Monday, June 14, 2021

How An India-Backed Global Transit Corridor (INSTC) Could Be An Alternative To The Suez Canal

The India-backed International North-South Transport Corridor (INSTC) could be a viable alternative to the Suez Canal, the blockage of which caused temporary disruptions in the global trade flows recently.

When Covid-19-affected supply chains were starting to recover, a mega container carrier had blocked the canal for seven days beginning from March 23. Suez Canal, a manmade waterway, is estimated to be catering to 10 percent of global trade flows on Asia-Europe trade routes.

Even as the problem was resolved and the widening of the stretch is underway, the blockage caused losses to the tune of US $10bn a day, which is about US$400mn per hour, according to some estimates.

The pandemic, in general, and the blockage, in particular, have underlined the importance of alternative routes. Euro-Asian inland transport links, mainly the International North-South Transport Corridor (INSTC), should thus be leveraged to build and boost the resilience of the inter-continental trade flows. In fact, the premise of INSTC was to provide an alternative to the Suez Canal.

File:Suez Canal, Egypt (satellite view).jpg - Wikimedia Commons
File: Suez Canal, Egypt (satellite view) – Wikimedia Commons

Over-dependence on the canal needs to be reduced by utilizing multimodal transit transport gateways of INSTC, a 7,200 km long network of ship, rail, and road routes. The INSTC was introduced at the turn of the century by India, Iran, and Russia. It provides transit transport connectivity from India through Iran and the Caspian Sea to Russia and Eurasian countries. This initiative has since expanded to include more than a dozen countries.

Its membership represents Europe, Central Asia, Eurasia, South Asia, and the Middle East. Regional forums such as the Commonwealth of Independent States (CIS), Economic Cooperation Organization (ECO), South Asian Association for Regional Cooperation (SAARC), Central Asia Regional Economic Cooperation Program (CAREC), Eurasian Economic Union (EEU), among others, also extend their cooperation to INSTC.

Iran’s Chabahar Port has emerged as a potential eastern gateway to INSTC. India has been at the forefront in aiding the development and management of the strategic port.

This mainly serves as a gateway to India-Iran-Afghanistan Transport and Transit Corridor under a Trilateral Agreement. The potential of its complementary connectivity linkages to INSTC has also become increasingly evident.

India’s proposal for including the Chabahar Port in the INSTC project while expanding its membership base is, therefore, is “to maximize its potential”, as Foreign Minister S Jaishankar said last month. Members need to expedite efforts to include Uzbekistan and Afghanistan, among others, in this initiative.

Importance Of TIR Convention 

As of now, 77 countries (and growing) which are part of the INSTC project and contiguous Europe, Africa, and Asia, among others are party to The Customs Convention on the International Transport of Goods under Cover of TIR Carnets, known as the TIR Convention, 1975.

The Convention enables inter-modal freight transportation in containerized and/or other recommended formats given one leg of an origin-destination pair is by road.

The United Nations Economic Commission for Europe (UNECE) which administers the Convention defines TIR Carnet as a standard internationally recognized Customs Document. TIR Carnet also serves as proof of an internationally valid guarantee, that is, exemption from paying Customs duties during transit.

TIR system is enabling seamless medical, economic, and humanitarian supplies to Covid-19 and conflict-stressed areas. The International Road Transport Union (IRU) that works with member countries’ Customs, and private players for TIR operations, has demonstrated TIR’s efficiencies in minimizing challenges while building resilience to shocks.

International North-South Transport Corridor (INSTC)
International North-South Transport Corridor (INSTC)

For example, when Turkmenistan’s borders were closed, IRU worked with the ECO, a 10 members’ regional cooperation organization representing a mix of South and Central Asian countries, to activate an alternative route to Kyrgyzstan, Tajikistan, and Uzbekistan via Afghanistan.

As the legal basis (annex 11 to the Convention) for eTIR requiring digital and paperless border formalities on May 25, 2021, came into force, digitalization of the system is expected to accelerate. It will be underpinning green, contactless, and resilient freight movements in the TIR including the INSTC countries.

Challenges & The Way forward 

A big challenge in popularizing the INSTC corridor is due to the US-Iran tensions. For example, economic and financial sanctions on Iran, and those doing business with the country that followed the US withdrawal from July 2015 Joint Comprehensive Plan of Action (JCPOA).

As an agreement between Iran and the Permanent Members of the United Nations Security Council — Germany and the European Union — JCPOA aims to deter Iran from developing nuclear weapons from its nuclear program. Post US sanctions, some exemptions were made on a case-to-case basis. Still, due to a dominant US financial and banking system, commercial interests in the region declined sharply, affecting INSTC corridor’s growth too.

As a response, the European Union introduced an Instrument in Support of Trade Exchanges (INSTEX) to trade with Iran while skirting unilateral sanctions. Similarly, alternative payment systems such as European Payments Initiative with scope for both Euro and non-Euro markets are taking shape.  

There are additional initiatives such as Asian Clearing Union (ACU) among Iran, Myanmar, and SAARC countries except for Afghanistan. ACU was set up in 1974 to enable a regional clearing system, promoting currency swap, and conserving foreign exchange reserves.

The ACU monetary unit is pegged with Euro, Yen and US Dollar accounts including with a provision for payments’ settlement in other convertible currencies. An integration of ACU with other international clearing unions (ICU) could enable sustainable banking and financial connectivity vital for the growth and development of the INSTC multi-modal corridor.

An extended route connecting ports in the Indian Ocean to Chabahar port in Iran for goods to move to ports in Israel or Turkey to reach the Mediterranean can be explored in the midterm.

In the long term, the potential of the INSTC corridor could be materialized with a Common Multimodal Union (CMU) in place, similar to Common Customs Union (CCU). CMU could serve as a logical logistics corridor with enabling international norms such as TIR, Convention Concerning International Carriage by Rail (CIM), Hague-Visby rules for the international carriage of goods by sea, and integration of ACU, EURO, INSTEX, and the Russian currency exchange.

With that, it will be in the interest of everyone to realize the potential of the INSTC project as an alternative to the Suez Canal route, and as an axis of resilient trade. A successful conclusion of the ongoing JCPOA negotiations with Iran also remains vital to realize this goal.

Written by Deepankar Sinha and Prashant Sharma

(Sinha is a Professor at the Indian Institute of Foreign Trade, Kolkata Campus, India while Sharma is a Jaipur-based global economic and strategic affairs analyst. Views are personal.)

Featured News