KEY TAKEAWAYS
KEY TAKEAWAYS
Despite a three-year long cease-fire along their contested border, trade and civil society engagement between India and Pakistan has dwindled, exacerbating the fragility of their relationship. With recently re-elected governments now in place in both countries, there is a window of opportunity to rekindle trade to bolster their fragile peace, support economic stability in Pakistan, create large markets and high-quality jobs on both sides, and open doors for diplomatic engagement that could eventually lead to progress on more contentious issues.
Peace and regular engagement would also allow their respective militaries to focus on other border disputes. Rather than simply resume the low-level trade that existed before 2019, the two countries can use the institutional memory and mechanisms that already exist, including dusting off more ambitious draft agreements that were discussed in 2011 and 2012.
India and Pakistan are currently upholding an uneasy cease-fire along the Line of Control (LOC). However, with no diplomatic engagement, little trade and declining civil society engagement — the latter two have, in the past, helped to keep communication channels open — the truce seems quite fragile.
Trade between the two countries has been severely constrained since 2019, following the Pulwama terrorist attacks and the Jammu and Kashmir Reorganization Act of 2019. These events led to India imposing punitive duties of 200 percent on Pakistani imports, and Pakistan suspending trade with India. However, in practice trade has continued. While India’s imports from Pakistan were a mere $3 million in 2023-24, India’s exports to Pakistan were $1.2 billion, made possible by Pakistani authorities approving Indian imports on as needed basis.
Nonetheless, bilateral trade has been well below potential, even at the best of times: a flagship 2018 World Bank South Asia report by this author suggests that bilateral goods trade could be 18 times as high as pre-2019 “normal” trade levels. One indicator of the immense trade potential can be seen in the high and rising levels of “indirect imports,” goods that are sourced through other countries, especially the United Arab Emirates, despite the obvious high costs of this indirect shipment method.
With re-elected governments now in place, the next few months offer some political space for bilateral trade discussions. Pakistan’s foreign minister, Ishaq Dar, recently acknowledged the business community’s appeals to resume trade with India, citing the high costs of indirect imports from India, and indicated that Pakistan would seriously examine the issue. This echoed Prime Minister Shahbaz Sharif ‘s earlier public expressions of support for trade with India. While Pakistani Army Chief General Asim Munir is more cautious, his strong desire, now reiterated on several occasions, to address Pakistan’s economic quagmire could lead him to support a constructive economic relationship with India. Moreover, if India restores statehood to Jammu and Kashmir, which Prime Minister Narendra Modi has said could happen “soon,” it would address one of Pakistan’s major objections to resumption of talks.
With re-elected governments now in place, the next few months offer some political space for bilateral trade discussions.
India’s ruling party won a third term in office on June 4, 2024. Its election campaign saw some strident rhetoric on Pakistan. With elections done, this rhetoric may taper off. Moreover, India has not banned imports from Pakistan, but only imposed a 200 percent duty on these imports. This technicality could allow India to positively respond to any Pakistani overtures, since reducing duties can be seen as a lesser climbdown than overturning a ban on trade.
After Modi was sworn in for his third term, former Prime Minister Nawaz Sharif, the president of Pakistan’s ruling PML-N coalition, congratulated him and suggested that, together, they “ … replace hate with hope and seize the opportunity to shape the destiny of the two billion people of South Asia.”
While it’s unclear if there are any ongoing backchannel talks, such talks have been successfully used in the past and could help to break the ice and prepare for formal talks.
For Pakistan, trade with India could help stabilize a crisis-racked economy. Islamabad’s exports could increase by as much as 80 percent, based on World Bank research that I was involved in. This would be a boon for a country that suffers from repeated foreign exchange crises. Commodity-focused trade with India could help dampen elevated food and fuel prices, another recurring and fundamental concern. For example, Indian imports could have significantly eased the soaring prices of flour in the Pakistan side of Kashmir, which led to large-scale unrest there in May 2024. In fact, India’s and Pakistan’s somewhat different crop harvesting cycles can help to mitigate seasonal food shortages in both countries. A deeper trading relationship with India could help induce more dynamism in Pakistan’s private sector, where many sectors are dominated by entrenched domestic industrialists. These potential gains are reflected in the business community’s repeated demands for normalizing trade with India.
For India, the economic gains are by no means trivial. While some analysts tend to downplay these gains, such views are based on the evidence derived from previous constrained trade regimes. Pakistan has a population of 236 million, with 37 percent under the age of 14. In time, Pakistan could become an even bigger trade market for India than Bangladesh, which is currently among India’s top 10 export destinations. A glimpse of the export potential can be had from the very high levels of indirect trade, and India’s goods exports to Pakistan still reaching over $1 billion despite all the hurdles. The gains in tourism could be even bigger than in goods trade, akin to the rise of Bangladesh as India’s top source of tourist inflows (over January-March 2024, Bangladesh accounted for 19.6% of foreign tourist arrivals into India). And if transit trade opens up, the idea of accessing Afghanistan and Central Asian markets via Pakistan is a tempting prospect for India, reminiscent of the silk roads.
For both countries, trading to their full potential can create millions of more stable and better quality jobs, with workers moving from the informal to the formal sector, and wages improving. In Pakistan, just one export-oriented sector — textiles and apparel — accounts for 40 percent of the industrial workforce. Expansion of this and other export-oriented sectors could have an enormous positive impact on the quality and stability of jobs. Even the (low levels) of pre-2019 trade sustained thousands of trade-supporting jobs in India’s Punjab and the Indian side of Kashmir, and there will no doubt be similar numbers at the Pakistani end — jobs which are mostly unavailable due to the current trade impasse.
India and Pakistan could also enjoy major strategic benefits from mutual trade. The foremost benefit could be to help make the current fragile peace more durable.
Both India and Pakistan could also enjoy major strategic benefits from mutual trade. The foremost benefit could be to help make the current fragile peace more durable. While trade can be weaponized, history is full of examples of trade contributing to peace. If given a chance, and especially if trade starts reaching levels close to its potential, it can foster powerful pro-peace constituencies on both sides.
Today, both India and Pakistan confront border challenges that are more difficult than the current situation on their mutual border. Pakistan and Afghanistan have seen increasingly tense relations over the last three years, frequently leading to armed conflict, and Islamabad’s ties with Iran are tense. Relations between India and China have deteriorated since the deadly clashes of June 2020 in the Galwan Valley, and the border is now even more militarized. Neither India nor Pakistan would like second fronts to open up on their mutual border. By creating economic interdependence, trade can help limit the possibilities of fresh border hostilities.
A second strategic benefit of trade relates to the China factor. Trade with India could help make Pakistan less dependent on China — currently, it imports 25 percent of its goods from China alone. It could also give Pakistan a little more bargaining power in its economic dealings with China. And for India, deepening trade with Pakistan — as well as the resulting possibility of other forms of economic cooperation — is a better option than leaving the field (i.e., Pakistan) wide open for China.
There was a time, a little over a decade ago, when a spirit of optimism prevailed over bilateral trade. Over the course of 2011 and 2012, after several years of talks at the commerce secretary level, a practical roadmap for normalization of trade was also developed. This roadmap can be dusted off and used as the starting point for negotiations between the two countries. Some core principles for the negotiations were the following.
First, trade liberalization should be asymmetrical, with India, as the more industrialized country, being more generous and reducing its trade barriers for Pakistan faster. This approach would allow Pakistan more time to adjust to imports from India, and make any new trade agreement with India more acceptable to the private sector. This approach was utilized between 1996 and 2019. For example, India treated imports from Pakistan on par with imports from other World Trade Organization members (“most favored nation,” or MFN status, in WTO parlance), but Pakistan did not reciprocate. In the draft roadmap agreed to in 2012, this asymmetric process was continued: India agreed that by 2013 it would reduce to 100 the products where it would not provide reduced duties, while Pakistan was given an additional five years to make similar concessions.
Second, trade would be more transparent if barriers are imposed only via (declining) import duties rather than a mix of product quotas/bans, and duties. Prior to 2019, Pakistan had a “negative” list of 1,209 products, which could not be imported from India. Moreover, it also restricted the number of products that could be imported via the most efficient trade route, the Wagah-Attari border. The joint statement of the commerce secretaries in New Delhi in September 2012 had in fact envisaged that Pakistan would transition fully to MFN trade by December 2012, and that it would remove restrictions on Wagah-Attari border trade.
Third, the two countries should take steps to reduce the transaction costs of trading to fully realize their mutual trade potential. A 2018 World Bank study found that it was more expensive to trade between India and Pakistan than between India and Brazil. In 2012, trade pacts included an agreement to cooperate and assist each other on customs matters, a preliminary agreement on recognition of testing and standards, and one on addressing trade grievances. Reviving such pre-existing agreements and follow-ups will bring down trade costs and create a virtuous cycle of rising trade and declining trade costs.
Four, trade opening should be accompanied by easing up of the visa regimes. This would help open up broader opportunities for economic collaboration and people-to-people connections. A more liberal visa agreement was signed in 2012, and remains the basis for Indian visas for Pakistani nationals, although its implementation would be more strict today. That agreement, and its spirit, should be revived. Doing so will foster conversations in other areas of collaboration and complementarities. Indeed, by 2012, India and Pakistan were actively discussing not only trade and easing of trade barriers, but also trade in electricity and fuel (including gas exports and power transmission), air connectivity, investment and so on.
The truce on the India-Pakistan border is fragile and remains vulnerable to terror attacks.
Finally, and in the spirit of intensifying people-to-people connections, the two countries could seriously consider establishing border “haats” or markets, where people mingle freely and conduct small value transactions. The modalities of such markets can draw on the hugely successful Bangladesh-India border haat program. To begin with, two border haats can be established, one at the Wagah-Attari border in the neighboring states of Punjab, and the other one along the LoC. Note that the successful Kartarpur corridor project also includes a small market where Indian pilgrims can purchase local artefacts.
The truce on the India-Pakistan border is fragile and remains vulnerable to terror attacks (which have seen an uptick in recent months) and changes in domestic political and foreign policy priorities. A resumption in trade relations, in limbo since 2019, could help to create conditions for a more durable peace, especially if it is allowed to grow to its full potential, thereby creating large enough pro-trade constituencies on both sides. Moreover, trade with India can be a major asset for Pakistan’s economic stability, and India could see the emergence of a market as large if not larger than Bangladesh in Pakistan. Finally, if trade is allowed to grow to its potential, it could also create openings to discuss other, more contentious issues. With sober analysis, both sides should see that, in the long term, there are important benefits to resuming normal trade relations. The alternative is a volatile relationship with huge costs for both countries.