South-Western College Publishing - Economics  

India Blasted
Subject International Trade
Topic(s) International Trade
Key Words International Trade, Exports, Imports, World Bank
News Story

President Clinton, responding to India’s conducting nuclear tests, imposed major economic sanctions on India. The sanctions halt credit, guarantees or other financial aid by U.S. governmental agencies; prohibit U.S. commercial banks from making loans to India’s government; and ban the sale of weapons. It is estimated that the sanctions will cost India about $20 billion of loans and economic assistance from the U.S. and international agencies. How much damage this will impose on India’s economy is uncertain. To a large extent it depends on whether the U.S. allies follow the U.S. lead in imposing sanctions and the extent to which the U.S. is successful in discouraging private investment in India.

U.S. exports to India amounted to $7.7 billion last year. An additional $7 billion was in the form of direct investment. The only export sector directly affected by the sanctions is technology. It is argued that computer technology could play a role in the design and execution of weapons and there is a direct prohibition on the sale of weapons.

The World Bank has $2 billion of planned investment projects in India for this year. Although the U.S. cannot unilaterally stop the World Bank funding, it can solicit support from other World Bank members. Japan has indicated that it will join the U.S. in this effort. The U.S. Export- Import Bank will be forced to cancel $500 million worth of pending loans to India and $3.5 in projects being considered for approval. The sanctions also affect $10.2 billion in insurance and finance by the Overseas Private Investment Corp.

While other countries have canceled planned aid to India, it is not at all certain that these countries will impose as severe sanctions as the U.S. has. The U.S. response will have an impact on India, although the extent of the injury is not likely to be severe at present.

  1. What is the direct and indirect impact on India of a reduction in its imports and exports?
  2. What is the direct and indirect impact on the U.S. of a reduction in its exports to India and its imports from India?
  3. What is the impact of these trade restrictions on both countries’ balance of payments?
Source Martha M. Hamilton, "Sanctions on India Hit U.S. Companies," the Washington Post, May 14,1998.

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