India May Export More Auto Parts as a Result of Trump's Tariff Bombshell

India is unlikely to suffer much from the 25% tax on automobiles and auto parts. MEMA, the Motor Equipment Manufacturers Association of the USA, stated that auto parts tariffs will go into force "no later than May 3, 2025". It further stated that automobile tariffs would go into effect on April 3. To begin with, India's overall vehicle exports to the US, at about $10 million, are utterly inconsequential and essentially equal to a rounding error in Japan's automobile exports to the US. With $2.2 billion in exports to the US, or about 30% of its total vehicle component exports, India is a more formidable competitor in the auto parts market. In contrast, this represents less than 3% of all vehicle parts imported into the United States. Although this is not Donald Trump's primary aim, it might end up as collateral damage in his attack on the major US component exporters, including China, Mexico, and Canada.

How Tariff Hike is Changing the Business Dynamics?

Since the 25% tariff is administered consistently to all nations, the impact on each country's competitive advantage is equal. Because of this, Indian auto parts manufacturers don't worry about their rivals undercutting them. They are afraid that importers will put pressure on them to cover at least some of the expense, hence reducing profitability. Some businesses have already begun a cost-cutting initiative in anticipation of this eventuality. Local US producers employing this 25% shield to establish production in the US and outbid imports is the other potential danger. This is likely to hurt high-cost nations like Canada, Japan, and Germany, who would totally lose out to American producers. But when it comes to low-cost countries like China, Vietnam, India, and several East European countries, the situation is different. It would be difficult for US manufacturers to match the costs of components from low-cost countries, even with the 25% advantage.

India’s Labour Cost Advantage

The rationale is that the labour arbitrage cost advantage that low-cost nations enjoy is measured in orders of magnitude rather than percentages. A typical US worker would earn at least $4,000 per month. On the other side, an auto component worker in India would make between INR 30,000 and INR 40,000. This corresponds to a labour cost advantage of 10:1, while the wage advantage is counterbalanced by increased US productivity. The range of this could be 2:1 to 3:1. This isn't because American labourers work three times as fast as Indian labourers. Automation is a major contributor to the productivity gap, while human productivity resulting from physical attributes and machine speed are also important factors. As a result, man-machine ratios in India may be 1:1, while in the US they may be 1:2 or 1:3.

The fact that US manufacturers would be hesitant to set up capacity to take on Indian products because they are unsure of how far they can decrease prices. This is another aspect that should reassure Indian exporters. This is on top of the reality that these inexpensive imports only make up a small portion of the market. Local producers would start by focusing on the low-hanging fruit, which would be significant amounts of expensive imports from expensive countries.