Exploring the Prospects of Pakistan’s Trade in ECO Bloc & Identification of Tradable Products

 Jahangir Achakzai*
           
Abstract

The member countries belonging to the ECO- economic bloc are characterized by having centuries old trade relations. However, these relations did not portray a remarkable improvement due to different economic and political reasons. Despite these economic and political breakdowns trade among them continued without much interruption. The region has a large trade potential and the Intra-regional trade can be increased over not a very long period. The trade potential exists both in terms of “trade diversion” from traditional sources towards ECO by removing the constraints and in terms of “trade creation” and “trade expansion” by easing import restrictions. By harmonizing regional development strategies, reducing Tariffs and non-tariff barriers and improving the infrastructure the ECO can prove a successful economic bloc in the region.

Introduction

The paper is a sequel to previous paper appearing in Pakistan Development Review (PDR) , where a gravity model of trade was applied to estimate the magnitude of potential trade flows between Pakistan and the nine Economic Cooperation Organization (ECO) member countries.  The result shows that the ECO bloc has great potential for the member countries. However, a dismal picture is presented by the available information regarding the share of the member countries in intra-regional trade which has never exceeded 6.0 percent of their total trade share with countries of the world. This low level of trade is not indicative of a paucity of opportunities, but rather a reflection of several trade-inhibiting factors, which must be overcome before the members have a chance of expanding their trade with each other to a meaningful level. The present paper is an effort to explore the future prospects of intra-regional trade among the countries of ECO bloc.

Economic Cooperation Organization (ECO)

The idea of regionalism is not new in this part of the world. The founder members of ECO bloc (Pakistan, Iran & Turkey) have been working successfully under the umbrella of Regional Cooperation for Development (RCD) since 1964. Although the performance of RCD has not been so impressive in comparison to EU and ASEAN etc. yet, the joining of seven new members namely; Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan in the year 1992 made it an important regional bloc in the area. Since then, there has been efforts to enhance cooperation among the member countries in all fields specially trade liberalization. The signing of ECO Trade Agreement (ECOTA) by the member countries of ECO in the year 2003 is a step towards that end. Under the agreement the member countries agreed to slash tariff rate to maximum of 15% in the next eight years to come.
           
Trade Potential

ECO has a large trade potential and Pakistan’s trade with countries of the region can be increased over not a very long period. The table gives the estimated future trade among Pakistan and nine ECO states .In the table except for Afghanistan and Turkey where the trade potential is fully exhausted the remaining seven countries are trading with less than 20% of their potential, even country like Iran which shares common border with Pakistan is trading with only 10% of her potential. The trade potential exists not only in terms of “trade diversion” from traditional sources towards ECO by removing the constraints but also in terms of “trade creation” by easing import restrictions. The trade potential may only be realized if these import duties are reduced extensively on the items that are the main exports of the ECO member states.

 

 

Table 1: Pakistan's predicted trade with the countries of the ECO
(Mill $)

Trading Country	Current Exports	Predicted Exports	Current: Predicted Ratio (%)
Turkey	110	98	112
Afghanistan	222	229	97
Azerbaijan	2	9	22
Turkmenistan	2	15	13
Kazakhstan	11	92	12
Iran	41	396	10
Uzbekistan	8	75	10
Kyrgyz Republic	1	13	8
Tajikistan	1	17	3

While lowering of import duties and quantitative restrictions would promote trade, they may have serious implications for infant industries unless effective measures are instituted against dumping. The present anti-dumping laws are quite ineffective because data required to prove dumping, as required by law, simply do not exist. Moreover, sufficient protection or subsidies for infant industries may have to be provided if Industrialization is not to be sacrificed for realizing higher trade levels.

Identification of Tradable Products

At the request of the Economic Cooperation Organization (ECO) Secretariat, a study was conducted with a view to identifying product groups with relevant intra-regional trade potential. The methodology adopted by the International Trade Centre (ITC) while conducting the study mainly dealt with the analysis of trade flows to identify products with a potential for increasing intra-regional trade. The approach primarily consisted of identifying complementary products and establishing whether a country has the ability to supply the potential demand from a third country.
Complementary products are defined as . The Indicative Trade Potential indicator is
Formally Indicative Trade Potential = Supply capacity of country-i less Market absorption of country-j.

Example: According to 2003 trade figures, Pakistan’s exports of rice to the world reached an average of US$ 633 m. per year, of which US$ 46 m. was exported to Iran. Iran’s imports from the world were approximately US$ 272 m. As a result, the indicative trade potential between the two countries is estimated to be US$ 272 m.

Item	Present Trade	Indicative trade potential	Supply capacity of Pakistan (exports to the world)	Market absorption of Iran (imports from the world)
Rice	US$ 46 m.	US$ 272 m.	US$ 633 m.	US$ 272 m.

The untapped trade potential between two countries is the difference between the present level of trade and the indicative trade potential which is equal to US$ 226 m. (US$ 272m. less US$ 46m.).
According to the study, the indicative trade potential is, as its name implies, indicative and may not be taken as a proof of complementarity between countries.
In the case where there exist a significant trade potential and presently no regional trade takes place, other aspects may be looked into. They include export competitiveness, consumer demand, transportation charges, trade barriers, and recent economic events (e.g. the impact of a regional financial crisis or political events).
The findings of the study pinpoints that Intra-regional trade grew by 17% between 1994 and 1997 while, extra-regional trade grew by 41% during the same period. Against this backdrop of low intra-regional trade growth, the trade flow analysis seeks out those products and regional markets with the greatest trade potential.
The Intra-regional trade in the ECO region has lost some of its importance, owing to modest export growth. In particular, the share of intra-regional exports in total exports fell from 7.7% to 6.4% between 1994 and 1997. In value terms, intra-regional exports have increased by 5.4% annually, compared to 12.2% with the rest of the world.

Indicative Trade Potential

Using a methodology developed by the International Trade Centre, the indicative trade potential for the sub-region was estimated to be approximately US$ 16 billion. With intra-regional trade at US$4.8 billion in 1997, it appears that intra-regional trade is at less than one third of its potential.
The results suggested that the agricultural and processed food sectors displayed the highest levels of trade potential, followed by the mineral, chemical, textile and clothing, metallurgy, machinery and mechanical appliances sectors.
The textile and clothing sector, cotton and woven fabrics ranked highest in terms of trade potential. In the metallurgy sector, iron or steel were considered to display significant potential for greater intra-regional trade. In the chemicals industry, cyclic hydrocarbons and medicaments showed the highest levels of trade potential.

Pak-ECO Tradable Products

Products potentially tradable between Pakistan and ECO member Countries may be identified in three ways.
First, a product exported by Pakistan or ECO countries at least in one year in substantial quantity may be taken as potentially tradable product.
Second, products being exported by either Pakistan or ECO countries to rest of the world while the same products are being imported in other Countries of the region may be taken as potentially tradable goods.
Third, the Chambers of Commerce and Industries may identify the potentially traded products.
The following products have been identified as Pakistan’s top fifteen potential exports to and imports from ECO countries.
Top fifteen potential exports from Pakistan to ECO countries.

1. Rice,
2. Cotton yarn,
3. Cotton fabrics,
4. Cereals & cereals preparations,
5. Miscellaneous manufacture articles,
6. Synthetic fabrics,
7. Animal & vegetable fats,
8. Apparel of material other than textile,
9. Petroleum & petroleum products,
10. Tarpaulins, Sails & tents
11. Clothing of textile fabrics
12. Carpet and rugs
13. Leather
14. Fruits and vegetables

15. Live animals chiefly for food

Top fifteen potential imports from ECO countries to Pakistan.

1. Petroleum & Petroleum Products
2. Raw Cotton
3. Machinery
4. Fruits, Vegetable Preparation
5. Chemical elements & compounds
6. Wheat and muslin Un-milled
7. Cork and wood manufactured
8. Chemical materials
9. Tires and Tubes of rubber
10. Iron and steel
11. Fertilizers manufactured
12. Miscellaneous manufacture articles
13. Ores and concentrates of iron
14. Chemical compounds
15. Manufactures of Non- ferrous metals

Politico–Economic Constraints on Trade Expansion

While the rationale for expansion of trade among the ECO member countries is obvious, ground realities leave much to be desired. The intra-regional trade in the ECO bloc has never exceeded 6 percent. This seemingly insignificant level of trade is not indicative of a paucity of potential, but rather a reflection of several trade-inhibiting factors that include; Non-availability of exportable surpluses, Inefficiency in Production Processes, Financial Constraint, Tariffs & Non- tariff barriers, Communication Gap, Customs procedures & transportation facilities etc.

Besides the above mentioned economic factors, there are number of political issues not allowing the inherent potential of regional trade to be exhausted in ECO bloc. In the case of Iran, Pakistan and Turkey, the relationships between them has been under heavy pressure due to political and, to some extent, religious differences which are continuously overplayed and politicized by the political elites of these countries. Turkey and Iran have deep differences over the issues of Islamic parties in Turkey and the situation in Israel and the occupied territories. To add to this list, there are the issues of Nagorno Karabakh, Armenia and Azerbaijan.

Iran and Pakistan have fundamental differences over the issue of war in Afghanistan. Iran has more than once protested to Pakistan for meddling in Afghan affairs in a way that its implications affect the foreign policy of regional powers.

Similarly, Iran’s relations with Turkey have been strained as a result of the Kurdish problem. Ankara has charged the Tehran government with giving sanctuary and aid to Kurdish insurgents.
The Iranian leadership envisions their country in the near future as the key player, economically and even politically and culturally, in the ECO region. Iran holds out to the landlocked states access to extensive port facilities on the Persian Gulf. The Iranians are also quick to point out that their trade offers the most secure and safe routes. By contrast, Afghanistan roads are characterized as unsafe, and Pakistan’s port of Karachi, although the closest route to much of Central Asia, depends on Afghan roads–in the absence of rail lines.

Prospects for Pak-Eco Economic Cooperation

Prospects for Pak-ECO Trade

Prospects for Pakistan’s trade with ECO member countries depend on the production pattern and development policies of the country. It seems that agriculture and agro-based industry would have a great priority . Similarly the small industry, processing industries and light engineering industry would continue to get attention. Pakistan’s comparative advantage lies in exporting rice, cotton, cotton yarn, cotton fabrics, leather, leather products, Cereals & cereals preparations, Tarpaulins, Sails & tents etc. The share of non-traditional goods must increase in order to realize growth in trade with ECO countries. Pakistan has many advantages in her trade with ECO countries. Well established traditions of trade, well developed means of communication and transport, geographical contiguity and religious and cultural bonds all place Pakistan in a position of advantage vis-à-vis other countries, and provide her with a readymade basis for greater economic cooperation. Need for greater information about the quality and availability of particular products and general trade prospects has been strongly felt in Pakistan. There is lack of information about consumer demand and the way new products can be introduced in ECO region. Pakistan has encountered difficulties in marketing some of its new products.
Similarly, the future pattern of imports in Pakistan would depend on the stages of development and the prospects of growth in the country. In fact, the type of commodities to be imported depends on the production pattern in the country. At present Pakistan is heavily dependent on the capital goods, Industrial raw material and some consumer goods. The heavy engineering base is being strengthened but the demand for imports would increase. Same is the case with the intermediate goods. In the next decade, therefore, emphasis would continue to be on the import of development goods and intermediate items. The import would also depend on the pattern of development in various sectors. If emphasis is to be placed on agriculture including water resource, imports would be different; similarly greater emphasis on rural road, rural electrification, and development of industries under private enterprises would change the dimension of import. The encouragement to the rural industries and small-scale enterprises would give different shape to the patterns of imports. The import would further be dependent on the credit facilities made available. Pakistan is keen to obtain capital equipments and various essential commodities under state loan or under supplier’s credit. Future economic relation would indicate the level of import and the type of product to be obtained from loan and credits.
As observed earlier, Pakistan has bright prospects of expanding its exports to ECO countries. Similarly, the members countries of ECO can, and need to, export more to Pakistan. Some specific areas of trade expansion are discussed here:
The exports of Pakistani cotton yarn, thread and fabrics can be expanded to the countries of the region. Pakistan can also meet their requirements of rice, cereals, animal & vegetable fats, fruits (especially oranges, bananas and mangoes), and fine quality cotton cloth. There are many other items, which can carve out for themselves a sizeable market in ECO counties.
Similarly, the member countries of ECO have a vast variety of goods to offer to Pakistan, viz. petroleum & petroleum products, machinery, chemical materials, iron & steel, fertilizers manufactured, tires and tubes of robber, chemical compounds etc.  and the list is constantly becoming longer.  This, however, does not mean that there are no new commodities to explore. There are many more items (such as mineral and agricultural products), which figure in the import bill, and though their individual contributions may be small, it would be rewarding to explore the possibility of trade expansion in some or all of them.
Above are indicated some of the directions in which trade may be expanded. Many more avenues are likely to open up as we get going. But trade expansion is not just a function of goodwill and of efficient trade mechanism. Such a mechanism will have to be evolved and kept flexible enough to adjust to the needs of a growing trade. Mutual concessions and special treatment of each other's goods are time honored and reliable aids to the free and bigger flow of goods. A well-formulated trade policy with a sequence of well-timed measure a1med at the expansion of trade between the member countries is the need of the time.
We have discussed some of the areas in which trade can be expanded among the member countries. We have seen that there exist a vast potential for co-operation among the countries. We have also enumerated the reasons why these countries are ideally situated for closer co-operation in the field of trade expansion with one another and have referred to the fact that there exists a ready-made basis for such co-operation. While the reasons point to necessity of greater and closer Pak-ECO economic co-operation, the existence of a ready-made basis spotlights the facility. Policy and practice must be so mobilized as to meet the necessity and avail the opportunity.
The list of areas of Pak-ECO co-operation to their mutual benefit is large, and will grow larger with time. Many opportunities exist and many more can be created. Whether these will be capitalized or not, will depend on the will and vision of the planners in the countries of the ECO region.

Pak-ECO Future Economic Cooperation

There is a possibility of greater economic cooperation between Pakistan and ECO member countries in the following fields.
In effort for rapid development Pakistan would need credit to bridge the gap between its savings and development needs. There are many sources from which funds can be obtained, but still the requirements are large. The country needs credit on easy terms – in the form of soft loans for many of its enterprises. These may be in the Industrial sector, water and power, heavy engineering, communication etc. The additional funds from Iran could be a great help. In fact one of the contentions of Pakistan all along has been to obtain complete plants on convenient terms.
Joint ventures between Pakistan and ECO countries can increase. The joint ventures can be very significant in establishing small units. These units to be established with small capital would go a long way in creating a middle entrepreneurial class. Small units with the help of these countries can be established for manufacturing tractors, steel, sugar, transport equipment and consumer goods.
The direction in which the economy of Pakistan is moving indicates that greater emphasis would be given to agriculture, livestock and rural development. These are the areas in which ECO countries can help. By associating in the planning process at the district level the countries can play a vital role in the development of the rural sector. The main fields, which need attention, are the drinking water supply, rural road programs, rural educations, rural electrification, social energy, rural housing, the establishment of rural industries etc. The experience of ECO countries in these fields can be very valuable. Similarly the agro-based industries are an important field in which the experience of ECO member countries can be utilized. These industries can be in food processing, meat, vegetable processing, etc. More important and significant would be the provision of experts and training facilities in various fields.

Conclusions

There have been attempts at trade expansion among the groups of developing countries to stimulate the rate of economic development. But most of these efforts however met with only limited success, or failure. Here an attempt is made to bring to light some of the areas in which trade can be expanded among the member states of ECO bloc. Many more avenues are likely to open up as we get going. But trade expansion is not just a function of goodwill and of efficient trade mechanism. Such a mechanism will have to be evolved and kept flexible enough to adjust to the needs of a growing trade. Mutual concessions and special treatment of each other's goods are time honored and reliable aids to the free and bigger flow of goods. A well-formulated trade policy with a sequence of well-timed measure a1med at the expansion of trade between the member countries is the need of the time. The fact remains that the realization of goals and objectives would require huge finance and continued international support. ECO has used its growing relations with international organizations to strengthen the activities and to stimulate further progress.
The list of areas of co-operation among the ECO member countries to their mutual benefit is large, and will grow larger with time. Many opportunities exist and many more can be created. Whether these will be capitalized or not, will depend on the will and vision of the planners in the countries of the ECO region.

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