A Double Edged Sword

Justin T. Russell
Jul 17
9 min read

Updated: Jul 20

Secondary Tariffs on China and India's Oil Trade with Russia.

Let us begin with the obvious…secondary tariffs are sanctions imposed by one country on third-party countries that continue to engage in trade with a targeted nation. In this case, President Trump and Congress are looking at Russia's oil trade and applying secondary tariffs on China and India for their continued purchases. It is clear that this move would have profound and multifaceted economic consequences for all parties involved, and for the global economy at large.

For China and India, the immediate impact would be a significant disruption to their energy security and economic stability. Both nations are massive energy consumers with a substantial reliance on imported oil to fuel their industrial growth and meet domestic demand. Russia has become a crucial supplier of discounted crude since the imposition of Western sanctions, offering an economically attractive alternative to traditional sources.

● Increased Costs and Inflation: If forced to cease or drastically reduce oil imports from Russia, China and India would have to seek alternative suppliers. This would likely mean purchasing oil at higher market prices, increasing their import bills significantly. These increased costs would then cascade through their economies, leading to higher inflation as production and transportation costs rise. For developing economies like India, where energy prices directly impact the cost of living for a vast population, this could lead to widespread economic hardship and social unrest.

● Supply Chain Disruptions: The global oil market operates on a delicate balance of supply and demand. Rerouting massive volumes of oil from Russia to other buyers, and China and India finding new large-scale suppliers, would strain existing logistics and shipping infrastructure. This could lead to bottlenecks, higher freight costs, and delays, impacting not just oil but a wide range of goods dependent on efficient global supply chains. Industries like refining, manufacturing, and textiles in both China and India, which rely on Russian crude and raw materials, would face severe margin pressures and potential output reductions.

● Reduced Competitiveness: Higher energy costs would make Chinese and Indian exports less competitive on the global market. As their domestic production becomes more expensive, their goods would face higher prices internationally, potentially leading to a decline in export volumes. Given that both nations are major global exporters, this would have significant implications for global trade flows and their respective GDP growth. For instance, China's GDP could contract if its electronics and textiles sectors face reduced access to critical markets due to these tariffs.

● Investment Risks: The uncertainty generated by secondary tariffs creates a volatile investment landscape. Companies with significant exposure to Russian energy inputs or those reliant on unimpeded trade with China and India would face heightened risks. Investors would need to recalibrate their portfolios, seeking out less exposed sectors or those with diversified supply chains. This could lead to capital flight or a reluctance to invest in these crucial emerging markets, further dampening economic prospects.

● Blowback on Sanctioning Countries: The notion that secondary tariffs only harm the targeted nations is often flawed. If China and India's economies suffer, global demand for goods and services would inevitably decline, impacting the economies of the sanctioning countries as well. Furthermore, retaliatory measures from China and India, such as restrictions on imports from the sanctioning nation or targeting specific industries, could inflict significant economic pain. The interconnectedness of the global economy means that punitive trade actions rarely have isolated effects.

BRICS By BRICS: Strengthening The Alliance Through Alternative Mechanisms and De-dollarization

Ironically, the imposition of secondary tariffs by the United States and its allies could inadvertently strengthen the BRICS alliance (Brazil, Russia, India, China, South Africa, and its newly expanded members like Saudi Arabia, UAE, Iran, Egypt, and Ethiopia) by accelerating their efforts to create alternative trade mechanisms and reduce reliance on the US dollar.

● Accelerated De-dollarization: The weaponization of the dollar through sanctions and tariffs serves as a powerful impetus for countries to seek alternatives. China, Russia, and India, in particular, have been at the forefront of exploring mechanisms to conduct trade in local currencies, thereby bypassing the dollar-denominated global financial system. Secondary tariffs would intensify these efforts, pushing them to develop more robust and efficient payment systems like China's Cross-Border Interbank Payment System (CIPS) and exploring rupee-ruble trade arrangements. The New Development Bank (NDB), the BRICS' financial institution, has already expanded its local currency lending, with approximately 25% of its portfolio already denominated in BRICS currencies, a figure projected to rise to 30% by 2026. This reduces foreign exchange risk and supports long-term sustainable projects.

● Development of Alternative Trade Routes and Infrastructure: When existing trade routes become vulnerable to political interference, nations are compelled to invest in and utilize alternative pathways. Secondary tariffs on oil would incentivize the BRICS nations to further develop land-based trade corridors, expand maritime routes that circumvent traditional choke points, and invest in logistical infrastructure that supports trade in non-dollar currencies. This could include further development of projects such as the International North-South Transport Corridor (INSTC), which connects India, Iran, Russia, and other Central Asian countries.

● Increased Intra-BRICS Trade: Facing external pressure, BRICS members would naturally increase their trade among themselves. This fosters greater economic interdependence within the bloc, making it more resilient to external pressures. As seen with India's surging imports of discounted Russian oil, economic pragmatism often trumps geopolitical alignment when vital national interests are at stake. This increased intra-bloc trade can also lead to the development of specialized supply chains within the BRICS framework, further reducing reliance on external partners.

● Enhanced Financial Cooperation: The need to circumvent dollar-based financial systems would push BRICS nations to strengthen their financial cooperation. This could involve expanding currency swap agreements, developing a common digital currency for trade settlement, or establishing new financial instruments that operate outside the traditional Western-dominated financial architecture. While challenges remain in achieving full financial integration, the threat of secondary sanctions provides a strong motivation to overcome these hurdles.

● Political Solidification: Economic pressure can often backfire by fostering unity among the targeted entities. If China and India perceive secondary tariffs as an attempt to dictate their foreign policy and undermine their sovereignty, it could solidify their resolve to cooperate more closely with Russia and other BRICS members. This shared experience of being targeted could strengthen political ties, leading to a more cohesive and assertive BRICS alliance on the global stage.

Is the United States Willing to ‘Roll The Dice’ on Secondary Tariffs?

Let’s be clear…the aggressive use of secondary tariffs and the broader weaponization of trade by a dominant power sends a clear signal to the rest of the world: economic dependencies can be exploited for geopolitical leverage. This has far-reaching implications for global trade relationships and is already prompting countries to diversify their partnerships and re-evaluate their reliance on single markets or currencies.

● Erosion of Trust in the Rules-Based Order: The frequent imposition of unilateral sanctions and tariffs, bypassing multilateral institutions like the WTO, erodes trust in the existing international rules-based trading system. Countries that once benefited from globalization and open markets may begin to view these systems as tools of coercion rather than frameworks for fair exchange. This can lead to a fragmentation of global trade into regional blocs or spheres of influence, with implications for economic efficiency and global cooperation.

● "De-risking" and Supply Chain Realignment: Businesses and governments worldwide are increasingly aware of the vulnerabilities inherent in highly concentrated supply chains. The threat of secondary sanctions incentivizes "de-risking" strategies, where companies diversify their sourcing, manufacturing, and sales operations across multiple countries. This could mean a shift away from over-reliance on China as the "world's factory" and an increase in manufacturing in other Asian nations, Latin America, or even reshoring. This trend, often referred to as "friendshoring" or "ally-shoring," prioritizes geopolitical alignment over pure economic efficiency, potentially leading to higher costs for consumers.

● The Question of Other Nations: The core question emerges: "What is to stop countries like Australia, New Zealand, Indonesia, and others from growing their trade portfolio with China, India, and Russia when the United States is making it so difficult to maintain existing relationships or pursue new ones?" These nations operate on economic realities and national interests.

○ Australia and New Zealand: While close allies of the US, their economies are heavily reliant on trade with China. If the US imposes tariffs that disrupt this trade, it forces them to make difficult choices. They may seek to expand trade in areas not targeted by sanctions or explore new avenues with BRICS nations to offset potential losses. Their pragmatic approach to trade often involves balancing geopolitical alliances with economic imperatives.

○ Indonesia: A rapidly growing economy in Southeast Asia, Indonesia has significant trade ties with China and is keen to expand its energy and resource exports. If the US-led trade policies create hurdles, Indonesia might deepen its economic engagement with BRICS members, especially as it seeks investment in infrastructure and economic development.

○ Southeast Asian Nations: The broader Southeast Asian region, including Vietnam, Malaysia, and Thailand, all have robust trade relationships with both China and Western economies. They are acutely aware of the dangers of being caught in the crossfire of trade wars. Their natural inclination would be to diversify their economic partners and maintain a degree of neutrality to protect their economic interests, rather than align exclusively with one power bloc. They will prioritize stable access to markets and resources.

● Rise of Regional Trade Blocs: The weaponization of trade can accelerate the formation and strengthening of regional trade agreements that exclude countries perceived as unreliable partners. This could lead to a more fragmented global trading system, where trade flows increasingly within specific blocs rather than globally.

Economic Carrots or Sticks in a Dangerous World

While economic sanctions and tariffs are often presented as a non-military alternative to addressing international conflicts, their effectiveness in achieving desired political outcomes is highly debatable, and their unintended consequences can be severe. There is a strong argument that a diplomatic solution to the war in Ukraine, and other international disputes, is a far more effective and sustainable path.

● Limited Efficacy of Sanctions: Historical evidence suggests that unilateral economic sanctions, especially against large and resilient economies, often fail to achieve their stated objectives. They can be costly for the imposing countries and often inflict greater hardship on the general population of the targeted nation rather than compelling a change in regime behavior. Russia's economy, for instance, has shown resilience despite widespread Western sanctions, partly due to its ability to pivot its energy exports to Asia. The idea that sanctions alone can force a nation to alter its fundamental foreign policy objectives is often a miscalculation.

● Unintended Consequences and Humanitarian Costs: Sanctions, particularly comprehensive ones, can have severe humanitarian consequences, exacerbating poverty and instability in the targeted countries. This can fuel resentment and anti-Western sentiment, making future diplomatic engagement even more challenging. The goal of sanctions is to compel behavioral change, but if they lead to increased suffering and a hardening of resolve, they become counterproductive.

● The Importance of Dialogue and Negotiation: A lasting resolution to complex international conflicts like the war in Ukraine necessitates genuine diplomatic engagement, negotiation, and compromise. Economic measures, while sometimes part of a broader strategy, should primarily serve to create leverage for diplomacy, not replace it. Focusing solely on punitive economic actions can harden positions, close off communication channels, and prolong conflicts.

● Building Sustainable Peace: Diplomatic solutions, even if they are difficult and require concessions from all sides, are essential for building sustainable peace and stability. They allow for the addressing of root causes of conflict, the establishment of trust, and the creation of frameworks for future cooperation. Punitive economic measures, on the other hand, can create long-term animosity and hinder post-conflict reconciliation and reconstruction efforts.

● Reinforcing International Law and Norms: While sanctions are a tool within international law, their unilateral application can undermine the very principles of international cooperation and multilateralism they purport to uphold. A diplomatic approach, involving international organizations and adherence to established legal frameworks, reinforces the importance of international law and norms, which is crucial for global governance and stability.

The Bottom Line…

It’s very simple…the pursuit of secondary tariffs against China and India for their oil trade with Russia represents a high-stakes gamble with potentially severe economic repercussions and geopolitical realignments. While intended to isolate Russia, such actions risk alienating key global economic players, accelerating de-dollarization, and solidifying alternative power blocs like BRICS. The interconnectedness of the global economy means that punitive trade measures rarely have isolated impacts; they often generate ripple effects that rebound on the initiators and push other nations to seek greater economic autonomy and diversified partnerships.

Ultimately, navigating complex international conflicts demands a nuanced approach that prioritizes diplomacy, dialogue, and a commitment to a stable, predictable global trading environment. Relying heavily on the weaponization of trade, especially through secondary tariffs, has historically proven to be a blunt instrument that often fails to achieve its objectives and instead fosters resentment, fragmentation, and the emergence of new geopolitical fault lines. The long-term stability and prosperity of the global community depend on fostering cooperation rather than escalating economic confrontation.