International Economic Issues: Global Value Chains, Financial Crises and Global Taxation for RBI Grade B ESI
Last updated: 2026-11-11 · MockMentor
"International Economic Issues" closes the Globalization unit of the RBI Grade B Phase 2 Economic and Social Issues (ESI) syllabus. It is the broadest line in the unit, and examiners use it for questions on whatever is reshaping the world economy: supply chains after the pandemic, tariff wars, financial crises and their lessons, the taxation of multinational companies, debt distress in poor countries and the use of the dollar. This chapter groups these issues under trade, finance and taxation, and ends with the risks that matter most for India now.
In one line: the world economy is moving from rapid, efficiency-driven globalisation to a more fragmented, security-driven pattern, and India's challenge is to gain from supply chain shifts while protecting itself from financial shocks and protectionism.
Basic concepts
- Global Value Chain (GVC): the splitting of production of a good or service into stages carried out in different countries. An iPhone, for example, is designed in the US, uses parts from Japan, Korea and Taiwan and is assembled in China or India.
- Backward and forward participation: backward participation is the share of imported inputs in a country's exports; forward participation is the share of its exports used as inputs in other countries' exports.
- Reshoring, nearshoring and friend-shoring: moving production back home, to a nearby country, or to politically friendly countries.
- Financial contagion: the spread of a financial crisis from one country or market to others.
- Base Erosion and Profit Shifting (BEPS): tax planning by multinational companies that shifts profits to low-tax countries, eroding the tax base where the real activity takes place.
- Double Taxation Avoidance Agreement (DTAA): a treaty between two countries to ensure that the same income is not taxed in both.
- De-dollarisation: efforts to reduce reliance on the US dollar in trade, reserves and payments.
Why in News?
- The United States imposed broad "reciprocal" tariffs on most trading partners in 2025; the US Supreme Court struck them down in February 2026, but trade tensions and new tariffs under other laws continued.
- The WTO's 14th Ministerial Conference in Yaoundé ended in March 2026 without agreement on the e-commerce duty moratorium, fisheries subsidies or WTO reform.
- India's government bonds have been included in major global bond indices since 2024, while net foreign portfolio investment saw an outflow of US$16.4 billion in 2025-26.
Issues in international trade
1. Global value chains
GVCs grew fastest from the 1990s to the global financial crisis of 2008, helped by falling tariffs, cheaper transport, the internet and China's entry into the WTO in 2001. They account for a large share of world trade. Countries that joined GVCs, such as China, Vietnam and Mexico, grew exports and manufacturing jobs quickly.
India's participation has been lower than that of East Asian economies, especially in manufacturing. Its strengths have been in services (IT and business processes) and, more recently, in electronics assembly and pharmaceuticals. High tariffs on inputs, logistics costs, rigid labour laws and small firm size have kept India out of many manufacturing chains.
Since 2018, GVCs have been reshaped by the US-China trade war, the pandemic, the war in Ukraine and concerns about supply security in semiconductors, batteries and critical minerals. Firms are adopting a "China plus one" strategy, adding production in other countries. India has gained from this in mobile phones and electronics, helped by PLI schemes.
2. Trade and development
Trade can raise growth by letting countries specialise, gain economies of scale and access technology. The East Asian experience showed the power of export-led growth. But gains are not automatic: they depend on infrastructure, skills, institutions and how trade policy is sequenced. Many developing countries argue that the WTO's rules on subsidies, intellectual property and investment limit the policies that today's rich countries once used to industrialise, which economist Ha-Joon Chang described as "kicking away the ladder".
3. Rise of protectionism
Tariffs, export controls, subsidies for domestic industry (such as the US Inflation Reduction Act and the CHIPS Act) and the EU's Carbon Border Adjustment Mechanism have made trade more political. The WTO's inability to settle disputes since 2019 has weakened the rules-based system. For India, this means both risks (tariffs on its exports) and openings (firms looking for alternatives to China).
4. The pandemic and globalisation
COVID-19 caused the sharpest fall in world trade since the Great Depression in the first half of 2020, and then exposed weak points in supply chains, from medicines and masks to semiconductors and shipping containers. It accelerated digital trade, remote work and the use of digital payments. It also led governments to put more weight on resilience than on efficiency, through stockpiles, diversified suppliers and domestic production in critical sectors.
Issues in international finance
What is a financial crisis?
A financial crisis is a sharp fall in the value of financial assets or the failure of financial institutions, which disrupts lending and causes a fall in economic activity. Common types include banking crises, currency crises (a sudden fall in the exchange rate), sovereign debt crises and stock market crashes. Crises usually follow a period of rapid credit growth, rising asset prices and heavy borrowing in foreign currency.
The Asian financial crisis (1997 to 1998)
| Aspect | Detail |
|---|---|
| Where | Thailand first, then Indonesia, South Korea, Malaysia and the Philippines |
| Causes | Large short-term foreign borrowing in dollars, currencies pegged to the dollar, weak bank supervision, real estate bubbles and current account deficits |
| Trigger | Thailand's decision to float the baht in July 1997 after it could not defend its peg |
| Effects | Sharp currency falls, bank failures, deep recessions and IMF programmes with tough conditions |
| India | Largely unaffected because it had limited short-term foreign debt and capital controls; the crisis reinforced India's caution on capital account convertibility |
The global financial crisis (2007 to 2009)
| Aspect | Detail |
|---|---|
| Where it began | The US housing market and the subprime mortgage market |
| Causes | Loose lending to borrowers who could not repay, securitisation of these loans into complex products, high leverage in banks, weak regulation and rating agency failures |
| Trigger | The collapse of Lehman Brothers in September 2008 |
| Effects | A global recession in 2009, failures and bailouts of banks, and a collapse in world trade |
| Response | Very low interest rates, quantitative easing by central banks, large fiscal stimulus, the rise of the G20 leaders' summit, and the Basel III capital and liquidity rules |
| India | Growth slowed and foreign investors pulled money out, but Indian banks had little exposure to toxic assets. RBI cut rates and eased liquidity, and the government gave a fiscal stimulus. |
Lessons
- Rapid credit growth and asset bubbles must be checked early (macroprudential policy).
- Short-term foreign currency debt is dangerous.
- Banks need strong capital and liquidity buffers.
- Central banks and governments must act quickly and together in a crisis.
- Large foreign exchange reserves give emerging economies a cushion, which is why India built them up.
Current risks in global finance
- High public debt in many countries after the pandemic, and debt distress in several low-income countries. The G20 Common Framework for debt treatment has worked slowly.
- High US interest rates and a strong dollar, which pull capital out of emerging markets and weaken their currencies.
- Growth of non-bank finance, private credit and crypto-assets, which are less regulated.
- Use of financial sanctions, such as the freezing of Russia's reserves in 2022 and its removal from the SWIFT payments network, which has led some countries to seek alternatives to the dollar.
De-dollarisation
The US dollar is used in nearly 90% of foreign exchange transactions and makes up over half of global reserves. Some countries, including members of BRICS, have increased trade in local currencies and built alternative payment links. India has encouraged trade settlement in rupees and linked UPI with foreign payment systems, but has said it is not seeking to replace the dollar. The dollar's dominance rests on the depth of US financial markets and the rule of law, which no other currency can yet match.
Issues in international taxation
Base Erosion and Profit Shifting
Multinational companies can shift profits to low-tax countries through transfer pricing (charging related companies inflated prices), placing intellectual property in tax havens, and using debt to cut taxable profits. Digital companies can earn large revenues in a country without a physical presence there. The OECD and G20 launched the BEPS project in 2013, producing 15 action points (2015) covering issues such as harmful tax practices, treaty abuse, transfer pricing and country-by-country reporting. India has adopted many of them, including country-by-country reporting and the general anti-avoidance rule (GAAR).
The two-pillar global tax deal
In October 2021, over 130 countries in the OECD/G20 Inclusive Framework, including India, agreed on a two-pillar solution:
| Pillar | What it does | Status |
|---|---|---|
| Pillar One | Gives market countries the right to tax a share of the profits of the largest and most profitable multinationals (Amount A), even without a physical presence | The multilateral convention has not come into force; progress has stalled |
| Pillar Two | A global minimum effective corporate tax rate of 15% for multinationals with annual revenue above €750 million; if a company pays less, its home country or other countries can collect a "top-up tax" | In force in many countries, including EU members, from 2024; in 2025, the G7 agreed a "side-by-side" arrangement that exempts US-headquartered groups from some rules |
India's corporate tax rates (22% for existing companies, 15% for new manufacturing units under the 2019 cuts, plus surcharge and cess) are above the 15% minimum, so Pillar Two has limited direct effect on Indian companies. India removed its 2% equalisation levy on e-commerce supplies in 2024 and its 6% levy on online advertising from April 2025.
Double Taxation Avoidance Agreements
India has DTAAs with about 95 countries. They decide which country can tax which income, lower withholding taxes on dividends, interest and royalties, and provide for the exchange of tax information. Some treaties, such as those with Mauritius, Cyprus and Singapore, were used for "treaty shopping": routing investment through a country only to avoid tax. India revised these treaties from 2016 to tax capital gains at source, and in 2017 signed the Multilateral Instrument (MLI) under BEPS, which adds anti-abuse rules (the principal purpose test) to its tax treaties.
Issues that matter most for India now
| Issue | Why it matters |
|---|---|
| Tariffs and trade wars | Hit exports to the US; also push firms to diversify from China |
| Supply chain shifts | An opening to attract manufacturing in electronics, batteries and pharmaceuticals |
| Critical minerals | Dependence on China for rare earths, lithium and battery materials; India's National Critical Mineral Mission (2025) and partnerships such as the Minerals Security Partnership |
| Oil prices and West Asia | India imports most of its oil; conflicts raise prices and the import bill |
| Capital flows | Index inclusion brings bond inflows, but portfolio flows can reverse quickly |
| Climate finance | India needs large investment for its energy transition; developed countries' finance has fallen short |
| Debt distress in the neighbourhood | Crises in Sri Lanka (2022) and pressure on others; India gave about US$4 billion of support to Sri Lanka |
| Digital trade rules | Debates over data localisation, the e-commerce duty moratorium and taxation of digital services |
Way forward
- Join global value chains by cutting input tariffs, lowering logistics costs and using new trade agreements.
- Keep reserves strong, monitor short-term external debt and use macroprudential tools against financial risks.
- Diversify sources of energy and critical minerals.
- Push for reform of global institutions and a fair share of climate finance.
- Support the global tax deal while protecting India's right to tax digital activity that takes place in India.
Possible exam and interview questions
- What are global value chains? Why has India's participation in them been limited, and how can it be raised? (420 words)
- Compare the causes and effects of the Asian financial crisis and the global financial crisis. What lessons do they hold for India? (620 words)
- Explain the two-pillar solution to the taxation of multinational companies. What does it mean for India?
- Is the world moving towards de-dollarisation? What is India's position?
- Interview: How should India respond to rising protectionism in the world economy?
Related reading: international economic institutions, opening up and the balance of payments, and our post on why FPIs are pulling money out of India.
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