The Unseen Bond

Key Developments in South and West Asia in 2025

The months of May and June 2025 marked a period of significant geopolitical activity in South and West Asia. On 7 May, tensions escalated when India launched an attack on Pakistan under a false pretext. Pakistan responded decisively, and the situation was further complicated by Iran's political and diplomatic support for Pakistan. The Iranian Foreign Minister took active steps to mediate between the two nations, aiming to de-escalate the conflict. A ceasefire was eventually established on 10 June, bringing temporary relief to the region.

However, the peace was short-lived. On 13 June, Israel conducted surprise attacks on key military and nuclear facilities in Iran. In response, Iran launched missile strikes against Israeli targets. Pakistan demonstrated strong solidarity with Iran, offering full political and diplomatic backing. Both houses of Pakistan’s parliament passed resolutions condemning Israel's actions. Notably, the United States consulted Pakistan on the matter, and Pakistan urged the U.S. to work towards ending the conflict. Iranians expressed gratitude towards Pakistan, with public demonstrations featuring slogans such as “Thank you Pakistan.”

The events of May and June 2025 not only tested the resilience of both nations but also strengthened their bilateral ties. This newfound closeness was evident through high-level visits, including the visit of Iranian President Dr. Masoud Pezeshkian to Pakistan from 2 to 3 August 2025. During this visit, several Memoranda of Understanding (MoUs) were signed in areas such as information technology, law and justice, climate change, and tourism. These agreements are expected to lead to formalized partnerships in the near future.

Enhancing Bilateral Trade: Opportunities and Challenges

A critical focus of the recent interactions has been the need to increase trade between Pakistan and Iran. Currently, bilateral trade stands at $3 billion, but both countries have set ambitious goals to raise this figure to $10 billion within a shorter timeframe. Despite being neighbors and maintaining generally cordial diplomatic relations, the two nations have not fully capitalized on their geographical proximity. The main challenge lies in the low level of formal trade, which is hindered by complex geopolitical dynamics.

Nonetheless, there is a substantial amount of informal trade between the two countries, often equaling the volume of formal trade. This highlights the potential for growth if proper mechanisms are put in place. Both countries possess unique economic strengths that could be leveraged for mutual benefit.

Iran, for instance, holds the fourth-largest oil reserves and the second-largest gas reserves, which form a significant portion of its export revenues. Other exports include chemicals, plastics, fruits, ceramics, and textiles. Pakistan, on the other hand, offers a range of products such as rice, mangoes, and oranges, which are highly sought after in Iran. Additionally, Pakistani sports gear and medical instruments have found a market in Iran.

Despite these advantages, challenges remain. The Preferential Trade Agreement (PTA), signed in 2004 and implemented in 2006, still serves as the primary framework for trade. However, it has not been replaced by a more comprehensive Free Trade Agreement (FTA), despite multiple rounds of negotiations. Furthermore, the lack of proper banking channels between the two countries continues to impede commercial progress.

Digital Trade and Economic Growth

One promising avenue for boosting trade is digital commerce. Digital trade involves the exchange of goods, services, or fees through digital means, such as streaming movies, downloading video games, or purchasing online advertisements. Both Pakistan and Iran have thriving digital industries, driven by young and tech-savvy populations. Iran's digital economy is projected to grow at an annual rate of 35%, reaching $100 billion by 2025. Similarly, Pakistan's IT sector is a major contributor to exports, with a growing potential to reach $15 billion by 2030.

In addition to digital trade, the textile industry in Pakistan presents another opportunity. As the largest manufacturing sector in Pakistan, the textile industry accounts for about 8.5% of GDP and contributes significantly to export revenues. With the right incentives and market access, Pakistani textiles could find a prominent place in the Iranian market.

Overcoming Hurdles for Mutual Benefit

While there are challenges to overcome, the potential benefits of enhanced trade between Pakistan and Iran are considerable. Geopolitical factors have historically influenced government policies, but these can be managed through diplomatic efforts. By focusing on shared objectives and fostering cooperation, both nations can unlock new opportunities for economic growth.

Ultimately, the success of bilateral trade will depend on the willingness of governments to address existing barriers and create an environment conducive to commerce. With concerted efforts, Pakistan and Iran can transform their economic relationship into a more robust and mutually beneficial partnership.