Suspending trade with India has cost Pakistan. Can the new government shift gears?

Pakistan’s newly appointed foreign minister has signaled a desire to reopen trade with neighbor and arch-adversary India – an aspiration that, if pursued, would mark a major diplomatic shift.

Islamabad suspended trade in 2019 after relations with Delhi deteriorated, in part because of India’s decision to strip the majority-Muslim state of Jammu and Kashmir of its legislative autonomy, and Pakistanis have been paying the price ever since. 

“I was speaking to an Indian company just yesterday that wants to sell us cumin,” says Mubashir Hussain, who owns a spice and dry fruit import business in Lahore. “I would like to buy the product, but it will first have to go to Dubai and then have its country of origin changed.”

While Pakistani businessmen and consumers are forced to foot the bill for these convoluted import journeys, experts say the trade ban has backfired politically. 

Over the past five years, Pakistan has made dialogue with India contingent on Delhi restoring Kashmir’s special status. But the Indian government refuses to engage with Pakistan on the disputed territory, viewing it as an internal matter – and a largely settled one at that. With border security concerns unresolved and Indian Prime Minister Narendra Modi expected to win a third term in the country’s upcoming elections, Pakistan’s new leadership is firmly on the back foot.

“Pakistan’s declining economic situation, unstable politics, and precarious security situation make its influence marginal when compared to India, and so its 2019 demands have only led India to further solidify its position,” says Pakistani academic Yaqoob Khan Bangash. He points to how India’s Supreme Court sided with the federal government on Kashmir’s status last December. “If Pakistan wants any detente with India it would have to eat a lot of humble pie and make the first few moves.” 

Trade pains

The Sharif family, which controls the ruling Pakistan Muslim League N (PMLN) party, has historically favored closer ties with India, partly because it relies on the electoral support of the Punjabi trading community whose interests are served by the border remaining open for commerce. This stance has frequently raised the ire of the country’s powerful military establishment, and was a contributing factor in the breakdown of civil-military relations during the 2013-2018 government of Muhammad Nawaz Sharif.

Now back in power, the PMLN “has compelling political reasons for pushing for border trade with India,” says Michael Kugelman, who directs the South Asia Institute at the Wilson Center. “Pakistan’s economic crisis offers an additional incentive.”

Pakistan’s economy is suffering from relatively low growth and high levels of inflation and has become dependent on cash injections from the International Monetary Fund. Some believe reopening the door to a massive neighbor market is just the economic jolt Pakistan needs.

In 2018-2019, Pakistan’s annual Indian imports totaled around $2 billion, and its exports neared $500 million. Today, there is no formal trade. All goods must be funneled through a third-country port such as Dubai or Singapore, at added costs. 

“You may have banned trade, but you haven’t been able to stop Indian products from entering the market,” says Mr. Hussain, the spice merchant. “All that you’ve done is made them more expensive.”

Foreign Minister Ishaq Dar acknowledged this reality at a press conference in London in late March, promising to gather stakeholders and “seriously examine” reopening trade with India. “What India did in 2019, the steps they took to amend the constitution and law, that was very painful,” said. “But I think the business community of Pakistan is very keen” to restart direct trade.

Unresolved tensions

While some Indian business communities agree, Indian officials are less keen.

Diplomat Maleeha Lodhi, formerly Pakistan’s Permanent Representative to the United Nations, notes that it was the Modi government that first imposed trade restrictions in 2019.

Months before Kashmir was stripped of its special status, a suicide bombing killed 40 Indian service personnel in the state's Pulwama district. India “slapped a 200% customs duty on Pakistani exports,” says Dr. Lodhi, and withdrew Pakistan's Most Favoured Nation Status – a principle that ensures that countries are not able to discriminate in the terms they offer trading partners. Delhi blamed Pakistan for the attack, which was claimed by the outlawed terrorist group Jaish-e-Mohammed, but Pakistan has consistently denied any involvement. 

The same day as Mr. Dar’s press conference, India’s Minister of External Affairs harkened back to these security woes, accusing Islamabad of being a sponsor of state terrorism. “How do you deal with a neighbor who does not hide the fact that they use terrorism as an instrument of statecraft?” he asked, referring to terror attacks on Indian soil. “It’s not a one-off happening ... but very sustained, almost at an industry level.”

In light of this, analysts in Pakistan have questioned the wisdom of Mr. Dar’s comments on restoring bilateral trade.

“Indian officials have repeatedly established their lack of enthusiasm and often, utter contempt, for the idea of any kind of normalization,” says foreign policy commentator Mosharraf Zaidi who served as an advisor to the Ministry of Foreign Affairs between 2011 and 2013. “For any Pakistani leader to continue to desperately signal his country’s openness to trade relations whilst India sustains a belligerent and bullying approach is inexplicable.”

The criticism appears to be resonating in at least some quarters of Pakistan’s foreign office.

On Thursday, spokesperson Mumtaz Baloch clarified that there had been “no change in Pakistan’s position” on resuming trade with India, an apparent backtrack on the foreign minister’s proposal.

Even if the government manages to placate its critics inside Pakistan, hopes for immediate change are slim. For Dr. Bangash, the academic, appealing to Mr. Modi’s legacy may be Pakistan’s best strategy.

“In his third term, the only thing which might lure Modi to want to talk to Pakistan could be a yearning to be recognized as a world peace maker,” he says.