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EghtesadOnline: Trade routes between Iran and Iraq have thrived over the past decade because Iraqi markets remained mostly open at a time when sanctions closed off other potential markets for Iranian exports.

According to Iran’s Trade Promotion Organization, Tehran’s non-oil exports to Baghdad—including food, construction materials and vehicles, among other items—surged from $2.3 billion in 2008 to $6.2 billion in 2015.
At the same time, the rise of the self-styled Islamic State terrorist group has opened up new opportunities for Iranian traders after Baghdad’s trade and diplomatic relations with its other neighbors suffered, reads an article on the website of the Carnegie Endowment for International Peace, a Washington-based think tank. Excerpts follow:
After sanctions tightened on Iran’s oil sector in 2012 and the country’s economy worsened, Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei outlined in February 2014 the principles of Resistance Economy.
This emphasized, alongside other goals, promoting non-oil exports to reduce the country’s heavy reliance on oil revenues.
Iraq’s geographic proximity and its Shia population in the south made its market ideal for Iran’s attempt to access the global economy and Iraq’s market increasingly absorbed Iranian non-oil exports. Tehran accordingly worked to establish free trade zones in its southwestern Khuzestan Province to boost trade with Baghdad, according to Financial Tribune.
Trade between both countries reached $12 billion in 2015, including gains from tourism, engineering services and goods transit. Iran aspires to scale up trade relations up to $25 billion in the coming years.
Iran’s non-oil trade with Iraq continued to grow through to the end of 2015, after the IS captured Mosul in June 2014, though at a slower pace than before the IS expansion and global oil price slump.
As IS took more territory in northern Iraq and trade routes between Turkey and Iraq were cut, Iran benefited from the increased border trade in basic goods.
Furthermore, Baghdad’s escalated tensions with Turkey and Saudi Arabia left Iran in a better geo-economic position than its rivals. Reportedly, in mid-2014, some Iraqi merchants began substituting Saudi commodities with Iranian ones because they believed Saudi Arabia was supporting IS. In addition, Baghdad City Council approved a boycott of commodities from Turkey a few days after Ankara deployed forces in Mosul for training exercises on December 5, 2015.

Geopolitical Risks

However, Iraqi imports from Iran are also facing potential geopolitical risks. Iranian non-oil exports mostly access the Iraqi market through seven border checkpoints, and 80% of Iran’s non-oil exports to Iraq pass through the northern half of the border.
According to Mehdi Najat-Nia, the spokesman for Iraqi affairs office in Iran’s Trade Promotion Organization, $3.5 billion worth of commodities entered Iraq via the northern Parviz Khan border checkpoint between March and December 2015, out of $4.5 billion worth of Iranian exports to Iraq during this period. This trade route was particularly vulnerable to the initial IS expansion northeast toward the Kurdistan Region of Iraq and Iran’s western borders, threatening the inflow of Iran’s non-oil exports.
By contrast, Iraq’s southern provinces have become more attractive to Iranian traders looking for reliable routes for export. The IS advancement in northern and central Iraq obstructed trade between Turkey and southern Iraq, increasing demand for Iranian commodities as a substitute.
Because Iranian trade had prioritized northern routes through the Kurdistan Region of Iraq, road freight and storage capacities in the predominately Shia Iraqi south have not been developed enough to accommodate all the non-oil exports Iran wants to send there.
The commodities traded through Shalamcheh checkpoint, located between Basra and Khuzestan, reached $1 billion in the Iranian year that ended in March 2016, of the $6.2 billion total Iranian exports to Iraq that year. Iran’s policymakers are, therefore, prioritizing diversification of road freight routes away from the northwest to reduce security risks and expand their market in southern Iraq.

Protectionist Trade Measures

In addition, Iranian contractors are optimistic about their potential opportunities to pursue projects in Iraq in the future. However, Iranian exports to Iraq and the magnitude of the Iranian stake in the reconstruction process depend on the political configurations of the Shia camp in Iraq, which have presented new political risks over the past few months.
Since Iraq’s Parliament was dissolved in April 2016, ongoing populist and anti-Iran rhetoric has risen, and there is increased pressure on Iraq’s new parliament to push protectionist measures against Iran’s non-oil exports.
Protectionist trade measures (tariff and non-tariff barriers) were previously enforced amid the oil price slump, for example increasing the tariffs on selected Iranian imports.
Shahla Amuri, the head of the Ahvaz chamber of commerce, expressed further concern about Iraqi protectionism in June 2016 that tripling the tariff barriers on some imports, especially construction materials, decreased Iran’s overall exports to Iraq.
Such measures have particularly affected the cement trade. Baghdad issued two executive orders in 2013 and 2015 to halt the importation of cement (aside from “exceptional cases”) to protect domestic production. Though the orders were likely not implemented strictly, due to political disputes and corruption, Iranian cement producers have felt the repercussions.
Amid the Iranian housing sector’s stagnation, there is weak domestic demand for cement and producers are heavily reliant on the Iraqi market, whose cement import ban meant Iran’s cement exports decreased by 20% in 2015.
Yet, according to Abdolreza Sheikhan, secretary of the Iranian Association for Cement Producers, 50-70% of Iran’s exports of cement went to Iraq from March 2014 to March 2016, estimating that regardless of the new measures, Iraq will still run a cement deficit of around 7-8 million tons per year that will need to be covered through imports.
In response to increased Iraqi protectionism and following a 6% decrease in Iran’s exports to Iraq in the first three months of the current Iranian year, Iran declared in May 2016 that an FTZ will be established at the Shalamcheh checkpoint as part of the wider Arvand Free Zone. Simultaneously, Iran will continue to lobby Baghdad for fewer tariffs on its exported goods.
A stable Iraq might enable Iran to gain greater economic leverage, not only in Iraq but perhaps even in a post-conflict Syria via more secure and diversified road freight routes.
Faltering industrial capacities in both Iraq and Syria would boost Iran’s non-oil economy and export sectors to overcome its unresolved unemployment problem. Amid turmoil, trade interests will continue to play an important role in shaping Iran’s political and security relationship with its western neighbor.

Iran-Iraq trade Iraqi Markets Iranian Exporters