ENHANING PAKISTAN’S EXPORT TO E O MEMER COUNTRIES IN...

The TRTA II Programme is funded by the European Union PITAD is focal point for the programme The programme is implemented by UNIDO in association with ITC & WIPO

ENHANCING PAKISTAN’S EXPORT TO ECO MEMBER COUNTRIES IN TEXTILE MADE-UPS AND LIGHT

ENGINEERING SECTORS

POLICY RESEARCH STUDY

Trade Related Technical Assistance (TRTA II) Programme

The study was commissioned under Component 1 of the European Union (EU) funded Trade RelatedTechnical Assistance (TRTA II) programme. The TRTA II programme is implemented by the UnitedNations Industrial Development Organization (UNIDO) in collaboration with the International TradeCentre (ITC) and World Intellectual Property Organization (WIPO). The Component 1 is about tradepolicy capacity building and is implemented by the International Trade Centre (ITC).

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Table of Contents

ABBREVIATIONS . .......................................................................................................................................... ii

EXECUTIVE SUMMARY . ............................................................................................................................... 2

INTRODUCTION . ............................................................................................................................................ 6

ECO OVERVIEW . ........................................................................................................................................... 8

ECO TRADE AGREEMENT . ........................................................................................................................ 40

REVIEW OF PAKISTAN‟S ECO TRADE- WITH FOCUS ON LIGHT ENGINEERING AND TEXTILE MADE-UPS . .................................................................................................................................................. 43

LIGHT ENGINEERING GOODS . .................................................................................................................. 50

TEXTILE MADE UPS . ................................................................................................................................... 60

STAKEHOLDER REVIEW . ........................................................................................................................... 67

TRANSPORT . ............................................................................................................................................... 74

TARIFFS AND NON TARIFF BARRIERS . ................................................................................................... 81

NON-TARIFF BARRIERS AND CHALLENGES TO DOING BUSINESS IN ECO COUNTRIES . ................ 88

SUMMARY OF FINDINGS AND RECCOMENDATIONS . .......................................................................... 101

REFERENCES AND SOURCES . ............................................................................................................... 110

ANNEXES . .................................................................................................................................................. 118

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ABBREVIATIONS

ACB Afghan Council for Business Registry

ACCI Afghan Chamber of Commerce and Industry

AD Investigations Anti-dumping investigations

ADB Asian Development Bank

AML Anti-Money laundering

AMPM After-Markets Parts Manufacturers

APTMA All Pakistan Textile Mills Association

APTTA Afghanistan Pakistan Transit Trade Agreement

ASEAN Association of South East Asian Nations

ATT Afghan Transit Trade

AVE Ad Valorem Equivalent

CARs Central Asian Republics

CB Tax Commercial Benefits Tax (applied on imports into Iran)

CE Marking “Conformité Européenne” compulsory conformity marking on products placed for display/sale in the EU

CET Common External Tariff

CFT Combating the Financing of Terrorism

CIA Central Intelligence Agency of the United States of America

CIS Commonwealth of Independent States

CU Customs Union

CVD Countervailing Duty

DEIK Foreign Economic Relations Board, Turkey

ECA Europe and Central Asia

ECO Economic Cooperation Organization

ECO Bank ECO Trade and Development Bank

ECOTA ECO Trade Agreement

EDB Engineering Development Board, Ministry of Industries and Production Government of Pakistan

EFTA European Free Trade Association

ERW Electric Resistance Welded (steel pipes)

EU European Union

EuoroMed European Union – Mediterranean Partnership

EurAsEC Eurasian Economic Community (Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan)

FATF Financial Action Task Force

FBR Federal Board of Revenue, Government of Pakistan

FBS Federal Bureau of Statistics, Government of Pakistan

FOB Free on Board

FPCCI Federation of Pakistan Chambers of Commerce and Industry

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FTAs Free Trade Agreements

GATT General Agreement on Trade and Tariffs

GDP Gross Domestic Product

HS Harmonized System

IFRS International Financial Reporting Standards

ISGS Inter State Gas Systems, Ministry of Petroleum and Natural Resources

ISO International Organization for Standardization

IT Information Technology

ITC International Trade Center, Geneva

KCCI Karachi Chamber of Commerce and Industry

Kg Kilogram

KK Highway Karakoram Highway (Pakistan to China)

LC Letter of Credit

LPI Logistics Performance Index (World Bank)

MACH. Machinery

MFN Most Favoured Nation

MT Metric Tons

mTons Million Tons

MUSIAD Independent Businessmen and Industrialists Association, Turkey

n.a. not available

n.e.s not elsewhere specified

NAFTA North American Free Trade Association

NEEDS Assessment National Engineering Exports Development Strategy

NLC National Logistics Cell

NTBs NonTariff Barriers

NTMs Non-Tariff Measures

OEM Original Equipment Manufacturers

OFAC Office of Foreign Assets Control

Pak Pakistan

PAPAAM Pakistan Auto Parts and Accessories Manufacturers Association

PET Polyethylene Terephthalate

PIDE Pakistan Institute of Development Economics

PKR Pakistan Rupee

PNSC Pakistan National Shipping Corporation

PTA Preferential Trade Agreements

RCD Regional Cooperation for Development

RTA Regional Trade Agreements

SAARC South Asia Association for Regional Cooperation

SBP State Bank of Pakistan

SDR Special Drawing Rights

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SME Small or Medium-sized Enterprise

SMEDA Small and Medium Enterprises Development Authority,

SPO State Planning Organization, Turkey

SPS Sanitary and Phyto-Sanitary measures Stats Statistics

TDAP Trade Development Authority of Pakistan, Ministry of Commerce, Government of Pakistan

TAPI Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline

TAYSAD Association of Automotive Parts and Component Manufacturers, Turkey

TEM Trans European South-North Motorway Project

TIM Turkish Exporters Assembly

TIR Customs Convention on the International Transport of Goods under Cover of TIR Carnets (TIR Convention 1975)

TOBB Union of Chambers and Commodity Exchanges of Turkey

TRACECA Transport Corridor Europe Central Asia

Trade Map UNCTAD-ITC Trade Map Data Base

TRTA Trade Related Technical Assistance Program

TTH Trans Turkey Highway

TUSIAD Turkish Businessmen's and Industrialists' Association

UN United Nations

UNCTAD United Nations Center for Trade and Development, Geneva

UNIDO United Nations Industrial Development Organization

US AID United States Agency for International Development

US United States of America

US$ bln Billion United States Dollars

US$ mln Million United States Dollars

USD or US$ United States Dollar

VAT Value Added Tax

WTO World Trade Organization

ENHANCING TEXTILE MADE-UPS AND LIGHT ENGINEERING SECTOR EXPORTS

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Acknowledgments

Shahid Scheik, independent consultant, wrote this paper. He is entirely responsible for the views expressed in the study. Premachandra Athukorala, Professor of Economics, Australia National University, peer reviewed this study.

The study was written under the overall supervision of Jean-Sébastien Roure, Senior Officer, Business and Trade Policy, International Trade Centre (ITC). The paper was coordinated by Muhammad Owais Khan, Trade Policy Officer, TRTAII-Pakistan, ITC, and Andrew Huelin, Associate Advisor, Business and Trade Policy, ITC. Andrew Huelin was the editor for this study, and Isabelle Jouve, Associate Programme Adviser, Business and Trade Policy, carried out desktop publishing.


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EXECUTIVE SUMMARY

The idea that the economic prosperity of peoples will be better achieved through regional cooperation rather than national economic effort alone has been influencing political thinking ever since the European Coal and Steel Community (now the European Union) demonstrated that success could be achieved, through supra-national collaboration, without compromising on national competitiveness.

The ECO, which was formed among Iran, Pakistan and Turkey in 1985 and was enlarged in 1992 to include seven additional states (Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan) as a regional trading arrangement has, however, not become for its members the engine of economic growth as was initially envisaged. The organization means different things to different members. Turkey and Iran, manoeuvring for economic and political influence in Central Asia, have sharply expanded their trade in that region. For the Central Asian Republics (CARs), embroiled in political disputes and reluctant to increase trade among themselves, this has provided an opportunity for trade creation, i.e., a shift from high cost domestic production/ traditional CIS suppliers to the lower cost products available from Iran and Turkey, but on a bilateral basis.

Despite political differences that have resulted in little progress in implementation of the agreed trade policy objectives, although this has not deterred market forces, which have reacted to opportunity and have been resilient to overcoming hurdles in the pursuit of profit. The result is a steady increase in intra-ECO trade, from US$4.305 billion in 2003 when the ECO Trade Agreement was signed to US$12.68 billion in 2009. One may speculate whether this trade has come about because of ECO or in spite of it, but the increase in trade is a reality, whatever the reason.

Pakistan‟s own exports to ECO countries have risen from US$ 826 million in 2003 to US$ 2296 million in 2009. For a country that has had an overall negative trade balance for the last three decades, ECO stands out for Pakistan as the one region with which there is a positive trade balance. True, this is built solely on the back of exports to Afghanistan and to a lesser extent Turkey, but the trade with Afghanistan has opened export avenues for manufactured industrial goods such as petroleum products, cement, iron and steel products, chemicals and plastics products, which were never traditional export items for Pakistan.

The other notable feature of Pakistan‟s exports to the ECO is that, with the exception of rice exports to Iran and cotton textiles to Turkey, no major item from Pakistan‟s traditional “top ten” shows up in exports to the ECO countries.

Research for this study has identified the following “single product/single country” characteristics in Pakistan‟s ECO trade: exports to Afghanistan make up 70 percent of Pakistan‟s total exports to ECO; while exports to Turkey (64 percent textile group) and Iran (77 percent rice) are heavily dependent on single products.

With reference to the sectors specified for this study, the “single country/single product” bias persists: 83 percent of total light engineering exports to ECO go to Afghanistan.

Exports to the CARs, which were already at negligible levels, continue to decline, at a time when Turkey and Iran, which now contribute over 85 percent of intra ECO trade, have increased their exports to these countries. Iran‟s exports to Afghanistan were reported as US$1.27 billion in 2010 and it has emerged as Pakistan‟s main competitor in the Afghan import market.


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In regard to the export potential of Steel Products (HS Codes 7306 and 7308), a category of the Light Engineering sector, the study found that Turkey and Iran are major producers (ranked respectively 10

th

and 17th in the world). Turkey‟s exports of iron and steel products were in excess of US$ 15 billion in

2010, Kazakhstan has surplus steel production which is exported to China and Uzbekistan (population 28 million) produces more steel than does Pakistan.

Investigations into the export potential of Auto Spares revealed that Iran and Turkey each produce more than 1.3 million vehicles per annum and are exporters of automobiles and auto parts. Turkey exported US$ 9 billion worth auto parts to Europe in 2009, while Iran has begun to export cars to Algeria and Afghanistan (20,000 and 5,000 units respectively in 2009).

Uzbekistan, which is the CARs center for auto production, from 2012 will also be fully manufacturing automotive power trains within the country and is also a manufacturer of auto spares.

For Surgical Appliances (HS Codes 901890 and 901849), the study found that against US$ 223,190 million global exports by Pakistan, export of surgical instruments to ECO is less than seven million dollars. Turkey is emerging as a major competitor in surgical instruments and its exports of products in category 901890 have reached US$77 million in 2009, against Pakistan‟s exports of US$198.3 million in 2009-10.

In regards to Textile Made-Ups, which the Trade Development Authority of Pakistan (TDAP) categorizes products from HS Code 56 and 63 (excluding bed wear and towels), Pakistan has no recorded exports of HS Chapter 56 (Wadding, Pads, Felts, etc.) to ECO countries, but interviews with manufacturers revealed that exports are indeed taking place, against purchases in PKR. Exports of applicable items in HS Code 63 (kitchen, toilet and table linen, curtains) to ECO countries are in very small amounts, mainly to Turkey, against Pakistan‟s worldwide exports of US$ 537.227 million of these products in 2009-10.

Export potential

Pakistan‟s exports to ECO (minus Afghanistan) of light engineering goods and to all ECO of textile made-ups are of such small amounts to be considered statistically insignificant. Since several studies have shown that Pakistan possesses revealed comparative advantage in surgical instruments and textile made-ups, the first step was to inquire whether a market existed for these products in the ECO.

This study has identified that in 2009, ECO countries, principally Turkey and Kazakhstan, imported US$200.48 million worth textile made-ups and US$301.08 million worth surgical instruments in the same product categories in which Pakistan is globally competitive. Therefore the issue is not whether there is a market in the ECO but why Pakistan is not selling in this market. As such stakeholder interviews were conducted to identify the perceived challenges and hurdles. Some of the main hurdles identified are as follows.

Tariffs and non-tariff barriers

Stakeholder interviews revealed that Tariffs and non-Tariff Barriers are not viewed as key hurdles in the promotion of exports to ECO countries, which (barring Iran) have import-friendly tariff regimes. Stakeholders are aware of the prevalence of “informal payments,” that delays in clearing shipments are almost institutionalized in this region (including Pakistan) and these aspects are quantified and priced into the product. They are treated as irritants to profitability rather than hindrances to development of trade.

Stakeholders identified transport, absence of banking channels and language as major impediments to developing trade with ECO countries, in particular the CARs.


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Transit trade

Pakistan‟s transit corridor plans need a realistic reappraisal. Insecurity in Afghanistan is only one part of the problem. The other part is development of roads and revival of rail infrastructure in Pakistan, as well as the development of warehousing and distribution points along the corridor and becoming part of the TIR Carnet convention in order meet the fundamental requirements of multi-modal logistics.

Iran and Turkey have taken the necessary steps for routing CARs cargo through their countries and already more than 24 million tons of the CARs external trade cargo moves along the TRACECA corridor.

In a nutshell, the situation can be summarised as follows. There is an annual import market in excess of US$ 500 million within ECO of surgical instruments and textile made-ups, of products in which Pakistan has exports in excess of US$ 750 million dollars annually. But Pakistan‟s exports of these products to ECO are under eleven million dollars. It is like ships passing in the night, proximate but unaware of each other‟s presence.

Above all this suggests a knowledge gap that needs to be addressed. If there is an opportunity to exploit, the market will find its own solutions and come back to the policy makers for necessary facilitation measures.

Policy recommendations

Trade facilitation

Establish language schools and provide subsidized language instruction in Russian, Turkish and Persian to students at school, college and university level; and to technical and managerial persons from the textile and engineering industries.

Pro-activity by Commercial Counselors and Trade Sections of Pakistan embassies in the Central Asian Republics through detailed market reports on key products, advice to trade associations in Pakistan

Arranging Pakistan-product trade fairs and visits by ECO country trade/industry association delegations to visit Pakistan

Negotiate friendly visa regime for business persons

Develop a subsidy program to facilitate registration of surgical products in Iran and Kazakhstan as done for pharmaceutical products

Tax incentives to attract MNCs for investing in licensed manufacture and export of white goods and auto parts from Pakistan

Initiate dialog for resumption of direct air links between Pakistan and CAR capitals. At present, most of the CAR capitals are not directly connected by air, for example travelers from Dushanbe


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to Kabul (less than one hour flying) connect via Dubai (three hours flying time each way.) Government may explore the feasibility of developing Islamabad or Lahore as the regional hub.

Transport and transit trade

Provide tax breaks and tariff reductions for inviting multi-national companies to investment in multi-modal transport companies and import of necessary transport equipment.

Engage in dialogue with China to remove obstacles in the way of the Quadrilateral Transit Treaty (among Pakistan, China, Kyrgyzstan and Kazakhstan)

Promote public-private partnerships with partners from China, Kyrgyzstan and Kazakhstan for such multi-modal transport operations may be explored for activating the Quadrilateral Transit Treaty

Join the TIR Carnet Convention to facilitate existing transit trade by road.

Urgently examine the restoration of Pakistan Railway‟s cargo operations. Reduced freight costs will give an impetus to exports of steel products to Afghanistan in particular.

Develop facilitation measures for corporatization of road transport companies

Examine the feasibility of direct sailings between Karachi and Turkish ports

Banking

Initiate dialogue with Iran for national currency swap as payment mode for trade between Pakistan and Iran to overcome the US dollar and other payment irritants to Pakistan-Iran trade

Capacity-building and training of bankers regarding modalities of European Union (EU) / United States sanctions on Iran and the financing options available to Pakistani banks. Despite these sanctions, the EU and Association of Southeast Asian Nations (ASEAN) member states remain Iran‟s largest import partners, therefore Pakistani banks need instruction on how to deal with the sanctions regime instead of not dealing altogether in Iran trade.

Perform ECO trade finance training, in particular for managers of the National Bank of Pakistan, which already has a presence in Azerbaijan and Kyrgyzstan.

State Bank of Pakistan should consider developing a mechanism to monitor efficient deployment of ECO Trade and Development Banks‟ funds with a focus on developing intra-ECO small and medium enterprise (SME) trade.


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INTRODUCTION

This paper is focused on analyzing the export potential for textile made-ups and light engineering goods from the perspectives of market opportunities and hurdles for increasing export in these items.

The research was commissioned by the Trade Related Technical Assistance (TRTA II) program, a project funded by the European Union and implemented by the International Trade Center (ITC) that aims to strengthen the capacity of Pakistan‟s export competitiveness.

Objectives of the study

The specify objectives of this study are as follows:

Identification and analysis of existing trade regime and market access opportunities with ECO member countries in “Textile made-ups” and “Light engineering” sectors;

Identification of (domestic and foreign) challenges and hurdles (including NTBs) affecting exports of two sectors to ECO countries;

Provide recommendations for domestic policy and regulatory reforms to enhance the competitiveness and boost exports for the identified two sectors to ECO countries;

Methodology

This study is based on both secondary data and primary data collected through interviews.

Secondary data was researched in two stages:

1. Through a literature review, which identified the following issues: (i) Pakistan‟s overall trade with ECO was weighted almost totally towards only three member countries (Afghanistan, Turkey and Iran); (ii) exports of textile made-ups were in negligible quantities to all ECO partners and of engineering goods almost totally to one country (Afghanistan), and; (iii) overall exports to the six Central Asian member states (Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) had declined during a period when those countries had increased their imports of manufactured goods, and:

2. Collection of detailed information on key subjects that emerged from the stakeholder interviews.

Qualitative information, principally from World Bank and Asian Development Bank (ADB), plus published research available on the internet and statistical data from print and web sources have been used to support the analysis.

Primary data was generated through interviews with stakeholders, based on a questionnaire that was modified, as appropriate, to elicit responses from: (i) exporters, (ii) transporters, (iii) financial institutions,


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(iv) trade associations, (v) trade representatives overseas and (vi) government departments. Their responses are presented in the section on Stakeholder Review.


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ECO OVERVIEW

In 1985, in the middle of the Iran-Iraq War and the Soviet War in Afghanistan, Iran, Pakistan and Turkey created the Economic Cooperation Organization (ECO), an organization that replaced these states‟ previous politically-oriented cooperation through the Regional Cooperation for Development (RCD), founded in 1964.

It was perceived by the founding governments that the ECO could become a considerable actor in Asia, a belief reinforced in 1992 when the organization was expanded to include Afghanistan and six Central Asian countries, newly independent from the former Soviet Union, to create a non-Arab Islamic bloc of ten member nations. The extended region was characterized by “factors such as rich minerals, agricultural resources, large population and a strategic location, all beneficial for evolving into a competing economic bloc.” (H. Peimani, 2003).

The ECO‟s basic aim is stated “to promote cooperation among the ten member states in the three main fields of technology, culture and economy. The focus in the economic area is towards trade through the removal of trade barriers and development of transport infrastructure” (www.ecosecretariat.org) for which the ECO Trade Agreement ECOTA signed in 2003 would provide the platform.

However, it took ten years after the organization‟s expansion for signature of the members on the ECO on ECOTA, the basic document governing trade matters; and as of 2011, half of the members had not yet ratified this document. Among those that have done so, there continues to be difference of opinion on whether the document has indeed come into force, as detailed in Section 2.

In Pakistan, there is a misconception among some public sector policy makers and trade decision-makers to view the ECO as a homogenous body, one that acts with a common purpose in intra-ECO matters. In reality, individual member states have divergent geo-political leanings and bilateral disputes, different systems of internal governance and vastly differing economies (free market versus state control) that result in varying perspectives being brought by them to the ECO negotiating table.

A major obstacle appears to be political differences, especially acute in the CARs which, after the collapse of the Soviet Union, “inherited economic and industrial structures that were designed to cater to the Soviet Union market but not to their domestic economies.” (Bobokhonov, 2006).

They perceived a need to create economic cooperation through regional trade agreements (Annex A) with the objectives of (i) establishing common economic space; (ii) coordinating economic policy in a number of fields (iii) harmonization of respective legislation; (iv) establishing a "single regulatory interstate independent commission on trade and tariffs," and; (v) coordination of WTO accession efforts. (Bobokhonov, 2006)

Despite these early cooperation attempts, including accession to the ECO, these countries still remain embroiled in disputes over water and energy distribution, transit and borders. For example, Kyrgyzstan experiences regular interruption of gas supply from Uzbekistan; Tajikistan has problems with land mines planted by Uzbek frontier guards, making transit from Tajikistan difficult through Uzbek territory; Uzbekistan has unsettled border issues with almost all the Central Asian countries, with the exception of Kazakhstan. Agriculture in Uzbekistan and Kazakhstan is heavily dependent for the supply of water resources on upstream Kyrgyz Republic and Tajikistan; and all the states bordering the Caspian Sea are involved in territorial disputes.


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As a result, the free flow of transit and cross-border trade is hampered (particularly for Pakistan) by national-territorial disputes arising from borders created by the former Soviet colonizing power. Each of these countries has enclaves that belong to its neighbours, e.g. there are four Uzbek enclaves and one Tajik enclave in Kyrgyzstan, and one Kyrgyz enclave in Uzbekistan.

With regard to geopolitical leanings, in the case of Pakistan and Iran, this has resulted in bilateral energy cooperation being put on the back-burner; moreover, the effect of the United States sanctions regime on banking channels in Pakistan has resulted in negative impact on trade with Iran.

The second hurdle is different levels of economic development. The ECO is marked by a great degree of economic disparity among its members (Annex A-1), with GDP ranging from US$ 735.82billion in Turkey and US$357.2 billion in Iran to US$4.97 billion in Tajikistan, US$ 4.66 billion in Kyrgyzstan and US$12.87 billion in Afghanistan (all figures 2010.)

Per capita incomes range from $10075 in Turkey and $8480 in Kazakhstan to $629 in Afghanistan and $668 in Tajikistan ($1020 in Pakistan) and these disparities generate the differing expectations and priorities that member states bring to the ECO table. Country-wise macro-economic data is detailed in the section that reviews Pakistan ECO trade. Some of the disparities are:

The combined GDP of Iran and Turkey is more than twice that of the other eight members combined.

Populations range from 171.33 million in Pakistan (2010), which has two and a half times as many people as the CARs put together and as many as Turkey, Iran and Afghanistan combined, to 5.02 million in Turkmenistan (2008), 5.45 million in Kyrgyzstan (2010) and 9.05 million in Azerbaijan (2010)

The total external trade of Iran (US$ 179.83 billion, 2010) and Turkey (US$ 299.42 billion, 2010) is 1.7 times that of the other member states put together.

The three oil-based economies (Iran, Kazakhstan, Azerbaijan) plus Turkmenistan and Uzbekistan had a combined balance of payments surplus in 2010 of USD 47.34 billion. The other five states had a trade deficit of US$ 93.66 billion (2010), of which Turkey‟s alone was US$71.70 billion.

Of the seven states that joined the ECO in 1992, the GDP of Kazakhstan alone is greater than that of the other six states combined.

Consequently, member states, possessing different priorities arising from diverse economic bases, have found it more convenient to find solutions to their trade issues at the bilateral level. This strategy has been successful because, except in the case of Pakistan‟s trade with each of the CARs, bilateral trade among the other member states has kept pace with their overall economic growth.

As a result, intra-ECO trade continues to rise and in 2009 it exceeded 7 percent of the members‟ overall trade, an increase of 100 percent over the trade volume in 2003.

One characteristic that distinguishes ECO from other regional trade blocs is that only three of its ten members (Turkey, Pakistan and Kyrgyzstan) have joined the WTO. This runs counter to the trade enhancement objective of a regional arrangement and achieving harmony on the key issues of trade


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facilitation will remain elusive so long as the basic ground rules as provided by WTO remain unaddressed. Member states are seen to be achieving their tariff objectives bilaterally or through other multilateral arrangements (e.g. Russia-Belarus-Kazakhstan in the form of a customs union).

Apart from the ECO Bank, which has begun work and sanctioned loans in the three member states (Iran, Pakistan, Turkey) that have contributed to its capital, on all other Agreements the observance remains at the documentary level, as may be seen from the attached list of the major Agreements (Annex B) attached.

Two separate reviews of the ECO in 2010 highlight the fact that key trade sector milestones are yet to be reached, including implementation of the agreements in force on transit trade and visa arrangements.

First, Hassan Beheshtipour, Iranian expert on the Caucasus and Central Asia, opines “fundamental differences in the political systems of the (ECO) member countries have resulted in the lack of consensus on all issues.” He mentions the “shortage of skilled and trained workforce in order to proceed with common economic projects” and that “non-advanced and mostly dependent technology in member states limits modernization and attraction of foreign investment.” He further identifies the obstacle of “single product and developing economies of most member states that mostly tend to cooperate with developed countries, rather than one another.” (wordpress.com, 2010)

Second, recommendations recorded during interaction by officials from the Pakistan Institute of Development Economics (PIDE) with public and private sector representatives in Iran and Turkey in June 2010 indicate there is a long way to go for implementation of ECO‟s trade facilitation plans:

Removal of regional NTBs

Harmonization of customs tariff regimes and simplification of procedures

Adoption of non discriminatory customs procedures which act as major trade barriers.

Trade facilitation measures particularly at the Border Transit Points.

Improving transportation system in ECO region

Improving transit trade infrastructure of smaller economies in ECO region

Visa facilitation for businessmen to be offered by Member States on priority

Completion of the ECOTA ratification process

Concrete action to be initiated for the promotion of intra regional trade

Financial support/credit lines offered by institutions/bank particularly for SME companies

ECO country wise economic data

This section contains Macro Economic Data on:

Afghanistan

Azerbaijan

Iran

Kazakhstan

Kyrgyzstan

Tajikistan


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Turkey

Turkmenistan

Uzbekistan

In this section:

Key economic indicators for all countries are sourced from World Development Indicators, World Bank. (For Iran, additional sources are Central Bank of Iran and Statistical Center of Iran)

Statistics on Pakistan‟s trade with all of the above countries are sourced, unless otherwise stated, from Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and Karachi Chamber of Commerce and Industry (KCCI)

Statistics on main export and import destinations and trade partners are sourced from EUROSTAT (Comext, Statistical Regime)

Trade and manufacture details are sourced from WTO, CIA World Fact Book, World Bank, ADB

The periods 2007-09, 2008-09 etc refer to 12 calendar months of the Pakistan Government fiscal year, July 01 – June 30


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COUNTRY PROFILE OF AFGHANISTAN

Area 652,000 sq. km.

Population 28.9 million (2009)

Capital Kabul

Location: Afghanistan, which is landlocked, is located in Central Asia, north and west of Pakistan, east of Iran, and south of Turkmenistan, Uzbekistan, and Tajikistan.

Key Economic Indicators

GDP Composition

Agriculture 38% Industry 24%, Services 38%

Major Industries

Textiles, soap, furniture, shoes, fertilizer, cement; hand woven carpets, natural gas and coal, copper.

Afghanistan’s Main Items of Export:

Opium, fruits and nuts, hand woven carpets, wool, cotton, hides and pelts, precious and semi-precious gems.

Afghanistan’s Main Items of Import:

Capital goods, food, textiles, petroleum products

Afghanistan’s Main Sources of Imports

Pakistan 26.8% USA 24.8% India 5.1% Germany 5.0%

Afghanistan’s Main Export Destinations

USA 26.4% India 23.1% Pakistan 17.3% Japan 12.5%

Source: Economy Watch

Pakistan’s Trade with Afghanistan

Pakistan‟s bilateral trade with Afghanistan is shown below.

Table A-1

Key economic indicators 2005 2006 2007 2008 2009

GDP (US$ bn): 7.3 8.9 9.7 12.1 13.3

GDP per capita (US$) 300 354 352 429 461

Real GDP growth (% change YOY) 14.0 12.0 12.1 3.4 15.7

Goods exports (%GDP) 24.6 23.3 19.0 17.7 Na

Inflation(% change YOY) 12.3 5.1 13.0 27.2 -9.3

Total Exports (US$ bn) 0.560 0.400 0.497 0.680 0.630

Total Imports (US$ bn) 3.200 2.850 2.819 3.350 5.30

Unemployment % Na 40.00 40.00 40.00 35.00

FDI Inflows (US$ mn) Na 242 243 300 Na

FDI Outflows (US$ mn) Na Na Na Na Na


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Table A-2

Trade between Pakistan and Afghanistan (Million US$)

Year

Pakistan exports to

Afghanistan

Pakistan imports from Afghanistan

Balance of trade

Total export of Pakistan

Afghanistan % share in

total exports.

Total imports of Pakistan

Afghanistan % share in total

Imports.

2004-05 747.721 38.971 708.75 14,391.08 5.20 20,598.114 0.19

2005-06 1063.67 47.490 1016.18 16,452.40 6.47 28,586.007 0.16

2006-07 753.9390 76.230 677.709 16,976.243 4.44 30,539.709 0.24

2007-08 1143.6630 90.486 1053.17 19222.857 5.95 39968.496 0.22

2008-09 1397.5180 93.067 1117.30 17,781.883 7.86 34,822.059 0.27

Details of Pakistan‟s exports to Afghanistan by Product:

Share by product in Pakistan’s exports to Afghanistan (2010)

Export to Afghanistan 2010 % share of exports

Petroleum Products 36% Cement and Fruit 11% Fruits, Vegetables and Food 7% Engineered Goods 6% Plastic and Chemicals 5% Pharmaceuticals 4%

Trade Ties

Despite political disagreements and reservations in both countries regarding the Afghanistan Pakistan Transit Trade Treaty, both countries remain important trade partners, a situation not reflected in the low statistical volumes of official trade.

Pakistan continues to be the largest trading partner of Afghanistan, while Afghanistan is the third largest export market for Pakistani goods (after the US and India.) Pakistan‟s exports to Afghanistan are estimated to have reached US $1.87 billion in 2010-11.

This is in total contrast to the position before 2001, when the Taliban government was in power and official trade never crossed US$ 26 million.

Table A-3

Products Exported from Pakistan Million US$ Products Imported into Pakistan Million US$

Commodity Description 2007 2008 2009 Commodity Description 2007 2008 2009

Petro and Petr. Products

313.92 424.51 432.36 Iron and Steel and its articles

19.06 28.62 21.72

Plastic and articles thereof

79.59 120.97 145.92 Edible Fruits, Nuts etc. 18.3 23.72 15.43

Wheat Flour 98.09 149.09 151.39 Edible Vegetables 11.43 17.57 16.71

Animal/ Vegetable fats or oil

106.95 162.55 175.34 Wood charcoal, wood articles

4.57 9.42 9.63

Iron and steel and its products

42.96 65.29 68.97 Leather and Leather manufactures

2.28 4.71 4.28


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Afghanistan’s Trade Agreements

Afghanistan is a member of several trade fora and initiatives including the Economic Cooperation Organization (ECO), and ECO Trade Agreement (ECOTA), Central Asian Cooperation Organization (CACO), the Central Asian Regional Economic Cooperation (CAREC), and Collective Security Treaty Organization (CSTO). Recently, Afghanistan became the eighth member of the South Asian Association for Regional Cooperation (SAARC), and has also begun its accession to World Trade Organization (WTO) observer status. (Source: Institute of Strategic Studies, Dec 2007)


15

COUNTRY PROFILE OF AZERBAIJAN

Official Name Republic of Azerbaijan

Area 86,600 sq km

Population 8.23 million (2009 est.)

Capital Baku (Baki)

Port and Terminals Baku

Table A-4

Key economic indicators 2005 2006 2007 2008 2009

GDP (US$ bn): Na Na 31.07 78.71 86.03

GDP per capita (US$) Na Na 9000 9600 10400

Growth Rate of GDP (% per year) 26.4 30.5 31.0 10.8 9.3

Inflation(Consumer price, % Change) 9.6 13.0 16.0 20.8 1.5

Unemployment rate (%) 8.5 8.5 8.5 7.0 6.0



FDI Inflows (US$ mn) 1680 -584 -4749 15 Na

FDI Outflows (US$ mn) 1221 705 286 556 Na

(Source: Economist Intelligence Unit)

GDP Composition (2009)

Agriculture 5.80% Industry 60.50% Services 33.70% (Source: US AID)

Major Industries

Petroleum and natural gas, petroleum products, oilfield equipment; steel, iron ore, cement; chemicals and petrochemicals; textiles

Pakistan’s Trade with Azerbaijan

Pakistan‟s exports grew fivefold over the period (from US $ 2.1 million in 2004-05 to US $ 11.9 million in 2008-09) with imports showing a stagnant trend (at just over one million dollars.)

Table A-5

Trade between Pakistan and Azerbaijan (Million US$)

Year

Export

Import

Balance of trade

Total exports of Pakistan

% share in total exports


% share in total imports

2004-05 2.075 1.042 1.033 14,391.081 0.014 20,598.114 0.005

2005-06 2.749 0.325 2.424 16,452.398 0.017 28,586.007 0.001

2006-07 6.535 7.777 -1.242 16,976.243 0.038 30,539.709 0.025

2007-08 5.27 0.357 5.23 19,222.857 0.034 39968.496 0.0009

2008-09 6.280 1.008 5.28 17,688.007 0.067 34822.045 0.0002

Source: WTO Trade data base, World Development Indicators, Federal Bureau of Statistics, State Bank of Pakistan, Investment Map, TDAP


16


No discernable trend is visible in the product-wise trade data with exports of miscellaneous manufactured articles ranked first.

Main Export Destinations of Azerbaijan

Italy 40.2% USA 12.6% India 5.1% France 4.9%

Main Import Sources of Azerbaijan

Russia 18.8% Turkey 11.2% Germany 8.3% Ukraine 7.9%

Azerbaijan’s Main Items of Export

Oil and gas 90%, machinery, cotton, foodstuffs

Azerbaijan’s Main Items of Import

Machinery and equipment, oil products, foodstuffs, metals, chemicals

Economy

Azerbaijan is considered to have good indigenous human and labor capital, particularly for sectors such as oil production and processing, chemicals production, electro-energetic, machine building and ferrous and non ferrous metallurgy production, which are an important part of the country‟s economy.

More than half the national economy is based on industrial production while 70% of industrial production is concentrated in one district.

Engineering Industry

The engineering Industry contributes 20% to the country‟s GDP through engineering for the oil sector, radio electronics and instruments production sectors, with development priority being accorded to industrial investment that promotes scientific-technological improvement in the production of electrical engines, cable products, automotives, and home appliances and others.

Light Industry

This sector consists of cotton ginning, weaving, sewing, silk production, wool washing, knitted fabric and footwear.

Table A-6

Product wise exports and imports

Export Commodities from Pakistan

Millions US$

Import Commodities from Azerbaijan

Millions US$


Misc. manufactured articles 1.22 2.87 2.91 Aluminum 0.09 4.17 0.21

Plastic and articles there of 0.38 0.98 1.11 Other Cotton na Na

Rice 0.64 1.50 1.60 Telecommunication appl. and eq.

0.077 2.79 0.12

Articles of apparel/cloth accessories

0.13 0.33 0.48 - - - -

Pharmaceutical Products 0.05 0.13 0.18 - - - -


17

Transportation

The railways are one of the key transportation means and consist of a branched network. The Baku- Darband route connects Azerbaijan to the Northern Caucasian Roads of Russia and European part of Russia, Baku-Agstafa route connects Azerbaijan with Black Sea ports.

Metallurgy

The metallurgy industry of Azerbaijan includes extraction and enrichment of ferrous and non-ferrous metals and production of fire resistant metals, with focus on meeting the needs of the oil industry, including tube rolling mills and an electric furnace steel mill that processes domestic iron ore to produce cast steel, fitting and rolls.


18

COUNTRY PROFILE OF IRAN

Official name Islamic Republic of Iran

Area 1.648 million sq km


Capital Tehran

Location Middle East, bordering the Gulf of Oman, the Persian Gulf, and the Caspian Sea, between Iraq and Pakistan

Port and Terminals Assaluyeh, Bandar Abbas, Bandar-e-Eman Khomeyni.

GDP by Sectors

Agriculture 10.2% Industry 44.5% Services 45.3%

Table A-7


Indicators 2006-07 2007-08 2008-09 2009-10 2010-11*

Population (mid-year; million [mln])

70.4 71.6 72.8 74.1 75.3

Average exchange rate (Iranian Rial [IRR] / USD)

9195 9285 9574 9920 10214

Inflation rate (CPI average; %) 11.9 18.4 25.4 10.8 9.5

GDP at current prices (USD bln) 222 286 331 326 338

GDP / capita ( USD) 3,152 3,990 4,538 4,399 4,484

Real GDP growth (%) 5.8 7.8 1.0 1.1 1.6

Unemployment % (ILO definition) 11.3 10.5 10.4 11.9 14.6

Industrial output growth (%) 6.7 8.5 10.8 4.5 4.0

Agricultural output growth (%) 9.3 4.7 6.2 3.0 2.8

Services output growth (%) 5.6 6.5 6.8 5.8 -2.2

Gross government debt / GDP (%) 19.7 17.9 21.8 21.6 21.7

Gross government debt (USD bln) 44 51 72 70 73

Export (fob, USD bln) 76 98 101 88 80

Import (fob, USD bln) 50 58 70 67 59

Trade balance 26 39 31 21 21

Current account balance (USD bln)

21 33 23 10 9

Current account / GDP (%) 9.3 11.4 6.9 3.2 2.5

Foreign reserves (USD bln) 42.5 52 71.8 85 100

*Forecast

Sources: Central Bank of Iran, Statistical Center of Iran, World Development Indicators – World Bank

Pakistan’s Trade with Iran

Pakistan‟s overall two-way trade with Iran and trade balance data is given below.


19

Table A-8

Year Pakistan‟s Exports Pakistan‟s Imports Trade Balance

2003-04 92.55 283.94 (191.39)

2004-05 147.11 242.09 ( 94.98)

2005-06 188.07 450.08 (262.01)

2006-07 167.54 405.63 (238.09)

2007-08 218.56 551.75 (333.19

2008-09 399.61 506.93 (107.32)

2009-10 207.18 489.63 (282.45)

Source: Karachi Chamber of Commerce and Industry, using SBP, FBR and FBS statistics

In the bilateral trade, both countries exports have increased by a mere 5% per annum since the signing of the Pakistan-Iran PTA in 2006. Pakistan had reduced this gap substantially in 2008-09 via rapid growth in rice exports, but the achievement could not develop into to a trend, due to a combination of adverse export market prices and import -source diversification by Iran, with the result that Pakistan‟s exports fell by almost 50% in 2009-10.

In 2011-12, bilateral trade will come under increased pressure as a result of widening of US/EU sanctions on dealings with Iranian banks, now expanded to include its Central Bank.

Table A-9

Iran’s total imports and imports of manufactured goods from Pakistant

Product Iran‟s

Global Imports

Import From Pakistan

Pakistan‟s World Exports

Surgical Instruments 126.9 1.11 232.99

Vegetable Fats and oils 483.99 0 95.01

Medicaments nes 23.01 0.90 57.34

Antibiotic nes 12.28 0.02 19.97

Sports Equipment 12.52 0.01 34.03

Bedding, Furnishings 20.22 0 69.20

Structure or Parts (of Iron or Steel) 133.90 0 71.56

Chewing Gum 2.51 0 32.55

Tubes, pipes, hollow Profile of Iron or Steel 18.66 0 19.23

Medicaments nes 8.89 0 42.96


The above table reflects Pakistan‟s minimal and near insignificant share in Iran‟s imports in ten selected product groups. However, Pakistan ranks 7th among Iran‟s top export destinations:


20

Table A-10

Main Non-Oil Export Destinations (2010)

Country Share

China 17.3 %

Iraq 17.0%

UAE 13.4%

India 6.5%

Afghanistan 5.0 %

Turkey 3.2%

Pakistan 2.1%

Indonesia 2.0%

Japan 1.9%

Belgium 1.9%

Sub-Total 70.2 %

Source: Islamic Republic of Iran, WTO

Table A-10 (above) illustrates how Iran, like Turkey, has made a successful effort to develop trade with ECO countries in a drive to expand non-oil exports to Asian markets, but, like Pakistan, its ECO export drive is confined to three non-CAR member states.

Table A-11

Main Sources of Import (2010)

Country Share

EU 23.2%

China 18.0%

United Arab Emirates 16.5%

South Korea 6.1%

Russia 5.6%

Turkey 4.9%

Brazil 3.5%

Japan 3.4%

India

3.2%

Imports from ECO (minus Turkey)

Kazakhstan 0.5%

Pakistan 0.4%

Uzbekistan 0.3%

Azerbaijan 0.1%

Tajikistan 0.1%

Kyrgyz Republic 0.0%

Source: Islamic Republic of Iran Statistics, WTO

However, Table A-11 above shows that, with the exception of Turkey, Iran‟s imports from ECO member states are under 1.5% of its total imports. The major sources of Iran‟s imports, EU and China, indicate that Iran‟s other ECO partners (including Pakistan) are unable to compete in product quality or price to meet the requirements of a population with rising income (US$4900 per capita).


21

Manufacturing Sectors Competing with Pakistan

Cement

For Iran, cement is one of the key non-oil export commodities of the country and its main export markets are Iraq, Azerbaijan, Turkmenistan, Qatar and Saudi Arabia. In terms of value, cement exports for 2008 were recorded at USD 58 million, rising to USD 600 million in 2009. According to a report by the Iranian Mines and Mining Industries Development and Renovation, cement exports were expected to reach the mark of five million tons by the end of 2010.Under the Vision 2025, cement production capacity has been predicted to increase to 110 million tons, of which 20 million tons would be exported annually.

Automobiles

Iran is home to the largest auto manufacturing industry in the Middle East. In terms of the units produced, Iran's auto industry, ranks amongst the top five in the developing nations. Many of the leading international automakers such as Peugeot, Kia, Volvo, Benz, Scania, Nissan and Mazda are active in Iran. Iran‟s auto manufacturing industry has also been the fastest growing industry in the country with an average growth rate of over 20% in the past decade. This exceeds the industry growth rate and five times by about three times and the overall economy growth rate by five times.

The sector consists of 25 automakers (both in the public and private sector) with a total production of around 1.3 million units‟ annual automobiles in 2008. Iran Khodro Company (IKCO) is the largest vehicle manufacturing company in Iran, with a 47% share of domestic vehicle production. IKCO exports cars to a number of countries, including Belarus, Russia, Syria, Tajikistan, Turkey and Venezuela although export is restricted to relatively low volumes. IKCO is also the country‟s main producer of commercial vehicles, possessing 71% and 77% of bus and minibus market shares respectively.

Local producers face little foreign competition leaving the market somewhat artificially inflated. State-owned car companies IKCO and SAIPA employ around 400,000 people, and as many as double this figure in related fields in different factories and workshops.

Iran has also been able to develop a sizeable component manufacturing capability. Currently up to 1400 factories with over 230,000 employees manufacture parts for the Iranian auto industry. This strength in component manufacturing is one of the factors that give Iran a competitive edge over other emerging regional producers.

Iron and Steel

Iran's steel production capacity reached approximately 15.8 million tons by March 20, 2009, with big projects becoming operational in various parts of the country. The total crude steel output during 2008-2009 was 10.5 million tons, which increased to 18.2 million tons by the end of 2009-2010. Iran is also one of the world‟s ten largest producers of wide steel sheets and an exclusive producer in the Middle East region. In 2009 Iran announced that the country had succeeded in achieving self-sufficiency in steel production.

Market Opportunities

The medical device market

Government investment has resulted in an improved health sector, with modernized services and facilities being built annually. Ownership of hospitals is evenly split between the public and private/charity sectors but is fragmented as a result of lack of co-ordination between agencies.


22

The medical device market appears to have no coherent regulatory framework, but Iranian buyers are thorough in evaluating products for purchase. Overseas firms are required to act through local agents familiar with the relevant procedures, particularly in the case of surgical instruments.

Despite the local manufacture of basic consumable items such as syringes, needles and catheters, dental instruments and fittings and orthopaedic appliances, imports of these items account for an estimated 97.7% of the market. Iran‟s total health-related imports in 2009 were estimated at approx 0. 6 billion dollars.


23

COUNTRY PROFILE OF KAZAKHSTAN

Area 2,717 thousand sq km


Capital Astana

Location: Central Asia, northwest of China; a small portion west of the Ural River in eastern-most Europe

Port and Harbors Aqtau , Atyrau (Gur'yev), Oskemen(Ust-Kamenogorsk), Pavlodar, Semey


Table A-12

Key Economic Indicators 2005 2006 2007 2008 2009

GDP (US$ bn): 56.1 81.0 104.9 141.2 107.0

GDP per capita (Us$) 3,786 5,363 6,748 9,076 6,875

Real GDP growth (% change YOY) 9.4 10.7 8.9 3.2 -2.0

Goods exports (%GDP) 54.5 51.3 49.5 52.7 49.2

Inflation(% change YOY) 7.6 8.6 18.8 17.2 7.5




FDI Inflows (US$ mn) 1971 6278 11126 14648 Na

FDI Outflows (US$ mn) -145.9 -384.7 3151.3 3811.9 Na

(Source: Economist Intelligence Unit, World Bank)

GDP – Composition:

Agriculture 6.4% Industry 38.1%, Services 55.5%

Major Industries

Oil, coal, iron ore, copper, titanium, bauxite, gold, silver, iron and steel; tractors and other agricultural machinery, electric motors, construction materials.

Pakistan’s Trade with Kazakhstan

Bilateral trade between the two countries has declined from US$ 10.6 million in 2004-05 to US$ 5.3 million in 2008-09 indicating that, despite stated intentions to increase trade between ECO member countries and signing of agreements, actual performance belies formal pronouncements.


24

Table A-13

Trade between Pakistan and Kazakhstan (Million US $)

Year

Export

Import

Balance of Trade

Pak export Pakistan

% share in total exp.

Total imports from Kazakhstan


2004-05 9.598 1.048 8.550 14,391.081 0.06 20,598.114 0.005

2005-06 9.366 1.01 8.356 16,452.398 0.05 28,586.007 0.003

2006-07 8.037 2.962 5.075 16,976.243 0.04 30,539.709 0.009

2007-08 8.408 4.764 -39.232 19,222.860 0.044 39,968.50 0.119

2008-09 5.317 0.000 5.317 17688.007 0.030 34822.045 0.000

Source: WTO Trade data base, World Development Indicators, Federal Bureau of Statistics, State Bank of Pakistan, Trade Map, TDAP

Pakistan‟s exports have almost halved over the period and although imports from Kazakhstan have more than quadrupled, the base is so small that it still accounts for only 0.119 percent of Pakistan‟s total imports (from all countries).

Source: WTO Trade data base, World Development Indicators, Federal Bureau of Statistics, State bank of Pakistan, Investment Map, TDAP

Product wise analyses indicate a 15 percent decline in value of leather goods exports and a 21.1 percent decrease in apparel exports. Pharmaceutical products have retained their level of about US $ 0.6-0.7 million.

Kazakhstan’s Main Items of Export

Oil and oil products 58%, Ferrous metals 24%, Chemicals 5%, Machinery 3%

Kazakhstan’s Main Items of Import

Machinery and equipment 41%, Metal products 28%, Foodstuffs 8%

Main Export and Import Destinations of Kazakhstan

Table A-15

Export Destination of Kazakhstan: - Import Sources of Kazakhstan

Italy 16.7% Russian Federation 36.4%

Switzerland 15.9% China 12.1%

Table A-14

Product wise Trade between Pakistan and Kazakhstan

Commodities Exported from Pakistan

Millions US$

Commodities Imported into Pakistan

Millions US$

Commodity 2007 2008 2009 Commodity 2007 2008 2009

Leather and leather manufactures

5.058 4.34 4.272 Chemicals org. / inorg. Compounds of precious metals

0.217 0.62 0.92

Articles of apparel/cloth access.

1.678 1.45 1.324 Iron, steel and its articles 0.168 0.491 0.70

Pharmaceutical products 0.662 0.56 0.747 Wheat and meslin 0 0 44.3

Telecommunication appl. and equip

0 0 0.469

Surgical instruments 0.445 0.382 0.040


25

China 10.8% Germany 6.8%

(Source: European Commission DG Trade)

COUNTRY PROFILE OF KYRGYZSTAN

Area 198,5000 sq km


Capital Bishkek

Port Facilities: No ports since Kyrgyzstan is a landlocked country

Member WTO


Table A-16

Indicators 2005 2006 2007 2008 2009

GDP (US$ bn) 2.44 Na 3.48 11.78 11.66

GDP per capita (US$) Na Na 2,000 2,200 2,100

Growth Rate of GDP (% per year) -1.6 3.8 6.5 7.6 -1

Inflation (Consumer price, % change) 4.4 4.5 6.4 24.5 7.9




FDI Inflows (US$ bn) 43 182 208 233 Na

FDI Outflows (US$ bn) 0.0 0.0 -0.2 0.3 Na

GDP Composition

Agriculture: 30.70% Industry: 15.90% Services: 53.40 (2009)

Major Industries

Small machinery, Textiles, Food processing, Cement, Shoes, Sawn logs, Refrigerators, Furniture, Electric motors, gold, rare earth metals.

Pakistan’s Trade with Kyrgyzstan

The following two tables give data on overall trade and annual export, import values of main products, products group.

Table A-17

Trade between Pakistan and Kyrgyzstan (Million US$)

Year

Export

Import

Balance of trade

Pakistan exports

% share in total export

Pakistan imports


2004-05 1.392 0.048 1.344 14,391.081 0.010 20,598.114 0.00

2005-06 1.700 0.393 1.353 16,452.398 0.010 28,586.007 0.001

2006-07 0.768 0.000 0.768 16,976.243 0.004 30,539.709 0.00

2007-08 1.746 0.618 1.128 19,222.860 0.009 39,968.500 0.002


26

2008-09 1.277 0.000 1.277 17688.007 0.007 34,822.045 0.000

Source: WTO Trade statistics data base, World Development Indicators, Federal Bureau of Statistic, State Bank of Pakistan, TDAP, Investment Map ITC

Pakistan‟s exports have remained static at the low levels of US $ 1.4 million in 2004-05, and US $ 1.3 in 2008-09. Imports, even at the highest level in 2007-08, have barely managed to exceed half a million dollars. Shares in percentage terms are close to nil.

Source: WTO Trade statistics data base, World development Indicators, Federal Bureau of Statistic, State Bank of Pakistan, TDAP, Investment Map

While product- wise statistical reviews show apparel and its accessories as the single largest component of export from Pakistan, their value for 2009 was only US $ 0.7 million. The largest item imported from Kyrgyzstan is sugar and its products (value US $ 0.35 million in 2009). There remains immense scope for improvement in bilateral trade, provided items are identified and trade routes established.

Main Export Destinations of Kyrgyzstan

Switzerland 27.2% Russia 19.2% Uzbekistan 14.3% Kazakhstan 11.4%.

Main Import Sources of Kyrgyzstan

China 70.8% Russia 12.3% Kazakhstan 4.1%

Kyrgyzstan’s Main Items of Export

Cotton, wool, meat, tobacco; gold, Mercury, uranium, natural gas, Hydropower; machinery; footwear

Kyrgyzstan’s Main Items of Import

Oil and gas, machinery and equipment, chemicals, foodstuffs

Transportation

Kyrgyzstan‟s importance to Pakistan arises from its strategic location astride China and Kazakhstan. Pakistan‟s alternate route Kazakhstan, using the Karakoram Highway enters the Kyrgyz Republic via Kunjerab. From Bishkek, the Kyrgyz capital, to Almaty, the main commercial center of Kazakhstan, is a driving distance of less than eight hours.

Pakistan, China, Kyrgyz republic and Kazakhstan have entered into a Quadrilateral Agreement on transit but the route is rarely used due to problem s at every stage. As transportation via the Kyrgyz Republic is

Table A-18



Millions US$


Millions US$


Articles of apparel / cloth access

0.646 0.284 0.724 Sugar and sugar confectioners

0.242 0 0.346

Raw hides skin and leather

0.38 0.162 0.372 Pharmaceutical products 0.137 0 0.152

Pharmaceutical products 0.289 0.122 0.177 Raw hides skin and leather 0.013 0 0.06

Boiler machinery and Mech. Appl.

0.171 0.07 0.163 Glass beads, Stones 0.00074 0 0

Rubber, articles there of 0.083 0.04 0.08 Misc. edible / food prep. 0.00045 0 0


27

important from the trade development standpoint, the difficulties involved are mentioned here in some detail.


28

COUNTRY PROFILE OF TAJIKISTAN

Area 143.1 thousand sq km

Population 7.349 ( 2009)

Capital Dushanbe


Table A-19

Key economic indicators

Indicators 2005 2006 2007 2008 2009

GDP (US$ bn) Na Na 3.7 Na 4.7

GDP per capita (Us$) Na Na 1,600 Na Na

Growth Rate of GDP (% per year) 5.5 5.0 7.8 7.9 3.4


Unemployment rate (%) Na Na 2.4 2.3 2.30





GDP Composition


Major Industries

Aluminium, zinc, lead, chemicals and fertilizers, cement, vegetable oil, metal-cutting machine tools, refrigerators and freezers

Pakistan’s Trade with Tajikistan

The tables below show total two way trade, balance of payments and item wise exports, imports.

Table A-20

Trade between Pakistan and Tajikistan (Million US$)

Year

Export

Import

Balance of trade





2004-05 0.791 9.808 (9.017) 14,391.081 0.005 20,598.114 0.048

2005-06 1.136 5.053 (3.917) 16,452.398 0.007 28,586.007 0.018

2006-07 0.424 2.345 (1.921) 16,976.243 0.002 30,539.709 0.007

2007-08 0.171 11.879 (11.708) 19,222.860 0.0009 39,968.500 0.030

2008-09 0.725 1.259 (0.534) 17,688.007 0.004 34,822.045 0.004

Source: WTO Trade Statistics data base, World Development Indicators, Federal Bureau of Statistic, State Bank of Pakistan, TDAP, Investment Map

Total exports from Pakistan remained stagnant over the period, while imports declined from US $ 9.8 million in 2004-05 to US $ 1.3 million in 2008-09.


29

Source: WTO Trade statistics data base, World Development Indicators, Federal Bureau of Statistic, State Bank of Pakistan, TDAP, Investment Map

Export Destinations of Tajikistan

Netherlands 36.7% Turkey 26.5% Russia 8.6% Uzbekistan 5.1% Pakistan 0.16%.

Import Sources of Tajikistan

Russia 32.3% Kazakhstan. 8% China 11.9% Uzbekistan 4.7% Pakistan 0.02%.

Tajikistan’s Main Items of Export

Aluminium, electricity, cotton, fruits, vegetable oil, textiles

Tajikistan’s Main Items of Import

Electricity, petroleum products, foodstuff aluminium oxide, machinery and equipment

Industrial Sector

High taxes, high bank interest rates, high accumulated depreciation of capital, and shortage of qualified personnel reduce the competitive ability of industrial production, both in the domestic and foreign markets. Numerous industrial sectors, especially those that are intensively technical and scientific (i.e. machine construction, electric equipment, chemical, electronic, mining) ceased their activity due to the collapse of the Soviet labour division scheme and reorientation of consumers in CIS countries towards foreign suppliers.

Table A-21



Millions US$


Millions US$


Cotton yarn and woven fabrics 0.405 0.131 0.098 Cotton 4.299 1.993 9.634

Man made filament and yarns 0.029 0.0095 0.007 Iron and Steel 0.343 0.164 0.461

Pharmaceutical products 0.125 0.046 0.034 Plastic and articles there of

0 0 0

Leather and leather manufactures

0.075 0.028 0.021 Dyeing and tanning material

0 0 0


30

COUNTRY PROFILE OF TURKEY

Area 779,000 sq km

Population 70.4 million (2009

Capital Ankara

Location Southern European and South western Asia, Bordering the Black Sea between Bulgaria and Georgia and the Mediterranean Sea, between Greece and Syria.

Ports Gemlik, Hopa, Iskenderun, Istanbul, Izmir, Kocaeli (Izmit), Icel (Mersin), Samsun, Trabzon


Table A-22


Indicators 2005 2006 2007 2008 2009

GDP (US$ bn): 362.5 378.4 659.3 798.9 593.5

GDP per capita (US$) 5062 5202 9,569 11,463 8,427

Real GDP growth (% change YOY) 7.4 5.0 4.6 3.5 -6.5

Goods and services exports (%GDP) 28.3 28.1 21.9 22.6 22.9


Unemployment rate (%) 10.0 Na 9.7 Na 14.60



FDI Inflows (US$ mn) 8535.0 17639.0 19136.0 14646.0 Na

FDI Outflows (US$ mn) 1065.0 1677.0 2275.0 2604.0 Na

GDP Composition


Major Industries

Textiles, food processing, autos, mining (coal, chromate, copper, boron), steel, petroleum, construction, lumber, paper

Turkey’s Main Export Destinations

Germany 9.6% United Kingdom 5.8% Italy 5.8% (Pakistan 0.09%)

Turkey’s Main Import Sources

Russian Federation 15.5% Germany 9.3% China 7.8% (Pakistan 0.22 %)

Pakistan’s Trade with Turkey

Trade between the two accounts has grown from US $ 361 million in 2004-05 to US $ 630 Million in 2009-2010 as shown in the tables.


31

Table A-23

Pakistan trade with Turkey (Million US$)

Year Export Import Total Trade balance

2001-02 98.036 34.73 132.76 63.30

2002-03 146.31 125.84 272.15 20.47

2003-04 218.79 77.83 296.62 140.96

2004-05 258.397 102.87 361.26 155.522

2006-07 304.50 188.89 493.39 115.61

2007-08 389.92 153.10 543.02 236.82

2008-09 455.31 118.51 573.82 336.80

2009-10 403.19 120.52 523.37 282.67

2009-10 503.93 125.54 629.47 378.39

Source: Federal Bureau of Statistics Trade Development Authority of Pakistan.

Both governments have targeted an increase in bilateral trade from $690 million to more than $1 billion by 2010. Pakistani exports include rice, sesame seeds, leather, textiles, fabrics, sports goods, and medical equipment. Turkey's exports to Pakistan include wheat, chickpeas, lentils, diesel, chemicals, transport vehicles, machinery and energy products. Turkish private corporations have also invested significantly in industrial and construction projects developing highways, pipelines and canals.

Table A-24

Trade between Pakistan and Turkey as share of Pakistan’s total trade (Million US$)

Year

Export

Import

Balance of trade





2004-05 258.397 102.87 155.522 14,391.081 1.80 20,598.114 0.50

2005-06 304.502 188.89 115.702 16,452.398 1.85 28,586.007 0.66

2006-07 389.924 153.10 236.824 16,976.243 2.29 30,539.709 0.50

2007-08 435.981 118.512 317.469 19,222.857 2.27 39,968.496 0.30

2008-09 434.140 118.328 315.812 17,781.883 2.44 34,822.059 0.34

Source: Federal Bureau of Statistics, Trade Development Authority of Pakistan.

Though the trade balance is in Pakistan‟s favor, amounting to US $ 316 million in 2008-09, Turkey‟s share in Pakistan‟s total exports is 2.44%, while being an insignificant 0.34% in Pakistan imports.

Major Items Exported from Pakistan

Cotton yarn and woven fabrics, manmade filament and yarn, leather and leather manufacture, sports goods.

Major Items Imported from Turkey

Products of iron and steel, road vehicles, boiler machinery, telecommunication and electrical equipment, paper, paper board and articles


32

Source: WTO Trade data base, World Development Indicators, Federal Bureau of Statistics, State Bank of Pakistan, Investment Map, Trade Development Authority of Pakistan (TDAP)

Trade Regime

The private sector and NGOs provide inputs to trade policy formulation by communicating their views to government authorities either directly or through the Union of Chambers and Commodity Exchanges of Turkey (TOBB), the Turkish Exporters Assembly (TIM), the Turkish Businessmen's and Industrialists' Association (TUSIAD), the Independent Businessmen's and Industrialists' Association (MUSIAD), and the Foreign Economic Relations Board (DEIK), as well as individual and local chambers of commerce and exporters' associations.

The main factor in shaping Turkey‟s foreign trade policy has been the Customs Union with the European Union. At the national level, an export-oriented, technology-intensive production structure, with emphasis on high-value-added products and services, is one of the basic objectives stipulated in Turkey's long-term strategy for 2001-23, prepared by the Undersecretariat of State Planning Organization (SPO).

Turkey„s institutional environment was placed in the top half of global business environments, achieving a rank of 73 (out of 183 countries) in the Ease of Doing Business index in 2009. In the Logistics Performance Index, which reflects the extent of trade facilitation in the country, Turkey is the best-performing country in the ECA region ranking 34th out of 150 countries. Turkey scores 3.15 on a scale of 1 to 5 (with 5 being the highest score), while the regional and income group averages are 2.59 and 2.85, respectively.

Trade Agreements

Turkey participates in several regional trade arrangements where the Customs Union with the EC is its priority. According to the Association Council Decision (Customs Union Decision-CUD) No. 1/95 of 6 March 1995, which provides for the Customs Union with the EC, Turkey is progressively aligning its preferential regime with that of the EC, including the GSP. Turkey also has a free-trade agreement with EFTA and is part of the Euro-Mediterranean Partnership aimed at establishing a free-trade area in the region by 2010. It is working to conclude a set of bilateral trade agreements with southern Mediterranean countries. Turkey also participates in the Economic Cooperation Organization and the Black Sea Economic Cooperation. Turkey's membership in several arrangements makes its trade regime complex and difficult to manage trade agreements could further complicate the trade regime and detract from multilateral efforts.

Turkey accounts for 0.7% of EFTA's total trade with the world. In 2006, some 99% of Turkey's merchandise imports from EFTA and 90% of its exports to EFTA were covered by its Customs Union with

Table A-25

Product wise Trade between Pakistan and Turkey


Millions US$

Commodities Imported from Turkey

Millions US$


Cotton yarn and woven fabrics

215.097 268.26 267.13 Machinery and mechanical app.

16.769 33.62 33.59

Man made filament and yarns

19.745 39.77 39.60 Telecommunication and electrical equip.

15.056 25.24 24.22

Leather and Leather manufactures

12.01 29.02 28.90 Articles of Iron and steel 30.164 22.60 22.39

Articles of apparel/cloth access

13.67 22.77 22.67 Paper, paper board and articles etc.

11.903 9.64 9.63

Sports goods 5.86 4.35 4.33


33

EFTA (i.e. subject to zero or reduced tariffs). Total EFTA-Turkey merchandise trade is estimated at about US$5,800 million in 2006 (up from US$2,918 million in 2002). Turkey's exports to EFTA countries were mainly textiles, vehicles, and iron and steel products (about US$1,200 million), while imports were mainly machinery, mechanical appliances, and pharmaceutical products.

Textile Industry

The Turkish textile Employers Association informs that Turkey has high capacities of yarn, weaving, dyeing and finishing of apparel capacity. The Turkish textile industry accounts for 4.2% of GDP, 13.3% of manufacturing output and employs 22% of the industrial workforce

Turkey has the following ratios of EU textile sector manufacturing capacity:

90% in ring spinning

75% in open-end rotors

80% of shuttle looms

27% of shuttle-less looms

Pakistan‟s exports of cotton products, synthetic fiber and apparel, valuing US$322 million represented 42% of Turkey‟s global imports of these products, distinguishing Pakistan as a major supplier to a textiles and apparel exporter of medium to high value products.

Pakistan‟s export of cotton fabrics are seen to have a rapid upward trend since 2004 and this may be due to (i) the Turkey-Morocco FTA of 2004, (ii) the Morocco-USA FTA (which allowed duty-fee access to Moroccan garments manufactured from Turkish fabrics) and (iii) the Customs Union with the EU. These developments created space for fabrics imports, as the Turkish textile industry was unable to meet the demand of the apparel export sector and growing domestic demand.

At the present time, exporters in Pakistan are worrying about the repercussions to their business due to the imposition of punitive duties by Turkey on imports of fabrics and apparel. Because Turkey has also applied measures (duties of 24% on fabrics and on apparel)to other South Asian suppliers such as India and Bangladesh, for Pakistan the issue has become a test of the utility of ECO membership and the preferential treatment that Turkey is morally and contractually bound to extend, notwithstanding the legality or otherwise of its position.

Road Transport

Compared to other modes of transport in the country, Turkey‟s road network is highly developed. Turkey‟s international highway transportation sector is reputed to have the largest and the most modern fleet in Europe and carries about 43% of Turkey's exports to the world markets.

Turkey ranks third in the international land transport business after Russia and Germany. The road surfaces have been improved and more than 13,000 km of roads have been converted into dual carriageways over the past decade. Turkey has completed the legal infrastructure regarding privatization of highways and bridges under the privatization program, within the framework of development of international land transport corridors such as Trans Turkey Highway (TTH) and Trans European South-North Motorway Project (TEM).

More than 60% of Turkey‟s logistics activity is operated from Istanbul but other cities are also emerging as major logistic centres.


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Banking and Finance

The ECO Trade Bank has extended loans amounting to USD 45 million to a number of SMEs in Turkey. From the data submitted by the ECO Bank, the SMEs benefiting from SDL funds are drawn from a diverse group of sectors which includes agribusiness and farming, manufacturing, healthcare, tourism, and trading.


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COUNTRY PROFILE TURKMENISTAN

Area 488,100 sq. km. (2010)

Population 5.2 Million (2010 est.)

Population growth rate 1.6%. (2009)

Literacy Rate 98.8% (2002)

Life expectancy 67.87 years.

Table A-26


Indicators 2005 2006 2007 2008 2009

GDP (US$ bn): 8.1 10.5 26.22 30.7

GDP per capita (US$) Na Na 9,200 6,600 6,900

GDP growth (% per year) 10 Na 7.0 9.98 6.1

Inflation(% change YOY) Na Na 11.3 13 15

Unemployment rate (%) Na Na Na Na 60





Economy (2010)

GDP $16.24 billion (Government of Turkmenistan report).

GDP per capita $3,248.

GDP real growth rate: 6.1%.

Inflation: 13%.

Agriculture: Products--cotton, grain, livestock, fruit and vegetables.

Industry: Types--natural gas, oil, petroleum products, textiles, food processing.


Agriculture 10.1% Industry 33.9 % Services 56.0 %

Major Industries

Small machinery, textiles, food processing, cement, shoes, sawn logs, refrigerators, furniture, electric motors, gold, rare earth metals.

Main Exports:

Gas 50%; Oil and oil products 32%

Cotton fiber 3%; Textiles 2%

Main Partners -Russia, Iran, Italy, Turkey

Main Imports

Machinery and Equipment 65%, Foodstuff 15% Main Partners - -Turkey, Russia, Ukraine,

U.A.E., China, United States


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Main Export Destinations of Turkmenistan

Ukraine 51.6%, Poland 10%, Hungary 8%, (Pakistan 0.11%)

Main Import Sources of Turkmenistan

Russia 16.8%, Turkey 13.8%, UAE 10.2% (Pakistan 0.02%)

Pakistan’s Trade with Turkmenistan

Pakistan‟s export have remained stagnant whilst imports have reduced from US $ 13.5 million 2004-05 to US $ 1.9 million 2009-09.

Table A-27

Trade between Pakistan and Turkmenistan (Million US$)

Year

Export

Import

Balance of trade


Turkmenistan share in total exports %


Turkmenistant share in total imports %

2004-05 0.994 13.528 (12.534) 14,391.081 0.007 20,598.114 0.066

2005-06 0.900 6.638 (5.738) 16,452.398 0.005 28,586.007 0.023

2006-07 1.009 9.885 (8.876) 16,976.243 0.005 30,539.709 0.032

2007-08 0.991 22.404 (21.413) 19,222.860 0.005 39,968.500 0.056

2008-09 1.337 1.915 (0.578) 17,88.007 0.007 34822.045 0.005


Two -way trade is negligible and Turkmenistan share in Pakistan‟s exports and imports is minimal.


Trade Brief

After independence in 1991, Turkmenistan opted for a gradual transformation from a planned to a market economy. Turkmenistan authorities have recently implemented several trade liberalizing measures, such as reductions in duty and excise taxes. However, economic activity continuous to be dominated by the public sector and the trade system is still relatively restrictive as all trade transactions have to be registered with the Turkmen State Commodity Exchange.

Trade Outcomes

Turkmenistan‟s imports grew by 57% in US $ Dollar terms in 2008. However, this was more than offset by a 50% increase in export, resulting in a trade surplus of 50% of its GDP in 2008. The country‟s largest

Table A-28

Products Imported from Pakistan

(Millions US$)

Products Exported to Pakistan

Millions US$


Pharmaceutical products 0.383 0.423 0.552 Iron and Steel 16.56 18.37 45.03

Cotton yarn and woven fabrics

0.128 0.143 0.184 Boilers, Machinery and Mech. app.

14.628 15.54 28.66

Leather and leather mfgs 0.014 0.0156 0.011 Organic Chemicals 10.04 10.67 22.91

Surgical instruments 0.053 0.06 0.052 Telecommunication appl. 7.907 8.41 12.57

Sports goods - - - Ceramic products 5.25 5.54 7.79


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exports are hydrocarbons accounting for about 90% of total exports cotton fiber used to be on important export product as well however, its share in exports revenue has fallen from around 10 % in the 1990s to only 1 %.

Investment Climate

In 2010 the Government of Turkmenistan took a number of steps to combat money laundering and terrorism financing, including a Presidential decree that mandates the use of International Financial reporting Standards (IFRS). Also in 2010 Turkmenistan established a Financial Intelligence Unit under the Minister of Finance to strengthen efforts aimed at anti-money laundering and combating financing of terrorism.

In June 2010, FATF removed Turkmenistan from the list of countries with the worst anti-money laundering and combating financing of terrorism records, to the Improving Global AML/CFT compliance: On Going Process list, (which is one level better than the public Statement List.)

Furthermore, many sectors and industrial enterprises are not in a position to revive capacities due to the perception of corruption, which in Tajikistan is a main factor in the suppression of competitive relations. An example quoted by Iran is the activity of a joint Tajik-Iranian enterprise, which manufactures tractors. Tractors constructed in the Dushanbeselmash plant. “These have high economic and technical indices and are stated to be at par with tractors imported from Belarus. However, Tajikistan customs bodies refuse to amend customs tariffs to eliminate taxation of the value-added equipment meant for the construction of these tractors. Consequently, tractors built by the joint enterprise are doubly taxed, but those imported from Belarus of the same specifications and the same capacity are taxed only once.” (source: Trade in Human Development – Tajikistan UNDP, 2010)

Olim Textile Project

The Olim textile project (2009) was the Eurasian Development Bank (EBD)‟s first investment project in Tajikistan. The Bank provided a loan to build a modern spinning factory capable of producing 5,000 tonnes of high quality cotton yarn annually. The project promotes mutual trade between the Bank‟s member states: fine and medium cotton yarn is being supplied to Russian textile companies for making high quality jersey, terry and hosiery. Russia imports cotton yarn, as does Uzbekistan, Turkey and India. In recent years there has been a strong demand for high grade yarn from Russian textile producers.

Competitive Advantages

Other competitive advantages in Tajikistan are the low cost of electricity, low labour and tax preferences: by government resolution, companies are exempted from income tax, VAT and customs duties on equipment and spare parts, VAT when selling finished products on the domestic market and VAT on exports for a period of 12 years.


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COUNTRY PROFILE UZBEKISTAN

Area 447,4000 sq km

Population 27.7million (, 2009)

Capital Tashkent (Toshkent)

Port and Harbors Termiz (Amu Darya)


Table A-29


Indicators 2005 2006 2007 2008 2009

GDP (US$ bn): 11.7 14.2 22.3 26.6 $30.32

GDP per capita (Us$) 444 535 830 979 1,093

Real GDP growth (% change YOY) 7.0 7.2 9.5 9.0 7.0

Goods exports (%GDP) 42.3 33.4 36.0 37.2 31.5


Unemployment rate (%) Na Na 0.8 0.9 1.1%

Total Exports (US$ bn) 4.706 5.365 8.040 Na 9.470

Total Imports (US$ bn) 3.640 3.915 4.470 Na 6.510




Agriculture 26.8 % Industry 39.5 % Services 33.7 %

Major Industries

Textiles, food processing, machine building, metallurgy, gold petroleum, natural gas, chemicals.

Table A-30

Export Destinations of Uzbekistan

Import Sources of Uzbekistan

Russia 26.6% Russia

China 4.3% China 16.4%

Turkey 7.5% South Korea 11.6%

Kazakhstan 7.4% Germany 5.4%

Pakistan (0.29%.) Pakistan (0.04 %).

Uzbekistan’s Main Items of Export:

Cotton 41.5%, gold 9.6%, energy products 9.6%, mineral fertilizers, ferrous metals, textiles, food products, automobiles

Uzbekistan’s Main Items of Import

Machinery and equipment 49.8%, foodstuffs 16.4%, chemicals, metals


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Pakistan’s Trade with Uzbekistan

The following tables show total trade between the two countries and main products, product groups moving either way.

Table A-31

Trade between Pakistan and Uzbekistan (Million US$)

Year

Export

Import

Balance of trade

Total export of Pakistan




2004-05 2.808 11.274 (8.466) 14,391.081 0.020 20,598.114 0.05

2005-06 2.513 10.739 (8.226) 16,452.398 0.015 28,586.007 0.04

2006-07 2.055 23.018 (20.963) 16,976.243 0.012 30,539.709 0.07

2007-08 2.795 18.024 (15.229) 19,222.860 0.015 39,968.500 0.045

2008-09 3.768 12.761 (8.993) 17688.007 0.021 34,822.045 0.036

Source: WTO Trade data base, World Development Indicator, Federal Bureau of Statistics, State Bank of Pakistan, TDAP, Investment Map

Imports into Pakistan have remained much higher than exports to Uzbekistan showing a consistent adverse trade balance.

Source: WTO Trade statistics data base, World development Indicators, Federal Bureau of Statistic, State Bank of Pakistan, TDAP, Investment Map

Trade Outcomes

Uzbekistan‟s trade growth in real (constant 2000 US Dollars) terms has increased from an average of 14.6% over the 2005-07 period to 18% in 2008, as both export and import growth accelerated from 11.7 to 15.8 % and 17.7 to 20 %, respectively.

Free Trade Zone Treaty: Uzbekistan is signatory to FTZ treaties with Azerbaijan, Moldova, Belarus Turkmenistan, Georgia, Tajikistan, Kazakhstan, Russian Federation, Kyrgyzstan, Ukraine

Table A-32



Millions US$


Millions US$


Pharmaceutical Products 1.218 0.986 0.989 Fertilizer 0 0 0

Leather and Leather manufactures

0.66 0.534 0.615 Cotton yarn and woven fabrics

9.328 20.03 15.79

Milling industry product 0 0 0 Iron and steel, Copper and articles thereof.

0.252 2.031 2.019

Milk and cream 0.506 0.411 0.482 Plastic and articles thereof 0 0 0

Sports goods 0.093 0.048 0.051 Telecommunication and electrical equip.

0 0 0


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ECO TRADE AGREEMENT

As stated by the ADB (2008)

“The ECO Trade Agreement, signed in 2003, aims to increase trade among member countries and region-wise and to lead to a substantial increase in trade-related investment. To that end, it introduces a negative list and includes provisions for dispute settlement. As many ECO member countries are landlocked, trade within the sub-region depends significantly on cross-border and transit facilities. An agreement on transit trade was signed in 1995 and one on transport in 1998. However, the ratification process is slow and this has had a direct impact on intra-ECO Trade”

ECOTA is the major document falling within the “Framework Agreement on ECO Trade Cooperation,” which was signed in March 2000, and is an umbrella instrument that “defines broad areas of trade cooperation among member states. Various measures provided for in the Agreement have been further developed in frameworks and institutional arrangements.” (ADB, 2008)

Documents covered by the “Framework Agreement on ECO Trade Cooperation”

Transit Trade Agreement March 1995

Trade and Development Bank Agreement March 1995

ECO Shipping Co. Agreement March 1995

ECO Air Agreement March 1995

Visa Simplification Agreement for Businessmen March 1995

Transit Transport Framework May 1998

Transit Transport Framework Agreement (TTFA) + Annexes 1-8 May 1998

International Road Transport Agreement (between Iran and Turkey) May 1980

ECOTA July 2003

The full text of the ECOTA and related documents are not reproduced here but can be accessed at (www.ecosecretariat.org).

The key objective of the ECOTA was the reduction of tariffs for creating a preferential trading area among the member states. In this regard, the Contracting Parties made firm commitments to provide their final lists by October 31, 2008. However, as of 2011 only three of the Contracting Parties (Afghanistan, Pakistan and Turkey) had provided their lists. A summation of the salient features of the ECO Trade Agreement is attached here as Annex C.

Currently there is an on-going debate on whether the ECOTA itself has actually come into force. Although ECOTA has been ratified by the required minimum number of five members (Tajikistan 2004, Pakistan April 2007, Afghanistan and Turkey July 2007 and Iran March 2008), Iran takes the position that since Tajikistan has yet to ratify the four Annexes to the Agreement and therefore the Agreement is not yet in force. As a consequence, Pakistan and Turkey have decided to grant tariff concessions bilaterally within the ECOTA framework and Turkey, Iran and Pakistan signed a trilateral agreement on reduction of customs duties by 10 percent for some products.

The road to achieving ECO-wide tariff goals is hindered by the fact that seven of the ten member states have so far not acceded to the WTO. Kyrgyzstan, Pakistan and Turkey are the only WTO members within the block. Applications for accession from the other member states are pending for review, some since 1995, but there does not seem to be any urgency on this score, even now.


41

This dichotomy in approach to the WTO and its underpinnings of a rules based international trading system, results in creating an uneven playing field within the ECO, allowing its non-WTO members to apply discriminatory tariffs as needed, while promoting their bilateral and multilateral trade interests without being non-compliant at either forum. Two reasons seem to explain this “slow-pedalling” on the issue of acquiring WTO membership.

First is the experience of Kyrgyzstan, which rushed to membership in 1997 without fully considering the long-term implications, reduced its tariffs by massive margins and conducted its trade negotiation without possessing adequate trade negotiating capabilities. As result, Kyrgyzstan was soon flooded with imported merchandise from all over the world, became a conduit for “informal” imports into the region and suffered serious balance of payments problems, from which it is still recovering. This experience has not been lost on its central Asian (CARs) partners.

Second, the five other CAR countries have strong trade ties with Russia, through the Commonwealth of Independent States (CIS) and a multiplicity of FTAs and Customs Unions (ANNEX D). Until December 2011 Russia remained outside the WTO, meaning non-membership at this forum had not detracted significantly from the international trade of the CARs.

The following evaluation of the ECOTA by the Azerbaijan Foreign Ministry underscores the continuing interest of the land-locked CARs in the transit trade aspect of ECOTA, an issue that impacts Pakistan as well.

“Brief Introduction to ECO” Republic of Azerbaijan, Ministry of Foreign Affairs, 2008

“The standpoint of the Republic of Azerbaijan with regard to joining ECOTA is ambiguous. On the one hand, signing of an agreement promoting trade in ECO region may be deemed to be useful, on the other hand, it is not rational to hurry in such a matter. At the same time, taking into consideration the on-going negotiations on accession of the Republic of Azerbaijan to WTO, the reduction of tariff becomes delicate. In principle, the process of cooperation (integration) includes three key components:

(i) Trade component: By trade component we mean in fact trade regime or in practice elimination of trade barriers.

(ii) Regulatory component. This component has two dimensions - shallow and deep. By shallow dimension we mean that partners are solving issues related to trade, while deep integration means, in fact, that cooperation on regulatory issues goes beyond pure trade issues.

(iii) Political component: At the moment this component is one of the most important one. In fact this aspect refers to the problem of striking delicate balance between liberalization at the national level and reaching certain level of supranational in terms of managing different integration schemes.

On the basis of economic cooperation we also have to further develop coordinated efforts for building transit infra-structure in these landlocked countries to make commerce of goods and energy possible. The Objective of ECO “Transit Trade Agreement” is to facilitate the enhancement of trade between Member States. The agreement was signed in Istanbul on 15 March 1995 and came into force on in December 1997. Azerbaijan ratified the Agreement in 2000. Notwithstanding that the agreement is in force since 1997, its actual implementation is impossible due to procedural delays.

Source: Director ECO Coordination, Ministry of Foreign Affairs, Republic of Azerbaijan


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43

REVIEW OF PAKISTAN’S ECO TRADE- WITH FOCUS ON LIGHT

ENGINEERING AND TEXTILE MADE-UPS

This section is in divided into three main parts. The first part undertakes a statistical review of Pakistan‟s trade with the three major ECO partners: Afghanistan, Iran and Turkey. Statistics are used to analyze in the second part Pakistan‟s ECO trade in Light Engineering and in the third part Pakistan‟s ECO trade in Textiles Made-Ups.

While Pakistan‟s trade with ECO has shown impressive growth, it still accounts for only 12% of exports and just 2.2% of imports.

Table 1

Trade with ECO Countries – As percentage in Total Exports / Imports of Pakistan

(Million US $)

Year Total Exports to ECO Countries

Total Exports of Pakistan

% in Total Exports of Pakistan

Total Imports from ECO countries

Total Imports of Pakistan

% in Total Imports of Pakistan

2003-04 825.97 12313.29 6.7 421.575 15591.78 2.7

2004-05 1170.88 14391.08 8.1 420.676 20598.11 2.0

2005-06 1574.66 16452.40 9.6 710.622 28586.01 2.5

2006-07 1330.23 16976.24 7.8 680.945 30539.71 2.2

2007-08 1819.13 19222.86 9.4 898.382 39968.50 2.2

2008-09 2216.15 17685.50 12.5 X X X

2009-10 2296.18 19290.70 12.0 X X X

Source: FPCCI

The trade is concentrated with only three countries Afghanistan, Turkey and Iran, which together account for 99 percent of Pakistan‟s exports to ECO; within this group, Afghanistan and Turkey take up 90 percent (in 2009-10), with Afghanistan alone accounting for almost 70 percent of Pakistan‟s ECO trade.

Table 2

Break-up of exports to ECO partners by country and region (Million US $)

Year Afghanistan CARs IRAN Turkey

2008-09 1397.52 15.03 399.62 403.98

2009-10 1571.52 13.54 207.18* 503.93

as %age of ECO exports

2008-09 63% ------ 18% 18%

2009-10 68% ------ 9% 22%

Source: TDAP, FPCCI

*The fall in exports to Iran in 2009-10 is occasioned by a drop of US$ 200 million in the sale of rice and it needs to be determined how much of this fall is due to external competition or results from the reluctance of banks in Pakistan to provide finance for trade with Iran in view of the prevailing US, EU, and United Nations sanctions regimes. (Details on financing of Pakistan‟s rice exports to Iran were not available from banks during the interviews conducted).


44

Within exports to these three countries, the export basket is further concentrated on only a handful of items. Pakistan‟s Afghan trade displays more solid product diversification, in that six sectors comprise 65 percent of exports as compared with Turkey, where textiles-related items account for 64 percent of all exports; and Iran, in which one commodity, rice, makes up almost three-fourths of Pakistan‟s entire exports to that country.

Table 3

Product share in Pakistan’s export to ECO countries based on 2010 exports figures

Export to Afghanistan % share

Petroleum Products 36%

Cement 11%

Fruits, Vegetables and Food 7%

Engineered Goods 6%

Plastic and Chemicals 5%

Pharmaceuticals 4%

Export to Iran

Rice 74%

Export to Turkey

Textiles Group (including apparel and yarn) 64%

Rice 8%

Afghanistan

Table 4 below shows that since 200, the top ten products have maintained their share of Pakistan‟s exports to Afghanistan, while expanding organically. Viewed from the aspects of value as well as product diversification, the growth of Pakistan‟s exports to Afghanistan is a success story during an otherwise period of stagnation in Pakistan‟s export landscape, especially in light of the several known constraints that hinder the growth of this trade.

Table 4

Product profile of Pakistan’s top 10 items of exports to Afghanistan (Million US$)

Product PAKISTAN‟S EXPORT TO AFGHANISTAN

Value in 2003 Value in 2006 Value in 2009

All products 408.20 991.50 1373.86

Mineral fuels, oils, distillation products, etc 82.47 278.53 394.49

Salt, sculpture, earth, stone, plaster, lime and cement 20.12 85.09 149.39

Cereals 34.49 50.08 148.57

Animal Vegetable fats and oils. 43.69 99.40 93.91

Articles of iron or steel 19.43 34.27 85.14

Plastic and articles thereof 12.58 72.70 69.22

Pharmaceutical products 2.44 9.45 59.05

Edible vegetables and certain roots and tubers 11.61 0.55 43.79

Edible fruit, nuts peel of citrus fruit, melons 5.66 15.68 41.61

Dairy products, eggs honey, edible animal products nest 6.76 23.90 38.99

Source: Karachi Chamber of Commerce and Industry

Three aspects of Pakistan‟s exports to Afghanistan deserve attention. First, the timeline of the growth of Pakistan‟s exports to Afghanistan indicates that this has been built upon the back of: (i) an enabling trade environment provided by the presence of international forces, and; (ii) the availability of foreign exchange


45

with the Afghan Government as a result of development financing by international donors. These are important considerations, because it should be remembered that: (i) Pakistan‟s formal exports prior to 2001 never crossed US$ 200 million per annum, even during the Taliban regime, and; (ii) the principal items of export (petroleum products and cement) are strongly linked to the presence of occupation forces and international development financing. Therefore, while Pakistan‟s exports to Afghanistan have indeed tripled in value since 2003, geo-political changes in the region can result in volatility and uncertainty impacting these exports.

Second, more than 50% of the exports to Afghanistan are comprised of products that have a heavy component of imported raw material, which means that, in effect, these are re-exports with value addition through processing and conversion.

Third, there is a wide gulf between the figures reported by Afghanistan and Pakistan in regard to Pakistan‟s exports. As Nicklas Norling (2011) of the Central Asia Caucasus Institute notes the Afghanistan‟s Central Statistical Office reports imports from Pakistan in 2010 at US$ 360 million (a figure also reported by COMTRADE.) The Afghan-Pakistan “shuttle trade” is in excess of US$1.9 billion and further International Monetary Fund‟s (IMF) figure of US$1.57 billion for Pakistan exports takes this “shuttle trade” into account. While most concerned persons in Pakistan agree that the volume of unofficial trade with Afghanistan exceeds the officially-reported figures, it is doubtful whether IMF bases its data on unverified estimates.

A more plausible explanation may be that many items “exported” to Afghanistan are paper rather than physical transactions. This is because it becomes profitable for traders in Pakistan to receive payments in US Dollars and issue “export documents” for heavily taxed items such as cigarettes (60 to 80 percent), or high value consumer white goods in order to collect a refund on sales tax and excise duties for goods that may in fact never leave the country.

Iran: Pakistan and Iran signed a preferential trade agreement in 2006, but this does not appear to have provided any impetus for rapid increase of trade by either party. With Iran, Pakistan has always had an adverse balance of trade, in recent years it is a single product customer, exports of rice accounting for 89% of exports in 2008-09 and 77% in 2009-10.

Table 5

Pakistan’s Trade with Iran (Million US $)

Year Pakistan‟s Exports Pakistan‟s Imports Trade Balance

2003-04 92.55 283.94 (191.39)

2004-05 147.11 242.09 (94.98)

2005-06 188.07 450.08 (262.01)

2006-07 167.54 405.63 (238.09)

2007-08 218.56 551.75 (333.19

2008-09 399.61 506.93 (107.32)

2009-10 207.18 89.63 (282.45)


Turkey

Pakistan‟s exports of cotton products, synthetic fiber and apparel, valuing US$322 million represented 42% of Turkey‟s global imports of these products, distinguishing Pakistan as a major supplier to a country that is itself a textiles and apparel exporter of medium to high value products.


46

Since 2005 Pakistan‟s exports of cotton fabrics to Turkey have shown a rapid increase and this may be due to: (i) the Turkey-Morocco FTA of 2004; (ii) the Morocco-USA FTA 2006 (which allows duty-fee access to Moroccan garments manufactured from Turkish fabrics), and; (iii) the Customs Union with the EU. These developments have created space for fabrics imports in Turkey, where the domestic industry has been unable to meet growing demand both from the apparel export sector and domestic retailers.

Presently, exporters in Pakistan are concerned about the repercussions to their business due to the imposition of punitive duties by Turkey on imports of fabrics and apparel. Since Turkey has also applied similar measures to other South Asian suppliers such as India and Bangladesh, for Pakistan the issue has become a test of the utility of ECO membership and the preferential treatment that Turkey is morally and contractually bound to extend, notwithstanding the legality or otherwise of its position on the safeguard measures.

Central Asian Republics

This vast territory, with combined imports in excess of US$ 60 billion, remains an enigma for Pakistan‟s export planners.

Pakistan‟s total exports to this region have slipped 10%, from US$ 15.03 million in 2008-09 to US$ 13.54 million in 2009-10, which is inexplicable considering that competitor countries have increased their exports to this region in the same period.

It is possible that the actual export figures for Pakistan‟s exports may be somewhat higher. One of the reasons is the position of Pakistan Customs Authorities, who state they have no instructions in respect of cargoes destined for CARs transiting through Afghanistan and therefore such merchandise is recorded at the Pakistan‟s land border posts under the head “Exports to Afghanistan.” (Information obtained during stakeholder interviews.)

There is evidence also that importers in Afghanistan re-export some Pakistan origin goods to the CAR market. One of the major exporters of goods falling under HS Chapter 73 advised during the course of stakeholder interview that their company was now looking for direct exports to the CAR region, having ascertained positive market demand as a result of reselling of their product by their Afghan customer.

These factors notwithstanding, one should not be detracted from the fact that Pakistan‟s recorded exports are in a decline in a market where imports are expanding rapidly.

Pakistan’s top five products to CAR in 2009 were:

Pharmaceuticals - 42.5%

Articles of leather - 11.6% (travel goods etc.)

Medical Apparatus - 8.4% (includes surgical instruments)

Cereals - 6.9%

Other textiles - 3.9% (worn clothing, etc.)

Source: PIDE Study on the “Impact of allowing India Transit access to Afghanistan”

As against this, India which faces somewhat higher logistics problems, recorded the following exports in 2008:


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Table 6

India’s exports to CAR region 2008 (Azerbaijan is excluded from these figures)

Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Total to CAR

Apparel 16.62 21.80 0 6.77 0 45.19

Machinery and Appliances

33.00 0 0 22.50 8.8 63.30

India‟s total exports 111.86 31.56 12.41 36.06 40.30 232.10

Source: “Reconnecting India with Central Asia” Gulshan Sachdeva, statistics from Dept. of Commerce, Ministry of Commerce and Industry, Government of India

Whether viewed in the short term against India‟s exports to the region or the longer term failure to establish a niche in the market for textile made-ups and surgical instruments identified in this study, Pakistan‟s export performance to the CAR area is highly unsatisfactory, considering that in both products Pakistan has a revealed comparative advantage.

Competitive environment

Intra-ECO imports have grown at a faster pace than intra-ECO exports. In the case of Pakistan, there is an adverse trade balance with all countries except Turkey and Afghanistan and even the CARs enjoy a favourable balance in their trade with Pakistan, if only on a modest scale.

Within the ECO, Pakistan‟s competitors are Turkey and Iran, which have the advantage of a wider manufacturing base and self-sufficiency in key raw materials. Turkey‟s exports to the CAR increased by more than six times between 2000-2009. This is no mean achievement when it is considered that Turkey enjoys proximity only with Azerbaijan, to some extent with Turkmenistan and the distance between Turkey and Kazakhstan‟s capital, Almaty, (Kazakhstan being vital to the CAR economy) exceeds 5000km.

Table 7

Turkey’s export and import figures with ECO countries – 2009 (Million US$)

Country Exports Imports Total trade

Iran 2025 3406 5431

Azerbaijan 1399 752 2151

Kazakhstan 634 1077 1711

Turkmenistan 945 330 1275

Pakistan 163 619 782

Uzbekistan 279 412 691

Afghanistan 233 5 238

Tajikistan 126 107 233

Kyrgyzstan 140 31 171

TOTAL 5944 6739 12683

Source: Asim Aksoy, Undersecretariat of Foreign Trade, Government of Turkey, Presentation at ECO Business Summit

Turkey‟s trade with the CARs has increased rapidly but methodically, showing market penetration in smaller economies such as Kyrgyzstan, which is swamped by merchandise form the People‟s Republic of China; and in Tajikistan, which has a reputation for imposing the most difficult market access conditions. Turkey strongest trade connect is through linguistic and cultural affinity with all of the CARs except Azerbaijan, which has language and cultural orientation towards Iran. Common language is a powerful driver of trade, as evidenced by the success of Turkey‟s export drive.


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Table 8

Growth of Turkey’s exports to the Central Asian Republics (US$ million)

Country 1990 1995 2000 2005 2006 2007 2008 2009

Kazakhstan 0 151 119 460 670 1080 891 634

Kyrgyzstan 0 38 21 90 132 181 191 140

Uzbekistan 0 139 83 151 176 226 337 279

Tajikistan 0 6 4 47 72 118 176 126

Turkmenistan 0 56 120 181 281 340 663 945

Total 0 390 347 929 1331 1945 2258 2124

Source: Turkey State Statistics Institute

Table 9 below identifies the main items of Turkey‟s exports to ECO and reveals several products that overlap (red font) with those being exported by Pakistan or which are in the pipeline for Pakistan‟s next export thrust into the region:

Table 9

Main export items of Turkey to ECO countries in 2009

Products VALUE MILLIONS $

Machinery Used in industry 823

Electrical Machinery 592

Plastic and Products Thereof 465

Products made from iron and steel 439

Iron and Steel 317

Furniture 311

Land Vehicles 232

Wood, wood coal 229

Carpets and Floor Tiles 133

Paper and products Thereof 130

Aluminium and Products thereof 127

Source: Asim Aksoy, Undersecretariat of Foreign Trade, Government of Turkey, Presentation at ECO Business Summit

The statistics show that Iran‟s trade with ECO has been built, like Turkey‟s, on opening up its markets to ECO partners:

Table 10

Iran’s Non-Oil Trade with selected economic blocs (US $ Million)

Economic blocs

Exports 2010 Imports 2010

Value Value

GCC (Gulf Cooperation Council) 3897 18586

ECO 3770 3159

EU 2011 13917

CIS 1675 1603

ASEAN 1356 2476


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Source: ITP TIS based on Iran‟s Customs Administration (IRICA) Statistics

However, unlike Turkey, whose exports of US$ 5.94 billion to ECO make up less than 6 percent of its total exports, Iran has a greater concentration of trade with ECO, with exports to only three countries (Turkey, Afghanistan and Pakistan) making up 10 percent of its total non-oil trade.

Iran reports close to US$ 4 billion in bilateral trade with Azerbaijan, which has been facilitated no doubt because of linguistic and cultural affinity (large areas of Azerbaijan were part of Iran until annexed by Russia in the 19th century). The closeness with Azerbaijan arises also from the on-going rivalry between Iran and Turkey for commercial and diplomatic influence within the region.

Iran has been realigning its trade towards Asia and the ECO is now its second largest regional destination for non-oil exports. From the table below we can see the regional thrust of Iran‟s exports, with only one non-Asian country ranking among its top 10 export destinations:

Table 11

Iran’s main non oil export destinations in 2010 (US$ million)

Sr No Countries Value Share %

1 China 4441 17.3

2 Iraq 4365 17.0

3 United Arab Emirates 3458 13.4

4 India 1672 6.5

5 Afghanistan 1280 5.0

6 Turkey 821 3.2

7 Pakistan 531 2.1

8 Indonesia 504 2.0

9 Japan 494 1.9

10 Belgium 485 1.9

TOTAL Top 10 18051 70.2

REST OF THE WORLD 7660 29.8

Source: ITPO TIS based on Iran‟s customs Administration (IRICA) Statistics.

In the above table, the item of interest is Iran‟s exports to Afghanistan, which are close to that of Pakistan and perhaps more productive, considering that more than 50 percent of Pakistan‟s exports to Afghanistan are based on product with a heavy component of imported raw material, where the earnings for Pakistan arise mainly from processing and value addition.


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LIGHT ENGINEERING GOODS

One of the two products selected for this study is “Light Engineering Goods.” At the outset it needs to be clarified that TDAP (responsible for export promotion) does not categorize products as “light engineering” for statistical purposes.

TDAP statistical complications display “Engineering Goods,” “Surgical Instruments” and “Cutlery” as separate categories. Within the category “Engineering Goods,” TDAP sub-categorizes products as: Electric Fans, Transport Equipment, Other Electrical Machinery, Machinery (Specialized), Auto Parts and Other Machinery.

In order to further ascertain which products could be classified as “Light Engineering”, this study relied on: (i) an investment brief on “Light Engineering Industry in Pakistan,” prepared by the Board of Investment, Government of Pakistan, which includes surgical instruments, electric fans, cutlery and auto parts; (ii) a US AID “FIRMS Project” sector study (January 2010) that includes surgical and medical instruments in the sector “light engineering”, and; (iii) Small and Medium Enterprises Development Authority‟s (SMEDA) publications, which apply the term “light industry” and “light engineering” to an array of items that include electric fan, surgical instruments, auto parts.

Export of auto parts to ECO is also modest (US$ 1.009 million to Turkey, US$0.4 million to Afghanistan and US$17 thousand to Iran, 2009-10). Due to the preoccupation of Pakistan Association of Automotive Parts Accessories Manufacturers (PAPAAM), the auto spares manufacturers association in preparations for an industrial exhibition, its officials were not able to share insight in time for inclusion and analysis in this report.

1

Pakistan‟ exports of engineered goods for 2008-09 and 2009-10 are given below:

Table 12

Pakistan export of engineering goods (US$ 000) classified by major items

2008-09 2009-10

Electric fans 28,745 34,311

Transport equipment 31,446 29,109

Other electric mach. 41,432 42,005

Mach. specialized 62,223 43,030

Auto parts 12,943 13,338

Other mach. 88,110 68,390

TOTAL 264,899 230,183

Source: TDAP

1 Note: This study does not cover export of electric fans since there is an excellent recent report (UNIDO, TRTA II PROGRAMME

Draft Report on Industrial Sectors, May 2010, Authors: Usman Khan, Ali Haroon, Shafqat Hayat Bhatti) that discusses this industry‟s export prospects.


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Major export destinations of engineering goods (excluding surgical instruments) are:

Table 13

Exports of engineering goods by top destinations (US$000)

Country 2008-09 2009-10

Bangladesh 20,787 21,835

UAE 45,721 23,952

Sudan 7,260 11,077

Saudi Arabia 10,442 8,940

ECO

Afghanistan 46,917 60,726

Iran 7,097 6,315

Turkey 2,098 1,795

Total engineering exports to ECO 56,112 68,836

as % of total engineering exports 22.8% 29.7%

Source: TDAP

Export of engineering goods (excluding surgical instruments) to ECO rose from US$ 56.11 million in 2008-09 to US$ 68.83 million in 2009-10, making up almost 30% of Pakistan‟s total global exports in this sector. Considering that Pakistan‟s global engineering exports declined by 13% in the same period, the inference is that the growth is not organic but a successful matching of products to market demand.

Data on exports of “Surgical Instruments” is given below:

Table 14

Pakistan export of surgical instruments classified by major items (US$000)

2008-09 2009-10

Other Instruments, Appliances Medical/Surgical/Vet 223,402 198,301

Surgical Scissors 20,931 15,164

Other Instruments/Appliances, Dental Science 8,234 9,257

Syringes Without Needles 40 239

Surgical Knives 349 119

Syringes With Needles 522 111

Total 253,478 223,191

Source: TDAP

In line with the “single product” trend discernible in Pakistan‟s exports, one product sector “Other Instruments, Appliances Medical/Surgical/Vet” contributes 88 percent of the total exports of surgical instruments. Products in this heading are mainly surgical and hospital disposable appliances made from imported stainless steel and diagnostic instruments, but interesting to the economy due to being labour intensive.


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Major export destinations for surgical instruments are given below:

Table 15

Exports of surgical instruments by top countries (US$000)

Country 2008-09 2009-10

USA 66,128 52,433

Germany 35,032 34,054

UK 27,072 24,562

France 11,715 12,944

Brazil 6,398 7,499

ECO

Iran 1,088 1,888

Turkey 2,304 2,230

Afghanistan 554 161

TOTAL ECO 3,946 4,279

Source: TDAP

Export figures for surgical instruments are seen to follow the general trend of Pakistan‟s exports - a few countries constitute the major part of sales, in this case five countries account for 60 percent of exports. The inclusion of Brazil among the top five importers reveals another curious anomaly of Pakistan‟s export marketing, i.e. the ability to sell in markets half-way across the globe but not in destinations closer to home.

When exports of surgical goods are added to the exports of engineering goods, the following picture emerges:

Table 16

Pakistan’s export of Engineered Goods

(US$ 000) 2008-09 2009-10

Engineering Goods + Surgical Instruments Combined 518,377 453,375

Exports to ECO 60,058 73,105

as % of Pakistan‟s global engineered goods exports 11.6% 16.1%

The inclusion of surgical instruments almost halves the share of engineered goods (from 30% to 16.1% in 2009-10) exported to ECO as a proportion of Pakistan‟s global exports of these items. However, even at 16.1% this is a healthy share, especially when compared with textile made-ups, which have an almost equal share in Pakistan global exports but have negligible export performance to ECO countries.


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The product wise-break up of engineering goods exports to ECO countries are detailed below:

Table 17

Product Wise break-up of Engineering Goods exports to ECO countries (US$000)

Afghanistan 2009-10 2008-09

Other Electrical Machinery 25,385 22,643

Other Machinery 18,130 10,480

Transport Equipment 6,206 1,699

Machinery Specialized 6,702 9,305

Electric Fans 3,902 2,640

Auto Parts 400 150

Surgical Instruments 161 554

Total 60,886 47,471

Turkey 2009-10 2008-09

Surgical Goods 2,230 2,304

Auto Parts 1,009 90

Other Machinery 407 630

Other Electrical Machinery 127 13

Transport Equipment 99 02

Machinery Specialized 99 1,288

Electric Fans 59 26

Total 4,030 4,353

Iran 2009-10 2008-09

Transport Equipment 5,543 5,472

Surgical Instruments 1,888 1,088

Other Machinery 331 1,409

Specialized Machinery 280 104

Other Electrical Machinery 145 5

Auto Parts 17 106

Total 8,204 8,184

Analysis of export potential in surgical goods

Pakistan‟s Engineering Development Board (a unit of the Ministry of Industries and Production) identifies the below HS Code items as being the two engineering products sold to the most destinations:

90189090 161 Destinations Pak Exports US$165.63 mln* World Export Trade US$34,780 million (2010)

90184900 110 Destinations Pak Exports US$ 11.55 mln* World Export Trade US$ 3,712 million (2010)

(*9 months exports: July-March 2011, source EDB Bulletin)


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Because both items are in the surgical instruments sector and noting that Pakistan‟s aggregate sale of surgical instruments to ECO countries is only US$ 4,279,000, it becomes necessary to examine the size of the import market within ECO of these categories to determine the prospects of increasing Pakistan‟s exports:

Table 18

ECO Countries: Import of selected Surgical Instruments and Medical Devices (US$000)

HS CODE 901890 HS CODE 90184900

Country 2008 2009 2010 2008 2009 2010

Afghanistan 44,070 55,616 4,836 0 0 332

Azerbaijan 40,072 52,997 35,729 454 276 260

Iran 116,295 126,909 117,895 10,955 12,545 17,757

Kazakhstan 73,769 66,145 68,116 2,253 2,122 3,919

Kyrgyzstan 3,188 5,391 6,499 358 359 507

Tajikistan 2,196 1,172 1,836 53 63 42

Turkey 34,002 31,818 35,495 2,419 2,708 3,292

Turkmenistan 2,996 14,604 13,217 60 371 625

Uzbekistan 11,977 13,614 17,543 547 597 1,145

Totals 328,565 368,266 301,166 17,099 19,041 27,879

A deeper study will clarify and match the prospects for products that are manufactured in Pakistan, but the volume of ECO imports (average US$ 330 million per annum) suggests that an export drive within ECO will return dividends for Pakistan‟s surgical goods industry.

There is a need for caution however. Within the ECO, Turkey is emerging as a major competitor in export of surgical instruments and medical devices. Turkey‟s world exports of items covered by HS901890 rose from US$ 69.55 million in 2008 to US$ 77.19 million in 2010. Moreover, the aggression with which Turkey is promoting its overall exports to the Central Asian region and the fact that China too is fast expanding its global outreach in this category suggest that their attention will turn to this region sooner rather than later.

Imports by the six CARs of items falling under HS Code 901890 are seen to be US$ 178.26 million, US$ 209.539 million and US$ 147.77 million during 2008, 2009 and 2010. Combined with Iran (average imports US$ 119 million in the past three years) the ECO not including Turkey offers an import market in excess of US$ 250 million, which is more than Pakistan‟s average annual total exports of surgical instruments over the past five years.

Analysis of export potential in steel products

The EDB identifies products falling within HS Codes 7306 and 7308 (hollow tubes, steel girders respectively) as Pakistan‟s top export earners in engineered goods (excluding surgical instruments) and additionally HS Codes 7615 (aluminium household goods) and 8507 (batteries for motor vehicles) as TOP performers in the Afghan market.

Table 19

Pakistan exports of engineered goods to Afghanistan (US$000)

HS CODE 2006 2007 2008 2009 2010

7308 11,997.51 10,097.68 22,574.85 32,554.77 45,325.02


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7306 8,571.09 23,533.86 33,692.98 30,047.69 50,978.37

7615 8,454.01 5,803.46 6,100.26 5,979.18 7,369.43

8507 772.41 3,450.89 5,826.41 4,824.47 7,809.39

Totals 29,745.02 42,885.49 68,184.50 73,406.70 111,482.14

Source: COMTRADE

Note: Whereas TDAP mentions Pakistan‟s entire engineering exports to Afghanistan as US$ 60.75 million in 2009-10, Comtrade data shows this as US$ 111.48 million, meaning there is a discrepancy in recordings.

The EDB states exports of engineering goods to Afghanistan for the nine months July 2010-March 2011 as US$ 124.61 million (Export –Imports Stats of Engineering Industry of Pakistan Jul-March 2010-11 and 2009-10) and further mentions in its needs assessment study that the informal exports of engineering goods to Afghanistan in all probability exceed the formal exports.

In the face of these conflicting figures, it is difficult to precisely determine the actual volume of Pakistan‟s export of engineering goods to Afghanistan.

Import (and export) of products by ECO countries under HS 7306 and 7308, in which Pakistan exports are only to Afghanistan, are given below:

Table 20

Import of HS code 7306 products by ECO countries

Imports (in Million US Dollars)

Azerbaijan $ 7.09 million (2006

Iran $22.15 million (2006)

Kazakhstan $16.80 million (2006), $21.02 mln (2007) and $440.61 mln (2008)

Turkmenistan $ 1.36 million (2006

Uzbekistan $ 1.58 million (2006)

Exports

Iran $118.06 million (2006)

Turkey $272.49 million (2006

Source: COMTRADE DATA

Table 21

Import of HS CODE 7308 products by ECO countries (Million US$ )

Imports 2006 2007 2008 2009 2010

Kazakhstan 262.74 267.78 560.59 432.13 n.a.

Azerbaijan 51.24 34.36 37.44 49.79 135.32

Turkey 76.42 91.71 138.32 82.56 77.02

Turkmenistan 17.31 14.66 56.92 192.00 174.24

Uzbekistan 8.93 15.54 12.75 16.88 12.02

Kyrgyzstan 1.53 2.90 9.64 12.87 4.57


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Iran 4.66 n.a. n.a. n,a n.a.

Exports

Turkey 1216.80 989.9 923.5

Iran 9.45 3.42 1.60

Source: COMTRADE DATA

As evidenced from Tables 20 and 21 above, there is huge demand for steel products in the CARs. Turkey and Iran are continuing to increase exports but import demand is rising at a faster pace.

Manufacturing sources in Pakistan believe, on the basis of their exports to Afghanistan and the knowledge their products are being re-exported from there to Tajikistan and other countries that Pakistan can be a competitive player. However, for this particular trade, the transport factor is critical and there will be little positive movement until either the transit route through Afghanistan is secure or the China-Kyrgyzstan route is made passable and safe.

Obstacles, Challenges and Opportunities

Import dependency

The biggest hurdle in the production and export of engineering goods is the availability of local raw material. Pakistan Steel‟s production is 50 percent below what it was two years ago and now Pakistan does not even rank among the top 60 steel producers in the world. By way of comparison, within the ECO, Turkey (29m tons) ranks 10th in the world in steel production, Iran (12m tons) ranks 17th and Kazakhstan (4.3m tons) ranks 31st (source: World Steel Association, figures for 2010)

At present, more than 80 percent of the steel used in domestic production is imported (EDB). Manufacturers interviewed advised that this does not affect product selling cost, because steel products are priced on the basis of global prices but they have to factor in a three month supply line and hold two months inventory - this creates cash flow problems, adds to the financial cost of their operations and heightens their risk due to price fluctuations in the market.

Iron and steel pipes and tubes

The global demand for steel pipes and tubes is 85 million MT (mainly electric resistance welding pipes and seamless pipes). In this huge market, Pakistan‟s share appears marginal at best, but the positive aspect is that exports are progressively rising, as evidenced by sales to Afghanistan.

Low labour costs combined with efficient managerial skills have enabled Pakistan‟s organized and corporate sector companies to grab market share overseas. Such large scale units are technologically advanced and produce products according to internationally recognized standards. In addition there is a large home market to provide economies of scale and sustain the export business. The downside is that freight charges for large diameter pipes and tubes become proportionately higher and, since the larger exporting units are located in Karachi, the extra distance has an adverse affect on cost.

But demand is strong in Afghanistan and the CARs and there is a need for AN organized market share capture to sustain the rapid growth of exports of steel pipes and tubes (HS 7306 and 7308) already established by Pakistan.


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Surgical instruments

Pakistan‟s exports of this item have remained constricted within a band of US$ 220-250 million for several years. This suggests mainly organic growth and the industry has not been able to come up with fresh marketing ideas, innovative products or technological improvements to break the US$ 300 million export barrier and go forward from there.

There are many supply-side constraints, chiefly the reliance on imported raw material, no access to capital for applying new technology, a fragmented industry (more than 2000 micro-enterprises and 600 small exporting companies) with small-scale enterprises that are unable to bear the expenses of export marketing or technical management.

With specific regard to exporting to ECO countries, the surgical instruments industry is faced with the process of registering each product separately with the health authorities in the major importing markets of Iran and Kazakhstan. This is a cumbersome and expensive procedure, each manufacturer has literally hundreds of product lines and each customer normally places orders literally across hundreds of products per shipment. There is scope for government intervention through subsidizing the cost of registration, as was done in the case of pharmaceuticals some years ago, with positive results.

Exporters of surgical instruments interviewed advised they were not inclined to spend time and resources in these markets when they were able to sell their products in the major importing markets of the United States and EU.

One exporter of surgical implants advised his company had made exports to Azerbaijan in 2009, but discontinued further business due to the logistics problems and the difficulties and expenses involved in travelling to meet the customers.

Another manufacturer informed the that his products are sold to customers in Iran, but the sale is indirect, i.e. through informal channels, by traders who deliver the goods in Iran and receive the payment there.

The strengths and weaknesses of the surgical instruments industry will not be discussed here. For more information some most insightful and well-researched reports from 2010 cover the light engineering industry in detail:

1. Report on Industrial Sectors (UNIDO TRTA II Program) Authors: Usman Khan, Ali Haroon, Shafqat Hayat Bhatti;

2. Pakistan Sector Assessment (US AID FIRMS Project) Chemonics International, Inc. Authors: Nihal Pitigala, Linda Nemec, and Fred Levitan;

3. Report on National Engineering Exports Development Strategy (NEEDS) Engineering Development Board

These studies have assisted this studies assessment of the advantages of surgical instruments exports as compared with electric fans. They are summarised in the following table.

Table 21-A

Comparative Data for Surgical Instruments and Electric Fans Industries

Electric Fans Industry Surgical instruments Industry

Annual Exports 2010 $ 34 million $ 223 million

Contribution to total exports 0.001% 1.1%


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Contribution to GDP 0.27% 0.41%

Employees per Rs 1 million capital invested 6 10

Value Added 25-30% 75%

Capacity Utilization 85-90% 60%

Share of Global Market 0.0% 1.3% (HS 9018)

Sector Employment 25-30.000 120-150.000

Product Diversification

The surgical instruments industry in Pakistan manufactures a wide range of products, among them being appliances for Diagnostics, Anesthesia, Vaccination, Bone Surgery, Neurology, Tracheotomy, Cardiovascular, Lung Surgery, Ophthalmology, Oral Instruments and Sterilization equipment.

Products in the electric fans industry are in only three ranges, ceiling fans (63 percent), pedestal fans (30 percent) and bracket fans (7 percent). This product mix is determined by the home market demand, which is continuously increasing, hence the 80-90 percent capacity utilization. But ceiling fans are not the first choice in the export market; also the industry has little products on offer for industrial fans (fans of under 125w capacity are classified as domestic appliances, above 125w as industrial or “other” fans), which have the greater demand in the global market. This is why the export of fans has not risen along the same growth curve as some other engineered products and is not likely to in the near future, in view of the strong domestic demand that leaves little export surplus.

The other constraint faced by exporters of electric fans is price. Pakistani products are 10 percent more expensive than similar product from India and three times as expensive (but of better quality) as are products from China, which brings to bear its huge advantage in applying economies of scale. (Where a large Pakistan manufacturer may produce 200.00 pieces in a year, a medium-sized Chinese factory can turn out 5000 units in a day.)

Auto parts

Although the export of automobile spare parts was recorded at US$ 13 million in 2009-10 and this industry faces strong challenges in the ECO import market, it merits encouragement for the following reasons:

First, like surgical instruments and electric fans, it has a favourable capital to employment ratio (4.5 persons employed per Rs 1 million capital.) The sector provides employment to 170.000 persons.

Second, the sector makes a positive contribution to Pakistan‟s chronically negative trade balance, its output contributing more than US$2.5 billion by way of import substitution and direct savings of US$1.25 billion in foreign exchange.

Third, compared to the electric fans industry, which has 80 percent component of imported raw materials, auto spares have approx 50 percent imported raw material component. The wage paid per worker is almost twice that paid in the surgical instruments or electric fans sectors.

Among the export challenges faced by auto parts manufacturers is the licensing issue, most of the major auto-parts vendors in Pakistan are either licensed or under technical arrangement not to export their products without prior agreement.


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But independent manufacturers are free to export and non-licensed products are in demand the world over, for reasons of price advantage over branded spares. The car parts import market in Dubai recorded US$ 2.4 billion business volume in 2009, with sales catering to the region (Iran, Central Asia and Turkey).

The bigger challenge is that the two largest markets in the ECO, with direct transportation access from Pakistan, have considerable domestic strength in this sector and are themselves exporters of auto spare parts.

Turkey produced 1,124,982 motor vehicles in 2010, ranking as the 7th largest automotive producer in Europe and 18th in the world. Turkey‟s motor vehicle industry consists of 15 assemblers and manufactures (some are foreign owned or joint ventures), generally operating under licences. In addition, there are about 700 automotive parts suppliers. Global Brands manufacturing in Turkey are: Fiat, Mercedes Benz, Daimler AG, Renault, MAN, Peugeot, Land Rover, Ford, Isuzu, Hyundai Toyota, Honda, Mitsubishi, Tata Motors.

The share of components in Turkey‟s total automotive exports was 32%, recording sales of USD7 billion, with over 70% exports to customers in Europe. Relatively low labour costs and duty-free access to the EC automotive market (following the Customs Union) are the principal reasons for the upsurge in Turkey‟s automotive industry.

2

Iran produced 1.3 million vehicles in 2009, and has begun exporting passenger cars to Algeria (20,000 units) and to Afghanistan (5,000 units). The same year Iran also manufactured over 8 million motorcycles.

There are over 25 automakers in Iran producing both light and heavy vehicles. Manufacturing is through joint ventures with Peugeot, Citroen, Renault (France), Volkswagen, B.M.W, Mercedes Benz (Germany), Nissan, Toyota (Japan), Kia Motors, Daewoo, Hyundai (South Korea), Proton (Malaysia), Chery (China)

The Iranian automotive parts industry consists of approximately 1200 companies (15,000 factories) organized into two primary sectors: Original Equipment Manufacturing (OEM) suppliers, which produce parts for auto makers, and After-Market Parts Manufacturers (AMPM), which produce replacement parts for vehicles. Iranian auto parts are exported to 39 countries. (Source: “Iran‟s Automotive Industry Overview" Atieh Bahar)

Uzbekistan. Central Asia‟s automotive sector is centered around Uzbekistan where the state-owned company Uzavtosanoat (UZA) controls 42 enterprises in the automotive sector, including investments with General Motors (GM-Uzbekistan), Itochu Corporation Japan (SamAuto) for trucks, joint venture with MAN Germany (MAN Auto-Uzbekistan) for heavy trucks, Mercedes-Benz ( MB Central Asia) for buses and with General Motors (GM PowerTrain-Uzbekistan) for production of engines. There are 15 main suppliers of auto-components working under UZA.

2 Source for above figures: TAYSAD - Association of Automotive Parts and Components Manufacturers in Turkey and “Turkish

Automotive Industry Report” Deloittes


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TEXTILE MADE UPS

The second sector specific to this study is “Textile Made Ups”. TDAP categorizes “Textile Made-Ups” as products falling under HS Code Chapters 56 and 63 (excluding bed wear and towels.).

Items falling under Chapter 56 are:

56.01 Wadding of textile materials, sanitary towels and napkins

56.02 Felt (whether or not coated)

56.03 Non-wovens (whether or not coated)

56.04 Rubber threads and textile yarns coated or covered in plastic

56.05 Metalized Yarn

56.06 Gimped Yarn

56.07 Ropes, Twine and Cordage

Items under Chapter 63 listed by TDAP falling under the category of “textile made-ups” are:

6302.4000 Table Linen knitted or crocheted

6302.5110 Table linen of other material

6302.9110 Toilet or Kitchen Linen

6303 Curtains

6304 Bedspreads

6307 Dish Cloths, Wash Cloths, Shopping Bags, Prayer Mats,

6308 Mats, table linen, etc in retail packing

Chapter 56

No items falling under any digit of Chapter 56 are listed against exports to any of the ECO countries. This is not to say that there are no exports from Pakistan. Stakeholder interviews with manufacturers in Karachi revealed that traders based in Quetta and Peshawar place large orders, mainly in items falling under HS Codes 56011010, 56011020, 56011030, 56011040 and 56011090 (these are products of personal hygiene for women and infants).

The manufacturers advise that these goods are not sold in the Pakistan market because they already have their own distribution channels and market intelligence to track retail sales of their products. They further advised that, as they maintained consolidated sales figures in PKR, for Sales Tax purposes, they would not be able to indicate what quantity of goods purchased from them were subsequently exported.

3

Where goods are exported to Afghanistan against PKR payment, no refund of duties and sales tax is allowed, consequently there is no revenue loss to government on such purchases and export. The study asked whether the possibility of direct exports to Afghanistan or the CAR had been explored by the manufacturers, the answer in all cases was that the problems associated with transport of the goods,

3 Note: State Bank of Pakistan authorizes refund of sales tax and other duties on export of goods to Afghanistan only when payment

for such goods is received in convertible currency 100% in advance either through scheduled bank Letter of Credit or cash transfer into a bank account.


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absence of banking channels and lack of market knowledge/business customs discouraged them from exploring the export possibilities in that region.

An analysis of trade in HS 56 indicates there is a match between Pakistan‟s production capabilities and demand in ECO countries and strongly suggests deeper investigation of the export possibilities.

Table 22

Trade Flow in HS CODE 56 (US$ Million)

Table 22-A Pakistan Exports to the World World Exports

HS CODE 2008 2009 2010 2008 2009 2010

5601 25.95 19.22 24.32 2441.7 2344.3 2649.3

5602 Negligible Negligible Negligible 1180.6 901.8 1025.8


5607 1.06 1.05 3.50 1998.4 1691.5 1828.7


TOTAL: 27.01 20.27 27.82 17,945.8 15,652.0 18,776,2

Source: ITC Trade Map

Table 22-B Turkey’s Imports from the World ECO Imports from World

HS CODE 2008 2009 2010 2008 2009 2010

5601 43.23 57.92 39.69 76.43 91.04 62.81

5602 20.21 12.54 16.33 29.56 20.32 27.60

5603 298.33 267.24 313.93 345.90 313.89 365.01

5607 18.54 8.03 10.29 33.76 24.32 23.95

5608 9.11 6.02 9.84 20.30 24.60 31.90

TOTAL 417.24 352.02 290.08 505.95 445.07 511.27


Table 22-C

HS 5602, 5603, 5607: Top 5 World Exporters (2010)

China $2.68 Billion

Germany $2.58 Billion

USA $2.09 Billion

Italy $1.55 Billion

Japan $1.02 Billion


As evident from the statistics, Pakistan has no exports of HS 56 to ECO. However, the statistics do reveal that Pakistani products in HS 5601 have export capability. Turkey has an average of 60% share of ECO‟s average annual imports of US$76.76 million in this product category, indicating that there is space for Pakistani exporters to explore the market in Turkey and other ECO countries.

HS 63 Pakistan‟s world-wide exports of products of various categories at 4 digit level in HS 63 (Textile Made Ups) were US$480.138 million in 2008-09 and US$537.227 million in 2009-10. This volume of business would explain the TRTA project‟s interest in researching export potential of these products,


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especially in view of the lack of customer and geographical diversification (90% of products are sold to ten countries, eight in the EU and two in North America) in a category in which Pakistan‟s exports have crossed half a billion dollars (see table below)

Table 23

Pakistan export of textile made ups (US$000)

2008-09 2009-10

Exports to the World 480,138 537,227

USA 302,476 (62.90%) 340,499 (63.4%)

UK 53,012 (11.04%) 63,438 (11.8%)

Germany 15,064 (3.14%) 19,200 (3.5%)

Other Western Europe and Canada 48,248 (10.05%) 61,783 (11.5%)

Total to above 10 countries 412,280 (85.9%) 484,920 (90.0%)

UAE 11,591 (2.4%) 6,593 (1.2%)

Exports to ECO

Afghanistan 683 (0%) 421 (0%)

Source: ITC Trade Map Figures in brackets represent share of exports to that destination as a percentage of Pakistan‟s total exports of Textile Made-Ups

An investigation at 6 digit level of ECO imports of these products reveals strong cause for intervention:

Table 24

Pakistan exports to the World HS 63 (6 digit)(US$ Million)

HS CODE 2008 2009 2010

630251 25.86 20.78 20.81

630291 22.68 17.26 18.05

630710 292.72 246.51 324.80

630790 25.9 23.8 25.1

630311 (to 99) 111.08 104.96 114.89

630392 5.79 3.41 3.96

630419 18.57 41.29 56.01

630492 6.92 5.79 8.11

630499 12.44 12.61 9.61

Table 25

ECO Imports from the world HS 63 (US$ Million)

HS CODE 2008 2009 2010

630251 2.43 1.67 22.17

630291 5.79 4.66 7.77

630710 12. 16 13.35 25.77

630790 46.26 53.21 70.84

630311 (to99) 16.81 21.87 44.72

630392 6.49 8.52 11.40

630419 44.72 34.92 59.15

630492 Negligible Negligible Negligible


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630499 Negligible Negligible Negligible

Table 26

World Imports of HS 63 (US$ Million)

HS CODE 2008 2009 2010

630251 799.37 628.27 611.55

630291 722.78 622.14 611.55

630710 1394.40 1302.26 1442.75

630790 7450.7 7465.90 8213.10

630311 (to 99) 1487.32 1307.95 1376.80

630392 2145.96 2113.36 2390.12

634109 431.91 358.99 376.80

634092 693.53 615.45 670.70

630499 376.40 324.73 294.04

Table 27 Comparison of ECO imports with Pakistan’s global exports of selected HS 63 categories

HS Code ECO Import Growth 2008-2010

ECO share of

World Imports

Pak Share of World exports

Pak Export Growth 2008-10

630710 100% 1.7% 22.5% 11%

630790 53% negligible Negligible X

630311 (to 99) 160% 34% 8.3% 3.4%

630419 32% 15.7% 14.8% 200%

Source for Tables 24-27 (ITC Trade Map)

ECO demand is seen in those HS codes where Pakistan‟s export growth is modest, while ECO demand is less strong in HS Code 630419, in which Pakistan‟s export growth has been spectacular. In any case, there is very high growth in ECO imports of HS60710 and 630419, in which Pakistan has a strong share of the global market.

HS 6302 – Two countries Turkey and Kazakhstan take up more than 80% of ECO‟s imports, which have increased from USD32.98 million in 2007 to USD49.31 million in 2010, i.e. by 52.5%. Pakistan has no exports to Kazakhstan, but does have a slice of Turkey‟s imports and this gives it a share ranging from 7.7% - 12.6% of the ECO import market in this category, while the increase in export value at 50% has kept pace with the ECO import growth in this item.

Major sources of import:

Turkey - China 42.3%, India 9.3, Pakistan 8.7%, Turkmenistan 8.4%, Free Zones 5.1%

Kazakhstan - China 29.1%, Turkey 23.7%, Russia19.6%, Italy 12.4%, Pakistan 3.5%

Pakistan‟s exports to ECO peaked at USD8.63 million in 2008 (market share 19.7%) but have dropped off since then and this peak market share has not yet been recaptured.

HS 6303 - Turkey takes up on average more than 75% of the total ECO imports of this item. Pakistan‟s exports to these markets during 2007-2009 amounted to a mere US100,620/00 and there were no recorded exports in 2010. The major sources of Import for Turkey in 2009 were Hungary (22.1%), Egypt (16.3%), China (18.4%), and Chinese Taipei (16%).


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HS6304 - Turkey takes up approx 93% of the total ECO imports, which averages approx. US$33 million and rose to US$59 million in 2010. Pakistan‟s global exports in this category have risen from US$39.16 million in 2007 to USD7373 million in 2010, but Pakistan has no exports of category to ECO, barring exports to Afghanistan which peaked at $50000 in 2010. Major sources of import for Turkey in 2009 were: China 63.6%, India 17.8%, France 5.9%, Moldova 2.6%

HS6307 - ECO imports have increased from USD58 million in 2007 to USD96 million in 2010, with Turkey and Kazakhstan accounting for 95% of all ECO imports in this category. Pakistan‟s exports to ECO are negligible, peaking at 0.946 million in 2008. Major sources of import (2009) were for:

Turkey - China 17.5%, USA 12.3%, Russia 11.5%, Poland 9.1%, Germany 7.7%

Kazakhstan - Turkey 45%, China 16.7%, Italy 13%

HS 6308 – this category covers goods exported in retail packing and the sales reflect the disconnect between Pakistan and ECO countries in the areas of retail-packed consumer textile goods.

Summary

The four highlighted categories accounted for US$519 million of exports from Pakistan in 2010 and US$200 million of imports in the ECO, yet there is practically no trade between the two.

The situation is further inexplicable because Pakistan is a world leader in two of these items, owning a 22.5% share of world exports in category 630710 and 14.8% in 630419 and a healthy 8.3% in 630311 (to 19). At the other end, ECO has high market shares in the world import market in two categories.

The products in these HS categories are value-added items, albeit not high on the value addition scale. They can be characterized as (i) disposable textile consumables and (ii) decorative textiles utilizing non-automated finishing process, qualities that make them suitable for manufacture in low-wage countries and cost-effective for import by countries with higher per capita incomes.

For these reasons, in the ECO, more than 80% of the imports of HS63 products are taken up by Turkey and Kazakhstan, both with the highest per capita incomes and the major tourism and hospitality facilities in the bloc.

Pakistan‟s advantages in the HS 63 product categories are (i) an established domestic production chain (ii) fully domestic raw materials and processing value chain. In addition, unlike apparels or fabrics purchased for processing overseas, HS 63 items are not time-sensitive; therefore the requirement of speedy logistics is not an issue. This is particularly true of products classified as HS6307, which are purchased in units of multiple container-loads for storage and B2B sale from warehouses.

On the plus side, export targets can be achieved without need for fresh capital investment for creation of a manufacturing chain. Sufficient existing capacity is available in weaving, knitting and processing industries.

The main suppliers to ECO are China and India; Pakistan can certainly match both countries for price and quality. It is not likely that businessmen in the trade do not have information on the ECO import potential; it is more likely that the factors ascertained through stakeholder interviews, i.e. lack of interest in the market, language barrier are the principal factors behind the absence of exports.


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Transportation and banking should not be considered as an obstacle since the main market is Turkey, country neither of these factors is an issue. This applies also, with some reservations, to the second main market, Kazakhstan, but if Indian and Chinese competition is successfully selling to customers in those countries, it needs to be analyzed why Pakistani companies are not present in this US$ 200 million import market.

Increases in production and export of these items will have a positive impact on employment in the power loom sector, which is faced with an existential threat. A by-product will be increased demand and activity in the manufacturing of textile machinery spare parts and consumables.

On the negative side, most of the products in HS 6307 are sold in an intensively competitive and price-sensitive market environment, with low margins for buyer and seller, who depend on volumes to generate profits. The element of freight is critical and the high cost of transportation to Kazakhstan may be a deterrent.

Obstacles

An export drive for ECO countries will encounter the following obstacles:

Tariffs on textiles are considerably higher in ECO countries, thereby impacting export costing and product profitability.

Textiles products have a very low share in the import of all ECO countries, barring Turkey (5.1% of imports) and Afghanistan (4.8% of imports), therefore growth will be limited to a few markets rather than throughout the ECO.

The data shows that there is an existing import market of over US$ 160 million in Turkey and Kazakhstan, therefore the strategic thrust will be towards market entry rather than market creation

Further analysis

The prospects for increasing exports of textile made-ups to ECO countries need to be assessed in the perspectives of Pakistan‟s overall export landscape, where, for the foreseeable future, the main driver of export growth will remain the textile sector, in which the country enjoys revealed comparative advantage. In the areas of textile and clothing, Pakistan has been losing world market share since the ending of the MFA.

Table 28

World Textile and Clothing Imports (US$ million)

1990 2000 2004 2005 2006 2007 2008

World Textiles 104,354 157,295 195,541 202,657 220,367 240,364 250,198

World Clothing 108,129 197,722 260,569 276,802 30,9142 345,830 361,888

Total 212,483 355,017 456,110 479,479 529,509 586,194 613,085

Pakistan Textile 2,663 4,532 6,125 7,087 7,469 7,371 7,186


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Pakistan Clothing 1,014 2,144 3,026 3,604 3,907 3,806 3,906

Total 3,677 6,676 9,151 10,691 11,376 11,177 11,092

% of World Trade 1.73% 1.88% 2.01% 2.23% 2.15% 1.91% 1.81%

Source: Ministry of Textiles

Pakistan‟s market access to developed country imports of textiles products faces market access resistance. According to the Millennium Development Indicators by ITC, UNCTAD and WTO – Goal 8, Indicator 8.6: Market Access, the proportion of Pakistan textile products allowed duty free into developed economies is much lower, both as a developing nation and as an ECO member, when compared with least developed countries:

Table 29

Proportion of ECO and Developing Economies textiles allowed duty free in Developed Countries

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Dev. Market 24 24 22 26 26 38 36 36 37 37

LCD 50 47 47 57 66 68 68 70 75 78

ECO 3 3 2 3 3 67 49 49 51 51

LCD – least developed countries; Dev market – Developing Market Countries (Pakistan Included)

Source: Compiled from COMTRADE database.

With respect to the Central Asian market, as identified by Asiya Chaudhary in a study titled the Changing Structure of Indian Textiles Industry after MFA Phase out: A Global Perspective, the post MFA environment reveals that in 2006, Asian textiles and clothing exports to CIS countries increased by 95%, there was no growth in 2007 and Asian textile exports to CIS countries again increased by 16% in 2008.

Consequently, there is a case for Pakistan to aggressively establish new markets for its textiles outside its traditional West European and North American partners. Pakistan missed the opportunity in 2006 and again in 2008 for capture market share in the CIS, meaning it will need to create the space for its products. The CIS include six of Pakistan‟s ECO partners and Russia, which by 2008 had become the world‟s fourth largest importer of textiles and clothing, taking up 6 percent of global imports.

There is a strong case for an aggressive push to promote textile products (including made-ups) in the ECO, with the objective of taking advantage of entry into the Russian market through the opening provided by its Customs Union with Kazakhstan.


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STAKEHOLDER REVIEW

For this study interviews were conducted with a cross-section of stakeholders in Pakistan, comprising a broad spectrum of public and private sector managers engaged directly in ECO matters at policy implementation, regulatory planning and business/trade interface.

Interviews were conducted with officials of TDAP WTO Cell, National Trade and Transport Facilitation Committee (Ministry of Commerce), ECO Trade and Development Bank. The Consul-General of Pakistan in Istanbul, who also has charge of the Trade Section of the Pakistan Embassy in Turkey, provided extremely valuable insights.

Discussions were held with Federation of Pakistan Chambers of Commerce and Industry (FPCCI). Background information and views were received from the Karachi Chamber of Commerce and Industry (KCCI), Pakistan Ready Made Garments and Exporters Association, Pakistan Freight Forwarders Association and members of the Pak-Iran, Pak-Uzbekistan, Pak-Kazakhstan, Pak-Turkey committees of the FPCCI.

In the area of trade finance, insights were obtained from HBL Bank, which has a branch in Kabul and from Allied Bank Ltd., which finances several companies that export textile products to Turkey (but not articles from Chapter 56 or 63 that are analyzed in this study.)

Private sector companies interviewed are engaged in export of HS Code 73 products to Afghanistan and had experience of surgical instruments exports to Iran and Azerbaijan. Views were gathered also from companies that export to Turkey and Kazakhstan (but not of items from Ch 56 and 63) and manufacturers who supply to exporters of items of Ch 56 and other engineering goods to Afghanistan.

One of the private sector companies interviewed is engaged in the business of consolidating and transporting cargo by road from Pakistan to Kazakhstan and has offices in the CAR region, was a valuable source of primary data.

All of the private sector businesses interviewed wished to remain anonymous, as did also some of the government officials, which has been adhered to in this section.

The instrument used for stakeholder review was a questionnaire, containing both open-ended and closed-end questions, focused on gathering trade-related information in matters of travel, NTBs, trade finance, logistics and any other problems that the respondents felt were hurdles in the development of trade with ECO countries.

Findings of the survey are tabulated below:

100% of respondents said that transport was a major hurdle in developing trade with ECO.

100% of respondents said that language was a major barrier

100% of private sector respondents advised that banking was a major hurdle in regard to Iran and the

CARs.


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100% of private sector respondents said that Pakistan‟s being a member of the ECO or their customer being in an ECO country made no difference whatsoever to their business.

80% of those in the textile trade that did not do business with ECO (and were not planning to do so) advised that their preference was for expanding their sales to existing markets in Europe and the USA.

100% of these respondents also said that their main reason for not exploring ECO markets was “lack of information of those markets.”

None of the companies involved in exports to the region felt that Non Tariff Measures were a hurdle, pointing out that tariffs in Afghanistan, the CARs and Turkey (until the recent safeguard measures) are import-friendly. On the issue of “informal payments,” and other imported related costs and documentation, companies from the organized sector did their business on the basis of freight on board (FOB) delivery at Peshawar; therefore onward payments and regulatory compliance were the responsibility of their importing customers.

Others were of the view that these “informal” payments are “part of the game” in this region, including South Asian Association for Regional Cooperation (SAARC), as are delays arising from obstinacy and inefficiency by bureaucrat officials on either side the borders. Successful businesses factor these into their costs, which is why they are able to sell.

INFORMATION RECEIVED FROM STAKEHOLDER RESPONSES

TURKEY

Textile products

Import documents are published in the Turkish language

Safeguard duties have been implemented recently on textiles and garments

Turkish business persons dealing with Pakistan do not perceive any positive impact on their business from both countries being ECO members

Pakistan businessmen need to have a better understanding of the Turkish market

Important measures recommended by Trade Commission of Pakistan, Turkey

Product Information

Research and Development

Quality control of products (there was repeated mention of this)

Knowledge gaps to be overcome:

Product awareness (knowledge of market trends in Turkey)

Quality control


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Freight subsidies and warehousing arrangements were felt to be less important than competitive pricing, quality control and product information. Where these elements are in place, buyers are attracted to Pakistani merchandise

Main competitors in apparels: China, India, Bangladesh and Indonesia

Recommendations

In Turkey, the cost of doing business is rising steadily along with economic growth and rise in living standards. Some labour intensive industries such as apparel will present difficulties due to rising labour costs.

Pakistan‟s low wage structure offers opportunity for these businesses to protect their market either by investing in production in Pakistan or by relocating their production to Pakistan. However, infrastructure and energy problems in Pakistan are deterrents.

Such an arrangement, e.g. basic manufacture in Pakistan and value addition in Turkey will enable goods to qualify for entry duty free through Turkey-EU Customs Union; the potential is for an increase of Pakistan exports by US 4-5 billion.

Pakistan Ready Made Garments Manufacturers and Exporters Association (PRGMEA) has already sent its comments earlier to TRTA Project office, therefore these are not being reproduced here, except to note PRGMEA‟s advice that direct sailings between Karachi and Turkey would help increase trade, as transhipments meant delay in dispatch time.

AFGHANISTAN

Articles of Iron and Steel

Competition for Pakistani products in the Afghan market is mainly from China, Iran and Turkey

Customs clearance procedures in Afghanistan are easier than in Sri Lanka

Duties on steel products are levied at 5%, additional costs for clearing the cargo are stated to be an additional 7% -10%, which includes cargo clearance and speed money

Exporters receive 100% payment in advance in USD or PKR, so bank financing is not an issue

Exporters felt that Pakistan and Afghanistan being members of ECO has made no difference to the promotion of their trade

Exporters advised that obtaining Visas for travel to Kabul is not a problem, but it is problematic to obtain visas for travel to other cities and this creates a problem by restricting the ability of sales representatives and customer service managers to visit other cities in Afghanistan where their products are sold

Domestic hurdles – manufacturers of steel products advised their supply chain costs and timeline are higher due to import of raw materials (steel from worldwide) and zinc from India.

Selling hurdles: Language is a barrier in Afghanistan

Border issues

Afghan customs require a surety deposit of 110% of the declared cargo value (by bank guarantee or in cash) of goods transiting through Afghanistan. This deposit is released after submission of cargo exit documents, but if informal payment of 10% is not made, release of the deposit amount


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can take several months to more than a year.

Certificate of origin is a must for goods imported into Afghanistan

Afghan customs require special packing instructions for each individual packed cargo

No IT usage at Afghan customs

No Standards Conformity certificates are required for engineered goods

Cargo takes 1-3 days for clearance by Pakistan customs

Pakistan customs do not accept documents showing transit through Afghanistan to CAR destinations. Such goods are cleared and entered as exported to Afghanistan.

Export of Steel Products to Afghanistan

Insurance premium is 0.58% for Karachi- Peshawar. Cargo beyond that is shipped at buyer‟s risk

Afghan importers must submit their import license with validity for each cargo

There is strong demand in CAR countries for products such as ERW 6” diameter seamless pipes, but non-availability of efficient transport is the principal barrier.

Transport from Karachi is 4 days to Peshawar Haji Camp, via Torkham to Kabul

Max Weight carried by trucks: Sheets and billets - 25 tons max (40 ft Container);Pipes, milling products - 40 tons max (40 ft Container)

Finance

Since goods are exported to Afghanistan against 100% advance payment, trade finance is not an issue, nor banking. Afghan importers make the remittances, as required, in US Dollars or through bank transfers within Pakistan where payment is made in PKR for the merchandise.

Recommendations

Pakistan should try to ensure smoother visa procedures with Afghan authorities

Transit through Afghan would enable cost-effective access to the CARs

KAZAKHSTAN

Customs procedures have become lengthier after the Customs Union with Russia and Belarus.

There is a restriction on import of religious literature from Pakistan; such literature is allowed from only a few approved seminaries in Pakistan that print literature in Russian. Cargo manifests that include printed material are subject to stringent checking.

Kazakh customs are fully computerized and the entire customs clearance procedures is done on- line.

Cargo into Kazakhstan coming by truck via Afghanistan is subject to strict checking in view of the open road and rail access to Russia and the from Central Asia making the region a hub for illicit trade.

Currently, the main items of export from Pakistan to Kazakhstan by road are cotton garments, sports goods, sports wear for martial arts and boxing equipment.


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Imports

Kazakh authorities give only 30 days notice in case of changes in import regulations, this can become costly because more often than not goods have been exported when the old regulations were in force.

Kazakhstan requires licensing for import of surgical goods, pharmaceuticals and certain food products.

Import duty of Euros 7.50/kg is applied on leather garments and Euros 3.00/kg on cotton garments. The result is import duty of between Euros 38,000 and 50,000 on cotton apparel for a 40 foot container, which affects negatively by raising the cost of Pakistani goods to a price level occupied by better quality products from Turkey and European sources

The volume of trade has fallen drastically. A company representative stated that in 2007 it handled US$25 million worth of leather garments alone, but in 2010 their trade in leather garments was less than US$2 million.

Travel

In the 1990s Uzbek Air, Kazakh Air, Tajik Air all had two flights a week to Pakistan, now the only access from Pakistan to the region is via Dubai. (Currently there are 29 flights a week between CAR and New Delhi).

Visa restrictions by Pakistan for single women from the CAR region have affected trade – many Kazakh women are engaged in the cotton and leather garments import or retail trade and work by making direct visits to buying sources, purchasing merchandise against cash payment and returning home with the goods by air.

Transit transport

It was felt that Pakistan should sign the TIR Convention for facilitating road transport to CAR destinations.

Modern trucking fleets and upgrading of road infra structure would need to be inducted in order to make transit trade effective.

There is no railway track on the Iranian side of the border at Taftan. Goods have to be unloaded from railway wagons onto trucks, transported to Zahedan and reloaded on to rail wagons. This adds to the freight costs.

ECO Transit Trade Agreement is signed and ratified, but not in force, because 10 members are required to make a quorum for finalizing rules.

TIR between Iran and Pakistan is pending. Activating this will facilitate transit trade for Pakistan to CAR through Iran.

Since 1994 Pakistan has bilateral transit trade agreements with Kazakhstan and Kyrgyzstan (in support of the Quadrilateral Agreement among these countries, China and Pakistan) but these are not being implemented.

In 2007 Uzbekistan and Pakistan signed a bilateral transit agreement, which was ratified in 2011 and is now in force, but is not ready for implementation.

The Pakistan-Afghanistan Transit Trade Agreement has provision for transit through Afghanistan to CARs.

BANKING

ECO Trade and Development Bank (ECO Bank)


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The ECO bank has inaugurated operations with a capital of 300 million SDR, subscribed 100 million SDR each by Pak, Iran and Turkey. The bank functions for the present in the three subscribing countries.

Afghanistan and Azerbaijan will become contributors to the ECO Bank in the next few months.

The ECO Bank‟s objectives are promotion of trade, economic opportunity and increasing employment in ECO countries. Its areas of intervention are: energy, infrastructure, agriculture, and external trade.

Its method of intervention is through extending lines of credit to banks in the respective countries. ECO Bank interfaces only with financial institutions.

The Charter restricts ECO Bank activities within the following parameters:

Import trade finance is meant only for purchase of goods from other ECO members. In case the required goods are not manufactured by an ECO member, then the importer is free to source from outside ECO using the funds provided through ECO Bank credit lines. For example the financing to PNSC to purchase ships from Holland as vessels could not be sourced from within ECO member countries.

For exports – export finance can be extended to the SME sector to facilitate exports to any destination; there is no restriction or preference for exporting to customers in ECO member states.

Financing is extended only in the form short term trade financing.

In Pakistan, ECO Bank have extended lines of credit to HBL Bank, United Bank Ltd., Orix Leasing Ltd., MCB Bank, Bank Al Falah and Faysal Bank. These credit lines are in USD or Euro, the ECO Bank limits itself to monitoring the funds extended to and repayments made by the client institutions, it does not micro manage the loans portfolio.

ECO Bank does not seek information on what product lines in imports or exports these loans are being deployed for the SME sector and consequently it has no data on the contribution its intervention has made for advancement of intra-ECO trade.

For the corporate sector, in Pakistan ECO Bank‟s infra-structure loans have been utilized for financing of:

Zorlu Energy, Turkey - wind energy project in Pakistan

Sapphire Group, Pakistan - Wind energy project in Pakistan

Pakistan National Shipping Corporation (PNSC), Pakistan – purchase of tankers

Pakistan Refinery Ltd., Pakistan – import of crude oil from Iran4

Banking challenges faced by the private sector

The private sector banks interviewed mentioned delays in payments settlements as a major obstacle in promoting trade financing with Iran.

4 Note: This loan could not materialize due to the US sanctions regime against Iran. The financial institution in Pakistan deploying

ECO Bank funds to finance this trade was reluctant to establish a Letter of Credit in US Dollars in favour of the Iranian supplier, because payment was to be routed through New York.

The LC opening bank in Pakistan felt it was unable to cover its risk exposure in case the supplier or the LC negotiating bank in Iran, at any time after establishment of the LC, were put on the watch list, in which case the payment from Iran could be held up for months until the matter was sorted out; or if either entity were put on the sanctions list, in which the remittances from Iran would be frozen.


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These banks are currently financing their clients‟ trade in textiles and bed wear exports to Turkey, but do not extend credit to finance for exports to Iran, nor do they establish Letters of Credit for imports from Iran.

The banks interviewed advised they did not have customers exporting rice to Iran (or perhaps they did not wish to discuss this subject) therefore information is not available from this research on the methodology of extending credit to exporters and negotiating export documents for the over US$ 200 million in exports of Pakistan rice to Iran in 2010.

HBL Bank (which has a branch in Kabul), United Bank Ltd and Askari Bank have banking dealings with Afghanistan and facilitate the remittance of 100% advance payment in USD from Afghan importers to their exporter clients. HBL Bank advised it has correspondent banking arrangements in all Central Asian countries.

The biggest issue for respondent banks in their dealings with Iranian banks is the reimbursement transaction, which is a lengthy process. Afghanistan, Iran, CARs deal in the Asian Dollar, for which the transaction methodology is totally different from the US Dollar as it works through the Asian Clearing Union which has its hub in Tehran. Clearing and settlement takes “several months.”

The respondent banks advised that their textile manufacturing customers have an interest in doing business with Iran, but do not have ways to identify market access and financing methods. Their customers also cite a lack of interest among Iranian importers in dealing with Pakistan.

The banks are unable to assist with Iran trade financing and have minimal exposure on this account due to Iran falling below the required thresholds for their “country risk” assessment.

Banking with Turkey is stated to be problem-free by private sector exporters, except that Pakistan banks require additional confirmation for LCs opened by some second-tier Turkish banks.

The banks in Pakistan do provide pre-shipment and post-shipment finance for exports to Turkey against LCs opened by Turkish banks.

Interviewed banks reported no transactions by their customers with CARs.

Private sector businesses strongly felt the need for devising a methodology for establishing normal banking channels with Iran, as much of the trade both ways has shifted to the informal sector, which leaves the organized corporate sector at a disadvantage.


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TRANSPORT

During interviews with private sector stakeholders exporting to customers in the ECO region, transport along with banking, was identified as the major hindrance to trade not only with Central Asia but also with Afghanistan (due to infrastructure and unregulated transport industry in Pakistan) and even with Turkey, in view of the absence of direct sailings from Karachi to Istanbul. This sector therefore merits a detailed analysis.

With the benefit of hindsight it can be seen that transit trade through Pakistan was seen as an economic imperative by the land-locked CARs (Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan) and probably motivated their haste in joining the ECO. Cargo transport by ship is the most economical form of transport, and is used to move 60% of world trade. Rail transport costs four times as much as ship transport, and road transport costs 15 times as much, exerting high cost pressures on the CARs economies (table below):

Table 30

Freight costs of the Central Asian Republics

Country Exports as % of GDP Imports as % of GDP Freight Costs as % of GDP

Kazakhstan 45% 40% 14%

Uzbekistan 39% 31% 12%

Turkmenistan 62% 54% 19%

Afghanistan 12% 69% 13%

Kygyz Rep 42% 51% 15%

Tajikistan 55% 65% 20%

Source: “Economic Cooperation in the Wider Central Asia Region” World Bank 2006

The Pakistan transit route offered the Central Asian countries a further powerful economic justification, because decrease by 1% in distance is stated to increase trade by 1.56% (Felipe and Kumar).

Moreover, for these countries transit through Afghanistan to Pakistani seaports also promised the possibility of economic independence, allowing diplomatic space in their dealings with powerful neighbours such as Russia and China, who controlled their westward and eastward outlets to the sea. Such a transit route, if developed for energy transportation, would enable the CARs to access customers and markets, if necessary, without seeking the intervention of western multinational interests.

The war in Afghanistan changed the situation irrevocably and plans for developing Pakistan as the major conduit for CAR trade never did materialize. Owing to the decay in Pakistan‟s internal transportation infrastructure suggests that the transit trade could not have expanded rapidly even if the route through Afghanistan were available.

A 2008 Azerbaijan Foreign Ministry position paper on the ECO Trade Agreement questioned whether ratifying ECOTA would bring any value in the “absence of progress” on transit agreements signed in 1997. Azerbaijan‟s indignation reflects its unhappiness with the unfulfilled promise of economic independence that the CARs had perceived in the Pakistan transit route. This is because, in order to obtain financial assistance for development and transportation of its exportable energy via the multi-billion dollar Transport Corridor Europe Central Asia (TRACECA) corridor that connects the central Asian region with Europe, Azerbaijan has had to put on the back-burner its long-standing territorial dispute with EU-backed Armenia.


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The history of the ECO Transit Transport Framework Agreement is no different from that of the ECO Trade Agreement – strong political agreement is evident on all substantive issues but this is not backed up by implementation.

From the perspective of Pakistan, the present status relative to ECO transit trade is recapped below:

AGREEMENT Status

ECO Transit Transport Framework Agreement In force

Quadrilateral Agreement on Traffic in Transit among Pakistan, China, Kyrgyzstan and Kazakhstan, 1995

In force

Bilateral Agreement between Pakistan and Uzbekistan in the Field of Road Transport

Yet to be ratified

Agreement on International motor transportation (TIR) between Pakistan and Kazakhstan

Yet to be ratified by both countries

International Road Transport Agreement between Pakistan and Tajikistan Proposed by Pakistan

International Road Transport Agreement between Pakistan and Turkmenistan Proposed by Pakistan

Multimodal Truck-Ship-Rail Services Being Discussed

Key issues such as ECO-wide insurance coverage and visas for truck drivers have not been agreed upon, as also common standards in regard to customs clearing and related matters. Each cargo journey by road is subject to arbitrary dealings at the frontiers, institutionalized procedures are the exception rather than the rule.

Much of the inaction arises from absence of agreement on ECO-wide implementation of the all-important Customs Convention on the International Transport of Goods under Cover of TIR Carnets (TIR Convention 1975), which is the international forum for facilitating transit trade by obliging the signatories to adhere to common documentation in matters of customs administration for the transport industry.

The TIR Convention, 1975 offers advantages in matters of customs administrations, national economies and the transport industry; it avoids the need for physical inspection of goods in the countries of transit other than the checking of seals and the external condition of the vehicle or containers; it works through a regional customs transit document (which would do away with temporary importation procedures for vehicles or the container); and abolishes the operation of national guarantees and national systems of documentation.

In order to access Central Asia bypassing Afghanistan, Pakistan has approved a TIR carnet with Iran which, when it becomes effective, would also allow transit for Pakistani cargo through Iran to Turkey and further west. The matter is pending for some time, awaiting approval by the Iranian parliament. Meantime, the Iranian government is believed to have proposed a reciprocal TIR carnet for Iran through Pakistan to India, but this request remains pending from the Pakistan side.

Pakistan‟s other route option for reaching Central Asia, bypassing Afghanistan, is via China. A Quadrilateral Agreement (Pakistan-China-Kyrgyzstan-Kazakhstan) has been in existence since the 1990s and was ratified by all parties in 2004 but it is reported that very few truckloads have originated from Pakistan for this route. In theory, a truck can traverse the distance from Lahore to Bishkek (in Kyrgyzstan) via the Karakoram Highway in six days in the summer months (the route is not navigable for heavy cargoes in the winter) and from Bishkek to Almaty (in Kazakhstan) in 7-8 hours, making it the shortest if not the most practicable route.


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In practice, though, there are issues of quarantine and visas at the Chinese end and a host of documentary requirements leading to delays in Kyrgyzstan and Kazakhstan that render this route unworkable financially and schedule-wise. Pakistan and China are currently in talks for a Transit Trade Agreement that would smooth out the irritants perceived in the Quadrilateral Transit Trade Agreement.

The CARs are signatories to the TIR convention but Pakistan is not a bilateral signatory with these countries and to date no transit advantages have accrued to Pakistan so far from that region.

In the meantime, while Pakistan for two decades has been attempting to position itself as the fulcrum of international trade with Central Asia, its ECO partners Iran and Turkey have acted with more purpose and speed to capture market share of this profitable logistics market.

Turkey is an original member (Iran has recently applied to join) of a transport facilitation program TRACECA that was launched in 1998, using: (i) routes from Eastern Europe via Turkey to; (ii) the transport network of the Southern Caucasus onward to; (iii) Azerbaijan by means of the Caspian ferries and (iv) into Central Asia using the railway networks of Turkmenistan and Kazakhstan, extending through to Uzbekistan, Kyrgyzstan, Tajikistan, and; (v) to the borders of China and Afghanistan.

Cargo movement along the TRACECA corridor has increased steadily, as shown in the table below:

Table 31 (Figures in Tons)

Year Export Import Transit Total

2003 4400690 3301319 7637285 15339294

2004 5403911 3836036 7300768 16540715

2005 4748426 3883099 8094770 16726295

2006 5117122 5043163 8571690 18731975

2007 6366120 7102184 9621754 23090058

2008 5117122 7989374 10971243 24077739

Source TRACECA secretariat

Iran has succeeded partially in capturing share of the Central Asia transit trade in a situation where war and instability in Afghanistan have denied those countries the most direct route to the sea via Pakistan.

Iranian companies are involved in transporting consignments by vessel from Europe to Bandar Abbas or Chah Bahar, via truck to Anzali (in Iran) to Aktau port (Kyrgyzstan) by vessel across the Caspian and from there to points in Kyrgyzstan and Tajikistan.

Iranian companies also accept cargo from Pakistan via the Mirjaveh or Zahedan border crossing and from there by Iranian trucks to destinations in Central Asia. During the course of stakeholder interview, the consultant was informed that, in the 2010-11 crop season, cargoes of fruit and vegetables, in all more than 30.000 tons, were dispatched from Okara in the Punjab to Kazakhstan via Iran and Turkmenistan, journey time 15 days for each truckload.

5

5 Note: Despite its attraction, the Iran route is not well regarded by cargo movers and shippers in Pakistan, in particular because the

Iranian authorities require separate payment for the distance a cargo moves inside Iran, i.e. transport companies must make three separate payments in Pakistan, Iran and the CAR destination and make separate insurance arrangements for each cross-border stage of the journey. This results in a very high transport cost: USD 10000-12000 for a 40ft container- carrying vehicle.)


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Iran also facilitates transit trade by rail transportation, details as below:6

Port Destination Country Route Journey Time

Bandar Abbas Turkmenistan Ashgabat, Mary, Charjew 10 -15 days

Bandar Abbas Uzbekistan: Tashkent, Samarqand, Bukhara 17-25 days

Bandar Abbas Tajikistan: Khujand, Dushanbe 22-27 days

Bandar Abbas Kyrgyzstan Osh , Bishkek 25-30 days

Bandar Abbas Kazakhstan Almaty , Astana 25-32 days

Bandar Abbas Afghanistan Heiratan 17-20 days

The greater hurdles are faced in the Central Asian Republics, where intra-regional political disputes cause frequent border closures and each journey confronts transporters with challenges in the form of new documentary procedures and costs that are constantly changing, as illustrated in Box 10 below:

Kyrgyzstan and Tajikistan transit problems

While all the selected Central Asian countries face transit problems due to their land-locked status, these are particularly acute for the Kyrgyz Republic and Tajikistan. The Kyrgyz Republic largely depends on transit through Kazakhstan for its trade with Russia and Europe, and Tajikistan heavily depends on transit through Uzbekistan for most of its international trade. Kazakhstan and the Kyrgyz Republic have recently reached several agreements aimed at facilitating transit of Kyrgyz trucks through the Kazakh territory.

Most notably, a transit permit and a customs convey have been abolished for cargo under TIR coverage. As a result, the amount of official payments for this transit declined substantially (from about US$ 775 in 2000 to about US$ 125 in 2004 for a Kyrgyz truck with a TIR carnet travelling from Bishkek to Novosibirsk, Russia), although the amount of unofficial payments seem to have remained unchanged (at about US$ 550).

Little progress has been made in reducing the costs of transit of Tajik trucks through the Uzbek territory, and these remain very high. Official and unofficial payments to be made by a Tajik truck carrying cargo from Dushanbe to Moscow are US$ 467 and US$ 1625 respectively. Official and unofficial transit and border crossing payments in Uzbekistan constitute more than 30 percent of the total road transportation costs from Dushanbe to Moscow. Because of delays at the border, harassment of traders and bribes, Tajikistan cannot take full advantage of its export potential, especially in agriculture, and incurs substantial export losses, as the cost of delivering perishable produce to the traditional markets in Russia becomes

prohibitive.

Source: Trade Barriers in Central Asia (Background Paper for Central Asia Economic Cooperation) ADB

Multi-Modal Transport

One of the reasons for the success of Iran and Turkey‟s ability to grow their transit transport capability is enhanced capacity in “multi-modal” or „Intermodal” transport.

6 Note: It is possible that some of these transit times are overly optimistic. Stakeholder interviews revealed that customs procedures

in Iran and the Central Asian states are arbitrary, borders are closed for no reason, sometimes for days on end and documentary requirements are changed with no prior intimation. Exporters from Pakistan are reluctant to use the rail option in view of the extra cost. Iranian railway does not reach up to the border crossing, consequently goods from Pakistan are loaded on to Iranian trucks at the Taftan border and dispatched to the railway station at Zahedan.


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Turkey operates a fleet of more than 40.000 long haul trucks, it has upgraded and digitized all its border crossing points, in 2008 it issued more than 735,000 TIR carnets (22% of all carnets issued globally) and has issued US$ 35 billion worth of guarantees for Turkish hauling companies to facilitate their cross-border movement. (Source: The Union of Chambers and Commodity Exchanges of Turkey.)

Iran has the advantage of a better working railway system than Turkey, where less than 5 percent of all cargo moves by rail. Despite its age, this railway system helps Iran to reduce costs and enables a competitive edge to Iran‟s transit services. In addition, Iran has modernized its carrying capacity and has the capability to move single payloads of up to 500 tons by road and rail to meet the logistics requirements of the many project activities in Azerbaijan and Kazakhstan.

The United Nations Convention on Multimodal Transport defines multimodal transport as “The carriage of the goods by at least two different modes of transport on the basis of a multimodal transport contract from a place in one country at which goods are taken in charge by a multimodal transport operator to a place designated for delivery situated in a different country (Institute of Logistics, 1994.)

Pakistan has not kept pace with Iran and Turkey in development of supply centers and distribution points to handle large scale multi-modal transport. On the contrary, over the past few years, the railway transport system has all but collapsed and, where cargo services are running, there is no reliability of delivery schedules.

Fortunately, the loss of rail capacity has not greatly disadvantaged Pakistan because its domestic road transportation costs remain highly competitive by regional and international standards. Trucking charges for a 40 ft vehicle (carrying 25 tons of steel products valruing US$41.000) are Rs. 170,000.00 (approx US $ 2000) from Karachi to Haji Camp Customs check post in Peshawar, a distance of about 1150 Km. ($0.0685 per ton/km). In contrast trucking charges for the same cargo from Karachi to Kabul are Rs300.000.oo (USD3450.oo), i.e. additional US$ 1450 freight for the next 235 Km from Peshawar to Kabul ($0.2468 per ton/km).

As stated by Cerit and Güler (1998), “Freight transport is closely linked with production and distribution processes and is being driven to meet increasing quality requirements in terms of flexibility, speed and reliability. Taking into account the complex interaction of sourcing, suppliers, manufacturers, retailers and consumers, freight inter-modality requires the integration of a broad range of transport services in the supply and distribution chains.”

However, while Pakistan has upgraded port facilities in Karachi, Port Qasim and Gwadar in anticipation of handling the Central Asian cargoes, its planning and investment has not kept pace with key aspects required for multi-dimensional efficiency of transport operations.

The inter-city and trans-national highways are mostly in a poor state, many of the bridges require re-building to handle higher-load capacity vehicles, truck drivers need to be trained in domestic and international road rules and regulations. Measures are required for import of special purpose vehicles that carry large weight/volume individual cargoes, the ageing fleet of vehicles needs to be replaced, and above all, there is ample room for capacity building of operating companies.

A study researched for the Pakistan Trade and Transport Facilitation project showed there were approximately 456 companies in Pakistan involved in freight forwarding (337 in Karachi, 73 in Lahore, 46 in all the other cities). Of these, only 50 companies were total solutions providers, having an aggregate investment of less than US$ 8 million and working capital of approximately US$12 million; their market share of 46% and estimated annual turn over of 515,000 TEUs. (source: International Asset Management Co. Ltd., “Pakistan‟s International Freight Forwarding Sector”)


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It would be optimistic to assume that Pakistan can compete as a global logistics player with such few companies operating with a minimal capital base. Moreover, in recent years Pakistan has raised its import tariffs for transport equipment to even higher levels, this does not create a climate conducive to investment in the logistics sector.

A major factor for transit trade is the availability of all-weather roads. Iran and Turkey provide year round logistics to the CARs. Whether it is import or export transit or, importantly for export cargo generated from Pakistan, certainty of logistics throughout the year is a sine qua non for businesses, which cannot be expected to plan for separate routes and costs for alternating six month periods.

Pakistan‟s position in the World Bank‟s logistic performance index (LPI) rankings has been slipping in the rankings for the past two years and is a situation that must be addressed on an urgent basis for the health of its overall export drive. The countries that would benefit from transit through Pakistan have all improved their rankings, even Afghanistan has moved up a few places.

Table 32

LPI Rank LPI Rank Change

Country in 2007 in 2009 in Ranking

Pakistan 68 110 -42

Kyrgyz Republic 103 91 +12

Azerbaijan 111 89 +22

Uzbekistan 129 68 +61

Kazakhstan 133 62 +71

Tajikistan 146 131 +15

Afghanistan 150 143 +7

The importance of trade facilitation (LPI) may be gauged from the fact that a 1% improvement in LPI of the exporting country increases exports by 5.5% and in the importing country boosts imports by 2.8% (Felipe and Kumar)

A 2006 World Bank, Economic Cooperation in the Wider Central Asia Region proposed some measures for trade facilitation, of which the following are relevant to Pakistan‟s transit trade objectives:

Create a performance measurement system for border stations and transit corridors

Improve coordination between border enforcement agencies at the national level, for example, through the creation of a National Trade Facilitation Council, as has been done in Pakistan

Increase bilateral border management cooperation, such as data exchanges, mutual recognition of customs documentation, and so forth. Bilateral cooperation, and donor support to customs and other border institutions, should be designed in ways that allow for easy extension to other countries.

Enforce the TIR convention among post-Soviet countries and consider the establishment of a temporary alternative transit insurance system for the rest of wider Central Asia

Create one common visa zone for all Central Asian countries (for instance in the context of EurASEC) and reduce visa fees for non-CIS members

Create a regional association of transport operators to lobby for improved regulation

And enforce a self-policing regime.


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TARIFFS AND NON TARIFF BARRIERS

Tariffs in the ECO countries do not appear to be a hurdle for the promotion of Pakistan exports of light engineering goods and textile made-ups, even in the absence of preferential treatment. Pakistan exports textiles products to destinations where it mostly faces higher tariffs than its competitors; its second highest buyer of engineering goods is Bangladesh, where imports tariffs are generally higher than in other countries; and in the ECO Pakistan‟s highest value export item to Iran is rice, on which Iran imposes a higher tariff than on any other imported product or commodity.

The statistics show that, apart from Iran, all the other ECO partners, especially Afghanistan, have steadily reduced tariff ceilings to create import-friendly trade regimes, in particular to facilitate import of machinery and engineered goods, which clearly dominate their imports basket, as illustrated in the below table:

Non WTO Members of ECO

Table 33

Tariff rates Applied by ECO Countries

AFGHANISTAN MFN applied duties Share in Imports (%) Imports Duty Free (%)

Average Duty Free (%) Max

Textiles 4.4 1.0 10 4.6 0

Clothing 10.0 0 10 0.2 0

Non-electric machinery 3.8 0 10 3.1 0

Electrical machinery 6.1 0 10 2.1 0

Transport Equipment 6.2 0 25 6.2 0

Manufactures n.e.s 7.8 0 16 29.7 0

Table 34


AZERBAIJAN MFN applied duties Share in Imports (%) Imports Duty Free (%)


Textiles 12.1 0.2 221 1.0 0

Clothing 15.0 0 15 0.3 0

Non-electric machinery 3.4 1.1 15 22.7 0

Electrical machinery 8.6 3.0 15 8.4 0

Transport Equipment 3.8 11.4 15 16.9 38.6

Manufactures n.e.s 9.7 6.5 15 4.2 4.3

Table 35


IRAN MFN applied duties Share in Imports (%) Imports Duty Free (%)


Textiles 48.0 0 120 n.a. n.a.

Clothing 100.0 0 100 n.a. n.a.

Non-electric machinery 11.6 0 60 n.a. n.a.


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Electrical machinery 21.8 0 80 n.a. n.a.

Transport Equipment 25.7 0 90 n.a. n.a.

Manufactures n.e.s 22.8 0 100 n.a. n.a.

Table 36


KAZAKHASTAN MFN applied duties Share in Imports (%) Imports Duty Free (%)


Textiles 7.4 1.8 47 0.8 2.8

Clothing 5.3 0 23 0.3 0

Non-electric machinery 0.7 89.0 15 18.2 83.3

Electrical machinery 1.2 83.3 30 8.6 88.9

Transport Equipment 2.0 71.3 10 17.2 59.1

Manufactures n.e.s 5.7 27.2 20 4.3 56.8

Table 37


TAJIKISTAN MFN applied duties Share in Imports (%) Imports Duty Free (%)


Textiles 110.4 0 15 NO DATA

Clothing 10.2 0 15

Non-electric machinery 5.0 0 5

Electrical machinery 5.0 0 5

Transport Equipment 5.1 2.5 10

Manufactures n.e.s 7.7 6.0 15

Table 38


UZBEKISTAN MFN applied duties Share in Imports (%) Imports Duty Free (%)


Textiles 10.4 0 317 NO DATA

Clothing 10.2 0 366

Non-electric machinery 5.0 20.5 31

Electrical machinery 5.0 8.7 348

Transport Equipment 5.1 2.5 30

Manufactures n.e.s 7.7 4.2 104


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WTO Members of ECO

Table 39


TURKEY Final bound duties MFN applied duties Share in Imports (%)

Imports Duty Free (%)

Average Duty Free (%)

Max Binding (%)

Average Duty free (%)

Max

Textiles 24.5 0 92.0 23 6.5 2.1 12 4.0 1.8

Clothing 28.9 0 40.0 3.0 11.5 0 12 1.1 0

Non-electric machinery

10.9 11.0 25.0 67.1 1.7 26.7 10 12.3 24.3

Electrical machinery

11.2 37.0 50.0 66.9 2.5 30.1 14 7.1 38

Transport Equipment

17.9 0 37.0 56.9 41 16.9 22 8.2 6.6

Manufactures n.e.s

14.1 23.7 46.0 43.0 2.6 23.6 14 3.0 44.6

Table 39


KYRGYZSTAN Final bound duties MFN applied duties Share in Imports (%)



Max Binding (%)


Max

Textiles 8.7 0.3 12 100 6.5 29.8 12 1.8 24.8

Clothing 11.9 0 12 100 11.5 0.5 12 0.3 4.0


6.6 23.7 15 100 2.6 73.8 10.8 6 85.6


6.6 22.4 15 100 3.4 63.3 15 5.7 88.0

Transport Equipment

9.0 5.7 10 100 4.8 49. 10.5 9 50.2

Manufactures n.e.s

7.3 28.2 15 100 4.8 50.0 10 2.4 77.5

Table 39


PAKISTAN Final bound duties MFN applied duties Share in Imports (%)



Max Binding (%)


Max

Textiles 23.3 0 75 100 16.7 2.0 35 2.5 10.6

Clothing 25.0 0 75 100 24.8 0 25 0.1 0


61.1 0 75 99.6 9.3 2.6 35 7.8 5.2


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64.0 0 75 100 14.6 0.8 35 6.5 35.5

Transport Equipment

61.6 0 75 68.3 25.0 1.7 100 3.5 5.9

Manufactures n.e.s

64.8 0 75 99.8 13.1 1.8 35 1.5

Source: World Tariff Profiles 2010 – WTO-OM, ITC, UN

At present there is no substantial domestic manufacturing capacity in the CARs or Afghanistan and Pakistan is seen to have exploited the opportunity in the latter country, steadily increasing its exports of engineered products due to the favourable tariff regime, but has failed to exploit similar opportunity in the CARs.

In the textiles sector, tariffs are higher, understandably because, with the exception of Kazakhstan, every other ECO member state has a sizeable t textile and apparel sector. Being significant a provider of employment at low capital cost to semi-skilled workers, the apparel industry in particular receives protective treatment in most economies that have scarce opportunities for deployment of advanced skills in their domestic economies.

It needs to be noted that Pakistan‟s textile exporters are no strangers to tariff adversity and have come to accept tariff walls as a challenge rather than an obstacle. For the past many years Pakistan has held its market share in the EU, despite competitors such as Bangladesh and Cambodia having a clear advantage of duty free status as least developed countries.

Pakistani textile exporters have managed to make the US their largest market (over US$4 billion) despite the discriminatory tariff treatment imposed by the US on Pakistan‟s textile exports. In a study “Getting Real on Trade with Pakistan: Duty-Free Market Access as Development Policy” (Elliott and Decker) the authors use US International Trade Commission statistics to demonstrate that the average duty rate of 11.4 percent imposed on imports from Pakistan is nearly thrice as high as for all dutiable imports and the average tariff on Pakistani apparel imports, at 14.9 percent, is almost twice as high as the 8 percent average US tariff on textile imports.

The reasons for Pakistani apparel not having penetrated the CAR market would appear to be the better logistic positioning of major producers China and Turkey in relation to Pakistan. Also, the absence of banking arrangements subject goods in transit, with weak insurance cover, to a host of variables, which is why the major organized apparel producers in Pakistan have stayed away from this market.

NON TARIFF BARRIERS

NTBs are broadly defined as “all barriers to trade that are not tariffs.” (Deardorf and Stern (1997.) Hillman (1991) defines them as “any governmental device or practice other than a tariff which directly impedes the entry of imports into a country and which discriminates against imports, but does not apply with equal force on domestic production or distribution”.

Along with tariffs, NTBs define the market access conditions that affect entry of particular products into an importing economy. The limitation on the use of tariffs within the multilateral trade system (and their considerable reduction in the framework of the GATT/WTO negotiations) has led to continual increase of the role of non-tariff barriers as protection and regulatory trade instruments. Presently, NTBs tend to be the major market access concern in many countries, especially in manufacturing sectors where NTBs have almost replaced tariffs (UNCTAD, 2005).


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UNCTAD distinguishes three general groups of NTBs based on their links with trade:

Directly trade-related NTBs (e.g. import quotas, antidumping measures, etc.)

NTBs that have a link with trade since their implementation is monitored at the border (e.g. SPS measures, packaging, etc.)

NTBs appeared from general public policy (government procurement, investment restrictions)

One of the anomalies of NTBs is that they are perceived as discriminatory by one side but legitimate tools for protection of trade and economic interests by the other. Within the ECO, an ongoing dispute between Turkey and Azerbaijan, as reported in an article by Hasan Kanbolat in a Turkish publication, highlights this aspect:

The problems that Turkey must settle include: Azerbaijan's ending of visa requirements for Turkish citizens; permitting Turkish banks to operate in Azerbaijan; eliminating the long delays at Azerbaijani customs; facilitating Turkish citizens' ability to obtain residence and work permits; increasing transportation quotas from 5,000 to 40,000; and implementing reference prices for Turkish goods.

Turkish goods are still subject to non-tariff barriers at Azerbaijani customs. A container's average waiting time at customs is 11 days around the world, but it can be as long as 50 days at Azerbaijani customs

The identified NTBs applied by each ECO member country are mentioned in Section 6B. At the ECO level, “the most prevalent NTB in the ECO Region,” have been identified by the ECO Secretariat, Waqar Shah, and are mentioned below:

Quantitative restrictions (quotas, prohibitions, licences)

Import surcharges

High transit transport fees

Restrictions on financial/banking services

Customs Barriers (delays in clearance, transit operations, lack of facilities at border points)

Lack of transparency (rapidly changing regulations, discretionary treatment)

Other studies on trade within ECO have identified the following obstacles to transit trade:

Numerous and cumbersome documentation requirements

Non-recognition of TIR seals

Visa restrictions on foreign truckers

Truck entry fees

Trucking cartels for ensuring “safe passage”

The specific NTBs that Pakistan must contend with for engineered goods and textile products are:

Para tariff – in Iran the “Commercial Benefits” charge, a para-tariff that ranges from 30% to 60% on the duty-paid value of goods imported into Iran.

Licensing regimes: Turkey, Afghanistan, Iran and Tajikistan all have import licensing regimes. In Afghanistan the importer must physically produce the valid import license in original for every


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consignment before customs begins the clearing process.

In Turkey, textile importers must register their import sources with the Undersecretariat of Foreign Trade

In Iran, Import Licenses are issued only after a lengthy verification process that has less relevance to commercial acumen and financial ability and more to citizenship obligations

Product registration: In the CARs and Iran, each surgical instrument needs to be registered separately according to the procedures applicable to pharmaceuticals. This increases the cost of business and generates lengthy delays in closing business deals.

Authorized representatives: To sell surgical instruments on the Iran market, the exporter must have an authorized representative or agent other then the importing customer, creating an additional layer of expense.

Arbitrary duty: Kazakhstan imposes a duty of Euros 3.00/kg on apparel and textile goods and Euros 7.50/kg brought into the country, irrespective of the scheduled tariffs. This translates to a minimum duty of 36000 Euros for a 40 ft container and, depending on the item, can work out sometimes to 80% of the value of the goods.

Pakistan‟s exports to Turkey and the CARs (minus Azerbaijan and Turkmenistan) face the additional barrier of those countries‟ membership of customs unions. Turkey‟s customs union with the EU and its free trade agreements within economic arrangements such as EFTA and EuroMed have had, until the recent imposition of punitive duties, a positive effect on Pakistan‟s exports of cotton fabrics to Turkey.

In the case of the CARs no effect is felt due at present due to the very low level of Pakistan‟s exports, but, looking to the future a recent study has shown that the Russia/Belarus/Kazakhstan customs union has resulted in raising the simple mean Ad Valorem Equivalent (AVE) from 6.45% to 12.10% and the weighted mean AVE from 4.3% to 12.67% in the tariff rates applied by Kazakhstan (see box below):

In this work, we used an appropriate methodology for converting the specific and combined tariffs into their ad valorem equivalent (AVE) rates, and hence used most detailed import data, at a 10-digit commodity classification code, for our computations. Our analysis demonstrated that after accession to the CU, the Kazakhstan‟s tariff protection level has increased considerably: for the entire economy, the simple mean AVE tariff rate has increased from 6.45% to 12.10%, and the weighted mean AVE tariff rate, from 4.30% to 12.67%. In addition, tariffs became spread out over a wider range of values, with the standard deviation of the tariffs being increased by about twice. International comparisons also show that after the accession of Kazakhstan to the CU, its level of tariff protection became higher than those in the low and middle income countries, and above the average in the world. In the group of upper middle income countries, which includes Kazakhstan, its average level of tariff protection is the highest among these countries.

Source: Tariff Protection Level in Kazakhstan: Before and After the Customs Union (Oraz Jandоsov, Lyaziza Sabyrova May 2011

Bearing in mind the need to increase trade with the CARs, particularly the entry they provide into the Russian market, which now accounts for 6% of global imports of clothing, a short note on the key difference between Customs Unions and FTAs is given below.

In customs unions, the contracting parties do two things: (i) allow free trade on products within the customs union, and (2) agree to a common external tariff (CET) with respect to imports from the rest of the world. Customs unions have become increasingly important in recent years, due to the success of the


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European Union, where trade among the EU member states moves tariff-free, and regardless of which member imports a product from outside the EU, the same tariff is applied.

The North American Free Trade Agreement (NAFTA) is the best known example of a free trade agreement (FTA) in which Canada, the United States and Mexico, allow free trade on products traded among the three countries, but do not share a common external tariff.

The advantage of customs unions over free trade areas is that customs unions eliminate the need to have „„rules of origin‟‟ schemes among the member countries. This is because in a free trade area, traders can indulge in “tariff arbitrage,” i.e. they import a product into a member country with a low tariff and then resell it to another member country with a high tariff. (NB: Although there is no FTA, the Afghanistan Pakistan Transit Trade Agreement is being misused by traders in Pakistan for tariff arbitrage. Also, interviews with stakeholders reveal similar arbitrage by Afghan traders who import Pakistani goods into Afghanistan and resell these in Central Asian countries.)

It is debatable whether customs unions can achieve the desired objectives in arrangements where there are wide income disparities within the member states. If the common external tariff results in a significant amount of trade diversion or fails to protect influential domestic industries, countries often exclude these products from the CET of the customs union (e. g. agriculture product exclusions in the EU-Turkey customs union)

In the Eurasian Economic Community customs union (Russia, Belarus, Kazakhstan) the CET is reportedly applied to less than 60% of the tariff lines for most of the members and is exercised through selective application, without prior agreement on exclusions.


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NON-TARIFF BARRIERS AND CHALLENGES TO DOING BUSINESS IN ECO

COUNTRIES

AFGHANISTAN

Import regulations

Firms engaged in import and export need to register at the Afghan Chamber of Commerce and Industry (ACCI.) Sole proprietors engaged in foreign trade activities must register at the ACB (Afghan Council for Business Registry).

Registration as a legal person or sole proprietor is currently conduced in accordance with the Corporations and Limited Liability Companies Law of 30 January 2007.

Registration is not the same thing as obtaining a business license. To engage in trade for commercial activities, legal persons and sole proprietors need to have a business license.

Foreign legal persons are required to register domestically in order to obtain a business license. This does not require investment and they may establish an agent (representative office). Foreign natural persons need to register as a sole proprietor and obtain a business license in order to be able to engage in trade activities.

The Business License is obtained from the Business License Department at the Ministry of Commerce and Industry. The schedule of fees for obtaining a business license is the following:

For Afghan legal persons, the fee is approximately US$ 57

For sole proprietor, the fee is approximately US$ 34

For foreign natural and legal persons, the fee is US$ 1,400 plus approximately US$ 29; and

For agency (representative office), the fee is US$ 1,900 plus approximately US$ 19

The fee schedule for the annual renewal of the Business License is the following:

For Afghan legal persons, the fee is approximately US$ 43;

For sole proprietor, the fee is Af 1,650 approximately US$ 33;

For foreign natural and legal persons, the fee is US$ 400 plus approximately US$ 29; and

For agency (representative office), the fee is US$ 900 plus approximately US$ 19 for other expenses.

Afghanistan confirms in its WTO accession proposal that any domestic or foreign firm or individual may acquire business licenses for importation or exportation without the requirement of investment.

Non-tariff barriers

The following para-taxes apply on imported goods:


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Type of para Tax Rate Application

Tax benefiting Afghan Red Crescent 2% of customs duty All imports except food items

Fixed Tax 2% of Duty Paid Value On All Imports*

3% of Duty Paid value In case of no business license*

Business Receipt Tax (BRT) 2% of Duty Paid Value Non-refundable

*These taxes can be claimed as credit against Income Tax assessment

Adverse Effects of Afghan Transit Trade (ATT) On Bilateral Trade

The on-going disagreements between Afghanistan and Pakistan on their transit trade was renewed when Pakistan imposed a condition that transit cargo must only be carried on vehicles operated by the government-owned National Logistics Cell (NLC), which did not have sufficient carrying capacity resulting in pile-up of Afghan cargo at Karachi port. The reported backlog was 6000 containers in December 2010 and 10,000 containers in March 2011.

At the intercession of the Afghan government, the Government of Pakistan subsequently instructed that other transporters also be authorized to move Afghan cargoes.

Other reported issues include customs delays. For instance, the Pakistan Customs office in Peshawar does not clear separate containers covered by a single invoice for individual entry into Afghanistan. All the containers are detained till such time as the last consignment purchased under that invoice reach the Customs.

Another obstacle is that of containers. On the one hand, Pakistan requires that goods to Afghanistan be shipped in the original containers provided by the suppliers, while on the other hand contractually, exporters are only bound to carry the goods ex-Karachi port. At Karachi, the Afghan traders are obliged to re-load cargo into new containers.

Slow Implementation of the Afghanistan Pakistan Trade Transit Agreement (APTTA)

Although no official reason has been cited, the requirement by Pakistan of bank guarantees for commodities and trucks during the period transit has become a new irritant. In the case of delays during the export season for fresh fruits, they cause a high percentage of loss in produce.

The Iran-Afghanistan Bilateral Trade and Transit Agreement created the Chabahar Free Zone Authority, which allows the import and export of goods to and from Afghanistan at a 90% discount on Iranian customs duties or tariffs, further allows 20% of warehouse space at the facility for transit goods and gives Afghanistan the opportunity to construct its own quay in Chabahar. This is in addition to extending Afghanistan use of Bandar Abbas port in a 1974 transit agreement.

AZERBAIJAN

Market Access7

Azerbaijan signed an FTA with Georgia in April 2010 and is currently negotiating with the European Union, China, India, the United States, Norway, Switzerland, Japan, Canada, and Chinese Taipei.

7 Source for Information on Market Access and Taxation- Advisor ECO Coordination Cell, Govt. of Azerbaijan


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A duty draw back scheme is in existence to recover VAT on goods that are imported for processing and re-exported, a draw back procedure has been be initiated, but no formal procedure for submitting an application has been defined.

The time for processing and re-export is established by the Custom authorities, and it is usually within two years. According to a recent World Bank study the availability of these draw-back schemes is discretionary.

Anti-Dumping Regime

Anti-Dumping rules are established by article 8 of the law on “Customs Tariffs”: if commodities are imported into Azerbaijan at a price lower than the production cost and this damages local production, anti-dumping duties are levied. Such regulation has not been ratified yet, and no anti-dumping duties are applied.

Countervailing Duty Regime

The countervailing duty regime is described in article 9 of the law on “Customs Tariffs”: if subsidies were used in the production of imported commodities that caused damage to local production, then compensatory duties are applicable.

Safeguard Measures

Article 2 of the law on “Customs Tariffs” provides for special duties to be applied as protective measures when quantity or terms of imports damage local producers or as retaliatory measures.

Rules of Origin

Chapter V of the law on “Customs Tariffs” provides criteria applied in the identification of the country of origin. Such rules, based on prevailing world standards, concern commodities completely produced in a country and those that are processed in more than one country.

Existing laws permit the following types of customs duties to be applied:

• ad valorem, calculated in accordance with the customs value;

• specific duties, calculated at the fixed cost per unit of goods.

Since 1 January 1997, there are no preferential tariff rates: imports from all sources are subject to the same tariff. Although Azerbaijan has signed preferential trading agreements with seven states of the CIS (Commonwealth of Independent States) - Georgia, Kazakhstan, Moldova, Russia, Turkmenistan, Uzbekistan and Ukraine - the trade liberalizing provisions under these agreements have not taken effect.

A VAT is charged at between 16-21% per cent on all imported goods as per the new Tax Code.

Since Azerbaijan does not have preferential trade agreements and all imports are subject to the same rules whatever their origin, the origin of imports does not have to be controlled. Certificates of origin are required mainly for statistical purposes.

Azerbaijan currently does not apply any import quotas. Azerbaijan‟s licensing procedures are not in line with WTO and the Agreement on Import Licensing Procedures. A Presidential Decree issued in 2002 significantly reduced a wide range of licensing requirements and introduced transparency in the licensing procedure, but many licensing requirements remain in place and in the context of the ongoing WTO


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accession negotiations new procedural rules for the issue of licenses must be introduced and the existing laws must be appropriately amended.

Import contracts concluded on chemicals, medicines and medical appliances must be registered with the Ministry of Health and Ministry of Agriculture.

Taxation

Azerbaijan has adopted a „Destination VAT principle‟ and VAT (currently set between 16 % and 21% depending on the products) is payable subject to applicable customs regime on the declared value of goods including assessed import duties and excise tax.

All goods, since July 1997, have been subject to an entry fee of 15%. A customs clearance fee of 0.5% is applicable on all imports and exports with minor exceptions.

IRAN

Although Pakistan and Iran signed a preferential trade agreement in 2006, this does not appear to have provided any impetus for rapid increase of trade by either party. Pakistan has always had an adverse balance of trade, in recent years Iran has become a single product customer, with exports of rice accounting for 89% of exports in 2008-09 and 77% in 2009-10.

Tariffs

Under the 2006 PTA, Iran has given concessions in items falling under Chapters 39, 40, 52, 68, 73, 82, 84, 85 and 90 through reductions in the Commercial Benefits Tax (CB Tax.)

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The CB Tax ranges from 46% to 56% for white goods and the reduction of 10%-20% in this para-tariff can be of benefit to manufacturers of household electronic equipment.

Para Tariffs

The principal para tariff is the “Commercial Benefits” tax which is applied at rates of between 30% to 60% of duty-paid CUF value to all goods imported into Iran

Tariffs Structure

The simple arithmetic average of Iran‟s import duties is 25.5%. The duties are average 25% for industrial goods and 29.6% for agricultural goods.

Industrial raw materials, medicines, wheat have no import duties

Import License

Import of foodstuff, medical equipment, pharmaceuticals and cosmetics require test certificates (from the Iranian Standards Authority) and authorization from the Ministry of Health. However, a certificate of free

8 (Details are available from SRO 872(1) 2006 of 24th August 2006 issued by Ministry of Commerce, Government of Pakistan and

SRO 894 (i) 2006 of 31st August 2006 issued by Federal Board of Revenue, Government of Pakistan)


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sale issued by a competent authority attesting that a product is allowed to be sold in its country of origin can be used in lieu of the test certification and/or authorization for some items.

A general license granted by the Ministry of Commerce is required for making any import into Iran and the importer needs additionally to obtain permission from the appropriate Ministry

Persons engaged in import of goods into Iran must possess a “Commercial Card” which is valid for a five year period, is subject to approval from the Ministry of Commerce and is issued subject to meeting basic business education criteria and having basic business establishment credentials.

KAZAKHSTAN

Import Administration

Kazakhstan has completely lifted all restrictions on trading activities. Any person can conduct foreign trade business according to applicable rules. All items can be imported into Kazakhstan without being subjected to quotas or licensing restrictions, with the exception of 11 categories which include weapons, ammunition and medicines.

Certificates of Origin

Generally, certificates of origin are not required for imports into Kazakhstan. However, Article 41 of the Customs Code states that a certificate of origin is required where: (1) goods are exported to Kazakhstan under a preferential tariff scheme; (2) goods from certain countries are subject to non-tariff measures, and the Kazakhstan Customs has reasons to believe that the goods in question are produced in the countries where they are claimed to have been produced; and (3) a certificate of origin is required by international agreements and conventions to which Kazakhstan is a signatory, or by the relevant Kazakhstan agency concerning the protection of natural environment, public health, consumers' rights, maintaining social order and national security, and the national interests.

Although the Kazakhstan Customs Code states that a certificate of origin is required for imports only under the three above specified circumstances, in actual practice, the Customs requires certificates of origin of imports under other circumstances as well, failing which import duties are doubled, based on the specified legal rates of Kazakhstan.

Trade Regularity Authority

The Ministry of Trade and Industry of Kazakhstan is the focal authority governing trade. Its affiliated Committee for Investments is responsible primarily for implementing preferential policies for investment and verifying the enterprises' qualifications for preferential policies. The Customs Control Committee under the Ministry of Finance of Kazakhstan is responsible for enforcing the Kazakhstan Customs laws, administering the customs procedures, collecting customs duties and fees, carrying out customs supervision and recording customs statistics.

Kazakhstan mainly imposes ad valorem duties on imports. With adjustments made in 2006 whereby the average weighted import tariff was reduced to 7.9%.

Tariff Rates Exemptions

As a member of the Euro Asian Economic Community, Kazakhstan makes exemptions on tariffs on most imports from Russia, Belarus, Kyrgyzstan and Tajikistan.

Kazakhstan and China have accorded most favored nation (MFN) status to each other. Kazakhstan also grants preferential duties to some Chinese products according to the Generalized System of Preferences.


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Goods imported for short term use in Kazakhstan under the temporary import regime can be fully or partially exempt from duties, taxes and non tariff regulations. Goods not eligible for duty exemptions include food products, industrial wastes and consumables.

A value added tax is also imposed on imports, calculated on duty paid value i.e. cost of goods plus customs duties. In 2006 the value added tax rate was 15%.

Load Limits for Vehicles

At the end of 2004, Kazakhstan adjusted the standard of load limits for vehicles carrying imported goods, which led to a rise in the tariff of Chinese exports to Kazakhstan and a detention of a large quantity of goods at the border. Regardless of the load limit of each vehicle, Kazakhstan imposes a unified tariff on all the vehicles carrying Chinese exports. Since implementation of the new policy, which places a strict limit on the load, the tariff on each vehicle has risen by at least 30%.

Certification

Kazakhstan started implementing new systems of standardization and certification in the year 2005, including the enactment of the Kazakhstan Technology Law, the Law on Assurance of Measurement Uniformity, List of Products and Services subject to Compulsory Certification and other supportive regulations. . These new laws and regulations aim to distinguish responsibilities from state authorities and private sectors. It is stipulated that the Government is responsible for product safety, while private sectors are in charge of quality control. According to these new regulations, Kazakhstan adopts compulsory certification on certain products and services, including machinery, cars, agricultural equipments, clothing, toys, food and medicine. However, the inspection and certification of imports in Kazakhstan are processed by the Kazakhstani Committee on Standards, Metrology and Certification and affiliated certification organizations. Inspection and certification standards remain unknown to the public, resulting in complicated procedures.

Trade Liberalization (after 2000)

This process coincided with Kazakhstan becoming a major oil producer and exporter and increase in import trade was driven by oil exports, as well as income from increased exports of gas, metal, and other natural resources. In value terms, exports of oil increased from 43% of total exports in 2002 to 57 percent in 2010. Nevertheless, the increase also reflected a genuine tendency towards trade liberalization. Both tariff and NTBs were reduced, and trade freedom increased significantly.

Increase in trade openness during the decade was not unique to Kazakhstan. Similar trends were exhibited by other transition economies. As a result the relative position of Kazakhstan in trade openness among economies in transition was roughly the same in 2008 as in 1995, deteriorating in 2009, when both exports and imports fell sharply during the 2008-2009 financial crisis.

Kazakhstan‟s trade underwent a significant contraction during the 2008-09 financial crisis which started relatively earlier in the country than it did worldwide, negatively impacting the banking system. Although the country‟s trade is starting to gradually recover, it has not yet reached the pre-crisis level.


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KYRGYZSTAN

Transport NTBs*

The first category of barriers includes:

Permits for entry and exit, transit, and transport from and to third countries;

Visa requirements (difficult process)

Requirements for paid parking during customs formalities, For instance, if a person is detained for a customs violation, a parking fee is levied on the carrier;

Prohibition on the transit of particular cargoes;

Examination of transit cargoes;

Customs deposit and customs formalities of goods, not subject to excise rate;

Repeated weighing of cargoes.

The second category of barriers includes:

Insurance of transport vehicles and crew;

Ecological and sanitary fees;

Services of various brokers;

Various fees established by local government bodies.

The process of obtaining permission and completing other formalities required by law enforcement officials and fiscal bodies is a major barrier which results in higher costs.

Transport operators are obliged to pay numerous fees and duties; this adds to their costs of transport thereby reducing the amount of imported goods that the population and national enterprises can purchase, and making domestic goods less competitive in world markets.

Exacerbating the cost of land transport is the rarefied air at high altitudes, which degrades truck performance: engine power output is reduced by 8% at an altitude of 1000 meters, by 12% at 1500 meters, and decreases 20% at altitudes over 3200 meters.

Thus, the cost of truck transportation in mountainous regions can be expected to be 20 times as much as transport by ship. Rail transport may not be a viable option, and transportation costs in Greater Central Asia can be expected to significantly exceed the cost of transportation elsewhere.

Trade with Tajikistan and Uzbekistan occurs under the framework of bilateral Free Trade Agreements (FTAs). The basis for all bilateral FTAs was established by the Agreement on the Creation of Free Trade Areas, signed by the heads of CIS countries on 15 April 1994, and by the Protocol on Amending and Adding the Agreement, signed on 2 April 1999.

These agreements stipulate that trade is not subject to customs duties, taxes or fees, or quantitative restrictions. The FTAs created a regional trade regime without customs duties or quantitative restrictions de jure. However, Uzbekistan is an exception. It applies exemptions from free trade treatment on goods


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produced in Kyrgyzstan under a Free Trade Regime Exemptions Protocol enacted on 25 December 1996. (Hasanov et al)

Tariffs9

The Kyrgyz Republic has one of the most open trade regimes in this region. In acceding to the WTO, it bound all its tariffs generally at a 10% ceiling rate and other import charges at zero and granted MFN status to all WTO members.

VAT at 20% is applied to imported goods at the duty and taxes paid value of the goods.

Para Tariffs

There is a 0.15% fee for customs clearance.

TAJIKISTAN

Complicated Customs Procedures – The time needed to export cargo equal to a 20-foot container (TEU) is 82 days and 83 days for import. In accordance with requirements of the burdensome procedures related to the cargo customs clearance, traders have to fill in 16 or more documents. High costs of goods transportation is another restraining factor for interregional trade. Official payments, e.g. VAT, customs duties and excises, reach approximately 40% of the costs for the total goods. Informal payments are at times even higher than official payments. This high investment in both time and financial resources encourages the smuggling of goods, where the real cost of goods in the invoice is intentionally decreased to reduce the size of duties required to be paid at the border.

Long Delays at Border Crossings – The average waiting time and delays at the borders, as well as possible lags are typical in Central Asia. Previous reports have documented data on the movement of transport and time spent at the selected border checkpoints. If just three hours could be spent per truck for transport checking, the productivity gain would lead to an annual savings of US$30 million.

Tariffs and NTBs

VAT, cross-border taxes, excises, customs duties total approx 35-46 per cent of the imported value of the goods.

Trade Policy

Since independence in 1991 Tajikistan trade policy has undergone a number of reforms mostly following the end of the civil war in 1997. The tariff schedule was replaced in 2003 and seven ad valorem tariff rates between 0% and 15% were introduced.

Based on its latest available 7.9 percent simple average MFN applied tariff, Tajikistan has a regime more restrictive to trade than that of an average Europe and Central Asia (ECA) country (6.8 percent), but more open than that of a low-income country (12.7 percent). Based on the MFN applied tariff, it ranks 86th out of 181 countries (where 1st is least restrictive).

Taking into account preferences, the simple average applied tariff is 6%. Similar to the majority of countries in its comparator groups, Tajikistan is more protective of its agricultural goods (11.4 percent tariff) than of its non-agricultural ones (7.4 %). Moreover, the 0.9 % share of tariff lines with zero MFN tariff in 2006 was among the lowest in the region where the average was 25.1%.

9 Source, WTO‟s Trade Policy reviews.


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External Environment Access to international markets from Tajikistan is similar to that of an average ECA country but better than that of an average low-income country. Tajikistan‟s weighted average rest of the world tariff (including preferences) is 2 percent, comparable to the regional average of 2.1 percent but almost half the 3.9 percent average of its income group.

Different from the majority of countries in the region, Tajikistan‟s agricultural products face a more favorable trading environment (1.4 percent tariff) than its non- agricultural products (2.2 percent tariff). In nominal terms, the Tajikistani somoni appreciated by 0.3 % against the U.S. dollar in 2008. This happened at the same time as the depreciation of the Russian ruble against the U.S. dollar which put Tajikistan at a competitive disadvantage since the Russian Federation is one of its main trading partners. It also lowered the value of remittances from Russia.

Trade Hurdles

In addition to high transport costs, other transactional costs represent a heavy burden for entrepreneurs. Officials confiscate cargo due to missing documents and detain these until informal payments are made. In view of multiple such factors, it is difficult to calculate how much time and money is spent on preparing documents and settling transactions.

Transactional costs, a form of general expenditures for logistics services in Tajikistan, are one of the most expensive in the world. According to World Bank findings (2005), they are about 27 percent of Tajikistan‟s GDP, compared to 10–16% in EU countries. Simplification of the trade policy and trade procedures, particularly those of customs, establishment of more competitive markets and the provision of more effective logistics services can lead to an annual savings of over 5 percent of GDP in logistics costs

Political disputes between Tajikistan and Uzbekistan spill over into their trade relations. According to Tajikistan, the trade policies of its closest neighbors do not facilitate increase in its export or import volumes, with Tajikistan accusing Uzbekistan of opting for an excessively protective position on this issue. With regard to Afghanistan, the situation remains unstable, partially resulting in increasing trends in import and export with Tajikistan‟s borders. This is related to the construction of the Dushanbe-Saritash road, which connects the country with Kyrgyzstan, and launching the Murgab-Kulma-Karokurum highway, which connects Tajikistan to China and other countries of South-East Asia.

In terms of business environment, the high rates of internal taxes represent immense obstacles to trade development. They impede domestic trade and increase the tax burden on entrepreneurs. Unofficially, small- and medium-sized entrepreneurs pay up to 12% of their sales to state officers to address issues related to customs, taxes, licensing, and other administrative procedures.

The other problem encountered by small- and medium-sized businesses is the shortage of electrical power for production development.

Finally, the lack of free access to credit significantly restricts the development of both domestic and foreign trade.

Trade barriers at the border are a major obstacle to the growth of Tajikistan‟s foreign trade:-

Goods transportation takes a long time due to excessive delays at the borders, which causes quality and loss of value in the export of agricultural produce.


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Fragmented and ineffective logistics services have led to a reduction in the volume of goods crossing the border.

Insufficient coordination between the various governmental institutions, responsible for implementing trade procedures, impacts on the work of entrepreneurs;

Although tariffs for import and official non-tariff barriers in Tajikistan are not high, major obstacles to trade are logistic and administrative-bureaucratic barriers, difficulties with fulfilling necessary formalities that occur when goods and transport cross borders, including preparing customs documents, payment of customs tariffs, visa issuance, transportation and cargo transit.

A World Bank survey determined that exporters and importers in Tajikistan often encounter three problems related to trade:-

Burdensome customs procedures, complex border-crossing and document checking procedures

Widespread corruption

Low quality transport services

Custom procedures in Tajikistan are reportedly the most ineffective among all Central Asian countries.

Firstly, Customs clearing of cargo (necessary formalities due to goods and transport crossing borders, including the preparation of customs documents and customs duties‟ payments) takes nearly a month (28 days), the longest period out of all the countries in the region.

Second, to obtain customs clearance, importers are required to undergo over 60 administrative steps, with exporters required to undergo 40 such steps, both processes exceeding those in the other CARs.

TURKEY

Turkey is a heavy user of trade remedy measures. Over the 1995–2008 period, according to the WTO, it was the 10th largest initiator of anti-dumping (AD) investigations (137 cases) and the second largest initiator (after India) of safeguards inquiries (14 cases).

There has been heavy use of contingency protection with initiations of 26 AD investigations, one safeguard investigation, and one countervailing duty (CVD) case (against Indian PET films) in 2008.

Turkey was among the top three users of AD initiations, one of eight countries that initiated safeguards cases, and one of five countries that filed a CVD initiation. The safeguard measure was imposed for cotton yarn for a one-year period from July 2008, and others imposed in 2009 were for matches and footwear products, amongst others, till November 2009.

Turkey, whose iron and steel industry accounts for about 15% of exports, was on the receiving end of three AD investigations in 2008, all three initiated in regard to iron and/or steel products, two by the EU and one by India.

Tariffs


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Tariffs on imports from non-European countries are approximately three per cent above EU rates but vary on a product to product basis.

A Value Added Tax (VAT) applies in Turkey irrespective of the country of origin. The VAT for most agricultural products (basic food) ranges from 1% to 8% and can reach up to 18% cent for some processed products. Capital goods, some raw materials, imports by government agencies and state owned enterprises, and products for investments with incentive certificates are exempt from import fees.

Specific Market Access Requirements

Turkey uses the EU Common External Tariff for all products originating from outside the EU Customs Union. Goods imported into Turkey are subject to the following tariffs and taxes: the customs tariff (the customs tariffs, and the Mass Housing Fund levy) and internal taxes (excise duties, i.e. special consumption tax (levied on luxury goods), VAT, and the stamp duty).

Value-added tax is levied on agricultural products and basic products at the rate of 1% or 8%, and on some non-agricultural products and luxury items (including cosmetics, furs, television and automobiles), at the rate of 18%.

Import Licenses

Turkey practices license management on some imported products, including certain types of motor vehicles, transport equipment, chemicals, fertilizer, endangered wild animals and plants, petroleum products and some products of sugar substitute. Importers require permission from relevant institutions to import these products

Registration of Imported Textiles

Since February 2009 Turkey requires that importers make a registration for the imported products of textile and apparel before import. The registration is valid for one year, applies to imports from all countries and covers imports under HS Categories, 420310, 420321, 420329, 420330, 430301, 4304, Categories 50, 51, 52, 53, 54 (except 540720), 55, 56, 57 (except 5701 and 5702), 58 (except 5805), 59, 60, 61, 62 63 (except 630532 and 630533) and 6505.

Markings

Turkey has adopted the European Union‟s CE Marking directive and has implemented 23 EU industrial directives, which affects an estimated 70% of manufactured products imported into Turkey.

TURKMENISTAN

Behind the Border Constraints

Despite the fact that freight forwarding, warehousing, and other logistics‐related services have been almost entirely privatized, major constraints to economic and export diversification include the poor development of telephone and Internet infrastructure, as well as the gradual deterioration of the quality of education and basic health services.

Public sector management appears to be fragmented and nontransparent, the country ranking 197th (out of 203) on the World Bank‟s 2007 Governance Overall Index, with a particularly low score on regulatory quality.

Turkmenistan is not a member of the World Trade Organization (WTO) but has enacted a number of laws that mirror WTO standards to some extent, including on investment, banking intellectual property rights,


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customs and privatization. However the legislation is not enforced uniformly. Turkmenistan is neither a signatory to nor is in compliance with the Agreement on Trade-Related Investment Measures (TRIMS).

Turkmenistan‟s laws make frequent references to bylaws that are often not publicly available. Most of these bylaws are passed in the form of presidential decrees but are not categorized by subject, making cross-referencing difficult.

A serious impediment to foreign investment remains the lack of knowledge of internationally recognized business practice and concepts, few business consultants to assist investors, scarcity of people with knowledge of English and very little English translations of laws and regulations.

UZBEKISTAN

Tariffs

Uzbekistan‟s trade regime remains relatively restrictive, with several administrative measures aimed at controlling domestic and external trade still in place. Exports have grown in the period from 2002 to 2008, but the government continues to curb imports through high tariff protection and NTMs.

The country has import‐exclusive excises, which significantly raise the rate of protection. The MFN tariff schedule applied to 38 countries has four bands, with tariffs escalating with the level of processing. The tariff schedule is designed to encourage imports of capital goods and production inputs and discourage import of consumer goods and other goods competing with domestic production.

Based on its 15.5 percent simple average of the MFN applied tariff, Uzbekistan has the most restrictive trade regime in the Europe and Central Asia (ECA) region, one that is also more restrictive than that of an average low-income country (12.7 percent).

The country‟s 1.2 percent share of tariff lines with zero MFN tariff, is among the lowest in the region, while the 34.7 percent share of tariff lines with duties higher than 15 percent (international peaks) is the highest in the region.

External Trade and Investment

Uzbekistan‟s foreign trade policy is based on import substitution. High tariffs, sporadic border closures and border crossing fees have a negative effect on level imports of both consumer products and capital equipment. Uzbekistan‟s traditional trade partners are the CIS countries, notably Russia, Ukraine and Kazakhstan, which in aggregate account for over 40 percent of its exports and imports. The role of non-CIS partners has been increasing in importance in recent years, with Turkey, China, Iran, South Korea and the EU being the most active.

Uzbekistan is a member of the IMF, World Bank, ADB, and European Bank for Reconstruction and Development (EBRD). It has observer status at the WTO, is a member of the World Intellectual Property Organization (WIPO) and is a signatory to the Convention on Settlement of Investment Disputes between states and Nationals of other States, the Paris Convention for the Protection of Industrial Property, the Madrid Agreement on Trademarks Protection and the Patent Cooperation Treaty.

External Environment

As an observer at the WTO, Uzbekistan signed a trade and investment framework with the United States and four Central Asian countries on June 1, 2008. Also at the end of 2008 Uzbekistan suspended its membership in EuraAsEC an international economic organization comprised of Belarus, Kazakhstan, the Kyrgyz Republic, the Russian Federation and Tajikistan.


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Behind the Border Constraints

In terms of the conduciveness of its institutional environment to business, Uzbekistan ranked 150th out of 183 countries in the 2010 Ease of Doing Business index, reflecting a cumbersome business environment. The country‟s Logistics Performance Index score, which reflects the extent of trade facilitation, is below the regional and income group averages, suggesting that Uzbekistan has a less conducive climate for trade.

The Value Added Tax (VAT)

The rate of VAT (20%) is fixed for imported products (works, services) by the Tax Code of the Republic of Uzbekistan. The VAT payment on imported products is effected before or during the customs registration.

Foreign Trade

According to the Customs Code Uzbekistan the following main customs fees are paid while moving goods and vehicles across customs borders: Customs duty, Value Added Tax, Excise. There are several options in paying customs duties:

1. For goods originating from the countries that have free trade agreement with Uzbekistan and exported by a resident of this country – customs duties are not levied.

2. For goods originating from the countries that have Most Favored Nation status agreements with Uzbekistan – customs duties are levied. For goods originating from other countries or with no reliable indication of origin – customs duties are levied in double rates.


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SUMMARY OF FINDINGS AND RECOMMENDATIONS

This study investigated the challenges and hurdles faced by Pakistan in promoting exports of light engineering goods and textile made-ups products to ECO member countries. The products analyzed in light engineering sector were surgical appliances (HS Codes 901980 and 901849) for being Pakistan‟s top engineering export item; and iron and steel products (HS Codes 7306 and 7308) for being the top export items to Afghanistan; in textile made-ups, products analyzed were from HS Code 56 (felts, items of personal hygiene) and HS 63 (kitchen and toilet linen and curtains, etc.) both of which have notable export performance to non-ECO countries.

The research covered an in-depth examination of tariffs and NTBs and a situation analysis of the transit transport to the land-locked Central Asian republics. The findings are summarized below.

Light Engineering Goods

Surgical Appliances

A market has been identified of US$ 300 million annual imports in the ECO (Table 18) of which US$ 150 million is in the CARs and US$ 117 million in Iran for products falling under HS 901890. As HS 901890 is Pakistan‟s principal item of export in surgical appliances, it is important to ascertain why: (i) Pakistani exporters are not represented in this market in a bigger way, and; (ii) Pakistani surgical instruments are not on the radar screens of ECO importers engaged in this business.

During the stakeholder reviews, exporters cited as a major hurdle the fact that in Iran and Central Asia each surgical instrument required separate registration as applicable for pharmaceutical products and this not only adds greatly to their cost of doing business but creates delays in the time required for approvals, etc.

The hurdles posed by an absence of reliable and efficient direct land transportation between Pakistan and Central Asia can be overcome by airfreight for those surgical instruments that have high unit value and low unit weight. This favourable cost/weight ratio enables pharmaceuticals to have the highest (42 percent) share in Pakistan‟s existing exports to Central Asia.

The surgical sector has a low capital investment –to- employment ratio (10 persons employed per Rupees one million investment) and provides direct and indirect employment to approx 500 persons for each million dollars of exports.

Auto Parts

Within the ECO, Turkey and Iran are major manufacturers of automobiles and Turkey has US$ 7 billion of exports of auto parts (shipped mainly to Europe.) Uzbekistan has emerged as the central automobile and commercial vehicles manufacturing hub for the CARs and is self sufficient in auto parts. Consequently, breaking into these markets will face more hurdles compared with exports to other countries.

Pakistan‟s auto parts exports are in the nascent stage. Export sales in 2009-10 were US$ 13 million and US$ 18 million in 2010-11 (Provisional SBP figures) therefore the trend is healthy. This sector requires encouragement due to its ability to absorb skilled labour and technical professionals.

However, inroads have been made into Turkey, which is itself a major exporter of auto spares. The industry needs to be encouraged because, like surgical instruments, it is not capital intensive, providing


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employment to 5 persons per each rupee one million investment. In addition, auto spares contribute to import substitution (US$2.4 billion estimated for 20009) and direct foreign exchange savings of US 1.25 billion.

Textile Made-ups

This study has identified existing imports of US$ 200 million in the ECO, more than 80 percent of it in Turkey and Kazakhstan, in products falling under HS 63. In the main these products consist of kitchen and toilet linen, table linen and curtains, etc.

Kitchen and toilet linen products are made from coarse yarns and unsophisticated processed fabrics and have the advantage of providing a fillip to the power loom manufacturing segment, which faces an existential crisis with serious unemployment ramifications.

Curtains are at the other end of the scale and, depending on the destination, demand a variety of cotton and non-cotton material and advanced printing and designing in order to be competitive. There is considerable value addition in the manufacture of curtains as opposed to kitchen/toilet linen, with higher requirement of labour in the processing chain.

Pakistan exports more than US$ 500 million products annually in this sector, but customers are concentrated in only five countries, which take up more than 90 percent of sales. There is a strong case for export diversification and for customer capture in ECO, which has imports in excess of US$ 200 million of these products.

The rationale for pursuing exports (despite the overall protectionist tariffs for textiles in ECO countries) of items covered in Chapters 56 and 63 is that they are not produced indigenously in ECO countries. Kitchen and toilet linen are made from coarse yarns that are not produced in ECO countries, while table linen and curtains require value addition through processing and printing, of which there are inadequate production facilities in the CARs. For the major ECO importer Turkey, rising wage structures make imports a more feasible proposition due to the high component of labour value-addition in these items.

Tariffs

This study has found that, barring Iran, tariffs in the ECO are not a barrier to promotion of Pakistan‟s exports in light engineering goods and textile made-ups. Iran, Turkey and Pakistan have mutually reduced tariffs by 10% for selected items under the ECOTA.

Non Tariff Barriers

Such NTB‟s as do exist apply to all countries - those selling successfully in the ECO have managed to overcome the hurdles of informal payments, hidden para taxes and clearance delays and Pakistani exporters would need to work within these hurdles.

The five CAR states (Azerbaijan, Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan) that have not yet ratified the ECO Trade Agreement are not under obligation to remove NTBs under ECOTA and Pakistan has made no headway with them for bilateral accommodation in this regard. The nations that have ratified the ECOTA (Afghanistan, Iran, Turkey and Tajikistan) are required merely to notify (not remove) existing para-tariffs and not to introduce any new para-tariffs after signing the treaty. Iran has extended to Pakistan reductions of 30 percent to 50 percent in its main para-tariff, the Commercial Benefits Tax, under its 2006 PTA with Pakistan.


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Where goods are shipped to Turkey or Iran by sea, exporters do not face the NTBs usually associated with remote land-border crossings. Moreover, the import clearing process in Turkey is more transparent and efficient than in other ECO countries and there is the additional advantage that goods under HS 63 codes applying to textile made-ups do not have to have prior import registration as required for garments and fabrics.

Transport

Direct sailings to Turkey: Currently, cargo from Karachi reaches Istanbul via trans-shipment and exporters believe that direct sailings would cut down the transit time and help their business.

Transit to the land-locked Central Asian states: Transit through Afghanistan remains hostage to the internal security situation in that country. At present, the Iran route is fully operational, but at very high costs and excessive time-delays. Therefore facilitation efforts by government should be focused on making the Karakoram Highway (KK) route workable, at least during its open season, by removal of the border-crossing hindrances identified in this study.

The alternate land routes to the CAR are via Iran or the Karakoram (KK) Highway. Access to Karachi via the KK Highway makes sound economic sense for Kazakhstan as well, because this is its shortest route to the sea and, when working, can become the quickest. ADB studies have shown that a saving of 1% in distance to port results in 1.5 % increase in exports to the land-locked country.

Exports to the Central Asian States

Pakistan‟s existing exports to this region are of an incredibly low volume that reflects neither the buying power of the CARs nor the export potential of Pakistan. Currently, the balance of trade is in favour of the CARs and will increase further should Pakistan begin to purchase raw cotton from Tajikistan.

Imports in CAR value more than US$ 60 million per annum and 50 percent of their trade is with the peripheral states (wider Central Asian region). Turkey and Iran export more than US$ 10 billion to that region and many of the items exported by Iran and Turkey to CAR are also manufactured in Pakistan.

Banking

Interviews with stakeholders identified banking as a serious hurdle in promoting trade with Iran, due to (i) United States sanctions that make Pakistan banks shy of involvement in dollar transactions routed via New York and (ii) reluctance of banks to negotiate Iran-origin LCs with Asian Dollar settlements via the Tehran-based Asian Clearing Union, in which payments are delayed by several months.

SME Financing

ECO Bank has extended lines of credit to several Pakistan banks (total value approx US$ 100 million) for financing SME exports, but there is no condition that these exports must be directed to ECO countries. The same conditions apply to financing extended by ECO Bank in Iran and Turkey. While this infusion of funds may generate some SME activity in each country, the terms do not make it conducive for intra-ECO trade development nor will it encourage new ECO-focused entrepreneurship. In Pakistan, banks find safety in lending to existing clients and are known to be shy of SME lending.


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RECOMMENDATIONS

Surgical Instruments and Appliances

Pharmaceuticals exports have risen strongly ever since TDAP extended a subsidy to assist exporters in offsetting the cost of product registration. It is recommended that similar facility be extended in the fist stage to exporters of surgical instruments to Iran and Kazakhstan, which are the major ECO import markets aside from Turkey, which does not require product registration of surgical instruments.

Licensing

Auto Parts

For strategy planners, the facts to note are that worldwide exports of auto parts is a $400 billion business annually, the US market in 2010 imported US$ 95 billion worth, including from Thailand (US$1.684 billion) and Indonesia (US$0.78 billion).

Within this volume, the world trade in unbranded parts is estimated to be as much, if not more, than branded parts (Dubai in the United Arab Emirates handles more than US$2.4 billion worth auto parts trade annually, principally for the Iran and CARs markets) because of cost advantages. This market segment provides Pakistan‟s auto parts manufacturers the opportunity to achieve economies of scale by adding export sales to the vertical growth in the expanding domestic market.

In its period of export growth, the auto parts industry is likely to face restrictions due to licensing constraints in their master agreements and auto parts manufacturers may be encouraged to take up this issue at industry level.

White Goods

Stakeholder interviews indicated that there is good volume of trade between Pakistan and Afghanistan in white goods, consisting of exports from Pakistan of manufactured goods.

A major problem faced by exports of white goods from Pakistan is brand identity, lack of which places them at the lower price end of the market and also limits their sales volumes. Manufacture under license of major foreign brands with export rights will assist Pakistani companies in breaking out of the price and volume constraints. Reference is cited of the export strength of countries such as Malaysia, Indonesia and Thailand which is based on licensed manufacture of international brands, with resultant creation of hundreds of thousands of jobs along the domestic supply chain.

Access to export of recognized brands can boost sales to Iran, which has provided preferential tariff (reduction of 50 percent in CB Tax) to several items of household electrical appliances.

Engineering Technical Services

Technical Services

Iran in 2009 exported more than US$2.5 billion worth of technical engineering services. This is another area where Pakistani companies may like to intervene because those who design and consult for mega projects have a major say in the sourcing and identification of equipment suppliers.


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Siemens Pakistan Ltd., the publicly-quoted Pakistan subsidiary of the German multinational, advised it was not competing in exports to Afghanistan or the CARs because it was not licensed to do so in the region by its parent company.

Considering that one of Pakistan‟s major engagements with the CARs is in the purchase of electricity, there will be huge demand for transmission towers, cables, etc. Focused market studies and supplier identification should commence now so that Pakistani companies are placed in the forefront to capture the greater share of equipment supplies whenever these plans come to fruition.

Pakistan has achieved considerable success in exporting HS 7306 and 7308 products (hollow tubes of iron and steel) to Afghanistan, utilizing the advantages of direct road transport links and absence of Iranian competition in this category.

The proposed TAPI (Turkmenistan, Afghanistan, Pakistan, India) and Iran-Pakistan-India energy transmission lines will generate major business opportunities for manufacturers of oil and gas pipelines and equipment. Some Pakistani companies already enjoy strong international reputations in this area and TDAP may remain in the loop with focal point institutions such as ISGS (Interstate Gas Systems) to ensure a place for Pakistani goods for these projects.

Future threat

If MFN status is extended to India in the near future, this will affect production in many factories, due to competitive pricing and better marketing strategies of Indian products. The textiles export industry is unlikely to be affected, but light engineering industries in the Punjab cluster are almost certain to suffer from the competition. Therefore, it becomes an imperative for them to find new markets in Afghanistan and further north.

Exports to CARs

Meantime, efforts to increase exports to the CAR may examine the experience of India, which exports twenty times as much to the same land-locked countries, with exports of textiles products and machinery equalling five times Pakistan‟s entire exports to that region. There could be some useful lessons learned from such an exercise.

For correcting the imbalance in trade with CAR, export planning may be focused on Kazakhstan. This is the region‟s largest economy, its “mover and shaker” (GDP is greater than the other five CARs put together) and accounts for more than half of the regions imports. It is also the country with the most institutionalized trade procedures and the best working banking system. Relative to this study, Kazakhstan, after Turkey, is the major importer in the ECO of the surgical goods and textile made-ups exported by Pakistan.

A major advantage of focusing on Kazakhstan is the access through Customs Union to Russia. To protect its product exports, New Zealand has applied to join the Russia/Belarus/Kazakhstan Customs Union and talks are in an advanced stage. As Russia now imports 6% of the world‟s textile and clothing (and Pakistan has exports of over US$100 million to Russia to protect) joining this Customs Union will provide greater market access for Pakistan than a bilateral PTA or FTA with Kazakhstan.

Banking and Finance


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National Bank of Pakistan

Absence of banking channels for exports to Central Asia was a major concern among stakeholders. National Bank of Pakistan has two branches in the region, one in Bishkek (Kyrgyzstan) and the other in Baku (Azerbaijan.) In a 2009 report from Baku, the US Trade Representative commented on the premature state of domestic banks and recommended that US entities wishing to do business in Azerbaijan should “contact Pakistan‟s National Bank” for credit and trade finance facilities.

Unfortunately, the presence of these two banks has not been a bonus for Pakistan‟s exports, which are practically nothing to Kyrgyzstan and similarly low to Azerbaijan.

TDAP may like to liaison with National Bank to identify the ways in which the bank‟s CAR presence can be used for the promotion of Pakistan‟ exports.

Financial Capacity Building

Pakistani banks refuse financing or negotiation of documents on LCs opened by Iranian banks for fear of negative repercussion arising from the US sanctions regime. Noting that Iran‟s biggest import sources are EU and ASEAN, it is inferred that, relative to Pak-Iran trade, the problem is not sanctions but lack of knowledge of them. This is a serious misunderstanding of the sanctions regime and it is affecting the development of Pakistan‟s trade with Iran.

Transportation

For export strategists in Pakistan, it would be realistic to evolve plans which assume that, for the foreseeable future, secure transit through Afghanistan will not be available. This has not happened in the past thirty years and there is no guarantee that the situation in Afghanistan, which has seen civil war, occupation and insurgency since 1979, will change anytime soon.

High priority should be accorded to upgrading the domestic transportation infra-structure. Improving LPI by one point increases exports by 1.5% for the exporting country, so the investment is an excellent trade-off with immediate returns.

Steps are required to remove irritants and obstacles for establishing regular traffic, using the Quadrilateral Transit treaty (Pakistan-China-Kyrgyzstan-Kazakhstan) to promote Pakistan-Kazakhstan trade.

Market Studies

Discussion with private sector stakeholders and research has revealed there is very little in-depth stock of knowledge available on sector- and product specific market studies of the ECO countries. Much spadework has been done through macro-economic and econometric studies, which have helped prepare the ground for creating the necessary macro-level environment. But matching products to markets and creating profitable business relationships between importer and exporter require an altogether different perspective.


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Building bridges

Stakeholders felt there was need for pro-activity among the trade commissioners and trade associations for capture of share of mind in the importing countries through trade exhibitions and cultural exchanges. There is very little people-to-people contact.

TDAP may like to consider inviting buyer delegations from ECO countries to visit Pakistan and observe the on-ground situation here for themselves. Often businessmen who travel to sell a product see opportunity in the host country and become buyers as well.

It is noted that the strategy used by Turkey and Iran to increase their exports with ECO partners is via opening their markets to imports from those countries. Trade implies reciprocity, it is not a one-way street.

Travel

In the 1990s, Kazak Air, Uzbekistan Airlines and Tajik Air each used to operate two flights a week to Pakistan cities, now there are no direct flights between Pakistan and any point in central Asia. By contrast, there are 29 flights a week between India and the CARs.

Pakistan may consider leveraging its geography to advantage. There are very few direct flights among the Central Asian Republics, which use Dubai as a hub for their interchange, even for flying from Bishkek to Kabul. Both Bishkek and Dushanbe are closer to Islamabad than to Karachi, flying time is one hour.

Turkey and Iran have non-visa status for each other‟s citizens, Turkey grants visa free status to Azerbaijan (which has not reciprocated), Kazakhstan grants visa fee entry to Turkish and Iranian citizens. Against this, Pakistan‟s FPCCI reports that the visa relaxations for businessmen as mentioned in the ECO agreements have yet to be implemented.

Separate PTAs/FTAs with individual ECO members

Pakistan is already in talks with Kazakhstan and Tajikistan for bilateral PTAs. This is the trend among ECO members. However, there is no evidence that PTAs or FTAs have had a positive effect on Pakistan‟s trade.

The results of Pakistan‟s FTAs with China and Malaysia and PTA with Iran have shown increase in imports at a much faster pace than exports and the bilateral trade gap has widened on the minus side, which was not the objective of the FTA/PTA.

The APTMA‟s interest in importing cotton from Tajikistan indicates that any PTA will be a bonus for the import lobby in Pakistan with no value returned on the export side, since the CARs already have low tariff regimes, especially for engineered goods.

Supply side constraints


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Pakistan‟s inability to increase exports via FTAs and PTAs indicates that supply side constraints may be a reason. Various studies have shown that over the long term Pakistan has been unable to expand its global market share. There are both positive and negative reasons involved.

On the positive side, it has to be recognized that domestic demand in Pakistan has outpaced manufacturing growth. This is reflected in the near-capacity sales of the major domestic manufacturers. Political uncertainty and the high cost of capital have led to reduced investment in projects where returns are spread over a longer term and the increased demand is being met by imports and in many cases there is no exportable surplus.

The negative side is that Pakistan‟s private sector appears to have lost its appetite for gaining the competitive edge. The textile sector is affected by cotton quality that falls short of benchmark international standards and a ginning industry that works on obsolete machinery. Each year textile producers are relying more and more on imported cotton, resulting in increased costs which, together with unfeasible power rates, squeezes profitability and affects quality.

The country has slipped in World Bank business performance rankings. Between 2003 and 2007, the number of ISO certified companies in Pakistan increased from 464 to only 2580. The corresponding figures for Turkey were from 3248 to 12802, for Iran from 470 to 5503, for India from 8367 to 46,091 and for China from 96,715 to 210,773.

If Pakistan wants to be globally competitive, especially in engineered goods or chemicals or plastics products, ISO certification is a must not just for exporters, but all their suppliers in the supply and value chains.

Further Policy Recommendations

Establish language schools and provide subsidized language instruction in Russian, Turkish, Persian to students at school, college and university level; and to technical and managerial persons from the textile and engineering industries.

Pro-activity by Commercial Counselors and Trade Sections of Pakistan embassies in the Central Asian Republics through detailed market reports on key products, advice to trade associations in Pakistan

Arranging Pakistan-product trade fairs and visits by ECO country trade/industry association delegations to visit Pakistan.

Provide tax breaks and tariff reductions for inviting investment in multi-modal transport companies and import of necessary transport equipment.

Public-Private partnership with partners from China, Kyrgyzstan and Kazakhstan for such multi-modal transport operations may be explored.

Joining the TIR Carnet Convention to facilitate transit trade by road

Urgently examine the restoration of Pakistan Railway‟s cargo operations. Reduced freight costs will give an impetus to exports of steel products to Afghanistan in particular.


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Develop facilitation measures for corporatization of road transport companies

Initiate dialogue with Iran for national currency swap as payment mode for trade between Pakistan and Iran to overcome the US Dollar irritants to Pakistan-Iran trade.

Capacity-building and training of bankers regarding modalities of EU/US sanctions on Iran and the financing options available to Pakistani banks. Despite these sanctions, the EU remains Iran‟s largest import partner; therefore Pakistani banks need instruction on how to deal with Iran instead of not dealing altogether in Iran trade.

ECO Trade Finance Training, in particular for managers of National Bank of Pakistan, which already has a presence in Azerbaijan and Kyrgyzstan.

Initiate dialog for resumption of direct air links between Pakistan and CAR capitals. At present, most of the CAR capitals are not directly connected by air, travelers use Dubai as a link and government may explore the possibility of making Islamabad or Lahore as the regional hub.

Provide a subsidy to exporters of surgical instruments for product registration in Iran and Kazakhstan

Examine the feasibility of direct Karachi-Istanbul sailings via PNSC

Tax incentives to MNCs for licensed manufacture and export of white goods and auto parts in Pakistan

State Bank of Pakistan may develop a mechanism to monitor efficient deployment of ECO Trade and Development Banks‟ funds with focus on developing intra-ECO SME trade.


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- Ministry of Commerce, Islamic Republic of Iran, 2009

MOC NEWS - Iran Commerce Ministry Newsletter Winter 2010

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- Engineering Development Board, Ministry of Industries, Government of Pakistan


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Non-Tariff Measures Affecting India‟s Textiles and Clothing Exports: Findings from the Survey of Exporters

- December 2009 Gordhan K. Saini,. Indira Gandhi Institute of Development Research, Mumbai

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- International Asset Management Company Limited

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Texts of Major ECO Agreements:

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- The Agreement on Establishment and Operation of ECO Smuggling and Customs Offences Data Bank

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- Ahmed Nawaz Hakro1 and Abdallah Mohammed Omezzine

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ANNEXES

ECO OVERVIEW ANNEX A

Regional Agreements Involving Wider Central Asia and its Neighbours 2005

CACO CAREC CIS CSATTF ECO EURASEC SAARC SHOS SPECA

CA Region

Afghanistan X X X x

Kazakhstan X X X X X X X

Kyrgyz Republic X X X X X X X

Tajikistan X X X X X X X

Turkmenistan X X X

Uzbekistan X X X X X X X

Other WCA Countries

X

Iran X X X X

Pakistan X X X X X

Russia X X X X X

Main WCA Neighbours

China X 0

India X X

Turkey X

UAE

Legend: X = member; (X) = membership under consideration; O – observer; (O) observer status under consideration

CACO Central Asian Cooperation Organization

CAREC Central Asia Regional Economic Cooperation

CIS Commonwealth of Independent States

CSATTF Central and South Asia Transport and Trade Forum

ECO Economic Cooperation Organization

EurASEC EurAsian Economic Community

SAARC South Asian Association for Regional Cooperation

ShOS Shanghai Organization for Security and Cooperation (Shanghai Five + Uzbekistan)

SPECA Special Program for the Economies of Central Asia (UNESCAP, 1998)

Source: “Economic Cooperation in the Wider Central Asia Region” World Bank


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ECO OVERVIEW ANNEX A-1

ECO TRADE AND MACRO-ECONOMIC DATA

Per Capita

IMPORTS EXPORTS GDP Population Income

2009 2010 2009 2010 2009 2010 2010 2010

Country US$Mln US$ Mln US$ Mln US$ ln US$Mln US$ Mln Million US$

Afghanistan 3336 5154 403 388 10641 12871 25.98 629

Azerbaijan 6123 6599 14701 21325 48853 51800 9.05 5798

Iran** 88084 84669 109298 95162 357200* 74.34 4811

Kazakhstan 37889 28409 71184 43196 133441 138400* 16.32 8480

Kyrgyzstan 3040 3223 1673 1760 5144 4666 5.45 856

Pakistan 34822 34710 17688 19290 164419 174900* 171.33 1020

Tajikistan 3975 1438 1664 1085 5165 4978 7.45 668

Turkey 140928 185544 102143 113883 742094 735825 73.03 10075

Turkmenistan 4516*** 7567 27960* 5.02 5569

Uzbekistan 9438 8798 11770 13045 26326 38990* 28.23 1381

Sources: ECO Secretariat and CIA World Fact Book


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ANNEX B

LIST OF AGREEMENT and STATUS OF RATIFICATION OF ECO AGREEMENTS

STATUS AS OF DECEMBER 2010

Documents Date

Treaty of Izmir

ECO Founding Document

Signatories: All member states

Parties Ratified: 8 (all Signatories except Afghanistan and Uzbekistan

September 1996

Agreement on Simplification of Visa Procedures For Businessmen of ECO Member States:

Signatories: 7 member states (all ECO Member States except Kyrgyzstan, Tajikistan and Uzbekistan)

Parties Ratified: 5 States (Afghanistan, Iran, Kazakhstan, Pakistan and Turkey)

Status: In force

March 1995

Additional Protocol on Simplification of Visa Procedures for Businessmen and Transit Drivers of the ECO Member States

Signatories: Afghanistan, Iran and Pakistan

Parties Ratified None

Status Not yet in force

March 2009

Articles of Agreement of the Trade and Development Bank

Signatories: Iran, Pakistan and Turkey

Parties Ratified: Three signatory states

Entry into force: August 3, 2005

Status: ECO Trade and Development bank is functional and operates in the three signatory countries.

March 1995

Transit Transport Framework Agreement (TTFA)

Signatories: 9 (All member states except Uzbekistan)

Parties Ratified: 8 States (all ECO member states except Turkmenistan and Uzbekistan)

Status: in force

March 1998

Framework Agreement on ECO Trade Cooperation

Signatories: 8 States (all ECO member states except Turkmenistan and Uzbekistan)

Parties Ratified: 6 states (Azerbaijan, Iran, Kazakhstan, Kygyz, Pakistan and Turkey)

Status: in force

March 2000

ECO Trade Agreement (ECOTA):

Signatories 5 member states namely Afghanistan, Iran, Pakistan, Tajikistan and Turkey

Parties Ratified: 5 states (All signatory states)

Entry into force 24th April, 2008

July 2003

Status: Tajikistan is yet to ratify the Annexes, Iran takes the position that, without annexes being ratified by minimum five signatories, ECOTA cannot come into force

ECO White Card Scheme

The Intern Motor Vehicle Third Party

Insurance Scheme

July 2008

Agreement on Promotion and Protection of Investment

Signatories: Afghanistan, Azerbaijan, Iran and Turkey

Parties Ratified Iran

Status: Not yet in force

July 2005

Agreement on the Establishment and Operation of ECO Smuggling and Customs Offences Data Bank

Signatories: 6 member states (Afghanistan, Azerbaijan, Iran, Pakistan, Tajikistan and Turkey)

Parties: Ratified: Turkey

July 2005

MoU on Cooperation against Smuggling and Customs Frauds. May 1998


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Signatories (Parties): All 10 ECO member states

Status: In force immediately after signing the MoU

Articles of Agreement on the Establishment of ECO Reinsurance Company

Signatories: 3 states: Iran, Pakistan and Turkey

Parties Ratified: Pakistan

Status: in force immediately after ratification by Iran and Turkey.

February 2010

Source: ECO Secretariat


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ECO TRADE AGREEMENT ANNEX C

SALIENT FEATURES OF THE ECO TRADE AGREEMENT

Art. 3 Sensitive goods (maximum 1% of tariff lines-6 digit H.S) Goods of the negative lists (sensitive list, prohibited list, max 20% of tariff lines) Prohibited products will be outside the purview of ECOTA

Art.4 Art.4-a Tariff reduction to 15 % in 8 years (Afghanistan allowed 15 years) Art.4-b Negative Lists to be notified Art 4-c Positive Lists to be expanded gradually on proportionate basis in 8 years, to

cover 80% of goods. Art.4-d Notify schedule of concessions. Reduction not to be less than 10% p/a on

existing tariffs

Art.5 Para Tariffs to be notified - No new PTBs to be introduced

Art.6 No restriction/prohibitions other than tariffs (within two years of implementation)

Art.13 (i) Steps for growth of trade by improving transport facilities within TTA and TTFA (ii) Free Transit for landlocked countries

Art.27 Dispute Settlement- initially through bilateral consultation, then by Cooperation Council which acts as dispute settlement body

Art.32 Cooperation with international organizations and groupings (UN and its specialized agencies other trade and economic org/groupings

Art.38 Modification / amendment though mutual consultation

ANNEXES

(I) RULES OF ORIGIN

General Provisions-Scope-Definitions Products wholly produced or obtained (raw/mineral, agriculture, animals and

fisheries) Originating Products- Originating product value not to be less than 60% FOB Territorial Requirements- Direct Transport, Exhibitions ECO Proof of Origin-Procedure for certificate/supporting documents Arrangements for Administrative Cooperation- Mutual assistance, verification, Dispute Settlement, penalties Final Provisions-Sub-Committee on Customs Matters

(II) STATE AID

(III) PROTECTION OF INTELLECTUAL PROPERTY RIGHTS

(IV) ANTI-DUMPING MEASURES


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Source: WTO/ESCAP Regional Seminar on the WTO and Regional Trade Agreements for Asia-Pacific Economies October 2009, Waqar Ahmad Shah, Director Trade and Investment, ECO

ECO TRADE AGREEMENT ANNEX D

FREE TRADE AGREEMENTS OF THE CENTRAL ASIAN REPUBLICS

Azerbaijan

- Azerbaijan-Georgia Free Trade Agreement (In Effect)

- Azerbaijan-Kazakhstan Free Trade Agreement (Signed)

- Azerbaijan-Moldova Free Trade Agreement (Signed)

- Azerbaijan-Russia Free Trade Agreement (Signed)

- Azerbaijan-Turkmenistan Free Trade Agreement (Signed)

- Azerbaijan-Ukraine Free Trade Agreement (In Effect)

- Azerbaijan-Uzbekistan Free Trade Agreement (Signed)

- Commonwealth of Independent States Free Trade Area (Signed)

- Georgia, Ukraine, Azerbaijan, Moldova Free Trade Agreement (In Effect)

Kazakhstan

- Armenia-Kazakhstan Free Trade Agreement (In Effect)

- Azerbaijan-Kazakhstan Free Trade Agreement (Signed)

- Common Economic Space ((FA) signed/FTA Under Negotiation)


- Eurasian Economic Community Customs Union (In Effect)

- Customs Union of Russia, Belarus, and Kazakhstan Free Trade Agreement (in effect)

- Kazakhstan-Georgia Free Trade Agreement (In Effect)

- Kyrgyz-Kazakhstan Free Trade Agreement (In Effect)

- New Zealand-Customs Union of Russia-Belarus-Kazakhstan Free Trade Agreement (Under Negotiation)

- Pakistan-Kazakhstan Preferential Trade Agreement (Proposed/Under consultation and study)

- Shanghai Cooperation Organization Free Trade Agreement (Proposed/Under consultation and study)

- Ukraine-Kazakhstan FTA (In Effect)

- Uzbekistan-Kazakhstan Free Trade Agreement (Signed)

- Viet Nam-Customs Union of Russia, Belarus, and Kazakhstan Free Trade Agreement (Proposed/Under consultation and study)

Kyrgyzstan

- Armenia-Kyrgyz Free Trade Agreement (In Effect)



- Kyrgyz-Kazakhstan Free Trade Agreement (In Effect)

- Kyrgyz-Moldova Free Trade Agreement (In Effect)


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- Kyrgyz-Russia Free Trade Agreement (In Effect)

- Kyrgyz-Ukraine Free Trade Agreement (In Effect)

- Kyrgyz-Uzbekistan Free Trade Agreement (In Effect)


- Tajikistan-Kyrgyz Free Trade Agreement (Signed)

Turkmenistan

- Armenia-Turkmenistan Free Trade Agreement (In Effect)

- Azerbaijan-Turkmenistan Free Trade Agreement (Signed)

- Turkmenistan-Georgia Free Trade Agreement (In Effect)

Tajikistan


- Economic Cooperation Organization Trade Agreement (Signed)


- Pakistan-Tajikistan Preferential Trade Agreement (Proposed/Under consultation and study)


- Tajikistan-Armenia Free Trade Agreement (Signed)

- Tajikistan-Belarus Free Trade Agreement (Signed)

- Tajikistan-Kyrgyz Free Trade Agreement (Signed)

- Tajikistan-Russia Free Trade Agreement (Signed)

- Tajikistan-Ukraine Free Trade Agreement (In Effect)

- Tajikistan-Uzbekistan Free Trade Agreement (Signed)

Uzbekistan

- Azerbaijan-Uzbekistan Free Trade Agreement (Signed)



- Kyrgyz-Uzbekistan Free Trade Agreement (In Effect)


- Tajikistan-Uzbekistan Free Trade Agreement (Signed)

- Ukraine-Uzbekistan FTA (In Effect)

- Uzbekistan-Georgia Free Trade Agreement (Signed)

- Uzbekistan-Kazakhstan Free Trade Agreement (Signed)

- Uzbekistan-Moldova Free Trade Agreement (Signed)

- Uzbekistan-Russia Free Trade Agreement (Signed)


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Component 1, Trade Policy Capacity Building, implemented by the International Trade Centre

(ITC), is aimed at the Ministry of Commerce and Government of Pakistan in developing a

coherent trade policy and attendant regulations for export competitiveness. Specifically, it will

aim to reinforce the skills of government officers working in trade related ministries and

implementing agencies on issues related to trade policy, commercial diplomacy and

regulatory reform. The main way in which to achieve this through the institutional capacity

building of key local training institutes, which is intended to have an immediate effect on the

capacity of government officers working on trade policy issues.

In addition, Component 1 promotes comprehensive, regular and well informed public-private

dialogue among the government, private sector and civil society for trade policy development,

monitoring and evaluation. To promote local ownership and legitimacy of the dialogue, a

steering committee comprising equal representation of the public and private sectors has

been established with the formal approval of the Ministry of Commerce of Pakistan. Its

mandate is to oversee the planning, implementation and monitoring of public-private dialogue

on key issues. To better inform the public-private dialogue process, research studies are

commission and internationally peer reviewed before dissemination to stakeholders.

The targeted interventions of Component 1 to achieve these goals constitute the following:

Result for Component 1: Coherent trade policy and regulatory reform for export

competiveness

1. The Pakistan Institute for Trade and Development (PITAD) institutional capacity is

strengthened

2. PITAD's and other research institutes' expertise on trade policy strengthened

3. Government officers' capacity on specific trade policy and international trade negotiations

strengthened

4. Research studies contributing to the development of a national export strategy conducted

5. Public-private dialogue for a coherent national export strategy is fostered”

For enquiries and further details about Component 1

Mohammad Owais Khan, Programme Officer (Trade Policy), International Trade Centre (ITC) EU funded TRTA II programme, Islamabad, phone: +92-51-8354822, Email: [email protected]

Trade Related Technical Assistance (TRTA II) Programme

mailto:[email protected]

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