War minus shooting: Role of India in contemporary international trade

International trade right now is bringing back memories of the Cold War. What can be India's role in it?

The Cold War was a period of intense geopolitical tensions between communist countries and Western democracies. That is how some experts are reading today’s international trade scenario, except that the weapons and ammunition are different.

The recent moves by central banks to increase the gold component in their foreign exchange reserves, attempts by countries such as China and India to internationalise their currencies, and the United States’ move to slap tariff hikes on Chinese electric vehicles and other products are accentuating fragmentation of international trade and raising its costs.

“Thus far, today’s fragmentation is not significantly different from the initial years of the Cold War,” said the International Monetary Fund’s Deputy Managing Director, Gita Gopinath, at the Stanford Institute for Economic Policy Research.

She, however, noted that the fragmentation is much smaller than the average “between-bloc trade shortfall” during the Cold War period, when trade between the rival Western and Eastern blocs was significantly depressed, relative to the trade within these blocs.

The two emerging blocs this time are led by the US and China, though it is not as straightforward as the Cold War. Gopinath’s speech was days before the US hiked tariffs on imports of Chinese electric vehicles, solar cells, certain aluminium and steel products, and specific medical products. This could affect the $18 billion worth of Chinese imports into the US.

So, how should India, a leader of the erstwhile Non-Aligned Movement, position itself this time? What is the role it can play in reducing the cost of global trade and resolving conflicts between blocs?

No decoupling with China

According to Gopinath, non-aligned countries have greater economic and diplomatic heft now and are much more integrated into the global economy than during the Cold War years. “Their role as connectors this time round can help attenuate some of the costs of fragmentation,” she said.

However, unlike in the Cold War era, India has grievances against the leader of one of the two emerging blocs: China. Yet, it is not able to decouple its economy from China’s.

So, can India help in economic integration, as Gopinath appears to believe, and in resolving political conflicts?

For India’s merchandise exports, the US is still its largest partner, with a 17 to 18 per cent share of India's goods exports in the last five years. China's share in this period has fluctuated between 3 and 7 per cent. However, it is India's imports that make China a formidable trading partner. While the share of the US in India's imports was around 6 per cent, China’s was 15 per cent during 2023-24 and has ranged between 14 and 16.5 per cent during the last five years. 

Despite India's moves to be cautious about Chinese imports, its economy is closely linked to Chinese imports. This gave rise to a huge trade deficit with China, $85.08 billion, during 2023-24, against a $36.74 billion trade surplus with the US. India has kept up its surplus with the US and deficit with China during the last five years.

Biswajit Dhar, distinguished professor at the Council for Social Development, says India is trying to decouple from China as seen in its move to introduce the production-linked incentive (PLI) scheme. All sectors selected for PLI are where imports from China are high, be it pharma, mobile phones, auto components, or electronics. Regardless, India is getting more connected to China.

“Year after year, our imports from China are going up,” Dhar points out. “In four years, PLI has not taken off in a big way. Now, the government has been saying that they are going to review it.”

Where does India fit?

Shyam Saran, former foreign secretary and honorary fellow, Centre for Policy Research, says India does not fit very much anywhere.

“By not signing the RCEP (Regional Comprehensive Economic Partnership), the biggest trading arrangement in Asia, we have marginalised ourselves,” says Saran.

India’s argument that Chinese imports will flood Indian markets if it became part of the RCEP, he says, is not very valid, because no rules are being followed by Beijing in its trade with India.  

“China has not subjected itself to any rules. By being part of RCEP, China would at least to some extent have to subject itself to rules and norms adopted by the common consent of the RCEP members. This route is not available to us now,” he says. “How many anti-dumping duties can you impose?”

Dhar says India has its own priorities in global trade, and cites the Chabahar port deal, which India proposed despite the US threatening it with sanctions. “Despite Ukraine, we backed Russia. Despite the US, we are backing Iran (in terms of the Chabahar deal),” he says, pointing out that these equations are not very clear.

Saran says when it comes to resolution of political conflicts, India is marginal. “That is not to say India does not have international influence, but we are not seen as a critical player in our ability to mediate in situations of wars like in West Asia and in Ukraine.”

He says India has to keep in mind that though its macroeconomic fundamentals may be greater than many economies, since it is the fifth largest economy, it is not closely connected with the global or regional economy.  

Singapore, says Saran, has more leeway in playing the role of an economic connector despite being a much smaller economy because it is more integrated with the rest of the world.  

Is it really the Cold War?

Saran does not agree with Gopinath that this is the Cold War in trade.

“It is true that China is trying to internationalise the Yuan. It is trying to diversify its currency reserves. The Chinese central bank is buying more gold. What they are trying to do is diversify their reserves from their excessive dependence on dollars,” he says.

China has set up its China International Payments System (CIPS) as an alternative to the US-led SWIFT (Society for Worldwide Interbank Financial Telecommunications) system. But CIPS relies on its memorandum of understanding with SWIFT. Even though CIPS has seen an increase in international payments, particularly because Russia is conducting its trade in Yuan, it is nowhere near what is handled by SWIFT.

Saran says the US dollar reigns supreme because it is convertible both on current account as well as capital account, and the US treasury market is liquid. As long as Yuan is not convertible on capital account, it is difficult to see how it could pose any kind of competition to the dollar in the foreseeable future, he says.

As far as India’s efforts to make the rupee acceptable for international payments is concerned, the country has to accept that it is dollar dependent. “You don't have any kind of significant alternative system in place,” Saran says.

Though India tried the rupee trade system, Russia did not want it.