Asia Politics

Pakistan suspends trade ties with India over Kashmir

Key Points
  • Pakistan says it's downgrading diplomatic relations with India after New Delhi stripped the Indian state of Jammu and Kashmir of special status.
  • Islamabad is suspending bilateral trade with New Delhi and expelling India's high commissioner to Islamabad.
  • The suspension of trade ties isn't set to have a material impact on either economy, according to risk consultancy Eurasia Group.
Pakistani Prime Minister Imran Khan addresses his nation on July 26, 2018.
Muhhamad Reza | Anadolu Agency | Getty Images

Pakistan said Wednesday it was downgrading its diplomatic relations with India after New Delhi stripped the Indian state of Jammu and Kashmir of its special status.

Pakistani Prime Minister Imran Khan "directed that all diplomatic channels be activated to expose brutal Indian racist regime, design and human rights violations," Islamabad said in a statement.

As a result, Pakistan was suspending its bilateral trade with New Delhi, and India's high commissioner to Islamabad, Ajay Bisaria, would be expelled.

"Independence Day this 14 August to be observed in solidarity with brave Kashmiris and their just struggle for their right of self-determination," the statement read. "15th August will be observed as Black Day."

India celebrates its independence day on Aug. 15.

Escalating tensions

On Monday, India said its central government would scrap Article 370, a constitutional provision that allowed the state of Jammu and Kashmir to make its own laws and granted special rights and privileges to permanent residents. The order was subsequently approved by the Indian president.

Pakistan called the move "illegal" and said it breached international law.

Jammu and Kashmir is India's only Muslim-majority state and is part of the broader disputed Kashmir region. Pakistan and India both lay claim to the full area but control only parts of it. The nuclear-armed rivals have fought multiple wars over the contested area and, most recently, carried out air strikes in each other's territory in February after a terrorist attack in India-controlled Kashmir killed more than 40 security officers.

India deployed tens of thousands of troops across the Kashmir Valley in anticipation of a backlash before announcing it was revoking Article 370. Authorities have banned public movements, shut down schools and colleges indefinitely, suspended phone and internet services, and put two former chief ministers of the state under house arrest.

Since then, Reuters reported that Indian security forces have kept a tight lid on protests in Kashmir. Young protesters were said to have been throwing stones at soldiers and police and media reports suggested some people were admitted to the hospital with pellet injuries. CNBC could not independently verify the accuracy of those reports.

Fallout assessments

It's unlikely that the escalating tension between India and Pakistan would lead to another war, according to Akhil Bery, South Asia analyst at risk consultancy Eurasia Group.

"Tensions between them will worsen over the next few weeks and there is clear upward pressure on the potential for limited military contact," Bery said in a note. "The nature of that conflict will depend upon whether Pakistan responds by allowing militant attacks in India, which we think probable."

He said, however, that the suspension of trade ties would not have a material impact on either economy.

India's total exports to Pakistan for the financial year 2018-19 stood at just over $2 billion and imports came in at around $495 million, according to a recent report from the Indian Council for Research on International Economic Relations (ICRIER).

On the other hand, informal trade through third-country ports like Dubai between the two countries was larger. ICRIER said India's informal exports to Pakistan were estimated to be nearly $4 billion and imports stood at $720 million for the financial year 2012-13.

Global responses

Reactions from major India and Pakistan allies mostly urged the nuclear rivals to resolve the tensions through diplomatic channels.

The United States said Wednesday it supports direct dialogue between New Delhi and Islamabad over Kashmir and called for calm and restraint from both sides.

British Foreign Secretary Dominic Raab said he spoke with India's foreign minister to get a better sense of the situation. "We've expressed some of our concerns around the situation and called for calm, but also had a clear readout of the situation from the perspective of the Indian government," Raab said.

China's foreign ministry on Wednesday said Beijing is "seriously concerned" about the situation in Jammu and Kashmir.

"China's position on the Kashmir issue is clear and consistent," foreign ministry spokesperson Hua Chunying said. "It is also an international consensus that the Kashmir issue is an issue left from the past between India and Pakistan."

Beijing also warned New Delhi to "exercise prudence in words and deeds" to avoid further complicating boundary issues. The two countries have a longstanding dispute over the border of the Ladakh region.

The sparsely populated mountainous desert region was granted Union Territory status following the bifurcation of the state of Jammu and Kashmir, but it will not have a legislative assembly and will fall under New Delhi's command.

India responded promptly to Beijing's comments, saying it was "an internal matter concerning the territory of India."

Reuters contributed to this report.