Facilitating Confidence-Driven Trade in South Asia

Six years ago this month, terrorists attacked a convoy of vehicles ferrying Indian paramilitary forces in Pulwama, located in Indian-administrated Jammu and Kashmir. The attack claimed the lives of forty Indian soldiers and prompted a tense—albeit short-lived—military exchange between the two countries. Days after the attack, India announced that it was withdrawing MFN (Most Favoured Nation) trading status to Pakistan and imposed 200 percent tariff on all imports emanating from Pakistan.

In April 2019, India announced the suspension of trade across the Line of Control (LoC), citing concerns over its misuse by Pakistan-based groups. Then, in August, Pakistan announced a complete suspension of trade in response to India’s revocation of Article 370 in Jammu and Kashmir. The sudden suspension of trade between the two countries in 2019 imperiled the livelihoods of the border communities on both sides.

Since then, trade between India and Pakistan has remained suspended. During this period, tensions between the two nations have remained palpable, serving as a poignant reminder of the lasting impact of the 1947 partition of the Indian subcontinent and deep-rooted complexities that continue to shape relations in the region.

Over the years, the region has sluggishly moved toward reconciliation, albeit in a nonlinear fashion. This is reflected in the low levels of intraregional trade in South Asia, which has ranged between 6 and 8 percent for the last two years, rendering it the least economically integrated region in the world.

Greater economic stability in South Asia hinges on the continued need for confidence-building measures (CBMs), which can help foster trust and create an environment conducive to long-term cooperation and growth. Positive examples of such efforts can be seen within the region. More than five decades after the 1971 war that led to the creation of an independent Bangladesh, the recent inauguration of a direct sea trade link between Karachi in Pakistan and Chittagong in Bangladesh marks a hopeful shift in South Asian diplomacy, demonstrating the potential for CBMs and international cooperation even after decades of discord.

CBMs are established tools to improve relationships, humanize the “other,” signal positive intentions, and avoid escalation. Trade, when combined with other CBMs, can offer a path toward conflict resolution based on the principles of mutual trust and open communication. For example, Brazil and Argentina jointly cooperated to build a regional model for nuclear security by signing the Brazilian Argentine Accounting and Control of Nuclear Material Agreement in early 1991. The agreement’s nonproliferation commitment ensured that both countries would refrain from pursuing nuclear weapons programs, a mutual pledge to peace and regional stability. This was further strengthened by the Mercosur Trade Agreement later that year, promoting economic cooperation and integration. The Organization for Security and Co-operation in Europe (OSCE) Guide on Non-military CBMs cites instances where CBMs, developed as a tool of preventive diplomacy between nations, evolved from mere military measures to encompass economic, social, and cultural cooperation, most importantly facilitating trade.

In South Asia, trade between the region’s two largest economies—India and Pakistan—has long been constrained by political tensions. In 1948-49, approximately 56 percent of Pakistan’s exports were directed to India, while 32 percent of its imports originated from India. However, these trade figures significantly declined over the decades; according to 2018-19 data from International Trade Centre Data Portal, the share of Pakistan’s exports to India and its imports from India have reduced to 2.1 and 3.4 percent, respectively. Despite bilateral tensions, amendments to the maritime protocol in 2005 allowed vessels from India and Pakistan to access each other’s ports for cargo destined for third countries, and the opening of the Wagah-Attari border provided a crucial impetus for land-based trade. In 2008, another significant development occurred with the initiation of trade across the Line of Control (LoC) in the Kashmir region (zero-duty trade based on the barter system), further expanding the scope for exchanges between the two nations.¹

Established as one of the first major trade CBMs between India and Pakistan, cross-LoC trade exemplifies how economic engagement can serve as a catalyst for cooperation, even in politically sensitive territories. Despite intermittent suspensions and ceasefire violations, cross-LoC trade survived more than a decade.

This border trade was a valuable lifeline for the communities. Between 2008 and 2019, cross-LoC trade was valued at $1.2 billion, generating more than 170,000 job days, and an exchange of more than 110,000 trucks with a freight revenue of about $9 million for transporters in Jammu and Kashmir. Nearly 25,000 people in the border districts of Uri and Poonch depended on this trade for their livelihoods. Similarly, in the border city of Amritsar (located in the Indian state of Punjab), nearly 50,000 people—including traders, custom house agents, gas station attendants, mechanics, dhaba (roadside eatery) owners, truck drivers, porters, and helpers—depended on the land trade between India and Pakistan via the Wagah-Attari crossing. The affected also included women from the slums around Amritsar who depended on dry dates from Pakistan to make a living.

The suspension of trade led to significant collateral damage, affecting lives in profound ways. Families have been forced to withdraw their children from schools, remove loved ones from hospitals, and even cancel weddings—highlighting the deep and widespread impact on personal and social stability. The impact extended beyond Punjab and Jammu and Kashmir to various other regions of India—including Hyderabad’s textile, gem, and jewelry traders; Delhi’s dry date traders; and Indore’s soy bean traders, among others.

Yet despite this backdrop, there’s an opportunity to revitalize bilateral trade ties. Leveraging modern solutions such as “trusted trader” programs, which enhance compliance and build confidence, can pave the way for more secure borders and supply chains. Additionally, integrating transparency and technological innovations into customs and port operations will not only foster trust but also improve trade efficiency, laying the groundwork for a more resilient, cooperative trade ecosystem that would benefit South Asia as a whole.

From Stalemate to Strength: Revamping India-Pakistan Trade Amid Suspension

The abrupt cessation of cross-border trade demonstrated the fragility of the economic links between the two nations, with livelihoods subject to disruption at a moment’s notice when political tensions flare. While trade volumes between India and Pakistan may seem insignificant in the context of overall global commerce, there is a long-standing and resilient market. Traders and businesses on both sides have consistently advocated for sustained economic engagement, arguing that established frameworks—such as those constructed through CBMs—can help protect economic engagement from political fallout.

While there is a deeply held view in India that two countries cannot enjoy trade while under threat of terrorism, the history of trade between India and Pakistan offers several examples where commercial relations endured despite significant challenges. Even in the face of disruptions caused by events like the Kargil conflict in 1999, the 2001 attack on India's Parliament, and the 2008 Mumbai terrorist attacks, trade continued.

Likewise, joint efforts could restore the economic stability that has been disrupted since 2019. Doing so would require a three-pronged approach: a) offering alternate economic opportunities to traders in border areas beyond immediate neighbors; b) reestablishing rules-based international trade between India and Pakistan; and c) incorporating a stricter regulatory regime addressing deficiencies of cross-LoC trade.

Until bilateral trade is reinstated, India might consider supporting border economies by pursuing the following measures:

• Rail connectivity between border areas and coastal trade centers: Until bilateral trade resumes, it will be a priority to complete the Patti-Makhu rail project—a 25.5-kilometer-long rail link across Punjab that would reduce the distance travelled to Mumbai from the cities of Amritsar and Jammu by 240 kilometers and 277 kilometers, respectively, thereby opening a new array of economic opportunities. This rail link will be a boon for traders in Indian Punjab, reduce the distance between northern states, and connect Punjab and Jammu with major trading centers in other states such as Gujarat, Maharashtra, and Rajasthan.
• Air connectivity between Amritsar International Airport and the Middle East and Central Asia: Establishing direct and more frequent air connectivity from Amritsar’s international airport to Afghanistan, the Middle East, and Central Asia for regular cargo flights could provide alternative trade routes and access to new markets, particularly for high-value and perishable goods. Furthermore, setting up a permanent perishable cargo center at the airport could transform Amritsar into a key hub for the air transportation of perishables, meeting the growing demand for air freight services in northern India.

A stable, rules-based trading system, backed by institutional safeguards to decouple economic engagement from political fluctuations is necessary to foster long-term trust and confidence in the bilateral trade relationship, for which India and Pakistan could consider the following:

• Re-honoring South Asian Free Trade Area (SAFTA): Re-honoring of SAFTA by both India and Pakistan can reinitiate bilateral economic engagement, overruling the economic hostilities of 2019. It could also signal a shared commitment to regional agreements and in the long-term, reduce the negative impact of political volatility on trade, and ensure a more resilient and sustainable economic partnership.
• Joint trade portal: Establishing a joint trade portal, hosted by national-level chambers of commerce on both sides, as a repository of comprehensive technical and operational know-how is critical for revamping India-Pakistan trade in a stronger, more organized, and resilient manner. Such a portal could offer real-time updates on compliance requirements and provide accessible resources for both current and prospective traders, reducing barriers to entry and promoting inclusive and expansive participation.
• Product-specific collaborations: Promoting product-specific collaborations between business associations and chambers of commerce (for example, between the Surgical Instruments Manufacturers Association of Pakistan in Sialkot and the Association of Surgical Instruments Manufacturers and Suppliers in Jalandhar) could help exchange technical expertise, tap into new markets, and enhance industry-level people-to-people connect.

The current suspension of cross-LoC trade could also be used as an opportunity to put in place a stricter regulatory regime, upgrading critical infrastructure and revising operating procedures. There is ample scope for reform, including:

• Infrastructural reforms: The installation of full-body truck scanners, X-ray machines, and closed-circuit television cameras could increase security and transparency at trade facilitation centers on both sides.
• Digitization of trade: Digital platforms to monitor invoicing, traders’ records, barter balancing and truck information, among other details, could enable real-time checks by the authorities, reducing the room for misuse.
• Dispute settlement mechanism: At present, there is no legal document or forum of jurisdiction that has been entrusted to resolve disputes between traders. A divisional Commercial Court or an appellate body could be configured to address the specific problems in cross-LoC trade.
• Product list based on the Harmonized System code: The current commodity list of twenty-one product categories could be replaced with a mutually agreed list of items based on the Harmonized System code, addressing the issue of misinterpretation and misrepresentation of commodities between the two countries.
• Base price for commodities: A committee for setting base prices for commodities could be established at trade facilitation centers, addressing concerns of under-invoicing.
• Currency conversion rate: Conversion rates between Indian and Pakistani currencies used for invoicing could be formally announced at trade facilitation centers at regular intervals. This could help traders with accurate conversions as well as reduce room for fraud.

Only after bilateral and cross-LoC trade resumes under an improved framework should discussions begin around more innovative CBMs, like piloting a “border haat” model, as seen in the case of India and Bangladesh, or other people-to-people exchanges.

Trusted Trader Programs: Strengthening Compliance and Confidence

Trusted trader programs, often implemented by customs authorities, establish a framework for certifying businesses that meet rigorous standards related to security, compliance, and operational efficiency. For instance, the U.S. Customs and Border Protection (CBP) operates the Customs Trade Partnership Against Terrorism (CTPAT), which allows certified importers to benefit from faster processing times and a lower likelihood of inspections in return for the trade community helping the CBP improve border security.

The regional trusted trader program in South Asia, referred to as the Authorized Economic Operator (AEO) program, has seen relatively modest uptake overall. As of October, 2024, India had 5,947 AEO entities enrolled in a three-tier program, accounting for approximately 35 percent of import declarations, according to India’s National Time Release Study 2024. In contrast, other South Asian countries exhibit significantly lower numbers, with many yet to fully implement or institutionalize their AEO programs.

Bolstering AEO adherence requires increasing awareness about the benefits offered to AEO clients; offering expedited clearance to AEOs in coordination with partner government agencies such as food safety, plant quarantine, animal quarantine, drug control, and more; and simplifying the AEO enrolment and renewal process. Promoting AEO programs and regular feedback loops between customs agencies and private firms can enhance trust and encourage more companies to participate, thereby fostering transparency, enhancing compliance, and strengthening trust and confidence between the public and private sectors.

In addition, the full implementation of mutual recognition of trusted trader programs between countries—acknowledging that certified entities in one country meet the security and compliance standards set by another—allows for reduced physical inspections of cargo from recognized “low risk” traders.

As of 2024, India has signed a mutual recognition agreement on an AEO program with Australia, Hong Kong, Russia, South Korea, Taiwan, the United Arab Emirates, and the United States. Promoting uptake of AEOs in South Asia and ensuring the mutual recognition of other programs will speed up the movement of goods and free up customs resources for higher-risk shipments. It will also improve the security of the entire supply chain by ensuring that all partners involved—from manufacturers to logistics providers—adhere to rigorous security and compliance standards.

The path to shared prosperity lies in creating a more connected, secure, and efficient trading environment. South Asian nations can work toward a resilient, trust-based trade ecosystem that encourages deeper economic ties by focusing on transparency, public-private partnerships between customs and traders, and enhancing the efficiency of customs and port operations. To achieve this lofty objective, however, it is crucial to rekindle trust between India and Pakistan, insulate bilateral trade from the vagaries of political tensions, and foster a more predictable environment for economic cooperation. Confidence-building measures are key to fostering trust between India and Pakistan, while also reassuring external trade and investment partners beyond the region.

Nikita Singla is a nonresident scholar in the Carnegie South Asia Program. The author is grateful to Alana Brase, Helena Jordheim, Annabel Richter, and Milan Vaishnav for helpful edits and comments on an earlier draft.