January 1989. That was the brief interlude of hope when Benazir Bhutto and Rajiv Gandhi, the then-Prime Ministers of Pakistan and India respectively, secretly negotiated a deal to cut their conventional forces on the tense Punjab border—until the Pakistan Army got wind of it and said no.

Negotiating conventional-force reductions is still the key to easing the dangerous tensions between these South Asian powers. This needs to be acknowledged when the Foreign Ministers of India and Pakistan hold their first dialogue since the 2008 Mumbai terrorist attack in a meeting scheduled for July.

No progress on force reductions can happen without American cooperation, since the U.S. directly subsidizes Pakistan’s force posture by giving Islamabad $1 billion per year in cash subsidies to the armed forces (known as Coalition Support Funds (CSF)). This huge slush fund is not earmarked for specific use on the Afghan border and thus can be diverted to weapons for the Punjab border without end-use oversight.

Even if Washington stopped CSF funding, the Pakistan Army would be reluctant to pursue arms cutbacks because the it needs and promotes tensions with India to justify the huge defense budgets that enable the Army to hold an elite position in Pakistan society. As Ayesha Siddiqa shows in her book Military, Incorporated the Army has economic enterprises worth at least $38 billion ranging from insurance to airlines. And India has a seemingly far larger and more capable military.

At first glance, the burden falls primarily then on India for conventional-force cutbacks, since it has 4047 main battle tanks, while Pakistan has only 2461. But Islamabad has US-supplied F-16s that offset Indian armored superiority so they would have to be part of a force-reduction package.

The difficulty of negotiating and implementing a conventional-forces reduction agreement underlines the need for a serious dialogue on increased trade. Hardliners in Islamabad warn that opening up trade would lead to economic domination by India. But President Asif Ali Zardari argues that economic isolationism has necessitated costly imports from afar that would be much cheaper if shipped in from next door. The isolationism has, in turn, denied many Pakistani industries profitable export markets in India.

To set the stage for economic linkages, New Delhi should lift procedural non-tariff barriers that block Pakistan’s export of textile products and raw cotton.

While negotiations on Kashmir should be deferred, the U.S. should encourage India and Pakistan to give greater autonomy to the Kashmiris under their respective jurisdictions, and promote intra-Kashmir trade as part of the growing India-Pakistan economic cooperation that Zardari advocates. And the “line of control” that defines the Indian-and-Pakistani-held portions of Kashmir should be treated as a de facto international boundary. The U.S. should also reject the Pakistan Army’s attempt to use the absence of Kashmir negotiations as an excuse for supporting the Taliban. The reason Pakistan wants a strong Taliban is to offset Indian influence in Afghanistan; this geopolitical imperative would not be altered by a Kashmir settlement. Finally, both New Delhi and Islamabad must recognize that defusing Kashmir will take time because it involves much more than a dispute over territory. Retention of a Muslim-majority Kashmir Valley is necessary to vindicate India’s character as a secular state in which 160 million Muslims coexist with a Hindu majority. Conversely, in Pakistani eyes, the accession of Kashmir would validate Pakistan’s creation as an Islamic state.

The most sensitive issue between the two countries and the least likely to get a frank airing is the undercover support that each gives to separatist groups across the border. Pakistan’s intelligence agencies not only support Kashmiri insurgents but also stir up tribal rebels in India’s northeast. Lashkar-e-Taiba (LET), an Islamist front group for the ISI, openly declares its goal to be the destabilization of India. New Delhi, for its part, funds Baluch and Sindhi dissidents in the Arabian Sea provinces of Baluchistan and Sindh.

Pakistan’s underlying fear is that India is not reconciled to its very existence, and such fears were justified in the initial years after the 1948 Partition. But now India, as a rising global power, wants a stable status quo above all.