Money Matters

Revisiting Pakistan-India trade?

By Maheen Shafeeq
Mon, 06, 24

As geopolitical tensions around the world experience an upswing, major countries are contemplating methods to ‘de-couple’ and ‘de-risk’ their economies.

Revisiting Pakistan-India trade?

As geopolitical tensions around the world experience an upswing, major countries are contemplating methods to ‘de-couple’ and ‘de-risk’ their economies.

US-China trade relations are being impacted due to their geopolitical tensions that come in the shape of ‘trade and tech wars’. A similar case is discernible between India and China’s trade ties, which are increasingly marred by border issues and growing geopolitical rivalry. It appears trade has become the shock bearer of geopolitical tensions.

The heavy burden of history and persistently strained relations between Pakistan and India have also been a significant source of a wedge in their economic ties. While trade between neighbours undeniably rests on a convincing argument, an analysis of Pakistan-India relations reveals that trade amid tensions is less likely to sustain a persistent momentum.

In the past, Pakistan and India have witnessed efforts towards expansion of trade relations following the 2003 ceasefire understanding, which led to 72 Confidence Building Measures (CBMs) including trade and travel. The Composite Dialogue of 2004-2008 was also accompanied by some significant initiatives such as cross-LoC trade. However, the post-2008 Mumbai attack period saw a downward trajectory of bilateral trade.

Even when India and Pakistan conducted bilateral trade, as detailed in Figure 1, the numbers were negligible. In the past ten years, 2013-14 was a high time for Pakistan’s trade with India. Since then, no significant increase in exports is evident. The graph depicts that trade between India and Pakistan continues to be overshadowed by political and strategic tensions between Islamabad and New Delhi.

Since the BJP government came into power in 2014, Pakistan’s imports from India have seen a downward trajectory. During the BJP’s first term (2014-19), trade ties with Pakistan took a dip, but during the BJP’s second term (2019-24), trade only saw a declining graph moving from $1,930 million to $0.121 million in 2022.

In February 2019, alleging that Pakistan was behind the Pulwama attack without providing any proof, the BJP government imposed stringent measures to disrupt trade ties with Pakistan.

First, India withdrew Pakistan’s ‘Most Favoured Nation (MFN)’ status and imposed 200 per cent customs duties on all Pakistani imports. New Delhi's actions created significant obstacles for the access and viability of Pakistani products in the Indian market. Second, in April 2019, India also unilaterally suspended cross-LoC trade, alleging it was being ‘misused.’

Pakistan did not retaliate to these Indian measures. It was only after New Delhi’s unilateral and illegal actions o August 5, 2019 with regard to Illegally Occupied Jammu and Kashmir (IIOJK) that Pakistan decided to suspend bilateral trade. Even then, the transit trade to and from Afghanistan was not affected. After this incident, Pakistan’s imports from India fell from $1,010 million to $243 million. Trade became a diplomatic tool to manage the political tensions that came with the BJP’s actions of weaponizing trade.

As a result, trade was disrupted neither because trade was not beneficial for the people of the two states nor due to trade deficit but because Pakistani exporters faced several unfair hurdles from the Indian side. This included para-tariffs and non-tariff barriers (NTBs). Indian importers increasingly preferred local alternatives. Also, the Sangh Parivar’s vigilantes threatened local importers to stop trading with the Pakistani business community.

Apart from social media campaigns to stop trade with Pakistan, in some instances, Hindu extremist groups in India have resorted to threats and intimidation tactics against businesses selling Pakistani products. The BJP government’s actions in the political domain directly impacted India’s trade relations with Pakistan.

Pakistan’s Foreign Minister Ishaq Dar recently indicated a willingness to examine trade ties with India. Many analysts have suggested that India and Pakistan should consider the resumption of trade and restoring the upgradation of diplomatic ties.

Experts in Islamabad consider trade a vital spot on the re-engagement plan and have recommended establishing trade ties with India for the sake of markets and businesses on both sides. Even the Lok Sabha candidates from Amritsar are demanding to re-open trade and even facilitating tourism with Pakistan through the Attari-Wagha land route, indicating some pressure on the new Indian government to reconsider its India-Pakistan trade policy. However, observers in New Delhi interpret the discourse on Pakistan-India trade in Pakistan with suspicion on the one hand, and as a sign of Pakistan’s ‘weakness’ on the other.

Observers in India suggest that New Delhi should be cautious in pursuing trade with Pakistan as the benefits for India are not commensurate. Overall, the view in India on trade with Pakistan remains marked by suspicion owing to prejudice towards Pakistan. India considers itself in a much-strengthened position as compared to Pakistan due to its economic size and evidently wishes to dictate its terms of engagement on trade matters.

Pakistan, on the other hand, is believed to be in an advantageous position as it could be a gateway for transit trade from India to Afghanistan, Iran and Central Asia, areas that are rich in energy. For its part, India feigns a belief that it can feasibly access Iran and Afghanistan via the sea route through the Chabahar Port, while it considers trade with the Central Asian States as not very profitable.

India further believes it has crafted a regional connectivity network with all states in South Asia bypassing Pakistan. Furthermore, India has been more focused on its ‘Act East’ policy and expanding trade relations with the Association of South East Asian Nations (ASEAN), which it deems to be comparatively much more profitable. New Delhi’s current policy lends further credence to the idea that India is less inclined to engage economically with Pakistan.

Although trade between neighbours has intrinsic benefits, Islamabad recognizes the challenges that the issue of trade with India faces on account of political and diplomatic factors as well as unfair trade practices. Meanwhile, the unaddressed issues of August 2019 and India’s provocative anti-Pakistan rhetoric and actions such as involvement in at least 20 extrajudicial killings in Pakistan continue to undermine the constructive prospects of bilateral relations.

The current status of political and diplomatic ties between India and Pakistan continues to hold a grim picture insofar as bilateral trade relations are concerned. For India’s part, there is a fundamental rethinking of New Delhi’s approach towards Pakistan. For Pakistan’s part, Islamabad must practise strategic patience when it comes to trade with India and thoroughly analyse Indian intent rather than its actions only.

Meanwhile, Pakistan can leverage the potential of its largest trade partners, the US and China. Regionally, Pakistan must push to operationalize the Gwadar Port and the China-Pakistan Economic Corridor (CPEC) to act as anchors for forging stronger trade connections, especially with seaport nations such as Sri Lanka, Maldives and Bangladesh and land-locked states such as Nepal.

The writer is a research analyst in emerging technologies and international security. She tweets/posts @MaheenShafeeq