ACTION ON PAK-AFGHAN TRANSIT TRADE NEGOTIATIONS

UNCLAS SECTION 01 OF 03 ISLAMABAD 000930

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAID EINV ETRD PK
SUBJECT: ACTION ON PAK-AFGHAN TRANSIT TRADE NEGOTIATIONS


1. (SBU) Summary: The Pakistani Cabinet approved the opening of
formal negotiations on a new Afghanistan Transit Trade Agreement
(ATT) April 8, a significant step toward replacing the outdated 1965
agreement currently in place. While this is a welcome step forward,
challenges ranging from vested interests, inadequate infrastructure
and tense relations with neighboring India mean that concluding a
new agreement will not be easy, despite welcome leadership by the
Ministry of Commerce. Pakistan prefers to conclude an agreement
with Afghanistan without addressing issues with India. Engaging
both the military and the civilian leadership in Pakistan will be
essential to making a new transit trade agreement a reality. End
Summary.

Background
--------------


2. (SBU) The flow of goods between Afghanistan and Pakistan (and by
extension to/from regional and global markets) is hindered by an
outdated 1965 transit trade agreement. Limitations of the current
agreement fuel corruption on both sides of the border, and the issue
has been a significant source of irritation between the two
governments.


3. (SBU) Afghanistan is eager to adopt a new bilateral agreement and
presented Pakistan with an updated text to re-open negotiations in
November 2008. While Pakistan has traditionally been unwilling to
change the status quo, the new offer of reciprocal transit rights
across Afghanistan to reach Central Asia spurred the Pakistani
Cabinet on April 8 to approve the launch of formal negotiations with
Afghanistan. They plan to announce this at the upcoming Regional
Economic Cooperation Conference on Afghanistan (RECCA) in Islamabad
(May 13-14).


4. (U) Both the Asian Development Bank and the World Bank have
studied transit trade issues; the World Bank has been instrumental
in assisting both parties in the current negotiating process.
Canada has sponsored a dialogue (the Dubai Process) which includes
an effort to coordinate and improve operations at the border. That
process has set a target for concluding the new Agreement by March

2010. After discussing this issue at Joint Economic Commission
(JEC) meetings in November 2008, the GOP has been consulting
internally on the Afghan draft, with the help of a World Bank
facilitator. The April 8 Cabinet decision has moved the ball a step
further and we expect the GOP to hand over their comments on the
Afghan draft soon. Both sides report that they have identified
their negotiating committees but bilateral follow-through on this
issue has, as yet, no clear road map.

The Current State of Play
--------------


5. (U) Goods face significant delays moving in both directions,
increasing the cost of doing business. However no study has been
carried out to determine these costs. Afghanistan is one of few
countries with which Pakistan has a positive trade balance. Exports
were $ 1.143 billion and imports $ 0.091 billion in fiscal year

2008. For the first half of the current fiscal year (July -December
2008),Pakistan's exports ($ 772 million) increased by 56 percent
over the same period last year. Major exports include cereals,
petroleum and petroleum products, edible oils, construction material
and plastic products. Currently, all Afghan-bound goods arrive at
the Port of Karachi. Per the 1965 treaty, the Afghans are unable to
competitively bid for commercial transport and are required to use
the National Logistics Cell (NLC) trucking company, an arm of the
Pakistani military.


6. (U) Due to the large flow of goods moving into Afghanistan
post-2001, goods often sit for long periods in extreme temperatures
at the port. Once placed on a truck, the goods move slowly through
a system of unofficial check points throughout Pakistan. Goods move
slowly because the roads and trucks are less than perfect. There
are further significant delays as a result of inadequate
infrastructure (narrow roads, no pull-asides) at the Torkham border
crossing for customs processing. Most trucks do not cross the
borders, so commercial goods are off-loaded by hand and placed on
Afghan trucks for the onward journey to Kabul or beyond.


7. (SBU) The roads between Peshawar-Torkham and Karachi-Chaman need

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repairs to continue to handle heavy trucks. Repairs to the routes
would speed the progress of traffic (now there are many chokepoints
caused by road disrepair, leaving slow-moving traffic vulnerable to
attack) and improving alternative routes (bypasses around Peshawar
and Quetta) would take traffic out of the cities and provide an
option if one route was blocked by an attack. Specific improvements
at the border crossings would also help: generators, lighting,
temporary housing for border/customs officials, computer upgrades,
and separate secure parking areas for trucks that need have
paperwork or security screening. Plans and funding exist to address
these needs on the Afghan side of both crossings. However, to have
the needed impact, matching improvements on the Pakistani side of
the border are also necessary. There are currently no USG plans or
funding for this purpose, and we do not believe any other donor has
such plans. Although Pakistani customs officials have indicated
their willingness to keep the border open longer hours, seven days a
week, they cite security and poor infrastructure as impediments.

Impact on U.S. Military and ISAF
--------------


8. (SBU) Generally speaking, U.S. military and ISAF bound cargo is
able to cross the Pak-Afghan border smoothly. At present 90 percent
of all re-supply goods arrive at the Port of Karachi and are then
trucked across the Torkham and Chaman border crossings. Goods are
pre-cleared prior to arrival in Karachi; the computerized
pre-clearance system between Karachi and the two main border
crossings generally works quite well. Problems arise when other
commercial traffic gets hung-up; the two-lane roads leading up to
the border crossings, and the choke points at the crossings
themselves mean that if even one or two commercial trucks don't have
their papers in order, any traffic behind them (cleared or not) also
gets delayed. A transit trade agreement that put in place processes
to move all traffic more smoothly would help.


9. (SBU) The U.S. military has developed a system in which they
commercially contract trucks that can cross the Pak-Afghan border to
ease the flow. All of these factors combined have forced the U.S.
military to budget months for travel that should take days. Rail
transport northward in Pakistan is equally problematic, with
antiquated or nonexistent rail lines being the primary culprit.

Challenges to a New Agreement
--------------


10. (SBU) Securing adoption of agreement, once negotiated, will be
difficult because of a number of deeply embedded Pakistani
concerns-smuggling is the issue on which the GOP is most vocal.
With Afghan tariffs among the lowest in the region at five percent,
Pakistan faces an influx of goods bound for Afghanistan that are
then smuggled back across the border into Pakistan. Electronics,
food, cigarettes, tires, and construction supplies are among the
items which then cause distortion in Pakistan's markets, disrupting
both trade and production cycles. A major Pakistani complaint is
that Afghanistan imports items for which there is little or no local
demand, and in excessive quantities (the National Logistics
Committee claims 10 to 20 times in excess of domestic demand; the
current agreement allows for imports totaling only twice domestic
demand). The GOP asserts that "most" of these goods find their way
back into Pakistan, since customs checks are not always conducted
immediately at the border.


11. (SBU) Furthermore, Pakistan has little appetite for allowing
India to transit goods to Afghanistan via its territory,
particularly as India does not allow reciprocity for Pakistan goods
to transit its territory. Ministry of Commerce officials have
expressed concern that a lack of bypass roads around the border at
Lahore will cause traffic bottlenecks. A lack of reciprocity from
India to open to trade routes for Pakistani trade to Bangladesh and
other markets is another area of concern. Pakistani officials have
indicated that it would be easier to secure a new transit trade
agreement with Afghanistan separately from improved trade with
India.


12. (SBU) Finally, Pakistani military, NLC and ISI interests control
the trucking industry for Afghan-bound and Afghan-origin goods, and
benefit financially from their current monopoly. These groups also
remain suspicious of any improvements to existing bilateral trade
arrangements; particularly as they do not see the benefit to

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Pakistan.

Process
--------------


13. (U) Once the negotiating teams reach agreement, the draft text
has two possible routes for approval: via legislation or via
Presidential Ordinance. To become law, the text must be vetted by
the Law Ministry before moving to the Cabinet for approval. Once
the Cabinet has approved, the draft agreement must go to the
Standing Committee of the National Assembly for its clearance. The
agreement will then go to Parliament, the National Assembly, and
then to Senate to become a law.


14. (U) An ordinance is the action of the executive. Ordinances are
valid for four months, but in practice are routinely renewed once
put on the books. Although it is faster and more certain, adopting
laws by ordinance rather than the legislative process is coming
under increasing criticism.


15. (SBU) Comment: We need to convince Pakistan that the current
situation is not in its national interest; in this sense the April 8
cabinet decision to re-open negotiations is a long overdue and
welcome step. The Pakistan Ministry of Commerce has played a
positive role in bringing Pakistani stakeholders on board, but it is
clear that we must also raise this through military channels. In
the meantime, the status quo hinders economic growth in both
countries and Pakistan is losing needed income as countries like
India turn to Iran for its Afghan transshipment needs. In addition,
future economic growth depends on improved trade flows which must be
regularized to avoid compounding the rapidly deteriorating security
and economic situation along the Afghanistan-Pakistan border. By
maximizing trade efficiencies between the two sides, a new agreement
will also assist ISAF efforts as we increase our presence in
Afghanistan.


16. (SBU) Comment Cont'd: For its part, the GOP will seek
acknowledgement that Pakistan is bearing significant costs by
facilitating trade to Afghanistan. While there is a case to be
made, we must be cautious if they try and conflate enforcement of
the agreement's provisions with the agreement itself. End Comment.

PATTERSON