Economy

Treaty of Trade

Chabahar Free Zone

The trilateral agreement between Iran, India, and Afghanistan is poised to place Chabahar on the map for commerce and to change the geopolitical and economic dynamics of the region.

Last May, a long overdue program between Iran, India, and Afghanistan was finally sealed to transform the port of Chabahar into a regional trade, investment, and transport hub. Back in 2003, Iran and India agreed to develop the port, but the project was suspended following the imposition of sanctions against the Islamic Republic. In 2014, both countries signed an MoU to jointly start the port’s expansion once the embargo was lifted, and now that it has become a reality, Afghanistan too will participate in the project.

Located in southeastern Iran, in proximity to the Pakistani borders from the east and the Sea of Oman to the south, Chabahar is the only Iranian port with direct access to the ocean. Having a free trade zone established in 1995, the port represents a deep-water and higher-capacity alternative to Bandar-Abbas, which currently handles 85% of Iran’s shipping volume but cannot host ships weighing more than 100 tons. In addition, it gives Iran the opportunity to avoid the busy and politically charged Strait of Hormuz, and cements regional cooperation with India and Afghanistan.

In fact, the Chabahar route will allow Indian goods to reach Afghanistan via the Iranian port without crossing Pakistan’s territory. Chabahar sits less than 1,000km from western India’s export powerhouse of Gujarat, the home state of Prime Minister Narendra Modi. The Indian Prime Minister allocated a USD500 million investment to transform the Iranian port into a hub for Indian business, especially oil and petrochemical production. The two countries also signed an MoU to explore the possibility of setting up an aluminum smelter and establishing a urea processing facility in the free zone. Moreover, a long-mooted plan to build a 1,400km sub-sea pipeline that would allow Iran to supply natural gas directly to India appears to be back on the agenda. For Afghanistan, Chabahar is an opportunity to find sustainable solutions for economic development and greater security on its mineral trade routes.

However, the Chabahar project is just a small cog in the North-South Trade Corridor (NSTC), a giant strategic project to rival China’s Silk Road. NSTC is estimated to slash freight costs to Russia by 30% and will be the shortest route for South Asian’s goods to European and CIS markets. In this sense, Iran is developing a land-based network in the form of road and railways that will link Chabahar to Central Asian markets and Afghanistan’s mines, known as the East Axis. At the same time, the port could also become a center to re-export goods from northern countries to regional markets, such as Oman, Pakistan, and East African countries, which have shown particular interest in Chabahar’s vast resources of marine fisheries and aquaculture facilities. Overall, Chabahar Free Trade-Industrial Zone has the potential to attract upward of USD15 billion in investment.

In addition, the Iranian government vows to establish one of the biggest automotive manufacturing sites in Asia in the free economic zone. It is in this context that Iran is equipping and strengthening Chabahar port facilities in order to achieve a loading and unloading capacity of 6 million tons per annum. For the time being, after the JCPOA implementation more than USD86 million of commodities were imported or exported from Chabahar Port in one month, a 50% increase compared to figures from last year. Motor vehicles and raw materials needed for production units were among the main commodities traded from the southeastern Iranian port.

By and large, deep-water ports are empowering regional integration that could otherwise take decades to develop without the supporting infrastructure links. Therefore, a successful development of Chabahar’s port infrastructure is likely to have wide ranging impacts across the area, whether by creating new trade transit routes or re-balancing regional geopolitics.

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