Iran's Need for Foreign Trade Paradigm Shift

EghtesadOnline: The ubiquitous debate over Iran’s shaky foreign trade and non-oil exports surfaced once more when H1 trade statistics were out last month, showing a 3.2% decline in exports and a 15.37% rise in imports year-on-year.

News ID: ۷۴۴۲۲۶

29 October 2017

The data also indicate that the country has a negative trade balance of around $3.05 billion.

Interestingly, the main reason for Iran’s meager amount of exports compared to its capacities, Mohammad Reza Modoudi, the deputy head of Trade Promotion Organization of Iran for goods and services export promotion, told Financial Tribune, is the fact that almost everything is being produced in the country.

“After the Islamic Revolution of 1979, we faced a series of problems on the international scene. The economic limitations imposed on us created difficulties in providing and supplying goods for the country. On the other hand, there was the issue of high unemployment and the government needed to create jobs for the growing population,” he said.

“Therefore, we turned to domestic production and endeavored to become self-sufficient in supplying our own demands to bypass international pressures and be minimally affected by the world’s unfriendly approach toward us.”

What happened at that point, he added, was that almost all officials gathered force to limit imports in a bid to support local production. They started issuing permits for small businesses to be launched throughout the country with the stated aim of becoming self-sufficient and generating jobs.

“Self-sufficiency is good and praiseworthy, but only when there is a clearly defined strategy behind it,” he said.

Scarce Trade Agreements

Modoudi says according to research carried out by the World Trade Organization and its data regarding global trade, nearly half of all trade pertains to exchanges between countries that have regional trade agreements.

“It is interesting to know that the share of Iran is only 3% (that is, it has trade agreements with only 3% of its trade partners),” he said.

Iran has preferential trade agreements with only six countries, namely Turkey, Pakistan, Uzbekistan, Tunisia, Cuba and Bosnia and Herzegovina, while having only one free trade agreement with Syria.

A limited number of goods are only exported from Iran to Afghanistan on preferential tariffs.

Iran became an observer member to World Trade Organization in 2005, but WTO failed to assign a group chairman to discuss Iran’s foreign trade regime, due to the opposition of the US that has been hostile toward Iran ever since the 1979 Islamic Revolution.

Mojtaba Khosrotaj, the head of Trade Promotion Organization of Iran, said in August that joining WTO is no longer a priority amid America’s aggressive Iran policy under US President Donald Trump.

“Our priority is now to increase cooperation with neighboring countries and those in the region, which offer the most benefits to us,” he said.

Not being a WTO member, Iran has been banking on preferential trade agreements with the limited number of countries it has strong economic trade ties with.

Ill-Founded Trade Policy

“Why is it that we have preferential and free trade agreements with only a few countries? Today, if we want to expand foreign trade, we need to understand that exports and imports are two sides of the same coin and go together. Trade is a two-way road. We can’t say that we only want to export and not import anything in return. Based on this viewpoint, all countries would only want to export their goods. This way trade will come to an end,” Khosrotaj said.

“Therefore, I think we should be cautious when speaking of ‘import management’. If not properly conducted, this could fling us into a pit of strategic mistakes for which we’ll have to pay for. When speaking of trade, we mean that in return for a part of the other country’s market, we agree to give them a part of our own.”

The TPO chief noted that what happens in trade negotiations, the country offers to export oil and gas, along with chocolate, dairy, cement and steel.

“Then it’s their turn to put forward the products they have for sale, because this is what a fair and square deal is supposed to be,” he said.

“They say they want to sell us textile. We say we’ve already got a textile industry that can meet the domestic demand and imports will hurt our business. They say we want to export rice. Our response is that we cultivate rice ourselves and imports are banned because we want to support our local farmers. They propose to export mangoes, but that’s a no-go again because people will shift to eating mangos and our apple market, for example, will be hurt.”

Khosrotaj stressed that you name it, Iran produces it and by saying that imports will cause damage to local production, talks come to a dead end.

“This is the reason why we can’t succeed in signing trade agreements with other countries. As such, when we fetter imports, exports are hampered as well,” he said.

No Competition to Incite Growth

Modoudi noted that development of Iran’s industries is impeded because they don’t feel the need to compete with better, more up-to-date products, as the country’s 80 million market is sufficient to consume the products of the small units founded using minimal investment.

“This way, we deprive ourselves of modern technology and potential foreign investors are discouraged from bringing their capital into our industries because at any given time, when the Iranian economy faces turmoil their activities will be the first thing questioned,” he said.

Due to these handicaps, the official said, neither Iran’s domestic market has found a proper modern form, nor has its foreign trade structures assumed global standards, making consumers unhappy in the bargain.

“So we are at our wit’s end here. We want to change but instead we are going round and round a vicious circle. We have to take into account that our resources and capacities are limited. The government needs a change of perspective,” he said.

No Export Orientation

Modoudi further said that the capacity defined for small production units after the revolution was to supply goods for a town, if not the province they were located in, and they were geared to meet domestic demand and no more.

“We found ourselves in a situation where there were countless small units producing goods, yet not in an industrial or economically viable scale. Back then, it was frowned upon if an official abstained from signing a business permit or questioned the feasibility of the projects. But the problem was that there were unfortunately no strategies or principles underlying these issued permits,” he said.

“Basically, during those years, no one thought of embarking upon production with the prospect of entering the international markets. The exception was a very small number of industries that were launched using government resources such as the oil, gas, copper, steel and petrochemical industries. So, our production was not export-oriented.”

To have export-oriented products, a lot of factors, including end price, productivity, research and development, market study and marketing, design and brand creation come to mind. Since all of these are capital-intensive, small units cannot and do not invest in them.

“Later, the domestic market got saturated with all these goods and producers faced a shortage of demand. What happened next was that they now wanted exports to solve their problems. But did their products measure up to international standards? No. Did they have the factors necessary for them to compete in the global market? Again, no,” Modoudi said.

He stressed that one of the main tasks facing Iranian industries is to upgrade these units and help them produce goods fit for exports, which is not an easy task.

H1 Fall in Exports Scrutinized

“At present, everyone is criticizing the trade figures for the first half of the current year (March 21-Sept. 22), saying why haven’t we arrived at the 21.7% rise in exports targeted in the Sixth Five-Year Development Plan (2017-22) for this year. But no one is considering the fact that growth has its requirements,” he said.

“It is stipulated in the fifth and sixth five-year development plans that in order to arrive at the expected growth rates, investments must be made in the related infrastructures and production capacities must be expanded. It is utterly meaningless to expect production units that are dealing with the same problems they had last year to generate growth in the current year. How can this come about?”

Modoudi said that after the implementation of the nuclear deal, formally known as the Joint Comprehensive Plan of Action, Iran experienced an increase in exports.

The reason behind this, he explained, was not that the country had an immense production capacity or that it was given the opportunity to use it to the fullest.

“No, this was not the case. Rather, over the sanction years, domestically produced goods had piled up in warehouses because our international trade activities were hindered. With the lifting of sanctions, we were able to sell those products and therefore, there was a rise in our export figures,” he said.

The official pointed out that during the first half of this year, exports declined, not due to the failure in maintaining production levels or export markets.

“We did some research on the products that showed a sharp export decline such as copper cathodes, pistachio, iron and steel and some oil products, and realized that our warehouses were empty,” he said.

Modoudi noted that Iran’s production capacity is limited and cannot keep up with international demand.

“Producers say that even if we work at our full capacity this year, we will still not be able to repeat last year’s records. So I must say that except for a few fields like cement or tile and ceramic industries, we have not as yet created the required production and export capacities and the investments made until now were to meet the domestic demand,” he said.

Modoudi concluded that overprotection of local production, though commendable on the surface, can in fact damage trade and the domestic market when it is conducted without planning and strategy.