Increased U.S. tariffs on vehicles and auto parts may have minimal effect on the Indian market
In a significant move, the United States imposed a 25% tariff on imports of passenger vehicles, light trucks, and certain automobile parts from India, effective from May 3, 2025. This decision, announced by President Donald Trump, is expected to impact nearly $2.9 billion in annual Indian exports to the U.S., making Indian auto components significantly less competitive in the American market.
The tariffs, which were notified to the World Trade Organization (WTO), could lead to reduced demand, lost market share, and potential long-term disruption for Indian exporters. A 25% tariff raises the cost of Indian auto parts for U.S. buyers, which could result in reduced demand and potential losses for Indian manufacturers. They may need to absorb higher costs, reduce their profit margins, or lose business to competitors from countries not subject to such tariffs.
India has responded by notifying the WTO of its intention to impose retaliatory tariffs on U.S. products, aiming to suspend concessions on approximately $2.9 billion in U.S. exports to India. This tit-for-tat approach signals a potential escalation in trade tensions, which could further complicate bilateral trade and ongoing negotiations for a broader trade agreement.
The dispute is unfolding alongside ongoing India-U.S. trade deal negotiations, with both sides taking a firm stance. The U.S. defends its tariffs as a safeguard measure justified under national security provisions, while India maintains they lack legal foundation. The impact of these tariffs on automobile exports from India will be insignificant, as the U.S. accounts for less than 1% of India's automobile exports. However, the tariffs will have a limited impact on India's $2.2 billion exports of auto components, as the tariff is applicable to other suppliers like Mexico and China as well.
The tariffs may prompt a reconfiguration of global supply chains, with U.S. importers shifting to alternative suppliers outside India. Medium to long-term, Indian auto component manufacturers may be forced to diversify their export markets or invest in local U.S. production to circumvent tariffs. Ajay Srivastava, founder of GTRI, warns that any similar misstep to Australia's reduction of import tariffs in the late 1980s could potentially collapse the Indian auto sector, given its significant contribution to the country's manufacturing GDP.
The U.S. plans to impose tariffs on auto components in May or later. The 25% tariffs on auto components apply across the board, providing a level-playing field for all exporting countries. It will not be feasible for the U.S. to immediately shift auto component makers into the country, as it would require years and billions of dollars. Lowering of duties as part of the Bilateral Trade Agreement between the U.S. and India could be counterproductive for the Indian auto industry, according to GTRI.
In conclusion, the 25% U.S. tariff on Indian auto components is a substantial trade barrier, likely to reduce India’s exports to the U.S., increase costs for Indian manufacturers, and potentially trigger a wider trade dispute. The ongoing WTO proceedings highlight the risk of a prolonged and escalating trade conflict, with significant implications for both countries’ automotive industries and broader economic relations.
- The tariffs on auto components will affect Indian manufacturers, as a 25% increase in cost could lead to reduced demand and potential losses.
- India's response to the tariffs involves notifying the WTO of its intention to impose retaliatory tariffs on U.S. products, aiming to suspend concessions on approximately $2.9 billion in U.S. exports.
- The tariffs may force Indian auto component manufacturers to diversify their export markets or invest in local U.S. production to circumvent tariffs.
- Ajay Srivastava, from GTRI, warns that a misstep similar to Australia's reduction of import tariffs in the late 1980s could potentially collapse the Indian auto sector due to its significant contribution to the country's manufacturing GDP.
