Despite ongoing trade restrictions between India and Pakistan, a significant volume of Indian goods continues to flow into Pakistan through indirect routes, valued at over USD 10 billion annually. By leveraging third-party ports in Dubai, Singapore, and Colombo, Indian companies are able to sidestep trade restrictions and re-label goods as originating from other countries. This grey-area trade, while not entirely illegal, raises questions about international trade practices and the effectiveness of geopolitical policies. As tensions rise following recent terror attacks, the future of direct trade between India and Pakistan remains uncertain.
The Hidden Trade Route: Bypassing Geopolitical Barriers
In a move that challenges the effectiveness of trade restrictions, Indian goods worth over USD 10 billion annually are reaching Pakistan, despite the absence of direct trade ties between the two countries. According to the Global Trade Research Initiative (GTRI), Indian businesses are creatively circumventing official trade barriers by rerouting goods through third-party countries such as Dubai, Singapore, and Colombo.
This transshipment model allows goods to be stored in bonded warehouses, where they can be re-labeled and modified to disguise their true country of origin. For example, Indian-made products are rebranded as "Made in UAE" before being shipped to Pakistan. This practice helps businesses sidestep India's trade restrictions and still access Pakistan's market, often at a premium price due to the added costs of storage and documentation.
Ajay Srivastava, founder of GTRI, emphasized that while this method isn't strictly illegal, it operates in a grey zone, allowing businesses to continue trade despite the challenges posed by strained diplomatic relations between India and Pakistan. The result is a thriving shadow trade, one that continues despite political efforts to curb it.
Impact of Political Tensions on Trade
The trade route has flourished even as political relations between India and Pakistan have deteriorated. The terrorist attack in Pahalgam, Jammu and Kashmir, which resulted in the deaths of 26 people, exacerbated tensions between the two nations. In response, India closed the Attari Integrated Check Post, halting direct trade, and Pakistan suspended all trade ties with India.
This escalation follows a history of increasingly restricted trade relations. After the Pulwama terror attack in 2019, India raised import duties on Pakistani goods to 200%, effectively choking off the flow of goods between the two countries. Pakistan's retaliatory measures included the suspension of trade in most sectors, leaving only limited imports like pharmaceuticals.
However, despite these moves, unofficial channels for trade have flourished, with Indian exports still reaching Pakistan indirectly, though in much smaller volumes. In the fiscal year 2024-25, India's exports to Pakistan were valued at USD 447.65 million, a fraction of what they were before the imposition of heavy duties.
Breakdown of India's Exports to Pakistan
The products flowing through these indirect routes include a variety of goods, but some sectors dominate the exports. Organic chemicals and pharmaceutical products make up around 60% of India's total exports to Pakistan, with these categories valued at approximately USD 129.55 million and USD 110.06 million, respectively. Other major exports include sugar (USD 85.16 million), auto components (USD 28.57 million), and petroleum products (USD 11.63 million).
Interestingly, India also imports minimal goods from Pakistan. In 2024-25, imports were just USD 0.42 million, which is a significant drop compared to past years when goods like fruits, cement, and petroleum were common imports. This decline highlights the one-sided nature of trade between the two countries, which has been increasingly constrained by political and economic factors.
Diplomatic Strain and the Future of Trade Relations
India and Pakistan’s trade relationship has been consistently affected by their broader geopolitical tensions, particularly surrounding the Kashmir issue and cross-border terrorism. Following the withdrawal of Most-Favored-Nation (MFN) status to Pakistan in 2019, India effectively shut down the formal trade channel. This, along with the 200% import duties, has significantly reduced the volume of trade.
Despite these efforts to curtail trade, both nations have struggled to completely sever their economic links. The indirect trade routes, while beneficial for some businesses, highlight the limitations of political measures in a globalized economy. Moreover, as both countries continue to grapple with security concerns and territorial disputes, the prospect of resuming direct trade seems increasingly unlikely.
The shadow trade also raises questions about the effectiveness of tariffs and trade restrictions in achieving their intended political goals. While they may limit direct trade, they cannot eliminate the global market's ability to find alternative routes. As long as such grey-area practices persist, trade between the two countries will likely continue, albeit in less transparent and more costly forms.
Conclusion
The ongoing trade bypasses between India and Pakistan underscore the complex dynamics of international trade in a politically charged environment. Despite efforts to shut down formal trade, businesses continue to find ways to maintain economic ties, often through creative and legally ambiguous channels. As geopolitical tensions continue to shape the landscape of South Asian trade, the future of direct commerce between India and Pakistan remains uncertain, but the underground routes may keep the flow of goods going, albeit at a higher cost and with added complexities.
Comments