The Interplay Between International Relations, National Security & Balance of Payments: An Easy Explanation

International Trade is a complex topic in economics, but it becomes more intertwined when we look it from the lens of national interest as well as geopolitics. International Trade impacts the economy as well as the international equations of the world, hence when we say that economics is important it means it’s important for the international relation aspects of world.

India gained Independence from the British empire on 15 August 1947 which was after 190 years. India didn’t inherit a very impressive trade balance account. Many students of Indian economics understand the fall of India due to the fall of Indian textiles market which contributed to approximately 22% of GDP of India during that time, when GDP of India fell due to the repressive trade policies of Britain esp. related to Manchester cloth of 1800’s which led to desolation of Indian weavers, textile makers which made India lose wealth & subsequently the partition of country which occurred in 1947. This is a very simplistic version of how International Trade affects the political-social realities of any country. Many experts presumably the realists in the International Relations also link the Iraqi civil war due to the business relations of USA. The Sri Lankan economic crisis which spiraled into the Sri Lankan political crisis was also triggered due to the lack of BoP, foreign exchange reserves.

The reason why international trade is so important for the political-social-economic stability of a nation can be understood easily. (A) No nation in the world is resource surplus & for keeping up with its economic policies & the basic needs it needs to adopt international trade as a cornerstone for its policies. The international trade also fills the government revenue resources by virtue of customs duty & without revenue resources there can’t be expenditure on the public welfare & applying the simple Wiseman’s economic theory of public expenditure which beautifully links the public expenditure with the tax tolerance limit of people, hence having a good source of dependable revenue like International Trade is necessary for maintaining the political & consumer equilibrium in a nation.

International Trade comprises of Balance of Payments or BoP’s which is the most important indicator of the performance of a nation on the platform of International Trade. The BoP in turn accounts for the capital account deficit & current account deficit. To explain the matter easily, capital account has FII, FDI, remittances as its components & current account has the trade of goods, services & invisibles. The BoP is calculated by: Current account deficit/surplus + capital account deficit/surplus error term which is an econometrics formula.

Hence because of the above evidence which I have presented it makes abundantly clear the role of international trade in securing India’s international relations & national security interests. The other 2 factors also influence the International Trade, the best example can be of Ukraine war when the war has caused the Russian imports of oil-gas to rise & some disruptions of supply chain effects which is threatening to paralyse the entire Europe’s economy effects of which can be seen in the recent decisions of supposedly “well off economies” like Germany, UK.

The international politics also effects the international trade equations of countries as it gives rise to newer power centers who are eager for the control of international trade which every country would want to exploit to rise as a power center. International relations is also a pursuit of constant negotiations & negotiations can always happen between equals i.e. those countries who have enough to offer & take. Hence when India launched Atmanirbhar Bharat initiative, Make In India initiative which aimed at bringing FDI into India which impacts the BoP positively & hence gives the Government of India more diplomatic heft which can be used as a bargaining tool in the future as Make In India has been successful in driving the Aggregate demand of India along with the government expenditure which helped India to keep its expenditure on defense infrastructure despite of Covid-19/ The game between International trade, International relations & national security also shows that the effect of any domestic policy impacts all the 3 in either in positive or negative way.

These are the fundamental basics of international relations & geopolitical realities which many people in the world in the terms of ideology forget to analyse & more than that understand the realities.

The role of international trade institutions like IBRD, IMF, World Bank also becomes important for the maintaining the trade relations and to a level the maintaining of sovereignty along with the diplomatic heft of countries in the world. Also, when a country doesn’t have enough reserves then more often than not its choices regarding domestic issues are dictated by those countries who have an eye on the strategic resources of that country.

It’s imperative for India to maintain always a good strategic reserve of foreign exchange reserves, Balance of Payments so that the diplomatic heft which is so important for ensuring national security of a country is also maintained. The current account deficit of India is currently at 1.2 percent of GDP which is good if we compare it from the lens of world.

There is also no need to panic as no country in the world (barring exceptions) would prefer keeping a BoP surplus (refer to the formula above in the article) as keeping a BoP surplus would affect inflation which would again reduce the value of BoP in the future long run. Imports of necessary goods till a particular limit of the economy is always good. India also has an export promotion board whose success can be seen when India recorded exports worth of 675 billion $ in the fiscal year of 2021-22 as if you keep buying from world & not sell then it’s a recipe for disaster as was the case of SL.

The Balance of Payments is a cornerstone of economic security of a country which needs to be introduced into the defense infrastructure of India in some manner or other.