NO BARRIERS FOR FREE TRADE

As key partners in the region for thirty years, Azerbaijan and Türkiye have implemented of the region's largest energy and transport projects. In recent years, the business communities of the two countries have been actively joining efforts to develop the non-oil sector and expand mutual trade turnover. In March 2021, Ankara and Baku singed a breakthrough bilateral agreement on preferential trade in this area. This trend further intensified in July 2023 after the Azerbaijani parliament (Milli Majlis) passed a law expanding the scope of the agreement.

Similarly, Azerbaijan is developing relations with Pakistan. Thus, it is expected that by the end of summer both countries finalise a joint draft agreement on preferential trade.

Common market

The integration of regional economic unions and common customs zones have been observed in many regions of the world since the 1960s-1970s thanks to various agreements—the most important component of such interstate models to liberalise cross-border trade. Such trends have been actively promoted in highly developed countries. In recent decades, this has been observed in developing countries as well because of favourable access to large regional markets, cheaper production resources, etc. Agreements on favourable trade terms contribute to the reduction of transport costs and increasing production. They also provide facilities necessary to attract foreign direct investment for countries willing to enter large integrated markets.

First steps to conclude relevant bilateral or multilateral agreements included tariff reductions within a given group of countries. The rules of the General Agreement on Tariffs and Trade (GATT) were still in force at that time. Although local preferential regime between several countries contradicted the principles of the GATT's successor, World Trade Organisation (WTO), preferential trade instruments were allowed as temporary to deepen integration processes in world trade. According to WTO data, by the beginning of the 21st century there were more than three dozen integration trade associations of various types in the world.

Preferential trade is a fairly common form of economic integration to promote commercial ties between a group of countries. Customs unions and common market become further integrated into allied state associations.

This was how the European Economic Community operated in the early stages of its development. Similar mechanisms were used in the European Free Trade Association, which was established in 1960 together with Austria, Finland, Iceland, Liechtenstein, Norway and Sweden. Similar schemes formed the foundation of the 1994 agreement to create the Free Trade Area between the US, Canada and Mexico, as well as the Southern Common Market, created in 1985, which included Argentina, Brazil, Uruguay, Paraguay and Venezuela.

The experience of these countries shows that agreements on granting privileges and various trade preferences are usually based on the principle of mutual moratorium on duty increases, hence contributing to the elimination of non-tariff barriers through the unification of various certificates, food, sanitary and other regulations.

Turkic integration

It is not surprising that member states of the Organisation of Turkic States (OTS) also make attempts to develop preferential trade. A year ago, the strategic document Turkic World-2040 initiated and supported by Türkiye identified the integration of customs and transport systems within OTS as a key issue. Azerbaijan has also intensified activities on the adoption of the relevant legal framework. For example, the draft Agreement on the Establishment of Simplified Customs Corridor between the Governments of the Organisation of Turkic States was discussed in the Milli Majlis. Most Central Asian countries maintain a similar position. According to Baghdad Amreev, Secretary General of the Organisation of Turkic States, the agreement on simplified customs procedures between Turkic countries has approached the signing stage. In addition, the OTS members have started the establishment of a free trade regime. Uzbekistan is the most active of the Central Asian states and is trying to realise this initiative in a number of areas with Azerbaijan and Türkiye.

Baku and Ankara were the pioneers among the OTS countries to introduce preferential trade mechanisms thanks to a relevant treaty effective since March 2015. The document introduces zero customs duties on mutual supplies for 15 items, mainly food products. The list includes some varieties of Azerbaijani cheese, grapes, plums, persimmons, black tea, tomatoes, cucumbers, etc. In turn, Azerbaijan provides access to its market for Turkish goods, including processed cheese, sunflower seeds, chewing gum, chocolate products, biscuits, tomatoes, etc. In some cases, annual quotas are applied to the listed export products.

So far the agreement has contributed to the increase of Azerbaijani-Turkish trade turnover to $4.5b in 2021 and more than $5.842b in 2022. Mutual trade has been developing dynamically in 2023 as well. In January-May, Azerbaijan's cumulative exports reached 16.17%, while Turkish imports to Azerbaijan accounted for 14.1%.

In the coming years, the two countries expect to raise the level of trade turnover to $15b a annually.

These ambitious goals require an almost threefold increase in trade turnover. Baku and Ankara intend to expand the customs privileges regime accordingly. Thus, in April 2023, they signed a protocol on amendments to the agreement concluded two years ago. In July, the parliament of Azerbaijan adopted the relevant law, which approves the protocol on amendments to the existing Preferential Trade Agreement between the governments of the two countries. Based on this protocol, Azerbaijan and Türkiye will import and export 15 new types of industrial and other commodities, increasing their total number to 30. Annexes to the document specify the basic tariff rate or additional customs duty to which the discount will be applied for each product.

New agreement with Pakistan

Azerbaijan is building similar partnerships with Pakistan. For many decades, the two friendly states have been taking concerted steps in foreign policy in various international organisations and supporting each other in the UN. Baku and Islamabad have long been actively cooperating in the defence industry. In the last three years, they have set a goal to expand trade and economic ties. Last year, the trade turnover between the two countries reached $28.1m (x1.4 times against the 2022 indicator).

However, it is quite obvious that the current indicators do not correspond to the economic development and potential of the two countries. Therefore, a number of bilateral meetings at the level of governments and relevant departments have been organised over the past two years, and the parties have identified the most optimal vectors for expanding business cooperation. The official visit of Pakistan's Prime Minister Muhammad Shahbaz Sharif to Azerbaijan in mid-June made a significant contribution to this work. During the visit, a number of important agreements were reached on expanding trade, increasing the number of flights, as well as implementing joint initiatives in the green energy and petrochemical industries, supply of liquefied natural gas (LNG). SOCAR of Azerbaijan and its partner Pakistan LNG Limited concluded in Lahore a framework agreement on LNG supplies to Pakistan at a favourable price.

Over the past three years, Azerbaijan and Pakistan have held a series of negotiations, which resulted in a joint draft agreement on preferential trade. A month ago, they signed a Memorandum of Understanding on trade co-operation, including a batch of measures to deepen trade ties. The list of products preferentially trade under the agreement is ready. A delegation from the Azerbaijani Ministry of Digital Development and Transport (MDDT) discussed the achievements during a recent visit to Pakistan. During his meeting with Pakistan's Federal Minister of Commerce Navid Qamar, Azerbaijani MDDT Rashad Nabiyev noted about the plans to finalise the draft agreement in August and sign an agreement on transit trade between Baku and Islamabad by October 2023.

Pakistan is most interested in establishing supplies of its textiles, silk, pharmaceutical products, and foodstuffs to Azerbaijan (an agreement on the duty-free import of Pakistani rice is already in force). Moreover, Azerbaijan can become an intermediate hub for transit or re-export of some Pakistani goods to the CIS countries bound with agreements on customs privileges, as well as to the favourable Turkish market.

Equally important are the Azerbaijani-Pakistani agreements on the development of a short transport line for the delivery of goods by land routes in transit through Iran. The first successful steps in this regard were taken in October 2021. As part of a pilot project, the Pakistani logistics company National Logistics Cell organised a test delivery of goods to Baku by two heavy-duty trucks. It is expected to start full-fledged cargo deliveries and expand bilateral trade turnover as soon as the relevant regulatory framework is in place and a transit agreement is concluded.