Trump's tariffs on India could spell trouble for automakers, may help Chennai

India’s auto sector is bracing itself for an impact as US President Donald Trump’s Trump Reciprocal Trade Act (TRTA) imposes new tariffs that could redefine trade.

The 27 per cent reciprocal tariffs could spell trouble for automakers like Tata Motors and its luxury arm Jaguar Land Rover (JLR), while Indian auto components manufacturers such as Bharat Forge and Motherson Group may emerge as unexpected beneficiaries. This comes at a time when global supply chains are already in flux.

One plus is that the US's higher tariffs on Chinese auto parts could redirect demand towards Indian manufacturers as buyers seek alternatives to Chinese imports.

Auto parts suppliers may benefit

While auto components are a minor part (1.8 per cent) of India’s total US exports according to data from CMIE and JM Financial, the US remains a major buyer (28 per cent) of Indian auto parts. The 1.8 per cent reflects auto components' small share in India’s overall exports to the US, which are dominated by telecom (20 per cent), pharmaceuticals (10 per cent), jewellery (16 per cent), and garments (10 per cent). However, the US remains a major market for India’s auto component industry, accounting for 28 per cent of its global exports, as per data from Crisil.

Indian suppliers like Bharat Forge and Motherson already hold a firm footing in the US market. Bharat Forge's export revenue for FY24 was Rs 4,928 crore; of which its US operations accounted for 17.4 per cent or Rs 856 crore of revenue. Motherson Group, which booked revenues of Rs 98,879 crore in FY24 has a higher 18 per cent exposure to the American market.

Also read: India faces selective trade headwinds from US tariff impact, apparel sector most hit

"The tariffs across the board are quite heavy in nature... Items like auto parts will see major tariff raises, but India seems protected from a competitive point of view, as tariffs on several South Asian economies that compete with India on these items are even higher," noted Bernstein analysts Venugopal Garre and Nikhil Arela.

This tariff shift aligns well with Chennai’s position as the "Detroit of the South", a moniker earned due to its concentration of top auto and auto parts manufacturers. The region is home to heavyweights like the TVS Group, Ashok Leyland, Royal Enfield, Hyundai, Renault-Nissan, BMW, and Daimler. With US buyers now looking beyond China, the auto component makers of this automotive hub could stand to gain.

A win for Chennai?

Adding another dimension to the trade battle, Trump’s policies heavily favour combustion engine vehicles over electric vehicles (EVs). His administration aims to reverse Joe Biden’s EV mandates, arguing that pushing EV adoption risks American jobs while increasing dependence on Chinese-made EV components. For Chennai’s auto industry, this shift could be a boon. The region is home to traditional combustion engine stalwarts like Ashok Leyland, Royal Enfield, and TVS Motor, all of whom could benefit from extended demand for petrol and diesel vehicles.

“Trump’s policies favour traditional auto manufacturing. This aligns well with India’s auto component ecosystem, which is deeply entrenched in the internal combustion engine supply chain,” Dhananjay Sinha, co-head of equities and head of research at Systematix Group told The Federal.

Car makers could take a hit

On the flip side, India’s carmakers could take a hit. The 25 per cent US tariff on imported vehicles is expected to dent sales of Jaguar Land Rover, which counts the US as an important client. In the third quarter of FY25, JLR's North American sales increased by 44 per cent year-on-year, reflecting strong demand in the region.

According to Hitesh Suvarna, equity analyst at JM Financial, the situation remains fluid.

Also read: Why retaliatory tariffs on US do not make sense for India

“All auto imports would be subject to 25 per cent tariffs with an aim to move back auto production to the US. Consumers would be eligible for interest rate reductions on locally-produced automobiles. This move, while beneficial for the US, puts pressure on global trade practices, as partners now re-evaluate their supply chains,” Suvarna said.

For other India-based auto original equipment manufacturers (OEMs), the direct impact of these tariffs may be minimal. After the exit of General Motors and Ford, no major US automaker maintains an Indian production base for exporting vehicles back to the US.

Discrepancy in tariff calculations

Trade between India and the US in the auto sector has historically been imbalanced. India exported $2.8 billion worth of automobiles and bike parts to the US in 2024, while American exports to India were just $0.42 billion. However, tariffs tell a different story. JM Financial says the weighted average tariff faced by US exports to India stands at 24.1 per cent, while Indian auto exports to the US face just 1.1 per cent in duties. This results in a tariff differential of 23.1 per cent – a key reason why the Trump administration has opted for reciprocal tariffs, claiming unfair trade practices. But analysts say the discrepancy in tariff calculations stems from the inclusion of non-tariff measures, leading to significantly inflated figures that do not reflect the actual tariff gap between the two countries.

"The reference tariff rate used while calculating the tariffs is a rather complicated number that appears to include non-tariff measures like domestic taxes and currency manipulation. This leads the US to calculate 52 per cent tariffs imposed by India on US goods (far higher than the actual tariff which is around 10 per cent), and halving this number to come up with 26 per cent tariffs on India," said Garre and Arela.

The inclusion of India's domestic taxes, the analysts termed as "strange" as these taxes apply to all goods sold in India, not just imports.

Also read: Trump’s tariffs: These Indian sectors may be worst hit but experts spot ‘gains’ too

Analysts say the US methodology inflates India's tariff rates by factoring in non-tariff measures, leading to a stark mismatch between perceived and actual trade barriers. JM Financial analyst Suvarna adds that while the US sets India’s reciprocal tariff at 26 per cent based on a derived 52 per cent rate, the real tariff gap is much smaller – just 4.9 per cent when trade barriers are considered. This disparity underscores the complexities of global trade and the likelihood of further negotiations.

India’s preemptive moves

Anticipating trade tensions, India had already taken proactive steps to ease potential friction. In March, New Delhi signed the Terms of Reference for a Bilateral Trade Agreement, an initiative reportedly fast-tracked by the Prime Minister’s Office. Additionally, India preemptively reduced import duties on key American products, including "high-end motorcycles, agricultural goods, and bourbon whiskey", as part of its Budget announcements. Despite the tariffs, analysts suggest that India is unlikely to retaliate aggressively.

“Unlike some other countries, we don’t see India implementing too many retaliatory measures,” noted Garre. This indicates that India may prioritise diplomacy over confrontation in the months ahead.

History may repeat itself

As the tariff war escalates, some experts warn that history may be repeating itself and the US could be heading for another recession. The TRTA is built on a strict "eye for an eye" trade policy.

“The tariff hikes – 60 per cent for China and 20-25 per cent for other nations – are eerily similar to the 'Smoot-Hawley Tariff Act of 1930', which worsened the Great Depression by triggering a global trade collapse,” cautioned Sinha.

Also read: Sensex tanks over 370 points in early trade on Trump’s tariffs

The Smoot-Hawley Act, intended to protect American industries, instead fuelled retaliatory measures worldwide, shrinking trade flows and deepening economic turmoil – a historical lesson today’s policymakers cannot ignore, say analysts.

Wait-and-watch situation

While India could benefit from China getting taxed higher, still the loss of competitiveness in US markets is a big concern. Higher prices on Indian exports could push American buyers toward Mexico and Canada, which benefit from duty-free access under the United States-Mexico-Canada Agreement (USMCA). With these two countries already supplying 46 per cent of all US auto component imports, they stand to gain the most if US buyers look for alternative suppliers.

In 2024, Mexico exported $109 billion worth of auto parts to the US, compared to India's $2.8 billion, highlighting its dominance in North American supply chains. Mexico is the fourth-largest auto parts producer in the world and is deeply integrated with US automakers, supplying critical components to plants across Michigan, Texas, and other manufacturing hubs. By contrast, India – especially Chennai – has a growing but comparatively smaller footprint. Yet, Mexico’s capacity constraints may limit its ability to fully absorb diverted demand from China, caution analysts.

Also read: LIVE: Senate rebukes Trump tariffs; China vows to retaliate as markets nosedive

Another issue is that India’s share of auto component exports to the US is significant at 28 per cent. Within this, powertrain parts, transmissions, engines, and electricals account for 40 per cent, 29 per cent, 13 per cent and 2 per cent, respectively, as per data from Crisil Intelligence. Cumulatively, they account for 84 per cent of all automotive component exports from India to the US, said Crisil, which has pegged the overall effect of the Trump tariffs on auto as "slightly negative."

It is also a wait-and-watch situation for auto parts makers in Chennai as the new tariffs will be announced on a date no later than May 3, 2025, on components such as engines, transmissions, powertrain parts and electricals.

"We await the detailed list of affected auto components and hope that the US administration will consider the concerns of Indian auto component manufacturers," said Ayush Lohia, CEO, Zuperia Auto.