The trade between Pakistan and Afghanistan is seen as something that endorses close bilateral ties while acts as a challenge for national security of Pakistan, simultaneously. This relationship is built on a complex mix of formal agreements and informal economic exchanges, shaping the economic and geopolitical landscape of the region. Despite numerous bilateral trade agreements and institutional mechanisms, trade between the two neighbors faces persistent challenges, including regulatory barriers, security concerns and political instability. The informal economic means have raised security concerns which are now threatening national security of Pakistan and obviously bilateral relations between the two. The question arises how can both countries effectively manage and optimize their trade relations while addressing these pressing issues?

The bilateral trade between Pakistan and Afghanistan serves as a critical component of their relationship. Afghanistan, being a landlocked country, relies heavily on Pakistan for access to essential commodities, while Pakistan benefits from a significant export market in Afghanistan AND Central Asian Republics via Afghanistan. The Afghanistan-Pakistan Transit Trade Agreement (APTTA) plays a crucial role in facilitating formal trade, yet the overall volume remains below potential due to various constraints. The formal trade mechanisms between Pakistan and Afghanistan are governed by this agreement, various trade facilitation agreements and World Trade Organization protocols. However, bureaucratic inefficiencies, frequent border closures, terrorism and inconsistent policies disrupt the flow of goods. Moreover, tariffs, taxation policies, and non-tariff barriers add further complications, discouraging traders from opting for legal trade routes. Formal trade efficiency can be strengthened through simplifying customs procedures, ensuring political stability and developing apt trade infrastructure.

On the other hand, informal trade between Pakistan and Afghanistan is a parallel economy. Despite the formal structures in place, informal trade is often termed as cross-border smuggling is a thorn in Pakistan’s economy. A major reason for this is the stringent regulatory environment, which compels traders to bypass official channels. The informal trade economy has deep roots in the region, with tribal networks playing a pivotal role in sustaining it. Additionally, informal trade is facilitated by smuggling networks which incorporates top inefficient bureaucracy, tribal heads, contractors, etc. that continues to flourish and impacts the effectiveness of formal channels.

Moreover, these channels have increasingly raised security concerns that not only threaten Pakistan’s national security but also pose challenges to bilateral relations. The porous Pakistan-Afghanistan border has facilitated a thriving informal trade network of smuggling, with goods such as petroleum products, food items, electronics and even pharmaceuticals frequently crossing the border without official documentation. This unregulated trade provides economic relief to traders and consumers on both sides, leading to significant revenue losses for both governments. It has also created opportunities for illicit activities, including the smuggling of contraband goods and the financing of militant groups.

Pakistan, in particular, has been facing security threats from the misuse of these informal channels. The unchecked flow of goods has provided revenue streams for militant groups, allowing them to sustain their operations. Furthermore, the absence of stringent border control mechanisms has led to the illegal movement of weapons and narcotics, exacerbating security challenges for Islamabad. Moreover, the lack of proper banking channels between Pakistan and Afghanistan has further hampered formal trade. The Afghan banking system is already struggling due to international sanctions and economic instability, traders often rely on informal money transfer networks, such as hawala, which lack transparency and regulatory oversight. This raises concerns about money laundering and terrorist financing, an episode probed by FATF, had seriously damaged Pakistan’s reputation internationally.

The bilateral relations between Pakistan and Afghanistan have historically been strained due to political differences, which directly affect trade policies. The Afghan government’s growing engagements with India and the U.S. coupled with Pakistan’s strategic concerns, often lead to economic retaliations in the form of trade restrictions. The fall of Kabul and takeover by Afghan Taliban as well as evolving regional dynamics, particularly China’s Belt and Road Initiative (BRI) and its implications for Afghanistan’s integration into economic corridors, present both challenges and opportunities for Pakistan to recalibrate its trade approach, but this recalibration rests on only once condition: reassurance of not using Afghan soil against Pakistan for any terrorist activity.

The bilateral relation between Pakistan and Afghanistan are already standing at a dangerous crossroads where only economic cooperation can serve as a catalyst for stability and security. The regulation of trade routes is essential to the security and harmony of both the states. It will also require close coordination between the security agencies of both nations. Intelligence sharing, joint border patrols and the establishment of counter-smuggling task forces can help mitigate illicit activities linked to trade routes. Moreover, recognizing that informal trade will not disappear overnight, Pakistan and Afghanistan should work towards integrating informal traders into the formal economy. Lastly, the establishment of designated trade corridors with stringent security measures can facilitate the formalization of trade while minimizing security threats.