Indian auto companies to feel the pinch as Mexico imposes 50% tariffs

Official trade data showed that India’s vehicle and parts exports to the US were the largest items of exports, comprising nearly $1 billion between April and September. Other top components were electric machinery, nuclear reactors and organic chemicals. Meanwhile, total goods exports to Mexico stood at $5.3 billion during the last fiscal.

The Society of Indian Automobile Manufacturers, an industry group that counts VW, Hyundai and Suzuki among its members, had urged India’s commerce ministry in November to press Mexico to “maintain status quo” on tariffs for vehicles shipped from India, according to a copy of the letter, Reuters reported.

“The proposed tariff hike is expected to have a direct impact on Indian automobile exports to Mexico…we seek Government of India’s support to kindly engage with the Mexican government,” the industry body said in its letter to the commerce ministry before the tariff was finalised as per Reuters.

The tariff hike could force Indian automakers to reevaluate strategies reliant on Mexico, which is India’s third-largest car export market after South Africa and Saudi Arabia. Car manufacturers in India have relied on exports to ensure production is maximised and there are economies of scale. Some also rely on exports to cushion slower domestic sales or improve margins – a business strategy that may need to be redrawn.

In meetings with government officials last month, car makers said the majority of shipments from India to Mexico are compact cars with an engine size of less than one litre, which are designed for the Mexican market and not for further export to the U.S., one of the sources said.

“Indian-origin vehicles are not a threat to Mexican local industry as Indian vehicles do not cater to high-end segments manufactured by Mexico for serving the North American market,” the industry group said in its letter.

Car makers also told Indian officials that of the 1.5 million passenger vehicles sold in Mexico each year, about two-thirds are imported, and India’s shipments make up “just about 6.7 per cent” of the total sales, according to the first source and the letter.

The Mexican Senate passed the bill with 76 votes in favour, 5 against and 35 abstentions. The approved bill is softer than one that stalled in the lower house this autumn, with tariffs on about 1,400 different product lines – mostly textiles, apparel, steel, auto parts, plastics and footwear – and reduced duties on roughly two-thirds of them compared with the original proposal.

Analysts and the private sector say the move is aimed at appeasing the U.S. ahead of the next review of the United States-Mexico-Canada trade agreement (USMCA), and that it is also intended to generate $3.76 billion in additional revenue next year as Mexico seeks to reduce its fiscal deficit.

“On the one hand, it protects certain local productive sectors that are at a disadvantage with respect to Chinese products. It also protects jobs,” said Mario Vazquez, a senator for the opposition PAN party.

But, also, “the tariff is an additional tax that citizens pay when they buy a product. And these are resources that go to the state. We would need to know what they are going to be used for. Hopefully, production chains in the country will be strengthened, Vazquez said.

Emmanuel Reyes, a senator from the ruling Morena party, defended the measure.

“These adjustments will boost Mexican products in global supply chains and protect jobs in key sectors,” said Reyes, who is chairman of the Senate Economy Committee.

“This is not merely a revenue-raising tool, but rather a means of guiding economic and trade policy in the interest of general welfare,” he said.

Mexico had said in September that it would raise its tariff on automobiles and other goods from China and other Asian countries. The United States has been pushing countries in Latin America to limit their economic ties with China, with which it competes for influence in the region.

With Reuters inputs