Mujtaba Arshad
AT a time when regional tensions have long constrained Pakistan’s economic potential, recent diplomatic engagement between the US and Iran with Pakistan playing a facilitating role may open an unexpected pathway toward regional connectivity, trade expansion and strategic economic integration under CPEC Phase II. For decades, Pakistan’s regional economic potential has remained constrained by geopolitical tensions, weak connectivity and limited regional integration. Despite sharing a long border and strong economic complementarities, Pakistan and Iran have historically failed to build robust trade relations. Bilateral trade has only recently approached $5 billion a figure that sits far below actual potential considering the size, proximity and location of both economies. This underperformance is largely the result of structural constraints, including weak transport infrastructure, sanctions-related complications, border inefficiencies and a lack of formal financial mechanisms. Consequently, Pakistan’s trade structure remains heavily dependent on a small number of traditional markets, increasing its vulnerability to external shocks.
As CPEC enters Phase II, the focus is gradually shifting from basic infrastructure construction toward industrial cooperation, Special Economic Zones (SEZs) and connectivity-driven growth. However, without a deliberate westward expansion, CPEC risks remaining a limited, vertical north-south corridor. This is where Iran emerges as the critical missing link. Iran’s geographic position gives Pakistan direct overland access to Central Asia, Middle East, Turkey, Russia and onward European markets. Integrating Iran into CPEC’s westward framework would effectively transform the corridor from a bilateral initiative into a multidirectional regional trade network. The real challenge, however, is whether Pakistan can convert this diplomatic opening into measurable economic gains. The most immediate channel lies in reducing the transportation inefficiencies, logistics bottlenecks and regulatory barriers that continue to inflate trade costs between the two neighbours. International evidence shows that reducing trade costs significantly increases trade volumes, while improved corridor integration can raise regional trade growth by as much as 10 to 15 percent.
Fortunately, Iran’s domestic demand aligns perfectly with Pakistan’s primary export strengths. Agricultural products such as rice, meat, citrus fruit, mangoes and maize remain in high demand due to Iran’s food security needs. Simultaneously, industrial goods including machinery, transport equipment and construction materials are emerging growth sectors, while consumer goods like pharmaceuticals, textiles and surgical instruments continue to hold stable demand. This means Pakistan already possesses the production base required to aggressively expand exports if logistics barriers are dismantled.
Beyond immediate bilateral trade, the broader strategic value of Iran lies in macro-market access. Through Iran, Pakistan can seamlessly connect to Central Asian economies with a combined GDP exceeding $400 billion. The Middle East, meanwhile, represents an import market worth more than $2 trillion annually, particularly in sectors where Pakistan holds a comparative advantage. Furthermore, connectivity through Iran provides shorter land routes toward Turkey and Europe reducing dependence on longer maritime pathways while linking Pakistan to Eurasian trade routes via the International North-South Transport Corridor (INSTC) and Caspian Sea networks.
The economic implications of this shift are substantial. Studies suggest that transport costs account for nearly 30 to 40 percent of total trade costs for transit-dependent economies. Corridor integration can reduce these transport costs by 20 to 25 percent while lowering transit times by up to 30 percent, directly sharpening Pakistan’s export competitiveness.
This geographic integration also reimagines the strategic significance of Gwadar. Gwadar’s future success depends heavily on regional stability; as tensions ease in key maritime zones, shipping confidence and port utilization naturally improve. Crucially, Gwadar and Iran’s Chabahar Port should not be viewed solely as rivals. The two ports can function as complementary regional hubs serving different segments of trade flows: Gwadar can operate as a transit and bulk cargo corridor connecting China and Central Asia, while Chabahar can facilitate trade into Iran, Afghanistan and Middle Eastern markets. Global trade experience demonstrates that coordinated port ecosystems generate greater efficiency, cargo specialization and long-term commercial sustainability than Zero-sum port competition.
Energy cooperation forms another major pillar of this westward opportunity. Pakistan’s economy remains highly vulnerable to imported energy, which accounts for nearly 25 to 30 percent of the country’s total import bill. Because most oil and LNG imports originate from distant Middle Eastern suppliers, Iran offers a geographically proximate and cost-effective alternative. Cross-border electricity trade and the revival of the Iran-Pakistan gas pipeline could reduce Pakistan’s energy import costs by an estimated 10 to 15 percent over the medium term. Lower, more reliable energy costs would directly inject productivity into energy-intensive domestic sectors such as textiles, fertilizer and manufacturing.
Ultimately, improved regional stability could revive the investor confidence that CPEC Phase II desperately requires. Pakistan’s Foreign Direct Investment (FDI) inflows have languished below $2 billion annually in recent years, reflecting political uncertainty. International evidence shows that countries participating in regional connectivity corridors experience noticeable spikes in investment following infrastructure integration. In Pakistan’s case, integrating Iran into the CPEC matrix could stimulate targeted investment in logistics, warehousing and export-oriented SEZs along the Gwadar corridor. Recent developments already indicate momentum in this direction. Pakistan has operationalized a new trade corridor through the Rimdan border, enabling exports toward Central Asia via Iran, while the gradual easing of banking and trade restrictions suggests that economic normalization is slowly becoming possible.
These developments reinforce a larger reality: regional peace is not merely a diplomatic objective; it is a potent economic instrument. To fully capitalize on this changing environment, Pakistan must strategically operationalize westward connectivity by strengthening border infrastructure, improving customs facilitation, establishing formal financial channels and promoting export-oriented industries. Pakistan should also pursue preferential trade arrangements, integrated border markets and coordinated customs mechanisms with Iran to institutionalize westward connectivity. The US-Iran diplomatic engagement may represent far more than a temporary geopolitical thaw. For Pakistan, it is the potential foundation of a new regional economic architecture. In the emerging regional order, Pakistan’s greatest opportunity lies not merely in geography, but in its ability to transform diplomacy into connectivity and connectivity into economic power.
