Department of Research, Studies and International News 05-05-2025

Despite decades of political tension and formal restrictions, trade between India and Pakistan has never truly come to a halt. Beneath the surface of strained diplomatic relations and closed borders lies a flourishing network of informal commerce that bypasses official channels, and its scale is staggering.

Following a deadly attack in Pahalgam, a popular tourist town in Indian-administered Kashmir, tensions between India and Pakistan surged once more. In the aftermath, both nations implemented retaliatory measures: suspending diplomatic engagements, halting cross-border trade, and closing down consular services. The Wagah-Attari land crossing, the only official trade route between the two countries, was shut, symbolizing yet another freeze in formal trade relations.

India, accusing Pakistan of being complicit in the April 22 attack, pulled back from a longstanding water-sharing treaty and reduced diplomatic staff. Pakistan, rejecting the allegations, responded with a complete halt to trade with India, including through intermediary nations. Although such actions seem decisive on paper, they obscure the broader picture of ongoing, substantial commerce via alternate routes.

Trade relations between India and Pakistan began in 1947 after the partition of British India. In 1996, India granted Pakistan the “Most Favoured Nation” (MFN) status under World Trade Organization (WTO) regulations, which obligate countries to extend equal trading terms to all partners. Yet persistent political hostilities hindered the full realization of this trade potential.

Between 2016 and 2018, bilateral trade ranged around $2.3 to $2.4 billion annually, with India enjoying a trade surplus. However, tensions flared again after a 2019 suicide bombing in Pulwama, which killed over 40 Indian soldiers. In response, India withdrew Pakistan’s MFN status and imposed a 200 percent tariff on imports. Pakistan retaliated by suspending trade altogether.

By 2024, official trade volumes had plummeted. Indian exports to Pakistan stood at $447.7 million, while Pakistan’s exports barely touched $420,000, down from hundreds of millions in earlier years.

The real trade: Hidden and Resilient

Yet these official figures are just the tip of the iceberg. Experts estimate that unofficial Indian exports to Pakistan total around $10 billion annually. This parallel trade operates through third-party nations such as the UAE, Singapore, and Sri Lanka. Goods are shipped from India, relabeled or re-documented in transit hubs, and then forwarded to Pakistan, often with a new country of origin cited to bypass scrutiny.

Ajay Srivastava, founder of the India-based think tank Global Trade Research Initiative (GTRI), explained that this workaround isn’t inherently illegal, but it operates in a regulatory grey zone. “Documents and packaging are changed while goods are in duty-free transit storage, allowing for re-export under a different origin,” he wrote. This system enables higher profit margins and provides traders with plausible deniability.

This kind of workaround is not unique to South Asia. For instance, following Russia’s invasion of Ukraine, countries like India have re-exported Russian crude oil to Europe through similar strategies. Such rerouting is a common response to sanctions or trade restrictions globally.

China, too, has employed similar tactics for decades, using ASEAN member states as intermediaries to access the Indian market and avoid higher direct tariffs.

Challenges in enforcement

Both Indian and Pakistani authorities are aware of this workaround. While Pakistan’s latest trade ban includes restrictions on third-country commerce, enforcement remains complicated. Customs agencies would need to significantly enhance their capacity to identify and trace the true origin of goods, often relying on documents provided by importers.

International trade lawyer Shantanu Singh notes that this effort would demand rigorous checks and a legal framework that distinguishes between genuine imports and disguised rerouted goods. However, the nature of this informal trade, driven by private traders and shaped by market demand, makes it difficult to stamp out entirely.

Underlying this enduring informal trade is a deep-rooted cultural and economic interdependence. Shared languages, tastes, and consumer preferences create a strong demand in Pakistan for Indian products, especially pharmaceuticals, textiles, and food items. Even when borders close, the appetite for these goods remains.

The closure of the Wagah-Attari crossing not only disrupts trade between India and Pakistan but also affects commerce from Afghanistan, which used this route for exports. Local economies on both sides of the border suffer from these interruptions, while private traders adapt and shift operations to new logistical hubs.

A pattern of politicized trade

Historically, each diplomatic fallout, be it the wars of 1965 and 1971 or the Kashmir crisis of 2019, has had economic consequences. While agreements like the Tashkent and Simla accords aimed to restore stability, trade has continued to swing in response to political developments.

Ultimately, despite repeated efforts by both governments to sever trade ties in times of conflict, the reality is more nuanced. As long as there is demand and the opportunity for profit, trade, formal or otherwise, will find a way.