CrossDock Web Exclusive: Dr. Palit on US-India trade relationship and the rewiring of global economic order

CrossDock's interview series has always striven to bring varied voices and perspectives from different fields and parts of the globe to discuss the ever-changing world of global trade and supply chains. In this latest edition, we have Dr. Amitendu Palit, an economist specializing in international trade and investment policies, free trade agreements, and supply chains.

Currently Senior Research Fellow and Research Lead for Trade and Economics at the Institute of South Asian Studies, National University of Singapore, Dr. Palit has spent decades at the intersection of trade, investment, and economic policy — advising institutions ranging from the ILO and the UN Development Program to the World Economic Forum.

Before turning to research, he shaped real-world macroeconomic policy from within the Indian government, contributing to annual economic surveys and budget consultations. He is the author and editor of numerous books on subjects as varied as China-India economics, Special Economic Zones, and the Trans-Pacific Partnership.

In this interview with CrossDock Insights, Dr. Palit talks about Asia's energy crunch, the India-US trade relationship, China's evolving industrial strategy, and where India's real strengths in global trade lie.

Dr. Palit, from your perspective, how severe is the energy shock for the data-center buildout across Asia, and which specific parts of the supply chain do you think are most exposed?

I think one of the issues that countries really overlooked is that if this kind of energy crisis builds up, what are the ways forward? That appears to have been a costly oversight for Asia.

If we include a country like Australia in broader Asia, then we can probably say that it has access to energy, which can help it manage the crisis. A country like Malaysia, or perhaps Brunei, may also be in a relatively better position. But other than these, even the major economies of Asia — Japan, Korea, China, and India — are significantly energy-dependent.

The dependence creates a complication because these economies currently have active industrial policies. When I say industrial policies, I refer specifically to state-driven policies working for achieving certain economic and strategic objectives. If energy prices rise, it can lead to a crisis for these industrial policies.

This is a situation that probably should have been anticipated. One of the areas where this industrial policy focuses, and the impact of the energy crisis becomes important, is for upcoming data centers and AI infrastructure.

For example, when it comes to Google and its investment commitment in India, it has tied up with the Adani Group for power supply. The venture will proceed on the strategy that all the electricity capacity will be provided through renewables. The Adani Group will generate the electricity. This will be off-grid and won’t create additional pressure on the national grid.

Building a hyperscale data center requires enormous amounts of equipment, materials, transport, and commodities to be brought together. The drive for building data centers has been driving global trade due to heavy AI-related goods trade arising largely because of the AI demand from Asia. This trade flow will get seriously impacted by this crisis.

One part of the energy crisis impact will be on the movement of commodities because shipping lines are in great distress. Another part is on creating an all-round impact on how goods move, how they are used, their demand, their volumes, and so on.

At this stage, there is considerable uncertainty about energy prices and supplies. Conditions in and around the Strait of Hormuz are bringing the focus back on the roadblocks that investments are expected to face due to disruptions from military conflicts.

There is a lot to unpack there. You mentioned the dependency on Big Tech, the distinction between the Global South and Global North in AI adoption, and the trade negotiations between India and the United States. If you were analyzing India’s negotiating strategy with the United States, especially with India committing to very large import targets over the next few years, what is genuinely new from a US business perspective?

Three quick points here.

First, I think we need to look very seriously at the prospects for nuclear energy. There is one policy, again an industrial policy, which the Government of India took on, and on which there has been very limited discussion. In December last year, Parliament amended India’s civil nuclear liability law. That opens up the possibility of foreign investments in SMRs: small modular reactors.

If you look at the energy mix and the way this works out, on one hand, there are fossil fuels, out of which the main source is coal. India will have to rely on coal considerably and consequentially going forward in enlarging its energy mix.

But if you look at the cleaner part, what are the options that India has? There’s wind, solar, nuclear, and hydro. I am leaving hydro aside. When it comes to wind and solar, the capacities are going to take a very long time to reach the scale they need to. I’m not denying the eventuality of that. But it might easily take 15 or 20 years. Wind and solar investments might also take very long to produce returns, acting as a deterrent for large-scale investors. Nuclear, comparatively, could be an easier option for attracting foreign investments. 

I would not just look at the US in this regard. India would look at the European Union, Canada, Japan, and several other countries for investing in civil nuclear capacities. Nuclear investments will necessitate imports also – from the US and others.

Second, in November last year, India and the US agreed on a bilateral gas purchase commitment. This should also help address supply shortages in India. This would also feature in India’s imports from the US.

The third aspect — something I alluded to in one of my recent papers on the India-US trade deal — is the import commitment of around $500 billion by India, a significant part of which would be for developing advanced AI infrastructure, complementing committed investments, for more capacities in agentic AI, and perhaps embodied AI.

Creating significant capacities will also require imports of AI chips. Those will figure in the overall import commitment and accelerate India’s infrastructure and AI adoption capacities.

So, I would feel that the three major imports by India from the US that we’re looking at are: nuclear energy-related, gas purchases, and AI-related imports.

Would diversifying energy imports also be a factor, especially because the recent U.S.-Iran conflict has again exposed India’s concentration risks in the Middle East?

I think that was always the intention. If we go back to 2018 - the time from when Iranian oil was sanctioned - India realized the importance of diversifying energy imports. It diversified deeper within the Middle East and the GCC countries.

You will note that from around that time, or even a little before, India’s strategic outreach with the GCC increased. Even before the present conflict, India had anxieties and concerns about energy supply, especially during the Ukraine conflict, and was working on managing the risk by deepening strategic ties with the Gulf. That is why even before the Iran conflict, India’s relationship with most countries in the GCC was already on a different path.

There is another thought that I want to share. The logic of diversifying energy requirements from within the Middle East because of geographical proximity and other political reasons is well understood. But when the entire Middle East itself plunges into a crisis like it has now, what other options does India have?

Let’s assume that India turns to the U.S. as a trusted and reliable energy partner. This will certainly help, especially since, in addition to the U.S. supplies, Venezuelan oil is also flowing to India. But factors like a very troubled shipping industry, marine insurance coverage not being provided adequately, and global demand for energy going forward to peak to a point where lack of supplies becomes acute, there would be worries over whether the diversification options have hit a wall.

A country like India has a huge requirement for gas and oil. We are talking about a 1.4 billion population moving into peak summer. This increases both industrial and domestic requirements. The question, therefore, is: Is India diversified enough in sourcing to take care of the escalation in demand? I think this is a question that needs to be looked at very seriously.

My take is that India is reasonably well balanced to withstand the demand pressures for a few more months. But beyond that, if the crisis continues, India will need to explore more procurement arrangements, including those it hasn’t pursued in the past, even if these arrangements create some strategic awkwardness.

At this stage, India doesn’t have alternatives to Russian oil purchases. I also do not think that India can disregard buying more oil from Iran, if that possibility can be persisted with.

How stable do you feel this India–U.S. trade alignment will be? The reason I ask is that the India–U.S. relationship had been growing increasingly stronger for the better part of the 21st century, but recent events make it feel like there has been a bit of a reset. In that sense, how stable do you think this trade alignment would be?

That is a very interesting question. 

Historically, if you look at India and the United States, they have had several trade disputes. India has repeatedly featured among countries that the US trade and investment agencies have considered difficult for its businesses.

India has been working on its red lines with trade partners, such as the EU and UK, in a spirited and sporting manner. With respect to the US, however, the atmosphere of negotiations has been characterized by unpredictable demands and high transactionality.

You first had a reciprocal tariff coming in, even when India was negotiating with the US. That could have been a negotiating tactic as far as President Trump is concerned, but it is something that made India very uncomfortable. India has been negotiating FTAs with several countries. But it is only with the US that it has to pick up a negotiating track which is not based on trust.

So honestly, I do not think the India-US treaty or trade arrangement stands on a solid footing. I would separate it from certain other parts of the India-US relationship, which are more durable and based on stronger foundations.

Trade continues to remain a volatile and unpredictable area between the two countries.

You spoke about rewiring and the awkwardness in trade relationships. One can argue that we are perhaps living through a rewiring of the world order, and also a rewiring of global trade relationships and supply chains.

We have also seen an uptick in non-dollar settlements between regional powers, driven by China and Russia, while India has opened multiple special accounts of its own. Particularly from your personal experience working on balance of payments under the ministry, do you foresee a world where dollar-denominated settlements will no longer be the de facto mechanism for global transactions?

And do you think the U.S. sometimes overplays its hand as the most lucrative market in the world, when in reality it accounts for about 15% of global trade?

The American dollar is one of the most powerful drivers of American hegemony. There is no denying that.

If you look at the share of the United States in global trade and compare it with the share of the American dollar in global transactions, the power of the dollar becomes clear. The share of the American dollar in global transactions is almost 60 percent. It is a much higher proportion compared with the United States’ global trade share.

The predominance of the dollar is because of several reasons. One of the most important reasons is that it is the most trusted reserve currency in the world. This makes it easily transactable vis-à-vis all other currencies. However, over the last two or three years, the value of the American dollar has been rising, and it has become increasingly difficult for most emerging markets, including India, to keep buying dollars for invoicing external transactions.

So, the economic logic for exploring non-dollar alternatives does exist. India has been exploring the option of settling trade in local currencies. It began doing that with Russia through the special rupee accounts that you mentioned. It has also started doing that with certain other countries in South Asia, Southeast Asia, Africa, and the Asia-Pacific.

But there is a problem here. The Indian rupee is not a global reserve currency. It is also not fully convertible in the capital account of the balance of payments. As a result, when external partners trade with their Indian counterparts in Indian rupees, the rupee received can be used only in future potential transactions with India, not with other countries. So, in that sense, the rupee is held idle.

This perhaps doesn’t matter for countries for whom India is a large trade partner, such as its neighbors, like Bangladesh, the Maldives, and Sri Lanka. But it can be a limiting factor for other economies.

So, what is the option? One option is what several emerging markets, including India, are looking at: shifting to sovereign digital currencies and making them connected.

But to be honest, this is unlikely to reduce the dominance of the American dollar in the near future. While its share in global transactions might gradually reduce, it will still remain the most prominent global currency.

Even the Chinese yuan will find it difficult to become the most acceptable global currency. It might become so within China’s own trade network — among countries with which China trades vigorously, and that are willing to accept payment in yuan, or if the yuan gains acceptance in third countries. So, it might become popular in a limited space.

But even if you look at a grouping like BRICS, I do not see it being very effective in cutting dependence on the dollar because of the differences between the countries in their digital-currency standards, digital payments interoperability, data conditions, and data regulations. It is going to be very difficult for them to make their digital currencies interoperable. Ultimately, there is the question of trust: to what extent countries trust each other in negotiating this mechanism.

Turning to Asia, particularly the "China Plus One" concept that gained traction post-COVID, two main trends appear to be at play. First, China itself is increasingly becoming a key consumption market for products manufactured across Asia. Second, Chinese manufacturers are setting up operations in countries like Vietnam and Thailand, primarily to retain access to Western markets and sidestep tariffs. Given this context, is the manufacturing expansion observed in other Asian nations predominantly a relocation of Chinese industrial capacity? And how significant is the "China Plus One" phenomenon truly?

I think you have a point when you talk about the redistribution of Chinese industrial capacity and, essentially, excess capacity. Yes, it has been happening for quite some time, and there is a pattern here.

If you look at China’s 15th Five-Year Plan, which was announced in March, it has a remarkably strong emphasis on digitalization and bringing in AI for increasing industrial competitiveness. The kind of AI China is focusing on is largely embodied AI.

China is a peculiar example of a country that, in spite of having one of the world’s largest populations, a good number of young people joining the workforce, and a skilled workforce, is not really following what is typically a labor-intensive industrial policy. It follows a policy where you see very strong applications of robotics. China’s use of industrial robots is the largest in the world.

Embodied AI is going to play two roles. One is increasing the productivity of traditional industries. For example, in textiles, and partly in automobiles and chemicals, embodied AI will increase competitiveness across various levels of the supply chain.

Second, AI will be used to make China the first-generation leader in strategic industries of the future. Biomedicine would be one such. Advanced manufacturing would be another.

Then what happens to those industries that have typically been behind China’s huge trade surpluses? I think China is slowly vacating that space. For a long time, wage rates have been rising within China. It is happy to pursue a policy where it starts investing more in other countries, especially around itself, and locates production there with the intention of running the production from the mainland.

This is very similar to what American and European companies have been doing for a long time: outsourcing production to Asia, with the design and thinking happening in Silicon Valley or the Rhine Valley. That is a model that China is adopting.

The other part of the story is that China is also looking to make its market more focused towards consumption. What is manufactured in the other countries with Chinese investments will probably also be exported back to China for domestic consumption.

What kind of industries are we looking at in that respect? We have already seen an industry like electric vehicles slowly beginning to pan out and take shape in various parts of the region. We are seeing many collaborations between China and countries in Africa and Asia.

There is an interesting advantage that China has when it comes to strategic and technology industries, something a lot of us tend to overlook. In several countries in Africa, Southeast Asia, and even South Asia, you will find that Chinese telecom companies have been present there with a historical base. Companies like Huawei and ZTE have been there for a very long time. They do not have comparable competitors.

The Chinese telecom companies have developed the hardware base. On that basis, Chinese AI developers can move into these countries, such as DeepSeek, and find a ready platform for releasing their applications. For example, smartphones made by Huawei may come with features developed by Tencent, embedded with WeChat, and so on.

It is also important to note that most of China’s agentic AI exports to the rest of the world are open source. That is a significant competitive advantage.

Why does it have this advantage? It is because of the enormous state support that continues to be provided to these industries, which basically outguns most other competitors from other markets.

This is the strategy on which China will operate. To what extent does this counter the China Plus One strategy? I think essentially the United States has retreated from the China Plus One strategy. You cannot have a China Plus One strategy if you are not investing in allies. It is not possible. Strategically, I think that policy has suffered a retreat.

There is a certain amount of collective convergence happening between other middle powers: India, the EU, Japan, and others. But the interesting thing is that over the last two years, especially since Trump 2.0, these countries are also parallelly engaging with China.

When the Biden administration brought in the CHIPS Act and gave one-time incentives for building semiconductor factories in the United States, Samsung and SK Hynix were brought into the United States. One of the major points these companies raised was: while they’re happy to invest in the United States, if that means they stop exporting to China, then one of their largest markets goes.

This is where we often do not consider China’s importance as a consumer. We only look at China as a producer, but you also have to consider its importance as a consumer. 

Even today, companies like Samsung will not want to let go of the Chinese market, even though they are mostly into buying legacy chips. 

Today, when these countries see that the United States itself is negotiating bilaterally with China, and that Nvidia has been allowed to sell its next-generation chips to China while the US government accepts it on the basis that it will get a share of the revenues, they realize that alliance and coalition building have taken a back seat.

To that extent, the China Plus policy also remains stunted. What, for example, happened to the Indo-Pacific Economic Framework that the Biden administration was following? 

On a related note, there is always this discussion in policy and economic circles about services versus manufacturing. You wrote that India’s GCCs generate more than $65 billion in services, much of it headed towards US-headquartered companies, while the PLI-driven manufacturing push has had mixed results.

Most of our audience thinks of India through the manufacturing lens, as a potential alternative in the China Plus One theme. In your honest assessment, is India’s real value in global supply chains and trade the intelligence and services layer, analytics, engineering design, and operations planning, rather than the factory floor?

If you look at digitally delivered services exports, India today is the fifth largest in the world. This is one industry where India is ahead of China in exports. It remains well below the US, which is the world’s largest exporter of digitally delivered services, but India is in the global top five, and its share in global digital trade is rising very fast.

There are two components of digital trade. One is that it is digitally ordered and delivered. The other is trade that is digitally ordered and physically delivered, essentially through ecommerce platforms, such as Amazon, eBay, Alibaba, and others. In the second segment, India’s relative comparative advantage is less because India does not have global e-commerce platforms. But in the first segment, it has a much greater comparative advantage.

What are the kinds of manufacturing activities where India can claim to have such comparable global advantages? Honestly, except for a couple of sectors like pharmaceuticals or petroleum refining, I do not think India can forward such a claim.

The hi-tech manufacturing sectors, such as automobiles and electronics, are becoming more digitized. They will also be powered more by AI. The human labor intensity of manufacturing will decrease in these areas.

India remains an economy that is relatively less affected by AI because it does not have the manufacturing that requires upgrading by AI. Most of its manufacturing is still in traditional sectors. 

The bulk of India’s manufacturing is in the medium and small-scale space. This is where it is not just a question of competing with similarly scaled enterprises from China. There are so many other economies in Asia with whom it is very difficult to compete.

If you look at very specific labor-intensive manufacturing sectors, that ship has sailed long ago. In garments and textiles, Bangladesh, Vietnam, and others have gone ahead long ago.

If the European Union FTA starts kicking in, yes, it will certainly mean benefits coming in for the textile sector. But India’s main value contribution in textiles is in design and engineering.

Honestly, I belong to a minority that thinks that India’s prospects are not in manufacturing, at least not in broad-based manufacturing. In selective manufacturing, yes, India can do very well in certain segments. But I think at the end of the day, there are specific services where India really has the edge.

Again, the edge is not in all services. I am not talking about transport services, for example. But if you look at services like education, healthcare, technical consulting, professional services, and fintech, the opportunities are great. 

There is some work I am doing right now, which looks at whether firms that are contributing significantly to India’s digitally delivered services can increase India’s presence in global value chains in some other respect. That will take a lot of digging and exploration.

But to come back to your query, I really think India’s services story is the key. If you go back to the India-US trade relationship, this is something that has remained intact because the US big tech is very, very protective about this part. You have not had President Trump talking about spoiling this relationship.

India is actively pursuing or has concluded trade agreements with major partners like the EU, UK, and New Zealand. Given your previous writings on India's protectionist tendencies, particularly in sectors such as agriculture, how do you anticipate the inherent conflict between this drive for market liberalization through FTAs and the persistence of domestic protectionist policies will unfold in the near future?

I think till now — in all the recent FTAs India has signed — such as with Australia, the UK, EU, New Zealand, UAE, and the one with the US, it hasn’t crossed very specific red lines. It continues to safeguard some sensitive sectors with tariffs.

It’s important to note that while we highlight India being protective in agriculture, the global experience shows that most major economies are also protective of agriculture. For example, the most extensive and intense discussions in Korea’s trade agreement with the US were on Korea’s reluctance to lower protection over rice and beef. Japan, too, has historically been protective of agriculture, as have been Europe and the US.

I don’t see what is so terribly wrong with being protective of agriculture. Agriculture is different from industry and manufacturing in its organic linkages with a country and its domestic economy. These linkages include history, community, politics, sociology, and several other interconnected aspects, making agriculture a sector that cannot be looked at from just a market perspective. At the same time, in a country like India, over-protectiveness can deprive agriculture from much-need investments and technology for modernization and exports. 

Going forward, what we are likely to see is that, depending on how global conditions shape up, some of India’s positions on agricultural protection may change, especially if food security becomes a matter of concern.

Food security requirements mean India needs to diversify. It might need to open its markets to a larger variety of imported products for its own domestic needs.

Unfortunately, in India, several market-based incentives in agriculture work in a perverse way. As a result, you find a state like Punjab, traditionally India’s highest producer of wheat, becoming one of the largest producers of rice. Punjab’s agro-climatic conditions are unsuitable for paddy as it is a relatively dry state, and paddy is a water-guzzling crop. However, a variety of incentives, including free electricity and fixed procurement prices, have encouraged large harvests of paddy, adversely affecting groundwater levels in Punjab.

Such incentives have led to poor outcomes in many other parts of India, especially the use of state policy for incentivizing the production of cereals, deflecting attention from other crops and causing their shortages.

If these conditions persist, India might face challenges of food security going forward. Imports will become necessary in that case. While India does import some agricultural products occasionally to address domestic shortages, it might become a more consistent policy over time.

Over time, some agricultural exports by India might achieve global distinction. I am personally very keen on watching the trend in the India-China trade relationship in this regard. Over the last nine to ten months, we have seen Indian exports increase, and agriculture could well be an area where such exports might rise further.

As a closing note, from your vantage point, what are the one or two broad themes you will be watching closely over the next 12 months in global trade and supply chains? What should policymakers and operators also keep an eye on?

I really hope that globally, there is an effort to provide comprehensive insurance coverage to shipping. This is a major factor adversely affecting the resilience of supply chains.

Till the time the major economies come together to reinsure the cargo that ships are carrying through various routes, businesses won’t be able to move goods without nightmares. 

If you look back, since COVID, the world has seen many conflicts. First, we had the Russia-Ukraine conflict. Then we had the Israel-Gaza conflict. Today, we have the Iran War. More such conflicts might come up in various parts of the world.

All these conflicts are impacting the major shipping routes of the world. Not just shipping; the conflicts are impacting air cargo movements also, because airlines are having to take circuitous routes to go from one part of the world to another.

Therefore, it is extremely important to ensure the safe passage of goods across the world.

We’re also discussing a lot about how AI is going to increase industrial competitiveness and play a big role in public-service delivery. In this regard, it is important to overcome the trust deficit that exists between nations.

No country is secure on AI sovereignty. If the US big tech grows very active in India in developing and adopting AI, there will be concerns about eventual ownership of the AI content and what it means for AI sovereignty.

AI sovereignty is not just about making AI products available in local languages. It has much to do with its trusted and ethical use. Unfortunately, you don’t have overarching regulations on trusted, ethical, and responsible use of AI. I hope that, given the concerns raised, there will soon be some progress in this regard.

Finally, we can’t afford to neglect the priorities for sustainability. The high incidence of conflicts is distracting global attention from sustainability. I do hope that some of the major economies are able to begin productive conversations and engagement on addressing sustainability to make sure that it doesn’t fall off the global public-policy agenda.

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