boost.
Dr Raza Khan is an analyst in the areas of security, politics, public policy and governance having a doctoral degree and two decades of work experience with national and international organisations and diplomatic missions. He can be reached at razamzai@gmail.com
All facts and information are the sole responsibility of the writer