In a post-pandemic global economy that is characterized by supply chain disruptions and fuel insecurity, the rise in global shipping costs is one of the major drivers for soaring inflation rates. While their impact on inflation is less severe than rising energy prices, climbing shipping costs produce more of a slow burn.
According to data released this year by the IMF, the impact of shipping costs on the consumer peaked after 12 months of the price hike, and can last for up to 18 months. Further, not every country is affected by these soaring costs the same way. Countries such as Pakistan, that import a large share of their consumer products are more adversely impacted than others. Similarly, landlocked countries such as the Central Asian states face greater inflationary pressures, as they have to pay higher freight costs in order to source imports.
These shipping costs will continue to rise this year due to the impact of the Russia-Ukraine war on the global economy. However, this predicament also presents an opportunity to transform not only the nature of our economy, but to also reconsider how we source imports. The Central Asian states are some of those economies that are feeling the brunt of these costs due to being landlocked. At the same time, Pakistan’s economy is in dire straits, partly due to the impact of a rise in global prices. Opening up our territory to transit trade is one of the ways through which Pakistan can economically benefit by connecting these states to India. In turn, we too can have greater access to markets east of India. Enabling the flow of goods will allow us to financially profit from allowing states to utilise our transport networks.
One oft-repeated claim regarding our foreign policy is that Pakistan is blessed with a geographical position that enables it to play a great role on the geo-strategic stage. The founder of the nation, Muhammad Ali Jinnah, went as far as to argue that: “Pakistan is the pivot of the world, as we are placed on the frontier on which the future position of the world revolves.”
Rather than getting into a debate about whether such claims about our self-perceived geo-strategic importance are accurate or not, it is much more important to consider whether we have utilized this blessing in the best manner. Pakistan has used its strategic location to extract benefits from global powers when they have a stake in the region. For different periods in our history, we have depended on the US’ interests in Afghanistan in order to welcome an influx of aid and opportunities. However, once these powers reduce their interest in the region, we fail to pivot towards a more sustainable policy. It is high time that rather than tactically using our geo-strategic location when the opportunity arises, we develop a long-term strategy that hinges on regional connectivity and geo-economics.
These shipping costs will continue to rise this year due to the impact of the Russia-Ukraine war on the global economy. However, this predicament also presents an opportunity to transform not only the nature of our economy, but to also reconsider how we source imports.
There are several other reasons to open our borders to the regional flow of goods. The Central Asian states face a host of issues in conducting trade. It costs five times more to ship a container to Shanghai from Central Asia than it does from Turkey or Central Europe. These states also perform poorly on the World Bank’s Logistics Performance Index, which includes indicators such as the time it takes for customs clearance, infrastructural efficiency, and general timeliness. However, Pakistan too performs abysmally in these indicators. If we are to become an effective transit hub, then it is necessary for us to move towards structural reforms. Our performance is particularly poor as far as the efficiency of our customs clearance process is concerned.
Another key stakeholder to consider in any debate regarding transit trade is Afghanistan. As a landlocked country, Afghanistan is dependent on its neighbour’s providing a free flow of goods. Over the last few years, there have been several roadblocks in properly implementing the Afghanistan-Pakistan Transit Trade Agreement. The previous Afghan administration had insisted on the inclusion of India into the agreement, while Pakistan had unsuccessfully tried to include Tajikistan as a stakeholder. It is imperative that access to other markets is provided to Afghanistan. The free flow of goods, in particular food items, would aid in alleviating the plight of the Afghan people. Further, a wide-ranging regional transit trade agreement will entail that all regional actors hold a stake in ensuring the stability of Afghanistan.
A similar argument can be made regarding the impact of transit agreements on Pakistan’s security concerns. All regional actors who become party to a potential trade agreement will remain invested in a constructive dialogue that is predicated on securing the viability of these linkages. Currently, those strategic policy makers in Pakistan who are against granting India access to Afghanistan and Central Asia, argue that such a move would allow India to increase its influence in that particular region. However, the assumption being made here is that India does not have other avenues to cultivate these connections. Recently, India and Iran have pledged to provide the Central Asian states with dedicated areas for their trade operations at Chahbahar Port and to relax customs rules for them.
In a sense, both Iran and India have seized upon our inability to fully utilise the port at Gwadar, as well as on the hesitance of the Central Asian states to use Russia as a transit hub in the aftermath of the war in Ukraine. However, this does not mean that there is no room for Pakistan to maneuver and use its geo-strategic location. Pakistan still remains the cheaper option for all stakeholders, as it significantly drives down freight costs by allowing states to depend on a land route, rather than relying on shipping routes. In fact, if Pakistan becomes the crossroads of a sizeable transit trade route, then all actors would have a stake in improving cooperation in matters such as counter-terrorism and regional security. Such a mechanism can also act as a foundation for brokering further trade agreements with individual states.
The existence of a transport corridor can also aid in inducing economic development along any potential route. In an ailing economy, it is necessary for such a stimulus to incentivize the creation of economic opportunities and infrastructural development. Unfortunately, many states are moving towards economic nationalism, given the impacts of Covid-19, the Russia-Ukraine conflict, and a US-China “trade war”. However, countries such as Pakistan, Afghanistan and the Central Asian states stand to lose the most if such a mindset is adopted. These states cannot meet the demand for food products, energy, and other commodities through domestic production. The creation and growth of a transit trade route can allow these states to cooperate on a host of other issues such as sourcing cheaper fuel. Currently, India and Iran are planning on introducing a “sanctions-proof” route for oil and gas that links South Asia to Central Asia, and eventually Russia. Projects such as the ailing Turkmenistan-Afghanistan-Pakistan-India pipeline (TAPI) need to be resurrected, especially considering the worrying reality that the region is moving towards greater connectivity, with or without Pakistan.
It is extremely perplexing that while grand trade routes such as the Chinese Belt and Road Initiative enjoy widespread public support in Pakistan and the approval of decision-makers in Islamabad, there is little discourse regarding the development of transit routes on a regional level. If restricting India’s influence is a concern, then we are already failing to do so as India has increased its influence in East Asia, the Middle East, and Central Asia at a rapid pace over the last decade. Our current policy of refusing to link South Asia to Central Asia is costing us more than any other regional stakeholder. We also need to consider the fact that transit routes are fluid and ever-growing. By allowing India to use our territory for the transport of goods, we too can gain a greater foothold in markets such as Bangladesh, Myanmar, and the South-East Asian states. By driving down transport costs, our goods can become much more competitive, and this can allow for the development of our own industrial sector.
By opting for greater cooperation with states in Central and South Asia, it does not necessarily mean that we are forsaking our relationship with China. In fact, it is necessary for us to diversify our trade linkages, especially considering the supply-chain disruptions that the Chinese economy has gone through due to the impact of the pandemic.
If we are to develop effective transit routes linking the states around us, it is also imperative that we understand certain risks that need to be addressed and mitigated. The development of transit routes can lead to rapid environmental degradation if such projects are not carried out in a sustainable manner. However, a cohesive regional approach to counter such impacts can minimize any potential harm that may be caused to the environment. In fact, the existence of such networks can act as a catalyst for promoting regional cooperation over the climate crisis.
Apart from opposition from strategic circles, certain local traders and manufacturers have opposed linking India to Central Asia, as they believe that their goods will become less competitive. At the same time, we need to recognize that there is already a large quantity of goods that are being traded illicitly from India to Afghanistan through our territory. Even our own goods are illegally being routed to both countries due to disruptions in formal trading channels and the existence of a cumbersome customs regime. As a result, the state is losing out on revenue that can be generated from duties, tariffs, and taxes. Such an attitude also induces unproductivity, as rather than choosing to develop competitive products, our local industries are trapped in a state of malaise. As outlined earlier, the existence of regional trade routes with low tariffs can actually make our goods competitive in other markets and also introduce them to previously unexplored markets.
It is clear that our current policy of refusing to be a part of regional trading networks is having adverse impacts on our economy. Given the poor state of our economic affairs, it is necessary for us to explore new avenues for generating revenue and forging trade partnerships. While we may not be the “pivot” of the world, we can still be a part of a connected region that hinges on cooperation and collective growth. Rather than complaining about the bad hand we have been dealt due to the pandemic and the conflict in Ukraine, we can use these geopolitical concerns to our own advantage. Moreover, by developing a long-term strategy hinging on connectivity and linkages, we can move towards ensuring regional prosperity and security. The impact of such measures will further lessen the burden on our economy and security apparatus.
By opting for greater cooperation with states in Central and South Asia, it does not necessarily mean that we are forsaking our relationship with China. In fact, it is necessary for us to diversify our trade linkages, especially considering the supply-chain disruptions that the Chinese economy has gone through due to the impact of the pandemic. Moreover, even our Chinese neighbours are increasing their economic engagements with Central Asia, Iran, and India. If we are to somehow claw our way out of this economic slump, it is imperative that we search for new markets and seek to connect these markets in an innovative manner.