WTO Ministerial Section • Volume 2 • Number 18 • 18th May 1998

Trade, aid fallout after India’s nuclear tests

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The international community responded with grave concern and numerous calls for sanctions last week after India announced it had conducted five underground nuclear arms tests. The U.S. Administration led international condemnation of India saying the testing of nuclear weapons “creates a dangerous instability” in the region. Indian Prime Minister Atal Bihari Vajipayee said India was building its nuclear defense system to guard against nuclear threats from neighboring Pakistan and China. The Prime Minister said that it is willing to consider a test ban now that last week’s tests–the first since 1974, are complete.

Japan, India’s largest aid donor, threatened to suspend all but humanitarian aid to the country, which includes nearly US$1 billion in loans. Japan also canceled a scheduled World Bank forum of donor nations on India that was to be held in Tokyo next month. The U.S. put a freeze on all but humanitarian aid as well, although direct U.S. aid to India amounts to a modest US$155 million. Germany froze any new development funds for India (about DM $27 million), and Denmark said it will limit its aid to US$28 million and curtailed plans to double its aid commitment by 2002. The Asian Development Bank (ADB), of which both the U.S. and Japan are a part, could block new loans to India: in particular, a $375 million loan for much needed infrastructure development.

U.S. law dictates that the U.S. must impose trade and aid sanctions against any previously non-nuclear nation that explodes a nuclear device. The U.S. law–the Nuclear Proliferation Prevention Act of 1994, also calls for the U.S. to oppose the granting of any new loans by multilateral lending institutions like the ADB, International Monetary Fund (IMF) and World Bank. This is bad news for India’s poor. India has not borrowed from the IMF since 1993, but it is the largest recipient of World Bank loans–currently with US$26.5 billion in outstanding debt. The World Bank funds programs targeting the poorest of India’s 945 million people. These include projects to improve the health and environmental conditions of the mostly agrarian population.

US$1.5 billion in World Bank assistance was granted to India last year: US$567 million in new loans await approval on May 26. The pending loans are for an electrical power grid and renewable energy development. While the U.S. does not have veto-power at the World Bank, IMF or ADB, it could block the consensus needed to approve new loans.

U.S. Congressman Edward Markey (D-Massachusetts) this weekend proposed an amendment to a defense bill that would impose prohibitive import tariffs on textiles and apparels for any nation that conducts nuclear weapons tests after January 1, 1998. Textiles and apparel are India’s most important export to the U.S., last year exporting more than US$1.8 billion to the U.S. market. The amendment is also intended to strongly discourage Pakistan from doing any retaliatory testing of its nuclear weaponry, as testing would threaten the over US$1 billion in annual textile and apparel exports from Pakistan to the U.S. A vote on the amendment could take place as early as this week.

Indian Commerce Minister Ramarishna Hegde last week said India “will stand up” to the sanctions. “India [is] not unduly worried about moves by U.S. banks to stop funding for its projects. . . India cannot be bullied and the sanctions are highly discriminatory,” Mr. Hegde said. Analysts observe that the sanctions could trigger a protectionist economic policy by the Indian government. One economist noted last week that India is in a better position to handle a cutoff in multilateral aid now than it was a few years ago. Its foreign currency reserves total more than US$26 billion and most of its World Bank debt is long- term.

“Global protests punch India,” ECONOMIC TIMES (India), May 13, 1998; “375-m ADB loans for road, port projects may be docked,” ECONOMIC TIMES (India), May 14, 1998; “International sanctions rain on India,” WALL STREET JOURNAL, May 14, 1998; “US action likely to be through World Bank,” FINANCIAL TIMES, May 14, 1998; “Sanctions may drive Hindu nationalists into protectionism: analysts;” “Sanctions will have little effect, says India’s media.” AGENCE FRANCE-PRESSE, May 13, 1998; “Japan will stop new India aid, block World Bank meet as part of nuclear sanctions;” “India’s testing triggers curbs on US trade, aid,” JOURNAL OF COMMERCE, May 13, 1998; “A move to curb India exports,” JOURNAL OF COMMERCE, May 18, 1998.