The year 2025 marks turning point in global trade. The established order, largely stable since World War II, is unraveling. The US has imposed a 50% tariff on many Indian imports, especially due to India’s crude oil purchases from Russia. This has forced India into difficult geopolitical and economic decisions. The outcomes will influence not only India-US relations but also broader global trade and diplomacy.
Geopolitical and Economic Context
India’s decision to continue buying Russian crude oil challenges its relationship with the US. Despite the high tariff, India prioritises geopolitical independence. Russia has become a major crude supplier to India over the last three years. The US tariff partly targets this trade. India faces a dilemma – stop buying Russian oil and face inflation or continue and risk economic fallout from tariffs.
Impact of Crude Oil Prices on Inflation
Crude oil prices surged after the Russia-Ukraine war but have stabilised around $80 per barrel. India imports about 1.5% of global crude from Russia. Studies show that a 10% crude price rise only increases Indian inflation by 0.2%. Therefore, stopping Russian crude imports will raise costs but not catastrophically. The economic cost is manageable, suggesting India’s choice is driven more by strategic concerns than purely economic ones.
Effect of US Tariffs on Indian Exports
The 50% US tariff hits labour-intensive sectors like textiles and gems hard. These sectors export about $20 billion to the US, nearly 30% of their total exports. Reduced exports will lower dollar inflows and may cause job losses. Finding alternative markets is difficult due to competition, regulatory barriers, and buyer networks. This tariff impact could offset savings from cheaper Russian oil.
Trade Relations with China and BRICS
India’s trade deficit with China is $99.2 billion, while it has a $41.2 billion surplus with the US. China exports much more textiles and gems to the US than India does. India mainly exports raw materials like ores and organic chemicals. Strengthening ties with China or BRICS is unlikely to compensate for lost US market share due to overlapping exports and existing trade imbalances.
Opportunities with the European Union and United Kingdom
India’s trade with the EU and UK offers potential relief. The EU is India’s second-largest textile market after the US. India already exports to these economies but trails competitors like China and Bangladesh. The India-UK Comprehensive Economic and Trade Agreement removes most duties on Indian exports. India aims to finalise a similar deal with the EU soon. These agreements could help diversify India’s export markets and reduce reliance on the US.
Future Outlook
India’s strategic and economic choices amid this global trade upheaval will influence its future role in international relations. Balancing geopolitical independence with economic realities remains a challenge. The evolving trade landscape requires swift diplomatic and market adaptation to maintain growth and stability.
Questions for UPSC:
- Discuss in the light of recent global trade tensions how tariff wars impact emerging economies like India and their geopolitical strategies.
- Critically examine the role of energy security in shaping India’s foreign policy, particularly in relation to Russia and the United States.
- Explain the challenges and opportunities for India in diversifying its export markets beyond the United States and China.
- With suitable examples, discuss the significance of trade agreements such as the India-UK Comprehensive Economic and Trade Agreement in enhancing India’s global trade footprint.
