The Trump administration’s imposition of 27% reciprocal tariff would take a heavy toll shipments of engineering goods to the US. The impact will be felt across industrial and electrical machinery, automobiles, auto component and aircrafts and related products, among others, the Engineering Export Promotion Council (EEPC), said.
Iron and steel, as well as products made from iron and steel, aluminium, copper, zinc, and lead, also fall under the engineering goods category. The Trump administration imposed a 25% tariff on steel and aluminium products through a proclamation in February. However, no changes have been made to the tariff structure for these products during the sweeping, across-the-board realignment announced last evening.
“Our annual exports to the US are worth around $20 bn. The realignment of tariffs is expected to result in a reduction of around 20-25% in our exports in the first year. The exact impact, however, cannot be determined at present, as it will depend on the American market’s ability to absorb these duties,” said EEPC Chairman Pankaj Chadha.
A tariff is essentially a tax on local people, experts say, adding that the upward revision of tariffs will make products more expensive for the American people, and hence, they will buy less, impacting exporting nations. Of the $106 billion in Indian engineering exports during the April-February period of the current fiscal year, ferrous and non-ferrous metals contributed around $28 billion, with the rest coming from sectors including some non-ferrous metals, such as lead, zinc, and copper, which would now attract a 27% tax, compared to near-zero earlier.
During the April-February period of the current fiscal year, the US accounted for approximately 16% of India’s total engineering exports. Exports to the US during the period increased by 8.3%, compared to an overall growth rate of 8%. In February, engineering goods exports to the US increased 5.8% year-on-year to $1.66 billion, while the total kitty declined by 8.6%. The US remained the top destination for Indian engineering goods exports during the month.
Industrial machinery, iron and steel, non-ferrous metals, automobile’s auto components, and electrical machinery are the top five engineering goods products India exports. In the US market, it faces competition primarily from Mexico, Canada, China and Japan for these products. While President Trump’s sweeping reciprocal tariffs, in varying degrees, impact these competing nations as well, experts say that the increased tariffs will lower the purchasing power of American citizens, which will, in turn, hamper exports. However, some feel there would be no immediate impact.
“Indian engineering and capital goods exports to the US account for approximately 25% of India’s total exports in this sector. While tariffs have been imposed on the import of Indian capital goods by US, the impact is likely to be neutral as similar/higher tariffs have been imposed on competing countries like Korea, Japan, Vietnam, China, Taiwan etc, thereby not impacting the competitive position of Indian exports materially,” said Ankit Jain, Vice President and Sector Head, Corporate Ratings, ICRA.
Vinod Karwa, Chair of the MSME Committee, PHDCCI, said, “The new tariff imposed by the USA under the Trump Administration will have no immediate adverse effect on MSME engineering and auto component manufacturers, as India is a low-cost country. American companies are continuously outsourcing their production due to their own high manufacturing cost, leading to non-competitiveness in the international market. In order to reset up these production lines, it will take a minimum of two years. Even after that, they will still be unable to match India in terms of both competitiveness and the availability of a highly skilled workforce.
EEPC’s Chadha said the engineering goods manufacturing sector will be scouting opportunities in the EU, Latin America, and Central America to compensate for the loss in the US market, adding that EEPC was anticipating trade diversions from countries such as China, Japan, South Korea, and Southeast Asian nations.
“Going forward, Indian engineering exporters will need to diversify their export markets to minimize the impact of higher US tariffs. As India and the US engage in negotiating a bilateral trade agreement (BTA), we hope it will mitigate the impact of the proposed 26% tariff on Indian goods,” Chadha said.