But for the time being, trade will take place just once a week, with a limited list of goods allowed.
As part of the opening ceremony, dozens of Pakistani school children chanted "Long Live Pakistan" and "Kashmir will become a part of Pakistan" as a brass band played patriotic music.
Recent months have seen some of the biggest anti-Indian protests in the area of Kashmir controlled New Delhi for years and the opening of the trade route goes towards meeting one of the demands of the groups behind those protests.
"The trade between two Kashmirs is a good beginning. Our ultimate aim is the line of control between two parts is removed," Mirwaiz Umar Farooq, chief of Kashmir's All Parties Hurriyat Conference, a separatist alliance, said.
Seven protesters were shot dead by Indian security forces in August when they marched to the border demanding the opening of the road to the Pakistani side.
At least 42 people have been killed by government forces and at least 1,000 wounded in the protests that followed.
Analysts fear the history of war and mistrust between the two neighbours could lead to delays for cross-border trade.
A bus service between divided Kashmir, launched with much fanfare in 2005, has struggled to cope with the resulting bureaucracy.
Tuesday's move is the first time vehicles have been allowed to cross the ceasefire line and the newly constructed Aman Setu or Peace Bridge since the 1948 war.
India has moved slowly on opening up the borders, believing that the move could aid separatist attacks on Indian forces from bases in Pakistan.
The South Asian neighbours both claim Kashmir in full but rule it in parts.
They have fought two wars over the region and were on the verge of a third in 2002 before pulling back.
The opening is the latest tentative peace move, but little has been done to resolve the central territorial issue.