Mint Primer: Can tariffs bring back US auto’s past glory?

One more day, one more Trump shock?

Indeed. Last week, Trump imposed a sharp 25% tariff on imported cars, trucks and auto components. The tariffs, effective from 3 April, will disrupt the efficient structure of the global auto industry that was established taking advantage of globalization and trade agreements. It will make cars in the US pricey by $4,000, experts warned. In 2024, the US imported auto products worth $474 billion, including cars valued at $ 220 billion. The move will hurt not only the big three US automakers—General Motors, Ford and Stellantis—but also their European, South Korean and Japanese counterparts.

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Why has Trump done so?

The US president wants to revive the auto industry in the US in a big way and, in the process, restore its once-famed industrial base. He is hoping that the tariffs will force automakers to set up factories in the US and increase production locally. Today, nearly 50% of all vehicles sold in the US are imported. Additionally, 60% of the parts that go into cars made in the US are foreign-made. The tariffs, he hopes, will also boost foreign investment into the US and help him raise funds to make up for any of his promised tax cuts. The US president and his team are hoping to raise as much as $100 billion from these tariffs.

What was the sector like at its peak?

In the 1960s, the combined domestic market share of the three US companies was more than 85%. This declined as Japanese carmakers made their way into the US. It fell below 50% in 2008 and is now just 29%. Toyota surpassed General Motors as the world’s largest automaker in 2006, and in 2021 it became the first foreign automaker to lead sales in the US.

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Will the tariffs help restore US glory?

Unlikely. By integrating their supply chain globally, the US carmakers were able to cut costs and thereby fight competition by sourcing efficiently. They took advantage of cheaper labour in Mexico to assemble cars and tapped countries like India to buy auto parts. Making cars in the US will be expensive as labour costs there are higher than in Mexico or India. Replicating the supply chain in the US will be costly. Economies of scale will be missing, and the US auto sector will not operate at its peak efficiency.

How will this move impact India?

India does not export cars or trucks directly to the US. Some bikes in limited volumes, especially Royal Enfield’s 650cc variants, find their way there. Tata Motors’ stock took a beating after the tariff announcement as 22% of Jaguar Land Rover sales from the UK are in the US. It is India’s auto components sector that will be hit hardest. In fiscal year 2024, it exported goods worth $21.1 billion, much of it to the US directly or indirectly. The industry is hoping that the tariffs, at least on auto parts, will be temporary.

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