Shutting Afghan trade: a costly mistake?

There’s a growing tension in Pakistan’s foreign policy: the urgent need for economic growth versus a hardening stance towards its neighbours. While legitimate security concerns might underpin Pakistan’s recent actions regarding Afghanistan, completely shutting down trade channels is proving to be a blunt, costly, and potentially self-inflicted wound.

The Paradox of Isolation

Pakistan is at a critical juncture, striving for an export-led growth model. Yet, simultaneously, it’s increasingly isolating itself from its immediate neighbourhood. This stark contradiction lies at the heart of the problem. Regional trade is not just about moving goods; it’s how countries build resilience, scale value chains, and anchor sustainable growth.

Instead of fostering these connections, Pakistan appears to be retreating on almost every frontier:

Trade with India remains frozen in political ice.
Financial sanctions severely constrain commerce with Iran.
And now, formal trade channels with Afghanistan have effectively been shut.

The outcome? Not strategic strength, but deepening economic isolation. For a nation already struggling to diversify exports and attract investment, voluntarily narrowing its trade corridors is a serious misstep.

The Concrete Economic Toll

The economic cost of this decision is anything but abstract. Data from the State Bank of Pakistan revealed a trade surplus of USD 752 million with Afghanistan in FY25. ITC Trade Map data painted an even stronger picture, placing exports to Afghanistan at USD 1.5 billion in 2024, generating a surplus of USD 855 million. Since the border closure, this substantial trade has ground to a near standstill.

Who’s Bearing the Brunt?

The disruption is now sending ripples through Pakistan’s domestic markets, with small and medium enterprises (SMEs) feeling the immediate impact:

Agriculture: Pakistan traditionally exports a wide range of agricultural goods to Afghanistan, including rice, wheat, potato, onion, citrus, and other fruits. With the border closed, rice and citrus markets are facing gluts, pushing prices downward. While some argue this helps reduce inflation, falling farm prices directly translate into weaker rural incomes – a damaging long-term consequence for an agricultural sector already reeling from other policy missteps.
Pharmaceuticals: The impact here is immediate and visible. Several medicine brands manufactured in Pakistan are specifically tailored for the Afghan market. Finished inventories are now sitting idle, with no viable export route.
Manufacturing: Companies like Pakistan Aluminum Beverage Cans Limited have reported significant hits to their can exports to Afghanistan and onward to Central Asian markets.

More Than Just an End Market: A Gateway to Central Asia

Afghanistan isn’t merely an end destination for Pakistani goods; it serves as a crucial transit gateway to multiple landlocked Central Asian economies. By severing this vital corridor, Pakistan is not only losing direct trade but also access to those lucrative markets. Maintaining overland connectivity to Central Asia is strategically paramount, and once such trade routes are lost, they are incredibly difficult to regain.

The Myth of “Alternative Markets”

When affected businesses appeal for a rethink, the standard official response often suggests finding “alternative export markets.” This response fundamentally misunderstands how trade works. Export relationships are built over years through sustained engagement, market development, and trust. They cannot simply be switched overnight.

This is why inventories of rice, pharmaceuticals, and other goods are piling up, leading to rising wastage, especially for perishables.
In some sectors, costs are escalating sharply. Northern cement producers, for example, are shifting from Afghan coal to South African sources, meaning coal is now shipped to Karachi and then transported north, raising costs by an estimated 30 percent. Simultaneously, cement exports to Afghanistan have ceased entirely.
Textile value chains are also affected, impacting both cotton imports from Afghanistan and polyester garment exports. Potato and citrus exporters are desperately seeking more expensive and legally complicated alternative routes, often through Iran.

These frictions quickly accumulate across entire value chains, hurting competitiveness and profitability.

Afghanistan Won’t Wait

Afghanistan is not immune to the fallout, but it is already exploring costlier alternatives, including air-shipping pharmaceutical products from India. Over time, new arrangements and trade routes will inevitably emerge. Once that happens, Pakistan risks permanently losing its long-held comparative advantage in that region.

The Forex Dimension

Even though trade with Afghanistan is conducted in Pakistani rupees, the substantial surplus historically translated into Afghan importers selling dollars in the Peshawar market, which then flowed into Pakistan’s interbank system. On average, monthly inflows of USD 50 to USD 70 million have effectively disappeared. While strong remittance inflows might currently mask this impact, it shouldn’t breed complacency.

A Call for Strategic Thinking

Pakistan needs to think more strategically. Trade normalization does not equate to compromising on security. Global examples abound where political or military tensions coexist with continued trade, such as between India and China, or China and Taiwan. Countries protect their farmers – the United States, for instance, has repeatedly revisited tariffs when counter-tariffs on soybeans disrupted its farm economy. Pakistan should be no different.

With limited room for maneuver – trade with India constrained by political hostility and asymmetry, and Iran by sanctions – Afghanistan remains a domain where Pakistan retains significant agency. Reopening and deepening trade with Afghanistan, and onward to Central Asia, is not a concession. It is an economic imperative that Pakistan can ill afford to ignore.

Source: Original Article