Trade Weaponisation

Posted 22 Jan 2025

Updated 25 Jan 2025

5 min read

Why in the News?

Recently, Minister of External Affairs expressed concerns over the increasing Weaponization of Trade and associated job losses.

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What is Trade Weaponization?

In simple words, Trade weaponization means using trade as a tool of foreign policy rather than as an economic goal in and of itself.
It is defined as strategic use of trade policies and tools to induce a trade partner to change its practices in any issue-area (including economic policy and diplomatic relations) by exploiting its economic vulnerabilities and asymmetries of trade partners.
- Albeit usually welfare-enhancing, international trade also generates relations of asymmetric interdependence. where one party may lose more than the other if economic ties are suspended.
For example, trade can be weaponized to induce a country to change its security alliances, such as in the case of the 1973 oil embargo.
- In 1973, Arab states imposed an oil embargo on the US and its allies against US's $2.2 billion military aid package for Israel.

Key Tools for Trade Weaponization

Selective Import/Export Restrictions: E.g., USA's Countering America's Adversaries Through Sanctions Act (CAATSA) targeting Iran, Russia, and North Korea.
Exploitation of Economic Dependencies: E.g., China leads in producing 20 critical minerals, accounting for 60 % of global production and 85 % of rare earth processing.
- This strategic advantage allows China to potentially restrict exports or manipulate prices, for pressuring other countries on geopolitical issues such as One China Policy.
Non-Tariff Barriers: Preventing customs clearance, obstacles concerning environment, biosecurity, intellectual property standards, etc.
- E.g., The EU imposed strict labeling and certification requirements on agricultural products, making it difficult for Indian farmers to sell their products in the EU market.
Currency Manipulation: E. g., China has been accused of manipulating its currency to keep it undervalued, making Chinese exports cheaper and more competitive in global markets.
Fulfilling National Agenda: After Chinese human rights activist Liu Xiaobo received the Nobel Peace Prize in 2010, China reduced trade with Norway.
- Trade only began to recover after the Norwegian king's visit to China in 2018, a year after Liu's death

Consequences of Trade Weaponization

Economic Consequences: Supply chain disruptions, reduced trade, and limited market access slow economic growth, lead to job losses, and may result in inflation that harms consumers especially in Global South.
Geopolitical Consequences: Trade disputes can escalate into broader geopolitical tensions, potentially leading to diplomatic crises.
- E.g., U.S. imposed economic sanctions on Russia over Ukraine, and Russia responded with counter-sanctions. This economic conflict worsened their tense relationship, leading to a Cold War-like atmosphere.
Weakening of Multilaterial Institutions: Trade weaponization undermines principles of multilateralism, where countries cooperate to establish rules-based systems, erode trust among nations collectively.
- E.g., the WTO Dispute Settlement System is dysfunctional due to the US's refusal to appoint new judges to the Appellate Body.

Trade Weaponization used against India

Western countries tried to pressure India by exploiting its economic and technological vulnerabilities, but India turned these challenges into opportunities:

Attaining Food Security: India signed a food aid agreement with the U.S. in 1954 under Public Law (PL) 480.
- However, the U.S. stopped the aid in the late 1960s as India refused to yield policy changes, like industrial privatization, demanded by the U.S.
- In this Background C Subramaniam envisaged "Green Revolution" which eventually made India a net exporter of food grains.
Nuclear Energy: For example, due to earlier Western countries sanctions over India's nuclear test in 1974 and 1998 and lack of indigenous uranium, India has uniquely developed a 3-stage nuclear programme to exploit its reserves of thorium.

Measures to counter Trade Weaponization

Supply Chain Resilience
- Supply Chain Resilience Initiative (SCRI) is an international collaboration between Australia, India and Japan to promote best practice w.r.t. national supply chain policy and principles in the Indo-Pacific.
- Establishment of Indo-Pacific Economic Framework for Prosperity (IPEF) to build cooperation and economic integration in the Indo-Pacific.
- Mineral Security Partnerships (MSP) for securing supply chains for critical minerals essential for modern technologies and clean energy.
Countering dominance: Like China plus one (business strategy that prevents investing in China only); Friend Shoring (enhancing trade between economic and political allies), etc.
Strengthening Domestic Production: Investing in local industries to produce critical goods can reduce reliance on foreign suppliers.
- For example, India's initiatives like Make in India, Atmanirbhar Bharat, Production-Linked Incentive (PLI) Scheme etc.
Strengthening International Cooperation: Multilateral organizations like the World Trade Organization (WTO) should be empowered to enforce rules and resolve disputes effectively.

Conclusion

The increasing weaponization of trade poses significant challenges to the global economy. By fostering international cooperation, diversifying supply chains, enhancing economic resilience, and promoting fair trade practices, nations can mitigate these risks and create a more stable and prosperous future.