UPSCNotes
International Relations Effect of Policies of Other Countries on India GS Paper II

How the Policies of Other Countries Affect India

Impact of foreign policies on India for UPSC — US tariffs and GSP, EU CBAM, Fed rate cycles, H-1B and Gulf labour rules, sanctions on Iran and Russia, CAATSA, and China's BRI and export controls.

SyllabusGS II · Effect of policies and politics of developed and developing countries on India's interests; Indian diaspora

By UPSC Notes Editorial Team 11 min read Updated Oct 2026 #international-relations#cbam#protectionism

Prerequisites: Effect of Policies of Other Countries — overview · External Sector and Trade

The Hook: A Carbon Price at Europe’s Border

Connect: In the News → Concept

On 1 January 2026, the European Union’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase. Since October 2023, EU importers of steel, aluminium, cement, fertilisers, electricity and hydrogen had only to report the carbon emissions embedded in those goods; from 2026, those emissions carry a cost linked to the EU’s own carbon price. India is among the large exporters of iron, steel and aluminium to the EU.

No Indian law changed — yet Indian exporters face a new cost. That is this syllabus line in one example: policies made in other capitals shape India’s trade, jobs, energy, security and people.

The Core Concept

The syllabus line has two halves — developed and developing countries — and two objects — their policies (deliberate decisions such as tariffs or visas) and their politics (elections, instability, coups and conflicts). The impact on India travels through six channels.

graph TD
    A[Policies and politics of other countries] --> B[Trade: tariffs, standards, carbon taxes]
    A --> C[Money: interest rates, capital flows]
    A --> D[People: visas, labour laws, remittances]
    A --> E[Sanctions: Iran, Russia, CAATSA]
    A --> F[Security: terrorism, CPEC, border pressure]
    A --> G[Resources: oil supply, critical minerals]
    B --> H[India's interests: growth, jobs, energy, security, diaspora]
    C --> H
    D --> H
    E --> H
    F --> H
    G --> H

1. Trade policy

PolicyCountryYearEffect on India
Section 232 tariffs on steel (25%) and aluminium (10%)USMarch 2018Hit Indian metal exports; India imposed retaliatory duties on US goods in June 2019
End of Generalised System of Preferences (GSP) benefitsUSJune 2019India had been the largest beneficiary of the US GSP scheme; duty-free access ended for many exports
Higher tariffs on Indian goods, including an additional duty linked to purchases of Russian oilUSAugust 2025Pressure on labour-intensive exports (textiles, gems and jewellery, seafood)
Carbon Border Adjustment MechanismEUReporting from October 2023; definitive from January 2026Cost on carbon-intensive exports; India argues it is a unilateral trade barrier contrary to “common but differentiated responsibilities”
EU Deforestation RegulationEUAdopted 2023Traceability requirements for coffee, cocoa, rubber, soya, wood, cattle and oil palm products
Subsidies under the Inflation Reduction Act and the CHIPS and Science ActUSAugust 2022Draw clean-energy and semiconductor investment to the US; also open partnership opportunities
Overcapacity and dumping of steel, chemicals, solar modulesChinaOngoingIndia’s widening trade deficit with China; anti-dumping duties by India

India’s response: a new generation of trade agreements — with the UAE (CEPA, signed February 2022), Australia (ECTA, signed April 2022), the EFTA states (TEPA, signed March 2024) and the UK (CETA, signed July 2025); Production Linked Incentive schemes; and anti-dumping and safeguard duties.

2. Monetary policy of developed economies

When the US Federal Reserve raises interest rates, global investors move money to US assets. Emerging markets see portfolio outflows, a weaker currency and costlier imports.

  • “Taper tantrum” (May–August 2013): a signal that the Fed would slow its bond purchases triggered sharp outflows and a fall in the rupee. India was grouped among the “Fragile Five” economies.
  • 2022–23 tightening: the Fed’s rapid rate rises pushed the rupee lower and forced the RBI to use its foreign-exchange reserves.

India’s buffers: large foreign-exchange reserves, a lower current-account deficit, and RBI intervention.

3. People: visas, labour laws and remittances

  • US: changes to H-1B rules matter because Indians receive the bulk of H-1B visas. In September 2025 the US announced a large one-time fee on new H-1B petitions.
  • Canada, the UK and Australia: tighter rules on international students (Canada capped study permits from January 2024) affect one of the largest outbound student populations in the world.
  • Gulf states: localisation policies such as Saudi Arabia’s Nitaqat (from 2011) and reforms or tightening of the kafala sponsorship system affect millions of Indian workers.
  • Remittances: India is the world’s largest recipient; it was the first country to receive over US$100 billion in a year, in 2022 (IOM, World Migration Report 2024). Any shock in the Gulf, the US or the UK shows up in household incomes in Kerala, Uttar Pradesh, Bihar and Punjab.

4. Sanctions

Sanction regimeEffect on IndiaIndia’s response
US withdrawal from the JCPOA (Iran nuclear deal) in May 2018; re-imposed sanctionsIndia stopped importing Iranian crude after US waivers ended in May 2019Secured a US exemption for Chabahar port development (November 2018)
CAATSA (US law, August 2017)Risk of sanctions for the S-400 purchase from RussiaDiplomacy to seek a waiver; diversification of suppliers
Western sanctions on Russia after February 2022; G7 price cap on Russian crude (December 2022)Payment difficulties; discounted Russian oilImports of Russian crude rose sharply; Special Rupee Vostro Accounts (RBI, July 2022)

India’s principle: it recognises only UN Security Council sanctions as binding; unilateral sanctions bind India only in practice, through their effect on banks, shipping and insurance.

5. Security and strategic policies of neighbours

  • Pakistan: sponsorship of cross-border terrorism — the single biggest drag on regional cooperation (SAARC) and the reason for India’s 2025 decision to hold the Indus Waters Treaty in abeyance.
  • China: the Belt and Road Initiative and CPEC through Pakistan-occupied territory; port projects in the Indian Ocean; lending to neighbours (Sri Lanka’s Hambantota lease, 2017); dam-building on the Yarlung Tsangpo (Brahmaputra); objections to India’s NSG membership.
  • Political change next door: the Taliban takeover in Afghanistan (August 2021), the military coup in Myanmar (February 2021) and the change of government in Bangladesh (August 2024) each forced India to rework security, refugee and connectivity plans.

6. Resources: oil and critical minerals

  • OPEC+ production decisions move crude prices; India imports most of its crude oil, so prices feed into inflation, the current-account deficit and the fiscal position. India maintains strategic petroleum reserves at Visakhapatnam, Mangaluru and Padur.
  • China’s export controls: in April 2025 China restricted exports of several rare-earth elements and magnets, affecting automobile and electronics makers worldwide, including in India.
  • India’s response: the National Critical Mineral Mission (approved January 2025); KABIL (Khanij Bidesh India Ltd) to acquire mineral assets abroad; membership of the US-led Minerals Security Partnership (June 2023).

Developed vs developing: a summary

Developed countriesDeveloping countries
Trade and climate standards (CBAM, deforestation rules)Security threats (terrorism, border pressure)
Monetary policy and capital flowsPolitical instability creating refugees and insecurity
Immigration and visa rulesLabour laws in the Gulf
Technology export controls and subsidiesChinese lending and infrastructure in the neighbourhood
Unilateral sanctionsOil supply decisions (OPEC+) and resource nationalism

Memory Anchors

Six channels — “TMP-SSR”: Trade · Money · People · Sanctions · Security · Resources.

CBAM sectors — “CHEAFI” → Cement, Hydrogen, Electricity, Aluminium, Fertilisers, Iron and steel.

One-line Mains hook: “In an interdependent world, foreign policy begins at home — at the factory gate, the visa counter and the fuel pump.”

For Prelims

Facts worth a mark
  • CBAM covers iron and steel, aluminium, cement, fertilisers, electricity and hydrogen; transitional (reporting) phase from October 2023, definitive phase from 1 January 2026.
  • The US ended India’s GSP benefits in June 2019.
  • CAATSA — Countering America’s Adversaries Through Sanctions Act, 2017.
  • JCPOA — the 2015 Iran nuclear deal; the US withdrew in May 2018.
  • Taper tantrum — 2013; “Fragile Five” included India.
  • India’s strategic petroleum reserves: Visakhapatnam, Mangaluru, Padur.

For Mains

  • Dimensions: economic (exports, investment, inflation, currency), social (jobs, remittances, migrant welfare), strategic (security, sanctions, technology denial), environmental (climate trade measures, CBDR), diplomatic (strategic autonomy).
  • Keywords: green protectionism, weaponisation of interdependence, friend-shoring, de-risking, unilateral sanctions, spillover effects, policy space, resilience.
  • Value-addition: India’s position at the WTO and UNFCCC that unilateral carbon border measures violate the principle of common but differentiated responsibilities; the Chabahar exemption as an example of diplomacy shielding Indian interests; the trade agreements of 2022–2025 as a hedge against protectionism.

Common Traps

Trap #1: 'CBAM is a WTO rule'
CBAM is a unilateral EU measure, not a WTO agreement. Its WTO compatibility is contested; India has criticised it as a trade barrier.
Trap #2: 'India must follow US sanctions'
India treats only UN Security Council sanctions as binding. US sanctions affect India through secondary pressure on banks, insurers and firms — which is why India sought exemptions (Chabahar) rather than accepting the sanctions as law.
Trap #3: Policy vs politics
The syllabus says “policies and politics”. Elections, coups and instability (Afghanistan 2021, Myanmar 2021, Bangladesh 2024) count as much as formal policies like tariffs. Use both in Mains answers.

In the News

  • April 2025 — China restricts exports of several rare-earth elements and magnets.
  • August 2025 — US tariffs on Indian goods rise sharply.
  • September 2025 — US announces a large fee on new H-1B petitions.
  • January 2026 — EU CBAM enters its definitive phase. Track follow-ups in the monthly current affairs.

Practice

Prelims

UPSC Practice · Prelims GS I Qep-1

Which of the following sectors are covered under the European Union’s Carbon Border Adjustment Mechanism (CBAM)?

  1. Iron and steel
  2. Pharmaceuticals
  3. Aluminium
  4. Fertilisers

Select the correct answer using the code given below.

  1. A 1 and 2 only
  2. B 1, 3 and 4 only
  3. C 2 and 4 only
  4. D 1, 2, 3 and 4
Solution

CBAM covers iron and steel, aluminium, cement, fertilisers, electricity and hydrogen — carbon-intensive sectors where carbon leakage is a risk. Pharmaceuticals are not covered.

Answer: B

UPSC-pattern practice question
UPSC Practice · Prelims GS I Qep-2

The term “CAATSA”, often discussed in the context of India’s purchase of the S-400 system, refers to:

  1. A A US law under which sanctions may be imposed for significant transactions with Russia's defence sector
  2. B A WTO agreement on trade in military equipment
  3. C A UN Security Council resolution on Iran
  4. D A European Union regulation on dual-use exports
Solution

CAATSA — the Countering America’s Adversaries Through Sanctions Act (2017) — is a US domestic law. It allows sanctions on entities that make significant transactions with Russia’s defence or intelligence sectors, among others. It is not a WTO agreement, a UNSC resolution or an EU rule.

Answer: A

UPSC-pattern practice question
UPSC Practice · Prelims GS I Qep-3

Consider the following statements:

  1. A rise in US interest rates tends to cause portfolio capital outflows from emerging economies such as India.
  2. The “taper tantrum” of 2013 refers to market turbulence after the US Federal Reserve signalled a slowdown in its asset purchases.

Which of the statements given above is/are correct?

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Solution

Both are correct. Higher US rates make US assets more attractive, pulling portfolio money out of emerging markets and weakening their currencies. The 2013 taper tantrum followed the Fed’s signal that it would taper (slow) its bond purchases; India was grouped among the “Fragile Five”.

Answer: C

UPSC-pattern practice question

Mains

UPSC Practice · Mains GS II 15 marks · 250 words Qep-m1

Rising protectionism and climate-linked trade measures in developed countries pose a challenge to India’s export-led growth ambitions. Examine, and suggest how India should respond.

Solution

Introduction: Developed economies increasingly use tariffs, subsidies and environmental standards as trade tools. For India, which aims to raise exports of goods and services, this narrows market access just as global supply chains are being reorganised.

Body:

  • Protectionism: US Section 232 tariffs (2018); end of GSP (2019); higher tariffs from August 2025; industrial subsidies under the Inflation Reduction Act and CHIPS Act.
  • Climate-linked measures: EU CBAM (definitive phase 2026) on steel and aluminium; the EU Deforestation Regulation on agricultural commodities; risk to MSMEs that cannot measure or certify emissions.
  • India’s concerns: unilateralism; conflict with common but differentiated responsibilities; compliance costs; loss of competitiveness.
  • Response: trade agreements (UAE, Australia, EFTA, UK) and talks with the EU; a domestic carbon market (Carbon Credit Trading Scheme) so that carbon prices paid at home can be recognised; green steel and energy efficiency; MRV capacity for MSMEs; WTO and G20 advocacy; diversification to Africa, Latin America and the Gulf.

Conclusion: India cannot wish away these measures but can turn them into a push for cleaner, more competitive industry while defending equity in multilateral forums.

UPSC-pattern practice question

Quick Revision

PolicyOne-liner
CBAMEU; six sectors; reporting from October 2023, definitive from January 2026
GSPUS ended India’s benefits, June 2019
Section 232US steel and aluminium tariffs, March 2018
CAATSAUS law, 2017; S-400 risk
JCPOAUS exit May 2018; Iranian oil imports stopped May 2019; Chabahar exempted
Russia sanctionsG7 price cap December 2022; rupee vostro accounts July 2022
Taper tantrum2013; Fragile Five
Rare earthsChina’s export controls, April 2025
RemittancesIndia first to cross US$100 billion, 2022 (IOM)

Key Takeaways

Key Takeaways
  1. Foreign policies reach India through six channels: trade, money, people, sanctions, security and resources.
  2. Developed countries affect India mostly through markets, capital, technology and visas; developing countries mostly through security, instability, labour policies and resources.
  3. India’s responses combine diplomacy (exemptions, trade agreements), domestic resilience (reserves, PLI, critical minerals) and multilateral advocacy.
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International-Relations Effect of Policies of Other Countries — Practice Questions UPSC Prelims-pattern practice questions on foreign policies affecting India — GSP, … International-Relations Effect of Policies of Other Countries — Quick Revision One-page UPSC revision of foreign policies affecting India — trade measures, sanctions, …