The geoeconomic turn: sanctions, export controls, trade wars and CBAM

Detail

1. What "weaponisation of trade" means

• Weaponisation of trade: a country uses trade as a tool of political pressure. The tools are:
• other countries' dependence on its goods;
• tariffs (taxes on imports);
• export bans;

• control over supply of key inputs.

• Why it matters now:

• GATT (1947) and the WTO (1995) were built on the idea that trade should be rules-based, open and non-discriminatory.
• The "geoeconomic turn" is the shift away from that idea. Countries now judge trade partly by security and power, not only by cost.
• This leads to trade fragmentation: the world splits into trade blocs of "friends" (friend-shoring).

2. Economic coercion

• Economic coercion: economic pressure used to force another country to change its policy.
• China's export controls on critical minerals:
• gallium and germanium (2023), used in chips, solar cells and night-vision equipment;
• graphite (2023), used in EV battery anodes;
• rare earths and magnets (2023–25), used in EV motors, wind turbines and missiles.

• China controls most of the world's refining of these minerals. A licence requirement alone can slow down factories abroad.

• EU Anti-Coercion Instrument (ACI), in force December 2023:

• The EU can retaliate against coercion by a third country.
• Possible counter-measures include tariffs, limits on public procurement and limits on investment.
• Its main purpose is deterrence: the threat should stop coercion before it starts.

3. Economic sanctions

• Economic sanctions: limits on trade, finance or investment with a country, imposed for political or security aims rather than economic ones.
• Two kinds:
• UNSC sanctions: adopted under Chapter VII of the UN Charter. They bind all UN members, including India.
• Unilateral sanctions: imposed by one country or bloc on its own. Examples:
  • OFAC (Office of Foreign Assets Control, US Treasury) lists of blocked persons and firms;
  • CAATSA (2017), the Countering America's Adversaries Through Sanctions Act. It threatens penalties on countries that buy major defence equipment from Russia. This put India's S-400 air-defence deal at risk.

• India's stated position is that it follows only UN sanctions.

• Russia package from 2022:

• SWIFT exclusion of some Russian banks. SWIFT is the Belgium-based messaging network banks use to send international payment instructions. Cut off from it, a bank finds cross-border payments slow and hard.
• About US$300 bn of Russian central-bank reserves frozen.

• G7 oil price cap of $60 per barrel (December 2022). How it works:

  • Western shippers and insurers may serve a Russian oil cargo only if it is sold at or below the cap.
  • Example: Urals crude trades at $75. A buyer who wants EU/G7 insurance must pay no more than $60. Russia earns $15 per barrel less, or has to use a "shadow fleet" of tankers without Western insurance.
  • The aim is to keep Russian oil flowing (so world prices do not jump) while cutting Russia's revenue.

• Iran sanctions and Chabahar:

• India signed a 10-year port deal for Chabahar in May 2024. The port gives India a route to Afghanistan and Central Asia that avoids Pakistan, and it links to the INSTC.
• The US waiver was revoked in 2025 (verify current).

4. Secondary sanctions

• Secondary sanctions: sanctions on third-country firms that deal with a sanctioned state. They go beyond the target country itself.
• A US primary sanction stops US firms from dealing with Iran.

• A secondary sanction punishes an Indian firm for dealing with Iran, for example by cutting it off from US banks and the dollar.

• October 2025 US sanctions on Rosneft and Lukoil: these exposed Indian refiners that were buying Russian crude (verify current).

• Why they bite: most world trade is paid in US dollars and passes through US banks. That gives the US reach far beyond its borders.

5. Export controls and dual-use goods

• Export controls: government limits on exporting sensitive goods, software or technology.
• Dual-use goods: items with both civilian and military uses. Examples: some chemicals, drones, high-end chips and machine tools.
• Multilateral export-control regimes (voluntary clubs of supplier countries):

Regime	Controls	India's status
MTCR (Missile Technology Control Regime)	missiles, UAVs and their technology	Member since June 2016
Wassenaar Arrangement	conventional arms and dual-use goods	Member since December 2017
Australia Group	chemical and biological weapons precursors	Member since January 2018
NSG (Nuclear Suppliers Group)	nuclear materials and technology	Bid blocked, mainly by China (NSG works by consensus)

• India is officially described as a member of MTCR, Wassenaar and the Australia Group. It has also harmonised its guidelines and control lists with the NSG, even without membership [8][9].
• SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies):
• India's national export control list of dual-use items, munitions and nuclear-related items. It includes software and technology, not just physical goods [8][9].
• It is run by DGFT (Directorate General of Foreign Trade, Ministry of Commerce). Exporters need a SCOMET licence from DGFT [8].
• Each item falls into one of three groups [8]:
  • prohibited for export;
  • restricted, which needs prior authorisation;
  • exempted under a general authorisation for certain destinations, with post-shipment reporting and record-keeping.
• Legal base: Chapter IVA of the Foreign Trade (Development & Regulation) Act, 1992, added by the 2010 amendment. Rules are in Chapter 10 of FTP 2023 and HBP 2023 [8].
• DGFT updates the SCOMET list from time to time to keep it in line with regime decisions [9].

6. Technology denial

• Technology denial: countries that hold a sensitive technology refuse to share it with other states.
• Indian cases:
• Cryogenic engine (1992–93): US pressure, citing MTCR, made Russia drop the transfer of cryogenic engine technology to ISRO. India then built its own (the CE-7.5 flew on GSLV in 2014).

• Post-Pokhran-II sanctions (1998): US and Japanese sanctions and entity listings of Indian scientific bodies after the nuclear tests.

• US advanced-chip and chip-tool controls on China (from October 2022): these limit exports of high-end AI chips and chip-making equipment to China.

• Lesson for India: denial led to indigenisation in space, missiles and nuclear. It now drives India's push for semiconductors and critical minerals.

7. The security exception: GATT Article XXI

• Article XXI(b) lets a member take any action "it considers necessary" to protect its essential security interests. Examples are actions linked to fissile material, arms trafficking, or measures "taken in time of war or other emergency in international relations".
• The "self-judging" claim: states such as the US argue that the wording "it considers" means only the state itself can decide, so no panel can review it.
• Russia – Traffic in Transit (DS512), panel report 2019:
• The dispute: Ukraine challenged Russia's limits on transit of goods from Ukraine through Russia. Ukraine cited GATT Article V (freedom of transit) and Article X [5].
• Russia said the measures answered the 2014 emergency in international relations [5].
• Findings [5][6]:
  • This was the first WTO interpretation of Article XXI.
  • Panels do have jurisdiction to review how Article XXI(b)(iii) is used, so it is not fully self-judging.
  • Members must invoke it in good faith. A panel can check that the security interest is not claimed in bad faith and that the measure is "not implausible" as a way to protect it.
  • Russia still won: it met the conditions of Article XXI(b)(iii).

• The report was adopted on 26 April 2019. Ukraine did not appeal [6].

• US s.232 steel and aluminium tariffs (2018):

• Section 232 of the US Trade Expansion Act, 1962 lets the US restrict imports that threaten "national security". It imposed 25% on steel and 10% on aluminium.
• In 2022, panels rejected the US defence under Article XXI. The same year, a panel in US – Origin Marking (Hong Kong, China) (DS597, report dated 21 December 2022) also rejected the US Article XXI claim [7].
• The US appealed "into the void":
  • The WTO Appellate Body has had no quorum since December 2019, because the US blocked new appointments.
  • An appeal to it can never be decided, so the panel ruling never becomes binding.

8. Tariffs as leverage

• Trade war: a cycle in which countries keep raising tariffs on each other in retaliation.
• US–China: it began with s.301 tariffs (2018). Section 301 of the US Trade Act, 1974 allows action against "unfair" foreign practices, here technology transfer and IP theft.

• It escalated sharply in 2025, with triple-digit rates in April 2025. Later truces lowered the rates.

• Retaliatory tariff: a tariff imposed in response to another country's measure.

• India, June 2019: India raised duties on 28 US products, including almonds, apples and walnuts, in reply to the US s.232 tariffs.

• These were withdrawn in 2023 after a bilateral settlement, and related WTO disputes were ended.

• Reciprocal tariff: a tariff set to mirror a partner's barriers ("you charge me X, I charge you X").

• The US announced "reciprocal" tariffs in April 2025.
• India's case:
  • 25% reciprocal tariff from 7 August 2025;
  • plus 25% "Russia-oil penalty" from 27 August 2025;
  • = 50% in total.
• Worked example: an Indian shirt worth $100 at the US border paid $50 duty, so the landed cost became $150. A competitor facing 20% landed at $120. The Indian exporter lost a $30 price gap.

• The rate was reportedly cut to 18% under the February 2026 interim framework (verify current).

• MFN problem: under GATT Article I (most-favoured-nation), a member must give every WTO member its best tariff rate.

• Country-specific "reciprocal" or "penalty" tariffs break MFN, unless they are justified as security measures.
• That is why Article XXI has become the key legal fault line.

9. The climate–trade nexus: CBAM

• Carbon leakage: a firm moves production, or buyers switch imports, to countries with weaker climate rules. Emissions are not cut; they just move.
• Carbon border adjustment mechanism (CBAM): a charge on carbon-intensive imports equal to the carbon price that domestic producers already pay. It is meant to stop carbon leakage.
• The EU pioneered it under Regulation (EU) 2023/956.
• Sectors covered: iron and steel, aluminium, cement, fertilisers, hydrogen and electricity.

• Timeline:

  • Transitional phase, October 2023 to December 2025: importers only report embedded emissions and pay nothing.
  • Definitive regime from 1 January 2026: importers buy CBAM certificates. Purchases are phased in, while free EU ETS allowances to EU producers are phased out by 2034 (verify current).

• How the charge works (simplified formula):

• CBAM cost = embedded emissions (tCO₂ per tonne) × [EU ETS price − carbon price already paid in the exporting country], then scaled down during the phase-in by the share of free allocation still given to EU producers.

• Illustrative example:

  • 1 tonne of Indian blast-furnace steel embeds 2.5 tCO₂. The EU ETS price is €80/tCO₂. The carbon price paid in India is €10/tCO₂.
  • CBAM cost = 2.5 × (80 − 10) = €175 per tonne, before any phase-in reduction.
  • If India had no carbon price, the cost would be 2.5 × 80 = €200. This is why a domestic carbon price matters.

• Impact on India:

• CBAM may raise the compliance burden on Indian steel exports to the EU. It may also add costs on fertiliser, aluminium and cement [2][3].
• It could also reshape value chains, not only exports to the EU [2].
• MSMEs and secondary steel producers are poorly equipped to measure and document embedded emissions [3].
• Indian steel exporters already face high logistics costs, non-tariff barriers and safeguard duties. CBAM reporting adds to these [3].

• The Ministry of Steel held a Chintan Shivir (brainstorming meeting) on CBAM and AI in steel [2].

• India's objections:

• It is unilateral: the EU sets the rules alone, outside the UNFCCC.
• It conflicts with CBDR-RC (common but differentiated responsibilities and respective capabilities, a UNFCCC principle). Rich countries caused most past emissions, so they should do more, not tax poorer countries' exports.
• It is green protectionism: climate rules used as disguised trade barriers against developing countries.

• It hits steel and aluminium exports, and the EU is a major market for both.

• India–EU FTA (concluded 2026), CBAM provisions [4]:

• a forward-looking MFN assurance: any CBAM flexibility the EU grants a third country will extend to India;
• technical cooperation on recognising India's carbon prices and recognising Indian verifiers;
• financial and targeted support to help India cut emissions and meet the new carbon rules.

10. India's answer: Carbon Credit Trading Scheme (CCTS)

• Legal base: the Energy Conservation (Amendment) Act, 2022, in force from 1 January 2023 [10].

• Section 14(w) of the EC Act, 2001 lets the Centre, in consultation with the Bureau of Energy Efficiency (BEE), specify a carbon credit trading scheme [11].

• CCTS notified on 28 June 2023 to set up the Indian Carbon Market (ICM). The scaffold's "June 2023" is confirmed [11][12].

• Governance: a National Steering Committee for the Indian Carbon Market (NSC-ICM) oversees the market [11].
• Compliance sectors (9): aluminium, chlor-alkali, cement, fertiliser, iron and steel, pulp and paper, petrochemicals, petroleum refinery and textiles [11][13].

• These overlap with CBAM sectors (steel, aluminium, cement, fertiliser), which is deliberate.

• Link to CBAM: carbon prices paid at home can be deducted from the CBAM charge (see the €175 vs €200 example above). India keeps the revenue instead of the EU.

11. Other green non-tariff barriers (NTBs)

• EU Deforestation Regulation (EUDR):
• Importers must prove that goods did not come from land deforested after a set cut-off date.
• Goods covered: coffee, cocoa, rubber, soy, palm oil, wood and cattle, plus products made from them.
• It matters for Indian coffee, rubber and leather exporters.

• Its start date has been delayed more than once (verify current).

• Carbon-pricing detail is in the environment-sustainable-development note.

Prelims Hooks

• SCOMET is India's national export control list covering dual-use items, munitions, nuclear items, software and technology. It is administered by DGFT, under Chapter IVA of the FT(D&R) Act, 1992 (added 2010).
• India's regime membership order: MTCR (June 2016) → Wassenaar (December 2017) → Australia Group (January 2018). India is not an NSG member.
• Russia – Traffic in Transit (DS512, 2019): the first WTO ruling on GATT Art. XXI. Art. XXI is not fully self-judging, but Russia won. Trap: "the panel ruled against Russia" is wrong.
• G7 oil price cap = $60 per barrel, from December 2022. It works by denying Western shipping and insurance services, not by banning oil.
• Secondary sanctions target third-country firms, not the sanctioned state itself.
• EU CBAM: Regulation 2023/956. Six sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, electricity. Reporting-only phase October 2023 to December 2025. Definitive regime from 1 January 2026.
• CCTS was notified 28 June 2023 under the Energy Conservation (Amendment) Act, 2022 (in force 1 January 2023). Nodal technical body: BEE.
• s.232 (US Trade Expansion Act, 1962) covers national-security tariffs on steel and aluminium. s.301 (US Trade Act, 1974) covers "unfair practices" and was used against China in 2018.
• India's June 2019 retaliation: 28 US products (almonds, apples, walnuts). Withdrawn in 2023.
• The EU Anti-Coercion Instrument has been in force since December 2023.

Mains Points

• Security exception as a loophole:
• If Art. XXI becomes fully self-judging, any tariff can be called "security" and WTO discipline collapses.
• DS512 set a good-faith, "not implausible" test. But with the Appellate Body non-functional since 2019, losers appeal "into the void".

• India's interest is a working, two-tier dispute system. India is itself exposed to unilateral tariffs, such as the 50% US rate in 2025.

• CBAM: climate tool or green protectionism?

• For the EU: it stops carbon leakage and puts EU and foreign producers on an equal footing.
• Against, from India's view: it is unilateral, it ignores CBDR-RC, and it hurts MSMEs through measurement costs.

• India's approach combines three responses:

  • build a domestic carbon price (CCTS), so revenue stays at home;
  • negotiate FTA safeguards (the India–EU FTA's MFN assurance and carbon-price recognition) [4];
  • decarbonise steel (green hydrogen, scrap-based EAF).

• Strategic autonomy vs sanctions exposure:

• Russian crude, the S-400 purchase and Chabahar show that the reach of the dollar lets US secondary sanctions override India's own choices.

• Options: rupee trade settlement, diversifying suppliers, and seeking waivers through diplomacy.

• Technology denial to self-reliance:

• Past denial (the cryogenic engine, the 1998 sanctions) led to indigenisation.
• Today, China's export controls on critical minerals and the US chip controls call for critical-mineral diplomacy (e.g. KABIL, the Minerals Security Partnership), a semiconductor mission and friend-shoring.
• India's export-control credibility (SCOMET, regime membership) makes it a trusted recipient of high technology.