The latest eruption of hostilities between India and Pakistan appears to have ended as others have — with U.S. officials helping nudge the two nuclear powers back from the brink. Neither side should delude themselves into thinking they’ve won a great victory, however, or that they can simply return to the status quo.

This is the third instance in less than a decade that a terrorist attack in Kashmir linked to Pakistan-based militant groups has brought the two nations close to full-fledged war. Each flare-up has been more dangerous than the last: India has repeatedly sought to “restore deterrence” by launching strikes across the border, then has had to devise more punishing responses when militants have, inevitably, struck again.

The latest round ended only after the two militaries had targeted each other’s airbases with ballistic missiles and drones — raising the bar ominously for any subsequent crisis. It should be obvious that this escalatory cycle carries costs for both nations. Each confrontation with India shores up the military’s grip over Pakistan. Clashes erode Pakistan’s already limited attractiveness as an investment destination and jeopardize the international loans on which its ailing economy depends.

Its diplomatic standing will continue to suffer as long as it refuses to subdue militant groups with established ties to its intelligence services. Having only recently gotten itself off a terrorist-financing watchlist, Pakistan risks being added back.

While India may enjoy a stronger position — its economy is more than 10 times larger than its neighbor’s and it is being courted by the U.S. and others as a potential counterweight to China — it, too, can ill afford this tit-for-tat cycle.

Instability can’t help but unsettle foreign manufacturers thinking of shifting production to the subcontinent. Clashes are a drain on scarce military resources and risk exposing potential weaknesses in Indian defenses. They divert resources and attention from the country’s main rival, China, not to mention from the need to address the legitimate grievances of Kashmiris.

Both countries ought to embrace this opportunity to address the broader issues that divide them. Pakistan’s leaders, in particular, should recognize that nearly 80 years after Partition, they cannot keep manipulating the issue of Kashmir to rally nationalist support and distract from the country’s economic and governance failures.

Until its military credibly repudiates all ties to terrorist groups, it will be blamed for future attacks regardless of the facts.

The best way to improve the lives of Kashmiris on both sides of the de facto border would be to seek peace and encourage trade, tourism and economic development across the region.

For its part, India cannot keep pretending its struggling neighbor can be ignored or intimidated militarily while its own global rise continues unchecked.

A more effective long-term strategy will require carrots as well as sticks. Specific demands — for the prosecution of militant leaders, for instance — should be linked to clear rewards for Pakistan: expanded trade and investment, joint development projects, broader people-to-people links. Such ties would make India stronger, too: Hostilities will ebb only when there are more people on both sides of the border invested in peace than in conflict.

At a minimum, the two countries should swiftly restore ties to their level before the latest terrorist outrage and strengthen communication links to prevent future conflicts from spiraling out of control. They should be relieved to have averted disaster yet again. They cannot afford to be complacent.

Bloomberg Opinion