Pakistan’s geographic location connects South Asia, Central Asia, and the Middle East. Which makes it an attractive trade partner and a natural conduit for the movements of goods in the region. This geographic potential can make it a beacon of regional integration. Afghanistan lies in the heart of South Central Asia and is landlocked by six countries. It indirectly requires access to seaports via Pakistan to establish a foothold in the global market. To facilitate the smooth flow of trade between Pakistan and Afghanistan, a legal framework was essential.

Pakistan’s transit trade with Afghanistan declined by 66% in early 2023–24 due to counter-smuggling and import restrictions.

Pakistan and Afghanistan’s transit trade agreement (APTTA) was signed in 1965 and 2010. It was intended that this agreement would enhance trade by providing access to Afghanistan to the sea for establishing a foothold in the global market. Similarly, Pakistan will get access to the North-South Corridor for trading with Central Asia states.  The trade between Pakistan and Afghanistan has grown by approximately 27 per cent, reaching $1.575 billion in the fiscal year of 2024-25.  Pakistan’s exports have skyrocketed by 33 per cent, reaching $1.05 billion, while Afghanistan’s exports have soared by 16 percent that reaching $524 million.

Despite the increase in the indicators, the trade between Pakistan and Afghanistan is declining exponentially due to the recurrent closure of the border and procedural and infrastructural bottlenecks. The Afghan Transit Trade (ATT) has nosedived to 66 per cent during the initial months of the fiscal year 2023-24 due to Pakistan’s anti-smuggling countermeasures and import restrictions. The forward cargo (goods imported into Afghanistan through Pakistan) dropped by 67 per cent, from $2.197 million in 2023-24 to just $729 million in 2024-25.

Similarly, the reverse cargo (goods exported from Afghanistan) saw a decline of 46 pc, decreasing from $46 million to $25 million. Local communities’ livelihoods are primarily reliant on the border trade, adversely affected by every skirmish and the subsequent border closures. The recurrent closures of the border have always resulted in the spoilage of perishable goods because the Local traders are mainly exporting agricultural produce.

Afghan traders increasingly pivot to Iranian routes, reducing Pakistan’s market foothold by nearly 80% over two years.

Principally, APTTA was agreed to facilitate the trade movement without any unnecessary restrictions. Still, in practice, APTTA is facing persistent barriers. According to Shahbaz Rana, an economic correspondent at the Express Tribune,  the core issue in the APTTA implementation is the restricted access of Afghanistan’s trade flow into India and out of it through Pakistan.

The recent clash between Pakistan and India after the Pahalgam attack on April 22 has created concerns in Kabul over  Afghanistan’s trade flow. Abdul Latif Nazari, a Taliban deputy minister of economy, emphasized, “Tensions in India-Pakistan relations negatively impact Afghanistan’s economic situation. Afghanistan’s essential goods were imported through the Wagah border, and with increased tensions, this process can undoubtedly cause serious harm to Afghanistan’s imports and exports”.

Trade between Pakistan and Afghanistan can boost regional economic integration. However, some critical security-oriented barriers are hampering this development in the region. In 2023, the then-caretaker government imposed a ban and stringent regulations on non-essential imports, driven by a fear of losing US dollars, which was harshly weakening the economy. The current government of Pakistan reiterated that the transit trade between these two countries is merely being put under regularization to curb every kind of illegal activity.

Introducing a bank guarantee was well-intended to discourage the informal economy, but it inadvertently created stumbling blocks for legitimate business activities. The current government has realised that the requirement of bank guarantees has affected investors and made business difficult. The port operators and investors in Gwadar have urged the implementation of an insurance guarantee to facilitate trade operations.

Bank guarantees and advance duty requirements have unintentionally obstructed legitimate cross-border trade.

According to the estimates of Khorasan Diary, 59 percent of Pakistan’s transit trade with Afghanistan has pivoted away to Iranian trade routes, mainly driven by the start-stop nature of transit, cross-firings, and mismanagement. Pakistan’s foothold in the Afghanistan market has dwindled by almost 80 per cent in the last two years, when Afghan traders have shifted their focus towards Iranian products.

To make Pakistan’s trade routes more attractive than Iran’s requires an easy legal and institutional framework to facilitate trade movement. The trade relations were further ruined when Pakistan started imposing a processing fee on goods imported under the Afghan Transit Trade Agreement. Under this policy, 10% is to be paid in advance during the declaration process on the original value of the goods that are supposed to be passing from Pakistan to Afghanistan.

To gain maximum advantage from trade with Afghanistan, several important changes have to be made, revisiting the 10% duties and the policy of 110% bank guarantees. More importantly, the decoupling of security and trade issues is imperative to fully capitalise on transit trade.

Decoupling trade from security concerns and reforming APTTA policies are crucial to revitalize regional economic integration.

Readdressing APTTA to facilitate smoother business ventures, enhancing cargo movement, and revisiting the counter-smuggling measures, ensuring the rule of law, can boost trade relations and create an avenue of trust between Pakistan and Afghanistan, particularly under the shadow of terrorism. A stable and friendly environment is crucial for nurturing the transit trade between Pakistan and Afghanistan for the sake of strategic necessity, which can ensure regional connectivity.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.