Extended Abstract

Economic Diplomacy and Trade Governance on the Path to Regional Convergence: An Analysis of Iran-Pakistan Trade Capacities
1. Introduction
In the contemporary international system, which is undergoing a profound transition from a unipolar order toward a multipolar and networked structure, the application of smart foreign policy tools has acquired strategic importance. Among these, economic diplomacy stands out as one of the most efficient and sustainable components of national power, serving not only as a driver of economic growth but also as a fundamental factor in shaping power relations, enhancing national security, and consolidating regional and extra-regional positions. Within this framework, states, as primary actors, seek to facilitate exchanges, reduce transaction costs, and create interdependent economic relationships through effective trade governance, the enactment of laws, and the formulation of intelligent trade agreements. These interdependencies, in turn, provide a foundation for political stability and regional integration.
For the Islamic Republic of Iran, which aims to transition beyond a rentier oil-based economy and diversify its trade partners—particularly among its neighbors—activating neglected capacities in economic diplomacy has become a priority. In this context, Pakistan, as one of Iran's most significant eastern neighbors, holds a special position. With a population exceeding 240 million, a sensitive geopolitical location in the Indian subcontinent, and proximity to Afghanistan, China, and international waters, Pakistan serves as a strategic bridge for Iran's access to South Asian markets as well as East-West transit corridors. Despite these unique potentials, the volume of bilateral trade between the two countries, which share cultural, religious, and historical commonalities, remains far below its real capacity. However, recent years have witnessed a strategic rapprochement and increased political will in both countries to move beyond the status quo. Concrete evidence of this will includes the revival of the Preferential Trade Agreement (PTA) after a decade of stagnation, the ambitious target of increasing bilateral trade to $10 billion in the medium term, and the initiation of negotiations to upgrade trade relations to a Free Trade Agreement (FTA). These developments are occurring within a regional context where Pakistan has increasingly positioned itself as an influential actor, evidenced by its mediation role in regional crises, such as its contribution to the ceasefire during the Ramadan War, which demonstrates Islamabad's political maturity and capacity to play a significant role in shaping Iran's development prospects.

2. Research Objective
The primary objective of this study is to investigate the conditions for improving Iran-Pakistan trade exchanges by leveraging the capacities of trade governance and economic diplomacy. In doing so, the research seeks to answer the core question: "How can the existing capacities in trade governance and economic diplomacy be utilized to elevate the level of trade exchanges between Iran and Pakistan to a level commensurate with the real potential and strategic interests of both countries?" Correspondingly, the main hypothesis posits that targeted economic diplomacy, through the revitalization and upgrading of trade agreements, holds a favorable foundation for realizing the trade prospects between Iran and Pakistan.
3. Research Methodology
This study employs a secondary analysis method, specifically utilizing trend analysis as its primary technique. The research is applied in nature and aims to identify existing gaps in Iran-Pakistan trade exchanges and propose solutions based on economic diplomacy. The statistical population encompasses all trade exchanges (exports and imports) between the Islamic Republic of Iran and the Islamic Republic of Pakistan, as well as each country's trade with the rest of the world, during the period from 2000 to 2025. Given the examination of all available data, the sample is considered equal to the population. Data were collected from four reputable international and domestic sources: the Customs Administration of the Islamic Republic of Iran, the World Bank, the Observatory of Economic Complexity (OEC), and the Trade Map database. Trade exchanges were derived through the cross-validation of data from these four sources.

4. Findings
The analysis of 25-year time-series data (2000–2025) revealed several critical findings:
a) Trade Growth and Structural Gaps: Bilateral trade has grown significantly, from approximately $180 million in 2020 to $2.2 billion in 2025. Pakistan's exports to Iran increased by 2,740% during the period, while Iran's exports to Pakistan grew by 2,170%. However, this figure still represents a small fraction of the estimated real potential. Despite growth, Pakistan's trade with Iran shows high volatility, with export volatility at 87% and import volatility at 72%, compared to Pakistan's global trade volatility of 18–22%. This indicates that bilateral trade is highly susceptible to exogenous variables such as sanctions, political changes, banking restrictions, and tariff/non-tariff barriers.
b) Complementary Trade Structure: The bilateral complementarity coefficient was calculated at 0.80, meaning that 80% of the trade potential lies in complementary goods, while only 20% is in competitive goods (primarily agricultural products like dates and fresh fruits). Iran holds comparative advantages in energy, steel, plastics, fertilizers, and chemicals. Pakistan holds advantages in rice, textiles, cotton, meat, and synthetic fibers.
c) Elasticity Analysis: Trade elasticity in the third period (2016–2025) reached its highest historical levels: import elasticity at 19.2 and export elasticity at 14.7. This indicates that Iran-Pakistan trade is growing 14 to 19 times faster than Pakistan's overall global trade growth. This high elasticity demonstrates that bilateral trade has transitioned from a "negative influence regime" (sanctions era) to a "positive influence regime" (political will, PTA revival, customs facilities), making it both a strategic opportunity and a threat, as positive diplomatic steps can multiply trade growth, but negative shocks can equally disrupt it.
5. Conclusion
This study concludes that despite notable growth, Iran-Pakistan bilateral trade remains far below its real potential. The high complementarity coefficient (0.80) and extreme elasticity demonstrate that the obstacles are primarily political, institutional, and infrastructural—not structural or economic—and that the conditions for improvement are entirely feasible through effective trade governance and active economic diplomacy.
The findings confirm the research hypothesis: targeted economic diplomacy, particularly through the revival and upgrading of Preferential Trade Agreements to Free Trade Agreements, has a strong and favorable foundation for realizing trade prospects. The historical evidence shows that diplomatic initiatives have directly and immediately boosted trade, while negative shocks (e.g., international sanctions) have severely disrupted it.
Based on these findings, the study recommends a set of strategic actions:
1. Revitalizing and upgrading the PTA to cover 10 priority product groups.
2. Creating shared value chains through joint investments in steel, petrochemicals, textiles, and energy sectors.
3. Coordinating customs and banking facilities, including establishing alternative financial channels and reducing clearance times.
4. Harmonizing health and Halal standards for agricultural and food products.
5. Utilizing the SCO framework to resolve legal and extra-legal issues, including customs standardization and transit facilitation.
Implementing these measures could potentially increase total bilateral trade from the current $2.25 billion to over $10 billion, representing a 300% growth and creating a robust foundation for regional stability, reduced dependency on extra-regional powers, and strengthened geopolitical bargaining power for both nations. Ultimately, economic interdependence—driven by trade governance—can serve as a vehicle for resolving political and security tensions, demonstrating that security issues are manageable through economic cooperation and mutual benefits.