Two months after nuclear-armed neighbors India and Pakistan clashed, global attention remains fixated on the fragility of the ceasefire. Yet an important front often goes unnoticed: the massive economic future the two countries could—and still can—share, shaping the destiny of 1.7 billion people.
In 2023, official trade between India and Pakistan amounted to just $510 million: an astonishingly low figure given their size, shared border, and economic potential. That number has dropped even further in the first half of 2025, as both governments have tightened restrictions on direct shipping, transshipment, and third-country-routed cargo. The stagnation is particularly stark when viewed alongside trade volumes with other partners. For example, Pakistan traded $467 million worth of goods with Sri Lanka, a country it does not share a land border with. Trade with the UAE stood at $8.78 billion, and with Saudi Arabia at $5.3 billion.
India’s regional trade tells a similar story. Its trade with Bangladesh reached $13.19 billion, and with Myanmar $1.7 billion, indicative of how proximity and cultural ties can serve as powerful enablers of economic cooperation when not obstructed by political roadblocks. Even China, despite political tensions, remains India’s second-largest trading partner, with bilateral trade crossing $118 billion in 2023. By contrast, the trade potential between India and Pakistan remains tragically underutilized, hamstrung not by a lack of demand or economic rationale, but by deep-rooted mistrust and a pattern of political retaliation.
A 2018 World Bank report on Pakistan-India trade estimated that normalized relations could unlock $5.2 billion in annual bilateral trade—more than five times the official volume at the time—driven by the two countries’ complementary economies and shared demand for each other’s goods. This same analysis emphasized that dismantling tariff and non-tariff barriers, coupled with modernizing border infrastructure, could unleash a South Asia-wide trade boom, with intra-regional trade increasing by at least 60% if barriers were reduced. Such gains would benefit not only India and Pakistan, but the entire region.
Amid these stark realities, a powerful framework helps explain why India and Pakistan remain trapped in cycles of escalation and how they might break free. Economist Dale Copeland’s trade expectations theory, a leading model in the study of international political economy and conflict, offers a compelling lens: the probability of war between states is shaped less by the extent of their current economic ties than by leaders’ expectations of future trade and investment. When expectations are positive, economic interdependence incentivizes restraint; when negative, it breeds insecurity, making leaders more prone to view conflict as a rational choice to preempt perceived decline.
Currently, India and Pakistan’s trade relationship exemplifies the latter dynamic. Official bilateral trade has collapsed from a peak of $2.41 billion in 2017-18 to an anemic $1.2 million in 2024. This near-total absence of formal commerce leaves both leaderships calculating negligible economic costs to escalation, so even minor incidents can spiral into crises without influential stakeholders lobbying for moderation.
Yet this official picture masks an undercurrent of resilient demand. According to the Global Trade Research Initiative, unofficial trade between India and Pakistan, largely routed through third countries such as the UAE and Singapore, is estimated at nearly $10 billion annually. Traders exploit bonded warehouses to relabel Indian goods before re-exporting them to Pakistan, revealing that while politics dictates official policy, market forces reveal enduring complementarities. Indian exports like pharmaceuticals, textiles, chemicals, and Pakistani exports such as minerals, fruits, and basic commodities, still find buyers, albeit through circuitous, costlier routes.
It is precisely these structural realities that should drive a rethink of bilateral trade policy. By institutionalizing and expanding formal trade, both countries can foster positive expectations of continuity, making conflict materially disadvantageous. Copeland’s model demonstrates that leaders fearing trade cutoffs or economic decline are likelier to gamble on confrontation; conversely, when leaders and civil societies anticipate stable, growing commerce, the opportunity costs of aggression multiply, encouraging dispute resolution through dialogue.
Data supports economic logic. Cheaper Indian pharmaceuticals could reduce Pakistan’s healthcare import bill, while Pakistani textiles and agricultural products can meet unmet demand in India’s border regions. A 2014 World Bank analysis suggested Pakistan could save up to $900 million yearly by importing goods directly from India instead of distant suppliers, translating into lower input costs for industries and more affordable consumer goods.
Moreover, border haats (small local markets operating on the border, as pioneered by the Bangladesh-India model) offer a microcosm of how people-centric trade can rebuild trust from the ground up. Since 2011, border haats between Bangladesh and India have revived family ties severed by Partition, empowered women economically, reduced smuggling, and created vibrant micro-economies. Their success lies in simplicity: vendors from border villages trade local products under minimal regulations, supervised by joint committees, with transparent operations limiting illicit activity.
If India and Pakistan replicate this model at Wagah-Attari and along the Line of Control, they could reintroduce controlled, low-risk economic engagement, directly benefiting communities most affected by conflict. These haats, while modest in scale, carry immense symbolic power: they allow face-to-face interactions, create shared economic interests, and embed peaceful cooperation into the social fabric.
Critics argue that normalized trade is unfeasible amid unresolved political disputes. Yet trade and diplomacy need not be zero-sum. Historical precedents underscore that economic engagement can soften hardened positions. The European Coal and Steel Community bound post-war France and Germany into a web of economic interdependence that made war materially irrational, thus setting the foundation for the European Union. In South Asia, bilateral trade could similarly generate vested interests in peace, shifting incentives for leaders who currently face no domestic economic backlash for bellicosity.
Institutionally, concrete steps can support this shift. A revived South Asia Free Trade Area (SAFTA) agreement must be paired with independent dispute resolution mechanisms and clear rules of origin, reducing the space for smuggling or informal rerouting. Trade facilitation through modernized customs procedures and digitized documentation can lower transaction costs and increase transparency. Confidence-building measures such as cross-border chambers of commerce, business visas, and educational exchanges can deepen civil society links, creating new constituencies for peace.
Equally important is political will to insulate economic engagement from short-term crises. The 2019 Pulwama attack exemplified how trade can become the first casualty of political tensions. Without a mutual commitment to ring-fence economic cooperation, positive expectations cannot anchor stability; policymakers must recognize that durable peace demands institutional continuity, not ad hoc gestures. The subcontinent has long been considered one of the world’s most emotionally charged regions. Relations between India and Pakistan remain tense, with the recent collapse of the four-year-long ceasefire rendering it null and void. Yet if history teaches anything, it is that endless hostility need not be the region’s destiny. A shared economic future, rooted in expanded trade, mutual investment, and people-to-people connections, offers the most realistic path to lasting stability. By fostering positive expectations of continued commerce, both countries can transform conflict into cooperation, and mistrust into opportunity. It is time for India and Pakistan’s leaders to break with the cycles of the past, to recognize that real peace will not come from military posturing but from the powerful, stabilizing logic of economic engagement. Trade alone will not erase grievances, but it can build constituencies for peace strong enough to anchor a new era: one where 1.7 billion people are no longer hostages to fear, but stakeholders in a shared and prosperous future.
