Global trade has an X factor and it’s called Donald Trump. Just when everybody thought global trade was picking up and could salvage torpid economic growth, the US president’s decision to end US participation in the Joint Comprehensive Plan of Action (JCPOA) for Iran has torpedoed all hope. This comes on top of the ongoing trade war. Years of meticulous negotiations by the P5+1 group—comprising five permanent members of the UN Security Council (China, France, Russia, the UK and US) plus Germany—have now been undone by a single pen stroke. India, caught between two important trade partners, will need a strategy to deal with this trade turmoil.
Trump’s disruptive Iran order will result in multiple geo-political fallouts. Topping the list are concerns that US’ re-imposition of economic sanctions on Iran will renew hostilities in the fervid West Asian region. Oil is the other source of anxiety and spot prices are already exhibiting signs of nervousness—Brent crude spot prices have jumped by almost 18% between 2 January and now. The deepest cut is reserved for world trade; it might even be dire for India, with the Bharatiya Janata Party-led government betting on exports as a route to economic growth and electoral gains in 2019.
The World Trade Organization’s (WTO’s) projections of 4.4% world trade growth during calendar 2018 (against 4.7% during 2017) was released almost a month before Trump’s Iran decision. Even at that time, WTO director-general Roberto Azevedo was aware of the risks: “…this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation." He may have spoken too soon because nations are queueing up outside the WTO to complain against US’ trade actions. Trump has been undermining global trade for a while: The US has been blocking key appointments to the WTO’s appellate body over the past few months in retaliation for what it perceives as the WTO’s “unfair" treatment. This is in addition to its escalating trade war with China. In addition, the Iran crisis has now thrown Azevedo’s whole menu of risk options in disarray.
India has a complex task ahead in contending with the economic sanctions. The re-imposed economic sanctions will now require countries to stop buying oil from Iran or “wind down" purchases over a 180-day window. Last time around, India and China were granted special exemption. India’s external affairs minister Sushma Swaraj recently said India recognizes only UN sanctions, not single-country unilateral sanctions. How this statement will translate into action is not yet clear.
There’s also confusion because ground conditions have changed: with shale oil flowing freely, the US will want Indian oil tankers loading up in the Gulf of Mexico rather than the Persian Gulf. There are other complications as well; the last time around, India and Iran devised a complicated payment arrangement, which included payment in rupees as well as in kind (foodgrain and other food products). Such an arrangement is prone to disagreements. This is likely to put further pressure on India-Iran ties, which have been fraying despite ancient civilizational and trade bonds.
But here’s the crux of the dilemma: total India-Iran merchandise trade amounted to $12.89 billion during 2016-17, only one-fifth of the $64.52-billion India-US trade. This calls for a deft balancing act by India, one that keeps all parties happy. On one side is Trump ready to replace Iran’s oil with shale output but riding roughshod over established trade ties. On the other side is Iran, not only a trade ally but also a partner in India’s regional ambitions, especially through the strategic investment and foothold in Chabahar port, which provides market access to Afghanistan and other Central Asian republics without going through Pakistan.
India’s hope lies with European P5+1 members going ahead with JCPOA, but even that seems doubtful. European leaders will be under pressure from their domestic businesses which accord higher value to their US operations.
US’ unilateral decision helps members of Organization of the Petroleum Exporting Countries (OPEC) keep oil prices high without cutting back on production: the Iran sanctions take out almost 3.8 million barrels of Iranian oil production daily from the global supply chain. Slowing exports and a rising oil import bill spell trouble for India’s current account deficit and that is an additional worry for planners and administrators. Apart from the external economy, a daily increase in fuel prices threatens to erode the current government’s political equity. The Reserve Bank of India has now hiked benchmark rates by 25 basis points.
Writing in the Hindustan Times, former foreign secretary Shyam Saran commented: “…the prevailing risk-laden environment in the world offers a window of opportunity for India to reposition itself as one of the most competitive and congenial investment destinations in the world. This will require a major policy overhaul away from the lurch towards populism that is becoming more evident as general elections loom large." Changes are needed on the trade front too. One, a recognition that easy economic conditions (such as low oil prices or benign rates) are history. Two, a major trade policy revamp that recognizes multiple impediments to exports and makes renewed efforts at developing alternative markets.
Rajrishi Singhal is a consultant and former editor of a leading business newspaper. His Twitter handle is @rajrishisinghal.
Comments are welcome at email@example.com.