Explained: How did Pakistan’s 'indirect' trade with India work?

120931140Trade bans are meant to hurt. But the official value of the potential hurt caused by India’s ban on imports from Pakistan seems underwhelming at first. Going by UN data, India says it bought stuff worth more than $6mn from Pakistan in 2024, and Pakistan says it sold stuff worth about $17,000 to India.Leaving the mismatch aside — which is incredibly large, even taking into account that import and export data for a pair of countries rarely match — the numbers are quite small.But the size of the official trade is not the point this time. Instead, India’s ban on products imported from Pakistan, announced last week in response to the Pahalgam attack, was aimed more at the “indirect” import of goods from Pakistan — which means stuff from Pakistan that is routed through other countries into India. And it is this unofficial value that gives us a better idea of the point of the import ban.There has been little meaningful trade for five yearsThe Most Favored Nation (MFN) status means a country treats its trading partner equally, like all others. India had granted that to Pakistan in 1996. Pakistan had agreed to do so for India in 2011 but eventually never did.In February 2019, after the Pulwama attack, India withdrew Pakistan’s MFN status and raised customs duty on Pakistani imports to 200%. Months later, in August 2019, when India revoked Jammu and Kashmir’s constitutional special status, Pakistan suspended bilateral trade with India. But it was a purely political decision with barely any economic repercussions for India. For two reasons — because Pakistan is an import-dependent economy, and because Pakistan’s share in India’s exports has never been significant. In 2018, the year before it announced the suspension of trade with India, the value of Pakistan’s imports from India was four times the value of India’s imports from Pakistan. This could have hurt India if Pakistan had been a large market for India’s exports — but in 2018, Pakistan accounted for just 0.7% of India’s exports.So, within two years, in March 2021, Pakistan had to back down and lift the embargo on cotton and sugar because of escalating prices in its domestic market. Trade picked up a bit — but not too much, and it never went back to the pre-2019 numbers. Officially. !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r,i=0;r=e[i];i++)if(r.contentWindow===a.source){var d=a.data["datawrapper-height"][t]+"px";r.style.height=d}}}))}(); But unofficial trade is said to be worth at least $2.5bnAnd it has reportedly been flowing for decades. Between 1993 and 2005, by one estimate, for every Rs 100 of trade between the two countries, another Rs 91 was said to be flowing through informal channels. It seems to have kept growing since then.A 2006 report published by the State Bank of Pakistan had acknowledged the scale and persistence of unofficial trade — and pointed to a value of $250mn to $2bn a year. By 2012-13, the informal trade was estimated to have exceeded formal trade — at almost double the official trade — and was valued at $4.7bn by an Indian Council for Research on International Economic Relations (ICRIER) analysis. When Pakistan announced its import ban in 2019, this unofficial trade was worth an annual $2.5bn, a 2020 analysis by Delhi-based think tank Bureau of Research on Industry and Economic Fundamentals (BRIEF) estimated.(As of now, the value of just one part of this unofficial trade — Indian goods that reach Pakistan — that has been cited across many reports is $10bn, sourced from a post by the founder of a business think tank. Since the methodology for arriving at these estimates has not been explained, it’s hard to say what the value of Pakistan’s unofficial exports to India could be.)So, how does the informal trade work?In two ways, according to analysts. One is by not declaring the trade at all — in which case, it’s illicit trade. A part of it is said to be done by professional informal traders, called 'khepias', who simply carry large quantities of goods on flights (and earlier, on trains like the Samjhauta Express) like regular passengers without declaring the cross-border trade. In 2019, khepias are believed to have transported goods worth some $35mn across the borders of India and Pakistan.The other, much more prevalent, way is by routing goods through other countries. Since these indirect channels obfuscate the point of origin of goods, traders bypass costs and bans. The trade is registered, but not between the actual buyer and seller. (The State Bank of Pakistan’s 2006 report on bilateral trade had emphasised that this “circular trade” is “technically official trade”.)For instance, if the unacknowledged intermediary in a trade between country A and country B is country C, then there will be two recorded trades — between country A and country C, and between country B and country C, but not between country A and country B.This could be done by actually sending goods to country C and then off to wherever they’re supposed to be sent. Or, as analysts over the years have pointed out, it could sometimes be done by what is called a “switch bill of lading”. Which means shipping documents that record the origin of goods are swapped out. So, if port A doesn’t allow goods from port B, the goods do flow from port B to port A but the paperwork shows that the goods came from port C. !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r,i=0;r=e[i];i++)if(r.contentWindow===a.source){var d=a.data["datawrapper-height"][t]+"px";r.style.height=d}}}))}(); It’s all very ‘organised’The UAE, all analysis of the informal trade suggests, is reportedly the most important player in re-routing of goods — accounting for more than 90% of the unofficial trade between the two countries.It’s a lot more expensive but it’s also more “efficient”. Approvals are quick, trade policies open, and ‘free zones’ have fewer regulations for trade. Goods can move in and out quickly. ('Free zones' are areas in the UAE where businesses get 100% customs duty exemptions, 100% corporate and income tax exemptions, and 100% repatriation of capital and profits.)Dubai’s free zones alone account for 60% of the city’s exports. And an ICRIER analysis said that most agents import products into 'free zones' in Dubai and re-export it with fresh documentation quickly. What happened after the 2019 ban?Unlike most hypotheticals, there is actual precedent for this situation. And India’s duty hike on Pakistani imports after the Pulwama attack in 2019 is a useful example. In 2018, besides oil, Pakistan’s largest export to India was dates — worth $112mn. In 2019, after the trade embargo, India bought dates worth only $13mn from Pakistan, which dropped to about $650,000 in 2020 (which was also the year of the Covid-19 pandemic), and $39,000 in 2021, before practically disappearing from the Indian demand list for Pakistan altogether.In the meantime, the value of dates India bought from the UAE went from $28mn in 2018 to $121mn by 2023.Or consider salt, for which India’s largest supplier in 2018 was Pakistan — selling salt worth over $4mn to India, almost all of which used to enter India through the Wagah-Attari land route with no customs duty.After the trade embargo, Pakistan’s salt exports to India started dropping and by 2023, it had shrunk to less than $12,000.The UAE, which used to sell salt worth less than $2,000 to India in 2018, scaled up its supply to more than $3mn by 2022.It is well established that trade bans usually end up pushing trade to “alternative” routes. But how will the alternative routes be plugged this time?To enforce the ban on informal trade, India has already prohibited Pakistani-flagged vessels from docking at Indian ports and suspended all postal services from Pakistan. And to enforce the import ban on things that originated in Pakistan, it would have to tighten its rules of origin checks (which is usually done through certificates of origin, random verification, and additional documentary evidence when considered necessary). That kind of pressure is more than Pakistan’s fragile economy can take at the moment. Credit ratings agency Moody’s said on May 5 that the current standoff could set back the slow economic recovery Pakistan has been attempting since its 2022 economic crisis and the subsequent IMF bailout. In the current situation, the risk of capital flight and further ratings downgrades could only grow — in a cycle that Pakistan can’t afford.Lead image generated with AI