Donald Trump's tariffs: Do the US trade tariffs have a silver lining for India’s automotive sector?

By Saurabh Agarwal and Parul Nagpal

The genesis of tariffs imposed by the United States can be traced back to the early years of the nation, as economic policy was a crucial aspect of its development. The first tariff law was enacted in 1789, primarily to generate revenue for the federal government and protect nascent American industries from foreign competition. Over the years, tariffs became a tool for economic strategy, influencing trade relations and domestic manufacturing.

In recent years, tariffs have been used as a tool in trade negotiations, particularly during the trade tensions with China, where the U.S. imposed tariffs on a wide range of goods to address trade imbalances and intellectual property concerns. This evolution reflects the complex interplay between domestic economic interests and international trade dynamics.

Trade Tariffs: Challenge or Opportunity?

The U.S. aims to regulate foreign competition and encourage domestic manufacturing with these tariffs; and the impact needs to be seen separately for each sector. In the context of automotive sector, for India, these tariffs might also present opportunities.

The United States remains one of the largest automotive importers globally, with $243.5 billion worth of vehicles and $197.2 billion in auto parts imported in 2024. As global trade policies and tariffs evolve, India’s position in this market is undergoing significant shifts. In FY 2023-24, India’s automotive exports reached $21.20 billion, and with strategic trade negotiations, its market share could further expand. Currently, the U.S. imports vehicles from major global players such as China, Germany, Mexico, and others, which account for a substantial portion of both mass-market and premium vehicles in the U.S. market. Below is a snapshot of key export figures from these countries to US:


As the U.S. imposes higher tariffs on imported vehicles, manufacturers from above countries may find it increasingly difficult to compete in the budget segment and consumer demand in the U.S. may also take a hit. This creates a gap that Indian manufacturers can fill, especially with their focus on cost-effective production.

The U.S. market is witnessing a growing demand for electric vehicles, driven by environmental concerns and government incentives. India has heavily invested in Electric Vehicle (EV) technology and infrastructure, supported by government initiatives to promote electric mobility. With a skilled labor pool in engineering and manufacturing, India is well-positioned to produce high-quality, cost-competitive EVs. Government policies, including subsidies for manufacturers, further boost the competitiveness of Indian EVs in the U.S. market.

When examining the automotive components industry in India, it’s essential to recognize the country’s expanding role as a key exporter in this sector. India has become a prominent supplier of automotive components to global markets, with a particularly strong focus on North America and Europe. Over the past few years, these regions have served as major destinations for Indian exports, especially in areas like spare parts, engine components, and other critical automotive supplies. To provide a clearer picture of India’s automotive component export performance, we’ve included key statistics in the snapshot below:


While India stands to benefit from potential increases in vehicle exports to the U.S., however, the market may see a decline in the demand of auto components in the U.S. due to higher tariffs in a short period. Further, there may be a decline in vehicle exports from other major automotive producers, such as Germany and Japan to U.S. These countries are significant markets for Indian automotive parts, and any reduction in vehicle exports from them could lead to a decreased demand for the components that India supplies to these automakers in the short term.

That said, with the U.S. imposing tariffs on its major component exporters, India now has a unique opportunity to expand its market share. However, this will require India’s automotive sector to adopt a strategic approach focused on both safeguarding and increasing its component exports. Effective supply chain management will be crucial in capturing growing opportunities not just in the U.S. market, but also in other North American countries like Mexico and Canada. By optimizing these supply chains and capitalizing on the shifting dynamics, India can position itself as a strong and reliable player in the global automotive market.

India is currently negotiating its first Bilateral Trade Agreements (BTAs) with the U.S., expected to be finalized by 2025, with an aim to ease trade restrictions, and may potentially lower tariffs on Indian automotive exports among others. Further, the Indian Government may enhance the support given to the manufacturers in India in the form of Production-Linked Incentive (PLI) scheme by incorporating more auto components, allowing new players to participate, and extending the scheme by two years and expedite implementation of Scheme to Promote Manufacturing of Electric Passenger Cars in India (SMEC). Such changes would help enhance India's competitive edge, making its auto components and vehicles more attractive to U.S. importers.

Conclusion

In summary, India's automotive industry stands at a pivotal moment, with the potential to expand significantly in the U.S. budget car market due to rising tariffs on foreign vehicles. But trade policies and tariff adjustments will play a decisive role in shaping its future and the success of this endeavour will depend on careful planning, investment, and adaptability to the evolving market landscape. Therefore, to strengthen its position in the U.S. market, India must focus on Quality and Compliance with stringent U.S. safety and environmental regulations, continuous technology upgradation, diversification beyond traditional components to EV part. Also, the continued Government support is an essential factor that would enable India to capitalize on this opportunity while ensuring the sustainability of its automotive component industry. Nevertheless, to analyse the true impact of these tariffs on automotive sector, it is essential for India to remain agile in response to the situation and continuously monitor the actions taken by other countries particularly by way of new Free Trade Agreements (FTAs) and counter-tariff measures in the coming days.

(Saurabh Agarwal is Partner & Automotive Tax Leader and Parul Nagpal is Tax Partner at EY India)
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