Trade Winds July 2015

TRADE WINDSTRADE WINDSJuly, 2015

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July Edition

Dear Reader,

Trade Winds is an initiative by the student community at IndianInstitute Of Foreign Trade to provide an enriching and learningexperience for everyone. With articles by our students, we offer anopportunity for budding MBAs to express their thoughts aboutvarious issues..

IIFT has been the premier B-school in India for disseminatingtrade knowledge and has been involved in trade policyformulation for India. Thus the views of faculty, alumni andindustrial personalities along with the students is aimed at pushingthe limits higher.

Along with the focus theme on Africa, this editions focuses onIndia’s relations with the US. Different perspectives about theimportance of trade and RTA are also included along with ananalysis of the Iran.

We, Team Trade Winds, hope to provide an enriching readingexperience to all. Happy Reading!

Team Trade WindsTrade Winds, the bi-monthly magazine of International Trade Club of IIFT is the result of contribution ofvarious stakeholders. We would like to thank all the contributors of articles and BLASH – The Trade Clubat IIFT.Team Trade Winds is also involved in the fortnightly publication of the Trade Digest newsletter. The teamcomprises of the following:Editors: Anirudh Namboodiri, Mihir Anand

MBA(IB) 2014-16

Yours sincerely,

Team Trade Winds“We are planning to give more market-linked export sops todifferent products this time instead of incentivizing productsand markets separately. We can then plan our promotion andmarketing drive better. There will also be focus on promotingservices exports”- DGFT

Trade Winds | July Edition

Indian Institute of Foreign Trade

SECTION PAGE NUMBER

Focus Theme

Inward introspection

World of Trade

Regional Trade Blocks

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Country Watch - Iran

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Focus Theme: The Rise of AfricaThis special feature strives to highlight the rise of Africa as the land of opportunity. Shunned asthe dark, hopeless continent once, it is now being hailed as being a potential goldmine forbusinesses. There is a lot of anticipation when it comes to African markets. At the same time,there is need for caution as the continent is plagued with unrest, disease and war.

Africa

By Mihir AnandMBA (IB) 2014-16

A large middle class is emerging and is fueling the continent. Also, the commodities boom is a major driver

behind the rapid growth story.

Indian Institute of Foreign Trade 4

May, 2000 December, 2011

“Floods in Mozambique; threats of famine in Ethiopia (again); mass murder in Uganda; the implosion of Sierra Leone; and a string of wars across the continent. The new millennium has brought more disaster than hope to Africa. Worse, the few candles of hope are flickering weakly.”

“Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.”


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Sources: 1. The Economist, Intelligence Unit2. GlobalPost/CIA Factbook3. afrographique.tumblr.com

Major Commodities by exports

4. Standard Bank, Africa: BRIC and Africa

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Inward IntrospectionInternational trade will be facilitated in India only if there is coordinated approach to remove all the obstacles. Inward Introspection analyzes the current issues concerning international trade in India with an analysis and future outlook.

India-US Trade Relations: Barriers and Bridges

India and the US, the two largest democraciesof the world, have witnessed significant growthin their bilateral trade and investmentrelationship in the previous two decades. In theearly part of 1990s, India embraced freeenterprise system and started its journey tobecome an economic powerhouse. Now theworld’s third largest economy, India hasbecome one of the largest trading partners ofthe US. Currently, the two countries have abilateral trade worth $100 bn, which shows atremendous increase from a modest $5.6 bn in1990. India’s major merchandise exports to theUS are textiles, precious stones & metals,mineral fuel, oil, and pharmaceutical products.Whereas, it majorly imports precious stones &metals, aircraft & spacecraft parts, machineryand electrical machinery.

Though the growth of economic relationshipbetween the two countries has beenimpressive, this has been because of a lowbase factor and there’s a vast scope ofimproving and deepening the bilateral tradeand investment relationship. China, which hasa comparable population to India, conductedapproximately $600 bn worth of bilateral tradewith the US in the previous year. Similarly,South Korea, whose GDP is 60% that of India’s,had an almost similar level of merchandisetrade with the US as did India.

Indian government’s policies have beenconstantly held responsible by the USauthorities for acting as a barrier to Americaninvestment and exports to India. There are twomajor areas of concern for the American


By Ankit Jaiswal,MBA (IB) 2014-16

The improved relations between the two countries are signs of a changing political situation in the world


customs procedures, and taxes & financialregulations. Intellectual property policy isanother big issue that has had a negativeimpact on certain industries. Studies showthat if these two hurdles are eliminated, therewould be a two-thirds increase in the USexports to India, and the US investment inIndia would approximately double in size.

One sector that has seen substantial growth inthe last few years is the services sector, whichgrew seven-fold in the last decade. India’sservices exports to the US grew by over 900percent from $2 bn in 2004 to $20 bn in 2014.At the same time, America’s exports to Indiagrew by around 250 percent from $4 bn in2004 $14 bn in 2014. Since 2006, servicestrade deficit of the US with India has beengrowing. This is in spite of the fact that the UShas a positive trade surplus in services withthe rest of the world. This has happenedlargely due to the growing stature of India as amajor outsourcing destination by the UScompanies. American companies outsourcebusiness services to India because of lowercost services inputs which makes them moreefficient and competitive, both in the US andoverseas. Though concerns have been raised

in the US that it can negatively impact theirjob market. For the US, the largest servicesexports to India have been tourism andeducation.

US investment in India through FDI hasincreased by 500 percent from $5 bn in 2004to $30 bn in 2014. Meanwhile, India’sinvestment in the US increased by around1400 percent from $400 mn in 2004 to $6 bnin 2014.In his recent US visit, Indian Prime MinisterNarendra Modi discussed various trade issueswith the US President Barack Obama. The twoleaders targeted a five-fold jump in bilateraltrade to $500 bn and pondered on ways toboost the business environment between thetwo countries. Meanwhile, the DefenceCooperation Agreement between the twocountries was extended by another 10 years.The deal was to expire in June 2015 but now itwill be valid till 2025. The developmentfollowed after India increased FDI cap for thedefence sector to 49% from the previous 26%.The pact was originally signed by the thenDefence Minister of India Pranab Mukherjeeand his US counterpart Donald Rumsfeld.

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India-US Bilateral Merchandise Trade

India's exports to US (US $ mn) India's imports from US (US $ mn)

Source: https://www.indianembassy.org/pages.php?id=42


The India-US civil nuclear agreement had hit aroadblock, when a nuclear liability law waspassed by India in 2010. During their lastmeeting in the US, Modi and Obama stressedon their commitment to take forward the civilnuclear partnership agreement and resolvethe related issues at the earliest. This isparticularly very important for India in orderto fulfil its energy security needs.Recently, both sides resolved the standoffover the WTO’s trade facilitation agreement.Initially, there were differences over publicstockholding of food grains, but the US agreedto an indefinite peace clause until apermanent settlement of the issue. Thisdevelopment has made possible a significantglobal deal which is touted as the mostimportant deal since the 1990s. It proved tobe a major political victory for the currentNDA government at the centre. Apart fromenhancing the trade relations between Indiaand US, the TFA when implemented, wouldact as a huge positive catalyst for the worldtrading system.To fully tap the bilateral trade opportunities,the two nations must commit to a deadline forconcluding a Bilateral Investment Treaty. It willindicate the Indian government’s support forthe growing investment by the US and providea rule-bound framework for the same. USauthorities should develop a dialog with theregulators in India for stronger enforcementand protection of intellectual property rights.H-1B visa policy should be relaxed as it canmake the Indian IT services industry moreefficient in providing services, thus benefittingthe business environment between the two

countries. The trade policy of the new Indiangovernment is yet to be formulated. Thisprovides an opportunity to the US fordeveloping a dialog with India to examinewhat economic reforms can be brought inorder to enhance the bilateral tradepartnership. A few minor concerns, ifaddressed, can build a foundation for arelationship that would be mutually beneficialand will help bolster the relationship betweenthe two great nations.

Bibliography:https://www.indianembassy.org/pages.php?id=42http://www.brookings.edu/research/opinions/2014/09/23-india-us-trade-investment-relationship-meltzerhttp://www.thehindu.com/opinion/op-ed/new-opportunities-for-indiaus-trade/article6439226.ecehttp://www.business-standard.com/article/economy-policy/modi-obama-discuss-trade-us-extends-defence-pact-by-10-years-114100100034_1.htmlhttp://articles.economictimes.indiatimes.com/2014-10-01/news/54516766_1_prime-minister-narendra-modi-world-trade-organisation-trade-policy-forumhttp://www.livemint.com/Politics/v2gAFo8koulnFNRr5p943O/India-likely-to-announce-WTO-breakthrough.htmlhttp://timesofindia.indiatimes.com/business/india-business/Indian-policies-creating-trade-barriers-US-report/articleshow/45623910.cms

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World of TradeAn increasing globalized world was facilitated by the formation of WTO. World of Trade covers topics pertaining to WTO – issues, potential for growth, opportunities and threats.

Trade Vs GDP Trend:A troubling trajectory

By Ritwik Singh & Arpit RathiMBA (IB) 2014-16

The rise in global GDP hasn’t been backed by asimilar rise in trade. While the emergence ofglobal supply chain backed by technologicaland policy boosts has been able to enhancetrade, the subsequent emerging nature ofhidden protectionism has inhibited its desiredgrowth. Before 2008 world trade volume grew

at twice the rate of global real GDP for about25 years but the sudden stalling of growth intrade at a slightly lesser rate than GDP hascome under serious scrutiny in the world oftrade.

The historical relationship between global trade and GDP over the past years is analyzed to predict future trends


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Export GDP Average of Exports Average of GDP

Growth in the volume of world merchandise trade and GDP, 2005-15a

Annual % change

Figures for 2013 and 2014 are projections.Source: WTO Secretariat


Factors that led to increase in trade from 1990-2008: Decreasing Cost of Trade: Decreasing costs of transportation, communication, currency exchange and tariffs have led to an overall decrease in cost of trading goods internationally.Emerging Global Value Chain: Removal of trade barriers after the Uruguay round in 1994 and formation of WTO resulted in the emergence of global supply Chain. Availability of cheap labour, access to strategic assets that helps to tap foreign assets and other factors which helps make the value chain more efficient have helped boost international trade. Another benefit of the global value chain is the propagation of macroeconomic shocks throughout, hence mitigating its impact.Increasing Per Capita Income: Rising income leads to shift from basic food and clothing products to manufacturing goods thus resulting in better prospects for product differentiation, diversification and International trade.Rise of the developing world: Emerging economies have seen a rise in their income over the past few decades. The developing countries now account for more than half of the world output. Reduction of MFN tariffs has played a key role in the expansion of trade in developing countries.Increasing price of commodities and Productivity growth: The prices of tradable goods have doubled since 2000 due to robust demand from the large developing countries. In addition, the tradable goods sector has witnessed higher productivity growth than the non-tradable goods.

Causes of the slowdown since 2008

From 1990-2008 the real GDP grew at about 3.2 percent whereas the world trade volume rose by 6.0 percent. Whereas since 2008 even though trade volume growth increased, it was only slightly greater than real GDP growth.

The ratio of Trade to GDP was 2.4(highest) in 2000 but has since fallen to 1.7 in 2013. The major causes of the slowdown are:EU recession: Recession in Euro Zone led to high unemployment in euro area economies (Germany being a notable exception). The Euro Crisis have had a dramatic impact on the trade flow. Moreover, even after signs of revival the Trade to GDP trend hasn’t responded in a similar manner.Uncertainty about Fed's tapering timing: The timing of the Federal Reserve’s winding down of its monetary stimulus in the United States has been uncertain as a result of which it contributed to financial volatility in developing economies.Failure of export led growth model: Export led growth model in developing countries have resulted in global excess supply as most of the countries intended to grow on the back of demand expansion in other countries but couldn’t succeed. At the same time export from one destination crowds out export from another thus failing to result in a global increase in trade.Rise of hidden protectionism: A large number of countries provide government subsidies to protect their local manufacturers. Also on certain occasions, deliberate interference in currency market has deterred trade. Hidden protectionism has resulted in negative multiplier effect affecting many more countries that has subsequently resulted in trade wars among them.

Is the decreasing Trade to GDP ratio really worth worrying?

Paul Krugman, noble prize winning economist, stated, “ever-growing trade relative to GDP isn’t a natural law, it’s just something that happened to result from the policies and technologies of the past few generations. We should be neither amazed nor disturbed if it stops happening.”

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Some of the major arguments raised to dismiss the apprehension caused by decreasing Trade to GDP ratio are:Slowdown in convergence: The rise in trade to GDP ratio was mainly due to poorer countries catching up with rich countries. Convergence resulted in more equitable distribution of world output. The slowdown in trade can be attributed to slowdown in convergence rather than some above-mentioned factor.

Reducing trade barriers: China has been giving large structural shocks to the US, Europe and Japan through burgeoning exports still there has been no retaliation from them in the form of imposing trade barriers. At the same time the increasing involvement in The Pacific by US and China and subsequent formulation of trade initiative involving them could lower trade barriers.Mismeasurement: It has been argued that there has been a sharp rise in trade in software and other digital goods that have been difficult to record. Subsequent measures are being incorporated to create a new trade data based on where economic value is added.

What does the future hold in store?WTO Director-General Roberto Azevêdo said. “It's clear that trade is going to improve as the world economy improves. But I know that just waiting for an automatic increase in trade will not be enough for WTO Members. "It is not

viable to say at present whether something like a 2:1 ratio between trade and GDP will reassert itself but the recent events suggests significant improvement will take place.With the European Union gaining traction (EU has a share of 33% of world imports) and the US economy gaining momentum the global trade environment is set to improve, the forecast for 2015(1.714) is itself suggestive of that.Increasing trade negotiations between countries specially US and China, in November last year they struck a deal which allows a proposed treaty on trade in information technology among willing members of the World Trade Organisation to proceed, has provided a positive signal for increasing trade among nations.At the same time, there are certain gathering risks that could disrupt trade flow and impact trade to GDP ratio.Civil conflicts and territorial disputes in the Middle East, Asia and Eastern Europe could result in high energy prices and subsequently hamper trade.Developing economies can face significant problems including large current account deficits (a major problem pertinent in Turkey and India), Argentina’s currency crises is another example. Along with these some other pertinent risks could be overinvestment in productive capacity, continuing protectionism to boost internal production and inhibit external demand .

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Source: Figure 2.3 in Subramanian and Kessler (2013).

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Regional Trade BlocksThe rise in number of agreements between different blocks of late is raising questions on even the future of WTO. Regional Trade Blocks analyses the past, present and future of these trade blocks.

Are Regional Trade Agreements really the need of the hour

By Anjali MirchandaniMBA (IB) 2014-16

RTA’s around the world have been on a rise post the 1990’s. As of June 2014, around 585 notifications of RTAs have been received by World Trade Organisation. What is this wave that has reached the crest? Is it all so new? During mid 1990s, trade liberalization and the drive of global free trade underwent a transformation. The political class shifted away from what was perceived as a relatively slow process of multilateral tariff negotiation to smaller and bilateral treaties- the RTAs. Basically RTAs are not a new found phenomenon, but a historic one. Previously, whenever multilateral trade talks broke down, bilateral trade agreements filled the void. Such an arrangement gave the states enough room to move towards freer trade in their own sweet time, and for their own benefits.But, RTA, precisely is a bit different from Free trade Agreement, in the sense that, it’s a form of preferential agreement among signatories to liberalise trade them, whereas FTA relaxes barriers for the rest of the world. RTA’s can thus be termed as discriminatory trade. Nowadays, RTAs have extended to providing coordination for investment in their cities(eg. relaxing interest rates, non-tariff barriers, etc.) The RTAs can have various levels or types:

First, at the most basic level- RTAs lowers trade barriers among members. An example of such an agreement is the Papua New Guinea -Australia Trade and Commercial Relations Agreement (PATCRA II) that has been in effect since 1977.Second, an RTA is a reciprocal arrangement between the members, wherein trade barriers, usually tariffs, are abolished; however members are free to pursue external trade policy. A prominent example would be the North American Free Trade Agreement (NAFTA).The third level of economic integration is the Customs Union. In a Customs Union, trade barriers among members are eliminated. Also, the participating nations adopt a common external trade policy. The Customs Union of the Southern Cone -Mercosur-represents such an arrangement.The fourth level of economic integration is the Common Market. In a Common Market, countries remove all barriers to movement of both goods and factors. It is Customs union plus the free mobility of people and capital. One example of Common Market is the Common Market for Eastern and Southern Africa (Comesa).

A brief study of the various RTAs and their impact on the respective countries to determine their

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The fifth level of economic integration is the Economic Union, wherein, besides the free goods and factor movements, member countries also adopt common macroeconomic and regulatory policies. An apt example of Economic Union is the European Union (EU).In a nutshell, RTAs or PTAs, were designed to benefit the Less Developed Countries, by the way of gaining access to larger export markets, and restraining access to domestic markets. Moreover, around 50 per cent of world trade is currently carried out under preferential trade arrangements. Preferential trade is growing at a faster rate than global trade - between 1993 and 1997, preferential trade grew at 66 per cent annually while global trade grew at 34 per cent annually.Which brings us back to the same question….Are RTAs really doing the trick i.e. help LDCs by the way of economic development or leading to regionalism and reducing efficient global trade?RTAs by their very nature are discriminatory, and an aberration from the WTO’s MFN(Most Favoured Nation) principle, the founding stone of multilateral trading system. Regional trade agreements imply both trade liberalisation and trade discrimination. Discrimination might be fruitful only when it promotes the transfer of resources from inefficient domestic suppliers to efficient producers within the region i.e. when there is trade creation.

However, it is detrimental when such transfer takes place from efficient to inefficient hands, i.e. trade diversion. The trends support two key statements,Generally, trade creation is the norm, and trade diversion an exception.Even if the latter happens, its magnitude is normally, relatively paltry.

India’s RTAs with the worldIndia traditionally has been the proponent of multilateral free trade, however given the needs of its economy; it too has joined the fray of RTAs. But the question of whether RTA is beneficial to us, depends upon how crucially our share is to the world trade. Currently, we are a marginal player in global trade, and thus wield little impact over it, less than 2 %. Also we are not a part of any major RTA that has a strong influence on world trade like NAFTA or EU. Most of our RTAs are with emerging economies or upcoming newly industrialised nations of SE Asia. We can stand to lose from the trade diverting effects of RTAs we are not involved in. The Indian textile sector, for example has been affected, as the US gives a preferential treatment and suty free access to textile products from Mexico under NAFTA.

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Source: World Trade Organisation, website


Are regional trade agreements welcome? – A word of cautionThe benign view that burgeoning trade creation over rides diversion doesn’t imply RTAs are all good. It has been observed that the spate of RTAs have slowed the negotiations of multilateral trade agreements at WTO. Another concern is that RTAs may create interest groups that block further liberalisation initiatives.There has been equal number of counter theories as well. The very question whether regionalism helps or hinders multilateralism –does not lend itself easily to testing. Questions linger- Would they have been any faster, or easier, had there been fewer (or more) RTAs? This is a very difficult question. As a result, to date empirical scrutiny has not been able to help us distinguish what can be good RTAs from what are presumably hindering ones.

The last wordThe rising wave of regionalism has been mostly beneficial to the world trade. Empirical studies have shown that- trade creation rather than trade diversion is the norm, given that governments choose their members with utmost care. Although a part of argument is that- regionalism might endanger multilateralism, at this juncture, the preferred way of reciprocal liberalisation for most nations, is RTAs.A way must be found to integrate regionalism with multilateralism if the opportunity has to be cashed in.

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COMESA: Promoting Trade in Africa

By Ashutosh Tyagi & Raja Sekhar ReddyMBA (IB) 2014-16

An analysis of the Common Market for Eastern and Southern Africa an its role in promoting trade


COMESA is a market place for trading inAfrican region which covers geographicalarea of 12 million sq. km and a population ofmore than 390 million. It includes 19countries of the Southern and Eastern regionof Africa. The Secretariat of COMESA islocated at Lusaka, Zambia. Intra-COMESAtrade has now reached to 20.9 billion USD(approx.). The member states of the COMESAare represented in Figure I.

Fig I. Member States of COMESA

disparity among the rising industrializedcountries and under-developed countriesevoked the need to form close ties atmultiple fronts.

Over the past few decades, African countriesformed blocks for unified growth andpromotion of trade in the region. COMESAwas established in 1994 and Free TradeAgreement was established among the initialnine member states in October 2000. Thiswas marked by the elimination of tariffs forthe products originating in COMESA memberstates for promotion of trade in the region.COMESA has often been described as acustoms union which is defined as a creationof single customs territory from manycustoms territory by eliminating the tradebarriers.

Principles and objectivesCOMESA (Common Market for Eastern andSouthern Africa) was formed to representsfree sovereign states of Africa which aim atpromoting peace and security in the regionalong with focusing on the upliftment andgrowth of the African region by acting as alarge economic and trading unit. COMESA’smain objective includes enhancing thestandard of living of the citizens in a secureand sustainable manner. For this, theconsolidation of markets, implementingsector programs, sectorial synergy andprivate sector contribution are the keycriteria.

Promotion of trade is also one of the majorobjectives of COMESA and it aims at

Introduction

The feeling for being self-reliant had inspiredAfrican nations to form close tie-ups on thebasis of mutual sub regional agreements forenhancing stability and prosperity of theregion. The events in 1970s, which includeddeteriorating conditions of eastern andcentral African federations and increasing


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creating an environment of closemacroeconomic cooperation along withimproving industrial productivity andcompetitiveness of the member states in theglobal scenario.

Activities and accomplishmentsCOMESA has adopted three approaches forplanning its activities based on the durationof the projects. This includes long termvision, medium term and planning cycle forsingle years. COMESA has graduallyprogressed consistently in a stage by stagemanner from preferential trade area to amonetary union through the stages of FreeTrade Area, Customs Union and CommonMarket.COMESA has played a pivotal role inmitigating the impact of the financial crisis inAfrican region. However, the expected slowglobal recovery and the impact of externalliquidity crunch have affected growth inAfrica. This can be seen on the productionlevel of certain sectors such as mining,manufacturing sectors and lower demandsfor African exports.

COMESA is known for introducing free tradeagreement in African region. The officiallaunch of customs union has helped tocreate an economic community dominatedby a single currency. It has taken active stepsfor consolidating the Free Trade Agreementinto a reality by placing important structuresfor the functional operation of CustomsUnion and Common Market. Also, theprotocols and regulations regarding the freemovement of people and goods across theregion.. COMESA contributes to 32.7% oftotal GDP of Africa and 37.4% of agriculturalgross domestic product contribution. It hasalso helped in standardizing andimplementing social welfare schemes,immigration and labor mobility policies.

Recent ActivitiesCOMESA recently celebrated 20th anniversaryof formation on 8th Dec 2014 and has playeda vital role in facilitating trade andindustrialization. The gala event highlightedthe role played by COMESA in the past twodecades and also the significance of the top-rated trade and financial institutions acrossthe continent

Figure II: Share of member states in COMESA GDP


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COMESA has continuously contributed in asignificant way in improving the conditions ofcitizen in the member states. The eliminationof financial costs related to customs bonds,enhancing performance and communicationfor facilitating trade through ManagementInventory Systems such as Advanced CargoInformation Systems and trade statisticssystems such as ACYCUDA++, has helped theregion over the past many years. Also, thesimplified trade regime which was introducedfor traders who operate on a small scale andacross many countries helped in easy andquick trade of goods.

The comprehensive Africa agriculturedevelopment program which is an effort tosetup a framework for the development ofagriculture in southern and eastern Africa isalso being implemented by COMESA. Thealliance for commodity trade in eastern andsouthern Africa (ACTESA) is also boosting theregional trade in Agricultural commoditiesincluding all seeds, livestock, forest andnatural products.

Opportunities

The implementation of COMESA programs hasbeen thwarted by the limited capabilities ofthe member states. Budget constraints havealso affected the different initiatives.Information flow is also a challenge forCOMESA. One of the major hurdles ofCOMESA is the ownership of the programmersat the grassroots level.

The opportunities for COMESA can be realizedif the emphasis is laid on achieving concreteresults and obtaining funding from memberstates for various programs. The nationaldevelopment plans of the state should alsogive priority to planned programs. Thepolitical and economic will of the memberstates has to be in line with the aims andobjectives of COMESA. If the hurdles aretackled properly then COMESA can play a veryimportant role in realizing the full potential ofAfrica and improving the living standards ofthe population in the region.

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Country WatchInternational Trade is often influenced greatly by various country-specific factors. Recent issues of certain countries are studied to assess their impact on the country’s trade with India and the res of the world

Iran

By Anirudh Namboodiri, Samarth KothariMBA (IB) 2014-16

The Joint Comprehensive Plan of Action(JCPOA) that has been agreed between Iranand the P5+1 nations (the five permanentmembers of the United Nations SecurityCouncil—China, France, Russia, UnitedKingdom, United States — plus Germany)signed on July 14, 2015 after nearly an year ofnegotiation marks an important step in theresolution of the decade-long cripplingsanctions imposed on Iran by the UnitedNations, led by the United States. While thiscould be seen as a positive step in keepingpeace in an increasingly volatile anddangerously nuclear Middle-east, there is moreto it than meets the eye, from India’sperspective.

Why does Iran need to be nuclear so badly?

As the third largest producer of crude oil in theworld, Iran cannot make a convincing argumentof needing nuclear power for its energysecurity. However, the world was surprisinglytrusting of Iran’s good intentions in the 1950swhen the United States offered assistance toIran to develop its civilian nuclear program.Soon, it became a member of the Non-

Proliferation Treaty (NPT) and started buildingthe nuclear facilities. However, the Islamicrevolution in 1979 changed the face of thenation. The American embassy hostage crisisensured that any further nuclear co-operationbetween the two countries was difficult. Withclear indications that Saddam Hussain waspursuing a nuclear program in Iraq during theIran-Iraq war, it is believed that Iran soughtassistance from Germany to complete theconstruction of its nuclear facility Bushehr. Iteven sought help from the father of Pakistan’snuclear program Abdul Qadeer Khan.

The impact of recent diplomatic events on Iran’s trade with India and the res of the world is analyzed



With growing intelligence reports that Irancould be secretly building a nuclear weapon,US President Bill Clinton signed a bill imposingsanctions on foreign companies withinvestments in Iran. In 1999, amid growingconcern in the middle-east about the growingpower of a nuclear Israel, Iranian PresidentMohammad Khatami visited Saudi Arabia andsupported the proposal of a nuclear-freemiddle east. However, Mujahedeen Khalq anIranian dissident group, obtained and shareddocuments revealing a clandestine nuclearprogram previously unknown to the UnitedNations. Which revealed a vast uraniumenrichment plant at Natanz and a heavy waterplant at Arak. After showing willingness todrop its nuclear weapons program andagreeing to IAEA inspections, in 2003, Iranviolated the agreement accusing theEuropeans of reneging on the promisedeconomic and political incentives. In July2005, American intelligence reports revealedreports of Iran’s weaponization programknown as Project 110 and Project 111.

The UN SanctionsIn the first round of sanctions in 2006, the UNSecurity Council approved sanctions intendedto curb Iran’s nuclear program, which bannedthe import and export of materials andtechnology used in uranium enrichment andreprocessing and in the production of ballisticmissiles. In June 2010, the United NationsSecurity Council implemented its fourth roundof sanctions against Iran’s nuclear program. Inaddition, Iran was barred from investing inother countries' nuclear enrichment plantsand uranium mines. In 2011, major Westernpowers took significant steps to cut Iran offfrom the international financial system withcoordinated sanctions aimed at its centralbank and commercial banks. The UnitedStates imposed sanctions on companiesinvolved in Iran’s nuclear industry, as well ason its oil industry. In 2012, an embargo onIranian oil played a large role in restrictingIran's ability to sell its most important export –

crude oil. In retaliation, Iran announcedlegislation intended to disrupt traffic in theStrait of Hormuz and tested missiles in adesert drill clearly intended as a warning toIsrael and the United States. After monthsof harsh, American-led sanctions, Iran'scurrency, the rial, plunged 40 percent. Thecurrency lost about half its value in 2012.Most of that decline came in a frenzy ofspeculative selling by Iranians worried thatrapid inflation could render their moneyworthless. The sanctions also presented a newcomplication to Iran's banking authorities:they may not be able to print enough money.

Meanwhile, the European Union toughenedsanctions against Iran, banning trade infinance, metals and natural gas, and makingother business transactions morecumbersome. In 2013, a new round ofAmerican sanctions took effect whichmandated that any country that buys Iranianoil must put the purchase money into a localbank account. Iran was not allowed repatriatethe money and could use it only to buy goodswithin that country. Violators risked facingsevere penalties in doing business with theUnited States.

Talks between a more amiable Iran, led by themild-mannered Hassan Rouhani, and theUnited States resumed for the first time since1979 in July 2013. Finally, in November 2013,an agreement was made to temporarily freezeIran’s nuclear program. After intensenegotiations between the two sides and talkslasting more than a year, an in-principleagreement has been reached between thetwo sides recently.

Impact of Iran sanctions on IndiaWhen the sanctions were imposed on Iran bythe UN Security Council, both the governmentand private sector of US & Europe boycottedboth trade and investments in Iran. India,Russia, China & Venezuela were one of thefew countries which continued their trade

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With Iran. Even though the US was putting a lot of pressure on India to support the international sanctions, India managed to hold its ground citing extreme dependence on imports from Iran.

Trade post 1st round of sanctions in 2006-09When the economic sanctions were imposed on Iran, India as a state policy did not openly support them. In fact, India used these as an opportunity to increase its imports of its largest import - crude oil. Iran reciprocated the gesture by offering a special treatment to its ally:• Iran offered discounts of up to $5 per barrel

of crude oil• Free delivery of oil, saving almost 70 cents

to $1 per barrel• Credit period of 90 days to Indian buyers,

when the industry norm was 30-60 daysIronically, the sanctions actually increased the trade between India and Iran from 2006-09 due to these favourable terms. The crude oil imported rose from 11.611 tonnes in 2006 to an all-time high of 23.809 million tonnes in 2009.

Trade post increased round of sanctions from 2010Due to increased tensions in the middle-east, the US intensified its sanctions on Iran and even started blacklisted foreign companies doing business in Iran from their US operations. Even India had to make commitments to reduce its trade with Iran. India had to show its solidarity with the international community, in order to become a serious contender for the permanent seat at the UN Security Council. Some problems faced by Indian importers as a result of these sanctions were:• No company was ready to provide

insurance cover on tankers from Iran• In 2012, US’ modified sanctions on Iran

mandated 100 per cent payment in the currency of the importing country for Iranian products

Due to these issues, India’s crude oil imports from Iran have been witnessing a decreasing trend. The US had asked India to limit its imports to below 8 million tonnes over a period of 5 years.

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11.61118.382

20.32123.809

0

5

10

15

20

25

2006 2007 2008 2009

Indian Crude Oil imports from Iran (in million tonnes)

Year

Source: ITC Trademap

17.23913.107 15.171

10.66213.547

0

5

10

15

20

2010 2011 2012 2013 2014

Indian Crude Oil imports from Iran (in million tonnes)

Year



India’s exports to IranHistorically, India has had a large trade deficit with Iran, although India imports crude oil and exports refined petroleum back to Iran, among other countries. This trade deficit narrowed down after the Iran sanctions, due to increasing Indian exports. India primarily exports rice, cereals, pharmaceutical products, machine tools, automobile parts and steel to Iran, all of which are permitted under sanctions. Till 2012, India under the sanctions had to pay for the oil it imported from Iran in a 45:55 (rupee: euro) arrangement. Therefore Iran used to finance its imports from India from the 45% rupee balance in UCO bank a/c.In 2012, US sanctions made it compulsory for importing countries to pay 100% in their local currency. As a result, Indian exports to Iran increased from $2.5 bn to $5 bn from 2012 to 2014. Therefore Indian exporters benefitted. India has allowed re-export of imported products to Iran under the provided 15 per cent value addition takes place in the country.

Way ForwardNot only businessmen, but also the Iranian

middle-class was severely affected by the UN sanctions throughout the last decade. A survey by the Islamic Republic News Agency said 82.6 percent of Iranians expressed “optimism” and “happiness” over the nuclear accord. Many Indian exporters have enjoyed a three-year run from 2012-15, when the Indian government chose not to support all the sanctions. India’s exports to Iran doubled and bilateral trade deficit almost halved during this period. S.C. Ralhan, president of the Federation of Indian Export Organisations (FIEO) says “The lifting of Western sanctions on Iran would have an adverse impact, particularly on non-agricultural commodities,". Millions of farmers too would take a hit from the easing of sanctions, a large buyer of basmati rice, soymeal, sugar, barley and meat. Under sanctions, Iran paid a premium of up to 20 percent over global prices to buy from India. Going forward, Iran is expected to shift to other suppliers like South American countries, who can supply at much lower prices compared to India. Firms from Germany, Italy and France that once dominated the Iran market will be back,

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1.617 1.845 2.335 1.949 2.509 2.462 2.572

5.4334.404

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013 2014

Indian Exports to Iran (in Billion USD)

Year



selling consumer products ranging from clothing to cars. Oil buyers have been ordered to raise $6.5 billion in hard currency to settle oil dues that they have been unable to pay due to the sanctions. The state-controlled UCO Bank holds $2.8 billion in Iranian oil money, which would be unlocked by the lifting of sanctions, forcing up funding costs.It is ironic that the countries like India and Russia, which have been supporting Iran the most during the sanctions will be the most negatively affected due to the lifting of these sanctions. However, in the long-term, the return to a more free market trade may work well for sectors like IT & pharmaceutical, where India has a better efficiency compared to its competitors. The 2.5 million strong Iranian middle class will be an excellent new market for India. More importantly, India can leverage its cultural and trade relationship with Iran as a bargaining chip for future negotiations. Iran has asked India to invest $8 billion to build a new terminal in the port of Chabahar, facilitating trade with central Asia. A quick development of the Chabahar port in Iran will act as a counter to Chinese encirclement of India through Gwadar port in

Pakistan. Also, work on the Iran-Pakistan-India pipeline can be expected to progress. However, India will have to balance its relationship with the Shia-dominated Iran and Sunni-dominated Saudi Arabia & Israel, especially with a proxy war escalating in the Middle East and the US cutting down its presence in the region. Whether the charismatic Indian Prime Minister NarendraModi with his proactive foreign policy will be able to maneuver our relation with Iran to new heights remains to be seen.Co

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Trade Winds July 2015