Global trade system is fracturing at its core, India must rethink its global trade dreams, say top economists

The decades-long trend of increasing globalisation appears to be reversing, with serious implications for countries like India. According to leading economists, the global trading system is undergoing a fundamental shift, and India must re-evaluate its long-held ambitions of becoming a global manufacturing and export powerhouse.

Jahangir Aziz, Head of Emerging Market Economics at JPMorgan, warned that what we’re witnessing is not just a global slowdown, but a structural break in the world trading order. “This is a broadside against an 80-year-old global trading system by the very country (United States) that built it piece by piece,” he said. “If that system has to change, the economic structure also needs to change.”

Aziz pointed out that previous global slowdowns were temporary, but the current trade tensions, particularly those triggered by US tariffs, are aimed at reducing trade deficits rather than addressing unfair practices. That, he argues, signals a deeper retreat from globalisation, and countries like India must adapt by reorienting toward domestic demand rather than relying on export-led growth.

Rathin Roy, Distinguished Professor at the Kautilya School of Public Policy, agreed that India must turn inward. “India’s share of world exports is piffling,” he said. “We cannot even compete with Bangladesh and Vietnam. When people talk about India exporting, I say, it would be a very good idea, because I’ve been hearing that line since I achieved puberty, and India has not been an exporter since then.”

Roy emphasised that focusing on the domestic market would be a far more realistic and productive strategy for India. “If we stop dreaming these pipe dreams about being a global manufacturer based on a relatively small shift in where iPhones are made, that can only be a good thing for India,” he said.

Pulapre Balakrishnan, Visiting Professor at the Centre for Development Studies, agreed that the global trade landscape is shifting, but added nuance. “India certainly does not have the luxury of producing for itself, for the simple reason that about 80% of its oil consumption is imported,” he said. “It has to export in quite a big way if it wants to at least take care of its balance of payments.”

However, he noted that exports have never been central to India’s growth, even after the 1991 liberalisation. “Exports as a means of actually growing the economy has not been part of India’s history, ever,” Balakrishnan said.

Aziz warned that a further ratcheting down of global trade could lead to slower medium-term growth. “During the global financial crisis, globalisation was surging. That was what was driving our investment and growth,” he said. “Now, the opposition to globalisation is not just political—it’s in action.”

All three economists agreed that India cannot afford to simply continue with business as usual. With global growth prospects dimmed by a retreat from free trade, the focus must shift to boosting domestic consumption, building local supply chains, and reshaping economic policy accordingly.

These are the excerpts of the discussion.

Q: Jahangir, please restate your theory as briefly as you can and what exactly needs to change in India’s policy.

Aziz: There are two ways of looking at the world as it stands today. One way is to say that the largest economy in the world will most likely go into a recession. The second-largest economy is not going to have a technical recession, but is likely to have a severe slowdown. And all of this is happening amid a tariff war that is no longer confined to the US and China but has spread to other countries.

If that’s how one wants to look at it, then what happens to the rest of the world is, by and large, going to be governed by the spillovers from these two economies slowing down. Over the last 50 years, we’ve gone through at least five US recessions. The world has survived, and we’ve come out of those recessions.

The alternative way of looking at it is that this is a broadside against an 80-year-old global trading system by the very country that built that system piece by piece. The damage we are watching, or fearing, is just a spillover from the breakage in the global trading system. The problem with this view is that if this is a resetting of the global trading system, then over the last 80 years, every country, whether advanced, developing, or emerging, has built its economic structure around this global trading system. Therefore, if that system has to change, the economic structure also needs to change.

That was basically my point, that the economic structure of almost all economies in the world, including India, is built in some way or another on the assumption that this global trading system will continue, with all its unfairness and concerns, but broadly continue. If that is no longer going to be the case, then the economic structure itself has to change.

Q: Let me question that thesis first. Rathin Roy, would you agree that the change is so dramatic that every country becomes inward-looking? Or is it going to be an incremental change where the US perhaps extracts some mileage, some production and trade surplus, from other countries, but basically, we all still play to our strengths through FTAs, like India-UK or India-EU? Will it really be such a dramatic change that everyone produces for themselves?

Roy: There will definitely be more autarky in the world. If you’re asking whether every country will produce for itself, probably not. I don’t think even Jahangir was saying that. There are small, open economies that really have no choice but to produce for others. Many of them don’t produce goods, although countries like Singapore do have a very high manufacturing share, and they will have to navigate these headwinds somewhat more carefully than India.

India, of course, has another great advantage, it’s a busted flush when it comes to world trade. India’s share of world exports is piffling. India cannot even compete with Bangladesh and Vietnam, especially Vietnam, forget China, for many of the things we ought to be producing, our share in manufacturing is anyway declining.

So, I rather hope that Jahangir is right. If he is, then India will do what I’ve been urging all along. Mahatma Gandhi once said about Western civilisation, it would be a very good idea. When people talk about India exporting, I say, it would be a very good idea, because I’ve been hearing that line since I achieved puberty, and India has not been an exporter since then.

So, if we then turn inward finally and stop dreaming these pipe dreams about being a global manufacturer based on a relatively small shift in where iPhones are manufactured, that can only be a good thing for India. If we focus on home market demand, which is huge, that can only be a good thing for India.

I’ll leave the consumption point for later. I do slightly want to nuance what Jahangir said in the Indian context. But otherwise, I think Jahangir is probably right when it comes to large countries. And large countries, especially India, which is a busted flush globally, should always have been focusing on domestic markets. I think Trump has done us a favour if he impels this government to do that more systematically and in a more disciplined way than it has in the past.

Q: Balakrishnan, your first thoughts, there is clearly a challenge to globalisation. But is it complete de-globalisation, or is it just some stalling and plateauing with perhaps the US extracting some advantages? What’s your best guess?

Balakrishnan: Let me start by saying that I do agree with Jahangir Aziz that we are seeing some serious disruption here. Now, what the magnitude of that disruption will be is certainly uncertain. The only thing we can be certain about is that there is going to be some uncertainty.

Secondly, I would say that India certainly does not have the luxury of producing for itself, for the simple reason that about 80% of its oil consumption is imported. So, it has to export in quite a big way if it wants to at least take care of its balance of payments.

But exports as a means of actually growing the economy has not been part of India’s history, ever. Not even after 1991. So, I’m not sure if the disruption in world trade is going to make a great difference to India’s growth prospects. But there is certainly going to be disruption, and the United States is a major trading partner of India. So how we come out of all of this is also going to be related to what sort of trade agreement we are able to negotiate with the United States.

Q: Is it going to be such a big U-turn? For instance, do you seriously think iPhones are going to be made in the US, even for the US?

Aziz: No, iPhones may not be made in the US for the US. But as you asked, what is the intention of these trading moves? If you look at the manner in which reciprocal tariffs were imposed, these were not based on, “India has this amount of tariffs, these non-tariff barriers, and they’ve cost American taxpayers X billion dollars. Therefore, the US will impose reciprocal tariffs of this amount.”

Q: The tariffs are based on trade deficits. That was very clear.

Aziz: That’s correct. So, let’s look at the trade deficit. It’s $1.1 trillion. Let’s say it goes to half a trillion. I’m not being as dramatic as you are, I’m glad Rathin pointed out I wasn’t being that dramatic.

All I was saying is that if you take away from the largest economy in the world half a trillion dollars in trade deficit every year, and let’s say that leads to a significant reduction in their imports, US imports are about $4.1 trillion every year, which is larger than India’s GDP. If that economy is turning autarkic, for whatever reason, it will force every other economy that trades with it to turn inward as well.

Q: I’m not denying that it is turning autarkic. What I’m saying is that they can’t take away $4.1 trillion in imports in one year, or even in 10 or 100 years. It will only be a little less than $4.1 trillion incrementally.

Aziz: That “little less” was done during the global financial crisis. Go back to that period. Those were the “golden years” for emerging markets, including India. Why were they golden years? Because globalisation was surging. We were establishing supply chains. That was what was driving our investment. That was what was driving our growth.

If you look at what happened to the world since the global financial crisis, potential growth, the medium-term growth, of every economy has actually ratcheted down. And that’s because global trade has ratcheted down.

Now you’re telling me, “Let’s look at another small ratcheting down.” I have no idea whether it’s going to be small or not. During the global financial crisis, there was some opposition to de-globalisation, I’ll grant you that, but it was political opposition in Europe and the US. It wasn’t on the policy front.

This is an opposition to globalisation not just politically but also in action. And we’re not even looking at the retaliation that will happen. We’re assuming that in 90 days, we’ll actually get trade deals with the Europeans and others. We haven’t seen any of those trade deals, apart from the India trade deal that’s being talked about. And as Rathin said, India doesn’t really matter in global trade.

What matters is Japan, Mexico, Canada, and Europe. And we haven’t seen anything of that sort. We don’t even know what retaliatory steps these countries will take. So, the ratcheting down of global trade can be significantly larger than what occurred during the global financial crisis, where the only thing that happened, by the way, was that trade financing froze.

So, my point is: you could see another ratcheting down of trade, and therefore another ratcheting down of medium-term growth, because we in the emerging markets continue to believe that being part of the global trade system is our ticket to prosperity. And that’s what I’m questioning.