Almost a decade after the idea of preferential trade was first proposed, Iran penned its first preferential tariff agreement (PTA) with Turkey when the Turkish Prime Minister Recep Tayyip Erdogan visited Iran in January 2014.
According to the agreement, 125 Iranian goods and 140 Turkish goods are to be traded based on preferential tariffs.
Iranian officials say Tehran is presently hit by a double whammy of plummeting oil prices and western-led sanctions over its nuclear energy program, affectively trimming down the administration’s revenues and impeding trade with other countries.
Iran is not a member of the World Trade Organization (WTO). Therefore, it would be natural for it to eagerly seek PTAs to set up safety nets for its growing economy via boosting non-oil exports.
Officials say PTAs will increase the quality of domestic products by creating competition with their foreign rivals, regulate the import of foreign brands and as a result curb the import of contraband goods.
However, the PTA contract with Turkey, which came into force this January, has sparked a rising chorus of criticism among some groups in Tehran.
PTA Items
The strongest criticism by the opponents of the PTA with Turkey is of the items included in the bilateral trade list. Based on the agreement, Iran exports agricultural products to Turkey and imports industrial products and machinery.
“The move will definitely ruin the domestic industrial sector,” Nader Ghazipoor, a parliament member said.
In a letter to the first vice president, Es’haq Jahangiri, Iran Entrepreneurs Forum asked for the PTA to be abolished, “since the agreement opens a gateway to the industrial prosperity of Turkey in lieu of that of Iran,” the head of the organization, Hamidreza Ghaznavi, said.
Contrariwise, as PTA proponents argue, Turkey’s agriculture sector is highly protected by the government, and high tariffs of up to 42 percent are charged on the country’s import of agriculture products, while the tariffs on non-agricultural products are only about 5.5 percent. So lower tariffs on exporting agricultural products to Turkey can be regarded as a bonus; while lower tariffs on industrial products isn’t much of a bonus for Iran, as the ministry of industry, mine, and trade public relations said in response to the PTA critics.
Additionally, regarding EU-Turkey customs union, the Turkish administration is obliged to match its tariff rates with those of the EU; but it can reduce its tariffs on goods that are not mentioned in its agreement with the European bloc, including agricultural and some industrial products, as the tariffs on these commodities have been lowered in its PTA with Iran, the ministry’s public relations added.
“Based on official statistics, Iran is the tenth importer of Turkish goods, but only 2.5 percent of Turkey’s imports are from Iranian”, Mehdi Behkish, secretary general of the Iranian National Committee of the International Chamber of Commerce (ICC), said .
Tariff Rates
The government has come under fire for its policy to annually decrease import tariffs. The ongoing decline that import tariffs are set to witness will undoubtedly be in Turkey’s favor, critics say.
Furthermore, opponents assert that Turkey is not experiencing the same circumstances as Iran since its trade activities are not restricted by sanctions.
Conversely, as proponents like Golnaz Ansrollahi, an official in the ministry of industry, says, the tariffs in the PTA are not fixed and both governments can revise them in the future.
In addition, as the advocates argue, the tariffs levied on goods imported to Iran are among the highest in the world and the PTA’s reduction of the rates will still keep them higher than the international average. For example, Valliollah Afkhamirad, the head of Trade Promotion Organization (TPO) says that official tariffs levied on apparel exports is about 200 percent and based on the signed PTA they have been reduced to 120 percent, which is still notably high. Therefore, this should be no threat to the domestic textile industry.
PTA supporters name curbing smuggling, as a major positive outcome of such agreements. In some officials’ opinion, reducing tariff levels and even removing them is the best way to combat smuggling. “As a matter of fact, high tariffs fuel smuggling,” Mehdi Behkish, says, adding that “smuggled goods, not the PTA, are the main competitor of our manufacturers.”
Minister of industries, mine and trade, Mohammad-Reza Nematzadeh, admits that the Rouhani administration has inherited the PTA with Turkey from its predecessors when the country entered into negotiations with Turkey some 10 years ago. “The benefits of the PTA will unravel in the long run.”
Under the current circumstances, the PTA provides the domestic industry with first-hand experience in international trade; which would prepare the country for a post-sanctions scenario. “If domestic producers cannot compete with Turkish brands, they will not be able to do so in any other condition,” Mojtaba Khosrotaj, the deputy minister of industry, mine and trade believes.
Resisting Isolation
Supporting domestic production via high tariffs on imported goods is a transient protective policy and can lead to the creation of monopolies in the long run. That is, under the aegis of the government, domestic industries face no rival to compete with and will have no incentive to improve.
Moreover, remaining isolated in the world which is moving fast towards economic integration does not seem wise and the Rouhani administration should be hailed for its audacity to put the ten-year-old decision into practice.
The Rouhani government has decided to reduce tariff rates in a bid to make the economy more competitive, while tariff is essentially tax and a source of revenue for the government. In other words, the government has embarked on signing PTAs with neighboring countries in a bid to increase trade and in the hope of recouping the lost revenues by increasing trade volume.
However, the administration is highly recommended to revisit the list of items of the PTA and use the private sector’s consultation to consider their demands and concerns.
The administration can also reduce tariffs on the import of raw materials instead of final products. Imports of final products can harm domestic production and lead to unemployment. But importing raw materials can help turn the wheels of domestic production and create jobs.
As a matter of fact, under current circumstances, it would be a high expectation to suppose that domestic manufacturers are capable of competing with foreign brands, as they rarely produce quality products due to high production costs and low productivity.
Hopefully, future PTAs will be inked with more consideration and less haste.
