This research examines the prospects of Pakistan- Afghanistan trade through the lens of new economic geography theory. The study focuses on bilateral trade between the two countries and Central Asian Republics, transit trade. Pakistan`s geographic location makes it an important country in the region for facilitating global connectivity and fostering trade with neighboring nations, providing access to world markets through its seaports and land routes. Pakistan is an important country for Afghanistan. Afghanistan, being a landlocked country, relies on Pakistan for access to international markets. On the other hand, Afghanistan provides access to Pakistan to energy-rich Central Asian Republics(CARs). The study finds that despite the significant geographical locations of Afghanistan and Pakistan bilateral trade between the two countries is behind its true potential while the transit trade facilities are being misused. The study also examines the factors hindering the full potential of Pak-Afghan bilateral and transit trade and provides policy recommendations.