India Pakistan Trade Potential: Barriers and Opportunities to A Frozen Relationship

Abstract

India and Pakistan share a 3,323 km border, and a history of economic division, but bilateral trade was only around US$1.2 billion in 2024. Their potential trade is estimated at US $37 billion, one of the highest unrealised trade gaps in the world, according to a World Bank study in 2018, "A Glass Half Full". This paper tries to identify the reasons for the persistence of the gap and the increase in it after the attacks in 2019 on Pulwama and in 2025 on Pahalgam. The paper is based on the liberal interdependence theory (Oneal and Russett, 1997) and the realist strategic rivalry and gravity model literature on South Asian trade (Taneja and colleagues at ICRIER) that categorises the barriers into institutional, instrumental and political shocks. It also looks at the parallel informal trade via third countries, which is estimated by the Global Trade Research Initiative to be about US $10 billion per year. The paper contends that economics is not the only reason for the freeze trade. While the economic argument of normalisation, is in favour of particularly for Pakistan, but the political argument has always prevailed in both capitals. It is the consumers who suffer, the traders in the border regions and the greater cause of South Asian integration due to freeze trade.