How Reciprocal Tariffs Impact the Automotive and Pharma Sectors: Navigating the Path to US Markets
The global trade environment is undergoing significant transformations, especially sincethe beginning of the second term of President Donald Trump. Today, tariffs andreciprocal tariffs are emerging as a focal point of discussion in relation to trade with the USA. While historically, the USA has been a market to the globe with everyone wantingto sell to the USA, the tariff talk seems to threaten to wear off that charm and countries like India need to take a hard look at the impact that the tariffs will have on the localeconomy and how it can be mitigated.
From a freight forwarder's perspective, understanding these developments is crucial for optimizing supply chains and weakening potential disruptions.
The Trump administration got down to business immediately after being sworn in and one of the key points from their agenda was to unveil plans to implement "reciprocal" tariffs, aimed at equalizing the duties that trading partners impose on American goods.
This is part of the Trump administration’s broader strategy to reshape global trade policies. It targets countries with significant trade imbalances and higher tariff structures, including India. The proposed tariffs could be enacted as soon as April 2025, introducing new challenges for exporters in sectors like automotive and pharmaceuticals.
Industry Snapshot: India's Automotive and Pharma Exports to the US
In the fiscal year 2023-24, India exported auto parts worth approximately $6.69 billion to the U.S.A. The exports encompass a range of vehicles and components, including passenger cars, two-wheelers, commercial vehicles, and automotive parts such as engines and electrical systems.
Pharmaceutical Exports to the US
India's pharmaceutical exports to the U.S. valued nearly $10 billion, accounting for about 45% of the USA’s generic medicine needs. Apart from generic medicines, India exports oral formulations.
Both the pharma and automotive industry are crucial to the US economy as well and hence it is unlikely that both the countries would want their economies and people to suffer higher costs. The industry is hopeful that a trade deal between the two countries will cover the tariff and its implications.
Experts in pharma believe that a reciprocal trade tariff would impact innovators more than the generic medicines as generics are low in value. The businesses are also considering absorbing some of the costs and passing only a partial cost to the end consumer however the industry currently seems to be in a wait and watch policy.
Similarly, the automotive sector believes that with evolving technology, the cost of the vehicles are moving upwards and an additional tariff will be relative to other countries that are facing a similar tariff so it will come down to the final impact on profits. While a portion of the costs might be absorbed by the industry, a portion of it will be passed on to the end customer.
With a growing elderly population there is a relative strain on the existing healthcare system in the US. They need India’s affordable and quality generic medicines to ensure quality care for their ageing population. Similarly, for the evolving automotive industry that is looking at alternate fuels, Indian auto components will be crucial to compete on a global scale. Any cost increase, however small, might have a significant impact on the vulnerable communities in both countries.
This isn’t a win-win situation for both the countries.
1. The tariffs charged for importing will eventually be passed to the customer and hence the customer ends up paying more.
2. This would mean the demand goes down and there could be a rise in inflation. The US companies that rely on components or medicines
would need to either find a cheaper alternative with the same quality or end up being less competitive in the open market.
3. Higher tariffs would mean the manufacturing would scale down as the demand would dip, thereby hampering investment in the American
and partner country workforce.
4. Searching for alternative markets and setting up logistics for it would take time, could run into inconsistencies and impact production. In the
meantime, the inflation might have a ripple effect across the globe.
5. Unnecessary high costs on essential services like healthcare would mean the government is forking more money from their budgets and that
would directly affect the quality of life of the vulnerable and the old in society.
6. The USA recently delayed tariffs to Canada and Mexico by a month, thereby prolonging the uncertainty.Such constant delays can be seen as a
pressurizing mechanism and will have a long term impact on the economy.
It will be important to see how both the governments navigate this challenge and agree on a bilateral trade agreement that is mutually beneficial. The wheels are already set in motion and there is hope of a greater collaboration and dialogue between both the countries to ensure a robust and mutually beneficial deal.
India on its part has started cutting duties and tariffs on certain US imports as promised in the budget. Experts believe that there is room for more cuts and that should be done during the negotiations, however it is also important for the USA to understand that India cannot have zero tariffs, especially for products that their local industries have a stronghold in. India needs to shield its domestic industries from foreign competition for numerous reasons like encouraging manufacturing, job creation, protecting the country's sovereignty, defence and health.
Being the most populous country in the world with porous borders and not so friendly neighbors, it is essential for India to ensure that their markets are beneficial for their local industries to have a thriving economy.
As freight forwarders, we can support the businesses to keep the costs low by providing route optimization, ensuring strict adherence to documentation and providing strategic advice on the changing trade landscape to help businesses keep costs low and have a better competitive advantage.
We believe that in the era of globalization, protectionism will have limited benefits and both countries should look towards greater co-operation, digitization and cost efficiencies to increase benefits.