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The recent decision by India to halt all trade with Pakistan, following a terror attack in Pahalgam, represents a significant escalation in the already strained relationship between the two nations. While the immediate impact is the cessation of formal trade channels, the Global Trade Research Initiative (GTRI) predicts that this will not eliminate demand for Indian goods in Pakistan. Instead, Pakistan is expected to seek alternative routes to procure these goods, primarily through third countries, albeit at a higher cost. This situation underscores the complex interplay of politics, economics, and security in the India-Pakistan dynamic, and highlights the limitations of trade embargoes as a tool for achieving strategic objectives. The history of trade relations between India and Pakistan is marked by periods of relative normalcy interspersed with episodes of intense disruption, often triggered by security concerns or political disagreements. The Pulwama attack in February 2019 served as a major catalyst for the deterioration of trade ties. In response to the attack, India revoked Pakistan's Most Favoured Nation (MFN) status and imposed a punitive 200 percent duty on imports from Pakistan. This move effectively crippled Pakistani exports to India, leading to a sharp decline in bilateral trade. Pakistan retaliated by suspending all bilateral trade with India in August 2019, further solidifying the trade freeze. Since then, formal trade has been largely suspended, with only a few exceptions made for humanitarian reasons, such as the export of medicines from India to Pakistan. Despite the official trade freeze, a significant volume of trade has continued to flow between the two countries, albeit through informal channels and third-party intermediaries. Official data reveals that India exported goods worth USD 447.7 million to Pakistan in the current fiscal year (April 2024 to January 2025). These exports primarily comprised essential items such as pharmaceuticals, active pharmaceutical ingredients (APIs), sugar, auto parts, and fertilizers. Pharmaceuticals, with exports exceeding USD 110.1 million, constituted a significant portion of India's exports to Pakistan. The reliance on Indian pharmaceuticals underscores the importance of these goods for the Pakistani healthcare system. Similarly, the export of active pharmaceutical ingredients (APIs) worth USD 129.6 million highlights the dependence of Pakistani pharmaceutical manufacturers on Indian raw materials. Other essential items exported by India to Pakistan included sugar (USD 85.2 million), auto parts (USD 12.8 million), and fertilizers (USD 6 million). These exports demonstrate the ongoing demand for Indian goods in Pakistan, despite the formal trade restrictions. In contrast to India's exports to Pakistan, India's imports from Pakistan were negligible, amounting to just USD 0.42 million. These imports primarily consisted of niche agricultural items, such as figs worth USD 78,000, and herbs like basil and rosemary, valued at USD 18,856. The limited volume of imports from Pakistan reflects the relatively small size of the Pakistani economy and the trade barriers imposed by India. The GTRI estimates that nearly USD 10 billion worth of trade still takes place between India and Pakistan through re-export routes, mainly via the United Arab Emirates and Singapore. This suggests that the formal trade freeze has not completely eliminated trade flows, but has merely diverted them to indirect channels. Pakistan reportedly imports several Indian products through these third countries, including pharmaceuticals, chemicals, cotton, tea, coffee, dyes, onions, tomatoes, iron, steel, sugar, salt, and auto parts. The reliance on third-country intermediaries increases the cost of these goods for Pakistani consumers and businesses, as it involves additional transportation, handling, and transaction costs. On the other hand, India may receive goods like Himalayan pink salt and dry fruits such as dates, apricots, and almonds from Pakistan through similar indirect routes. The use of indirect routes highlights the resilience of trade flows in the face of political and security challenges. However, it also raises concerns about the transparency and security of these trade channels, as they may be vulnerable to illicit activities such as smuggling and money laundering. The decision by India to halt all trade with Pakistan is likely to have a number of consequences. First, it will increase the cost of goods for Pakistani consumers and businesses, as they will have to pay higher prices for Indian goods sourced through third countries. Second, it will disrupt supply chains and create uncertainty for businesses on both sides of the border. Third, it will further erode trust and confidence between the two countries, making it more difficult to resolve other outstanding issues. Fourth, it could potentially lead to increased smuggling and other illicit activities, as businesses seek to circumvent the formal trade restrictions. From India's perspective, the trade halt is intended to send a strong message to Pakistan about the consequences of supporting terrorism. However, it is unclear whether this strategy will be effective in achieving its intended objectives. Pakistan may be able to find alternative sources of supply for some of the goods it imports from India, or it may be able to increase its domestic production of these goods. In addition, the trade halt could backfire by further alienating the Pakistani population and strengthening the hand of extremist groups. A more effective approach may be to engage in dialogue with Pakistan and to address the underlying issues that are fueling the conflict. This could involve measures such as strengthening border security, cracking down on terrorist financing, and promoting regional cooperation. In the long run, the normalization of trade relations between India and Pakistan could bring significant economic benefits to both countries. Increased trade could create jobs, boost economic growth, and improve living standards. It could also help to foster greater understanding and cooperation between the two countries, reducing the risk of conflict. However, achieving this outcome will require a significant shift in political will on both sides of the border. Both countries will need to be willing to put aside their differences and to focus on the common interests that they share. The recent trade halt underscores the deep-seated challenges that continue to plague the India-Pakistan relationship. Resolving these challenges will require a comprehensive approach that addresses the political, security, and economic dimensions of the conflict. While trade embargoes may be seen as a quick fix, they are unlikely to be effective in achieving lasting peace and stability. Instead, a sustained effort to build trust and confidence between the two countries is essential. This could involve measures such as people-to-people exchanges, cultural programs, and joint economic projects. By fostering greater understanding and cooperation, India and Pakistan can create a more peaceful and prosperous future for themselves and for the region as a whole.
The Global Trade Research Initiative (GTRI)'s analysis provides crucial insights into the likely ramifications of the trade suspension. Their prediction that Pakistan will resort to sourcing Indian goods through third countries highlights the limitations of using trade as a tool for coercion. While the formal trade routes are blocked, the underlying demand remains, creating opportunities for alternative, albeit more expensive, channels to emerge. This situation underscores the importance of understanding the elasticity of demand and the substitutability of goods when considering trade restrictions. If the demand for Indian goods in Pakistan is relatively inelastic and there are limited substitutes available, then the trade halt is likely to have a significant impact on the Pakistani economy. However, if the demand is elastic and there are readily available substitutes, then the impact will be less severe. The reliance on third-country intermediaries also raises concerns about transparency and traceability. It becomes more difficult to track the origin and quality of goods when they are routed through multiple countries. This can create opportunities for smuggling, counterfeiting, and other illicit activities. It also makes it more challenging to enforce trade regulations and intellectual property rights. The GTRI's estimate that nearly USD 10 billion worth of trade still takes place between India and Pakistan through re-export routes is a significant figure. It suggests that the formal trade freeze has not been entirely effective in cutting off trade flows. Instead, it has simply diverted them to indirect channels, increasing costs and reducing transparency. The fact that Pakistan reportedly imports a wide range of Indian products through these third countries, including pharmaceuticals, chemicals, cotton, tea, coffee, dyes, onions, tomatoes, iron, steel, sugar, salt, and auto parts, demonstrates the breadth and depth of the economic ties between the two countries, even in the face of political tensions. The dependence on Indian pharmaceuticals and APIs is particularly noteworthy, as it highlights the importance of these goods for the Pakistani healthcare system. Disruptions to the supply of these goods could have serious consequences for public health. On the other hand, India's imports from Pakistan are relatively limited, consisting mainly of niche agricultural items such as figs and herbs. This suggests that Pakistan is more dependent on India for trade than vice versa. The trade imbalance also reflects the relative sizes of the two economies, with India being significantly larger and more diversified. The GTRI's analysis also points to the potential for both countries to receive goods through indirect routes. India may receive goods like Himalayan pink salt and dry fruits such as dates, apricots, and almonds from Pakistan through similar indirect routes. This suggests that both countries are adapting to the trade freeze by finding alternative ways to access goods that are not readily available domestically. The use of indirect routes also highlights the role of third countries in facilitating trade between India and Pakistan. The United Arab Emirates and Singapore are mentioned as the main hubs for re-export trade. These countries have well-developed trade infrastructure and logistics networks, making them attractive destinations for businesses seeking to circumvent trade restrictions. The involvement of third countries in trade between India and Pakistan also has implications for regional trade dynamics. It can increase trade volumes and create new opportunities for businesses in these countries. However, it can also raise concerns about trade diversion and the potential for unfair competition. The GTRI's analysis is a valuable contribution to the understanding of the complex economic relationship between India and Pakistan. It provides insights into the likely consequences of the trade halt and highlights the challenges of using trade as a tool for coercion. It also underscores the importance of promoting transparency and cooperation in trade relations, even in the face of political tensions.
The long-term implications of the trade halt are multifaceted and require careful consideration. While the immediate impact is felt in the disruption of formal trade and the increased cost of goods for Pakistani consumers, the broader ramifications extend to regional economic stability and the potential for exacerbating existing political tensions. From an economic standpoint, the trade diversion towards third countries introduces inefficiencies and added costs. The increased transportation, handling, and transaction fees associated with re-export routes ultimately burden businesses and consumers in both India and Pakistan. This can hinder economic growth and reduce competitiveness, particularly for smaller enterprises that may struggle to absorb the additional costs. Furthermore, the lack of transparency in indirect trade channels creates opportunities for illicit activities such as smuggling, tax evasion, and the trade of counterfeit goods. These activities can undermine legitimate businesses, distort market prices, and pose risks to public health and safety. The reliance on third-country intermediaries also raises concerns about the security of supply chains. Disruptions in the supply of essential goods, such as pharmaceuticals and food items, can have serious consequences for public welfare, particularly in Pakistan, which relies heavily on Indian pharmaceuticals. From a political perspective, the trade halt can further erode trust and confidence between India and Pakistan, making it more difficult to resolve other outstanding issues. The suspension of trade is often perceived as a hostile act, which can inflame nationalist sentiments and harden positions on both sides. This can create a vicious cycle of escalation, where each action provokes a reaction, making it increasingly difficult to find common ground. Moreover, the trade halt can have unintended consequences on the internal dynamics of Pakistan. It can strengthen the hand of extremist groups and undermine moderate voices that advocate for peaceful dialogue and cooperation with India. The economic hardship caused by the trade disruption can also fuel social unrest and instability, creating new challenges for the Pakistani government. The trade halt also has implications for regional economic integration. The South Asian Free Trade Area (SAFTA), which aims to promote trade and economic cooperation among South Asian countries, has been largely ineffective due to the strained relations between India and Pakistan. The trade halt further undermines the prospects for regional economic integration and reinforces the perception that political considerations often outweigh economic benefits in South Asia. In order to mitigate the negative consequences of the trade halt, it is essential for both India and Pakistan to explore alternative approaches to managing their economic relationship. One option is to focus on building confidence-building measures that can help to reduce tensions and create a more conducive environment for trade. This could involve measures such as regular dialogue between government officials, business leaders, and civil society representatives, as well as joint projects in areas of mutual interest, such as environmental protection and disaster management. Another option is to explore the possibility of establishing a limited trade regime that allows for the exchange of essential goods and services, such as pharmaceuticals and food items, under strict monitoring and verification mechanisms. This could help to address the immediate needs of the populations in both countries while minimizing the risks of illicit activities. Ultimately, the normalization of trade relations between India and Pakistan requires a fundamental shift in political will on both sides. Both countries need to recognize that economic cooperation is in their mutual interest and that it can contribute to greater peace and stability in the region. This requires a willingness to put aside historical grievances and to focus on building a future based on trust and cooperation. The recent trade halt is a stark reminder of the challenges that lie ahead. However, it also presents an opportunity for both India and Pakistan to re-evaluate their approach to economic relations and to explore new avenues for cooperation. By working together, they can create a more prosperous and secure future for themselves and for the entire South Asian region.