Iran and Pakistan initiate barter trade: A step back for civilization?

Iran is one of the world’s most politically isolated nations, with a notorious international reputation, and is currently under the onus of innumerable economic sanctions, which have virtually cut it off from global trade and commerce. But that same cornered nation is also Pakistan’s major trade partner so what did our nation decide to do to help its Iranian friends? Well, go back to history of course! Let’s switch to the barter system again!

Iran is a signatory of the Nuclear Non-Proliferation Treaty (NPT), signed under the United Nations. This treaty prevents a nation from manufacturing nuclear armaments, bombs, warheads etc. but peaceful, ‘civilian’ use of nuclear energy (e.g. electricity generation) is permitted and sometimes, encouraged. A large part of the world, most particularly and vehemently the West, claims that Iran is working on developing nuclear weapons- a clear violation of its international obligations. And Iran eloquently retorts that its nuclear program primarily serves the country’s energy and medicinal needs.

In a blend of paranoid skepticism and some justifiable precautionary concern, the West, and the US in particular, imposed a wide range of sanctions (restrictions) on Iran’s industries and global trade. Along with many bilateral sanctions by India, Israel, Australia, Switzerland, Japan etc., the UN itself has imposed many limitations on Iranian trade, including the most searing Resolution 1929. These sanctions, which are particularly hard-handed on the petroleum industry, banks and other financial institutions, have fired many bullets against the Iranian economy but somehow, the Iranian armor has absorbed it all and its nuclear program remains unscathed and unperturbed.

On August 8, the Economic Co-ordination Committee of Cabinet (ECC) of Pakistan signaled a green light for potential barter trade between the two countries, which is a significant step after a long process of negotiations marked by deadlocks, disputes and disparities.

The barter system basically involves the exchange of one good for another so there is no currency or any medium of exchange involved. The barter system dates back to a period of time millions of years ago, but research has proven that no society has ever thrived entirely on the barter system. Some form of currency has always existed in trade and exchange and the flaws of the barter system means it is no longer used today. Under the barter deal, Iran will import one million tons of wheat from Pakistan, and in return, Tehran would provide fertilisers and iron ore.

The barter system aims to circumvent global sanctions and reconnect Iran to transnational trade since conventional exchange with and financial payments to Iran have become increasingly difficult.  But as ingenious as it may seem, it still beckons the question- is the barter system viable in the modern world? Is using a historically obsolete economic policy a step back for civilization?

My research does not believe so. The barter system was replaced because of two integral flaws: the need for a ‘double co-incidence of wants’ and the difficulty of comparing the value of the items being exchanged. These problems are no longer relevant.

Despite being a major producer of wheat, Iran has often failed to meet its domestic demand. On the other hand, Pakistan has been enjoying wheat surpluses in recent years, being the world’s 8^th largest producer of wheat. However, Pakistan still needs a very large amount of iron ore, particularly for its momentous steel industry, since its indigenous iron reserves are low quality and not mined on a large-scale. Iran, however, is the world’s 8^th largest producer of iron ore and a major exporter. The agro-based Pakistani economy also requires increasingly large amount of fertilizer, but demand always exceeds supply so the barter deal will help bridge this gap. Each country wants what the other country possesses. The barter trade is clearly a win-win situation.

US dollars are essentially the main international measure of value for economic indicators such as trade imbalances, GDP, GNP, national income, reserves etc. It is fairly easy to determine the exact amount of wheat that would equalize an exact amount of fertilizer and iron ore i.e. X tonnes of wheat should be exchanged for Y tonnes of iron ore + Z tonnes of fertilizer, in terms of their current market price. This leads to highly precise, mutually fair trade transactions. So, there is no longer any problem of exchanges in which one side may benefit more than the other, due to inaccurate comparisons.

As ancient as it is, barter is still a part of our everyday lives. At restaurants, we give our friend a taste of our pizza if he gives us a sip of his soda. Sometimes, you agree to fix someone’s computer if he/she completes your math homework. At other times, you exchange your marbles, candy, chocolates and even Pokemon cards! In the most underdeveloped economies (particularly those with inflation rates of six or seven-digit figures!) such as Zimbabwe, barter is still relatively common.

Vinay Gauba adds his own insight on the matter, “Barter may seem to be a thing of the past, but with the Iran-Pakistan barter trade, the system seems to be coming into the limelight again. Is it a good idea? Well, diplomatically, it can strengthen relations between the two countries and could be a brilliant step towards enhanced cultural and political friendship. It also contributes towards economic wellbeing since both countries can trade and produce more of what they are good at, thereby boosting the overall production of the two countries (comparative advantage).

The import of iron ore and fertilizer can greatly help Pakistan in its aim to enhance the industrial sector and this could well be a step in the right direction for Pakistan in its hope to develop further.

However, some flaws remain, one of them being that wheat exports are heavily dependent on external factors like weather, so in the case of floods etc., Pakistan may suffer from shortage of wheat. So in the long run, the deal may not work out to be as effective. Furthermore, political changes, which frequently cause instability in Pakistan, can also be a threat to the longevity of such a trade agreement. Factors including inflation and exchange rates would mean that frequent revision of the trade terms may be necessary which could actually be a hassle if the two countries fail to agree on mutual terms on later amendments proposed to this barter trade agreement. So on the whole, this move could work wonders for the relations and productivity of the two countries but its progress may be undermined by the aforementioned issues which may act as a constraint in the near future.”

The re-emergence of the barter system is clearly good news for Iran, which is also working on signing such deals with China and Thailand. The endless line of sanctions imposed on Iran are daunting, to say the least, but critical thinking and smart diplomacy can expose the loopholes of even the most insurmountable barriers. This new form of trade will surely anger the US, which has been working to strengthen sanctions and prevent such breaches. The US has also threatened to take similar actions against countries that trade with Iran and try to get around these sanctions- this could complicate the Pak-US relationship further. However, only time will tell whether barter will become Iran’s main connection to the outside world in the future and whether our own country will reap any significant benefits.

History teaches us many important lessons and the comeback of the barter system shows how past economic policies may still be useful today. Regardless of the limited scope of the agreement, this new form of trade will be integral in determining the future of further sanctions on Iran, the position of Iran in the global market, the economic relations of Iran and Pakistan and to an extent, the apparent thaw of the Pak-US relationship.

Further Reading

Last week, we tackled the grim topic of the Rohingya killings, and the social media’s reaction to this tragic event. You can read this and more in The Diplomat.