The latest statistics of Iran Custom Administration indicate that Iran’s non-oil trade balance has became negative again in the first 4 months of current fiscal year (March 20-July 21), after it was positive during the last fiscal year.
While non-oil exports (including gas condensate, also known as ultra-light oil) has decreased by 9.5 percent, imports have significantly increased, by 24 percent, in terms of value.
Should Iran be concerned with the reappearance of deficit in its trade balance?
Mehrdad Emadi, a consultant at the UK-based Betamatrix International Consultancy, believes that the 4-month statistics, which reveal a sharp rise in Iran’s foreign trade driven by increased imports is a result of the JCPOA (Joint Comprehensive Plan of Action aka nuclear deal) which came into force in 2016.
"The rise was both expected and hoped for since it confirms that the removal of the trade and the financial restrictions imposed on Iran as a result of sanctions would enable the Iranian businesses and state-owned-enterprises (SOE) to trade more directly with their counter parts outside the country, in particular with their European counter parts without the need to pay heavy handling costs to the intermediaries and agents that often charged exorbitant fees to facilitate Iran’s foreign trade," said Emadi in an exclusive interview with Trend.
"In this context, the rise in imports could be considered a positive and perhaps the most significant outcome of the JCPOA following the Agreement with the P5+1," he said.
The Agreement undoubtedly has reduced the risk of trading with Iran, Emadi underlined.
He also named two reasons for considering the unimpeded trade and financial transactions with the rest of the world as the most significant benefit from the JCPOA.
"First, the Agreement has enabled Iran to speed up its industrialisation and technological upgrading through trading directly with world leading firms in the EU, the Republic of Korea and Japan on a more competitive basis that is very close to their world prices and avoid paying shell companies and enter opaque contracts which only facilitated rent-seeking activities both inside and outside the country," he said.
Coming to the second reason, Emadi said that through reconnecting its industrial firms with the technologically advanced economies in the European Union and the East Asia, Iranian authorities have stated that they intend to focus on the import of capital goods and gradually moving away from the import of consumer goods.
"This is a more efficient allocation of Iran’s revenue from the sale of non-renewable resources most notably crude oil and gas. However this path has not been without its challenges," Emadi said.
Top trade partners and rising share of the EU
"For the period presented in the report, we observe a fall of 9.5 percent in the combined value of Iranian exports of non-oil goods whilst imports show a rise of 24 percent. Effectively this gap between the rising costs of imports and shrinking revenue from exports has brought back Iran’s chronic deficit in non-oil trade," Emadi noted.
"A closer examination of the distribution of exports of the country and its imports reveals that China, Iraq, UAE, the Republic of Korea (ROK) and India have a combined share of nearly 69 percent in absorbing Iran’s non-oil exports. As for the key exporters to the Iran, China, UAE, ROK, Turkey and India have a combined share of 59.5 percent and China remains Iran’s largest trade partner in both export and import of non-oil," he said.
"I suggest a big part of the leading position of China in Iran’s foreign trade stems from the 20 years Trade Agreement signed by the previous Iranian government as a means to secure a stable trade link for Iran though at a very high cost to the industry and agriculture but at the same time ensuring that China would refuse pressures to join the sanction club against Iran," Emadi said, adding that through this agreement China has been able to import minerals and raw material on a preferential basis from Iran and in return almost in the majority of cases sell Chinese goods (sometimes a direct barter)," he explained.
The expert further said that a second observation is the role of the UAE in both supplying consumer goods to the Iranian businesses as well as acting as the third largest importer of Iranian goods.
"It has been suggested and the available data on secondary trade supports the view that most of the trade by the UAE is via Iranian network of traders who set up offices in the Emirate to reduce the bit of sanctions on the economy," Emadi said.
It has also been suggested that a noticeable part of these agents have had links with the quasi-state entities inside Iran, he added.
"It is noticeable that one of the dimensions of the new US sanctions against Iran introduced by the Congress-which clearly undermines the ethos and the spirit of the JCPOA framework- is its referral to the suggested links in trade with entities alleged to have links with the security and defence forces," Emadi said.
"This makes the UAE share in the Iranian trade both an assets that in the past proved useful during the sanction era but at the same time should it come to be used against Iran it could become a liability in future since it is always more difficult to prove absence of links rather than proving their existence. And effectively the US proposed sanctions demand proof of non-linkage," the expert said.
He went on to say that a more interesting point in the Custom Administration report may be the rise in trade with the leading economies of Europe.
"Data for this period show that the rise in imports from Italy (26%), Germany (29%), France (51) and England (200%) were largely based on capital good and consumer durables," Emadi said.
Both of these categories can help with the transfer of advance technology and upgrading in the competiveness of the economy, he added.
Emadi went on to add that in almost all of the new agreements in manufacturing, Iran has succeeded in including clauses that explicitly set out time lines for joint production inside Iran and partial export of the manufactured final goods sometimes under an Iranian brand.
"Underlining that this is an important vehicle for the transfer of technology and the key requirement to enhance the export capabilities of the economy in the medium and long term especially in the case of Germany, France and Italy," he said.
Coming to the data on UK, Emadi said that the rise in the value of imports from England is less significant since the base line was very small to begin with.
"If the increased import is part of flow of capital goods in the oil and gas industries, Iran could leap-frog in its energy projects well in advance of its target. However, this requires a more business-driven view of the gains from trading with Iran in the UK than shown so far by the business community in Britain," he said.
According to Emadi had the trade with Iran reflected the relative size of the British economy in Europe in comparison with Germany and France and patterns of trade with the Arab countries of the Persian Gulf, British exports to Iran would had risen by more than 1100 percent in this period, solely based on the energy sector needs of Iran and the existing capacity in the UK reaching a ceiling of 6 billion Euros in three years.
"So far Whitehall has shown a remarkable indifference to the significance of trade with Iran and its impact on reducing the growing trade deficit of the UK economy. Even so, the doubling of trade with the Britain and the double digit increase in import from Italy, Germany and France all reflect the desire of these economies to expand their trade with Iran in the post-JCPOA era."
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