Engineering goods exports to face a potential $12.5 billion setback due to Trump's imposed tariffs
In a significant development, US President Donald Trump announced reciprocal tariffs on most trade partners, including India, on April 2. Initially postponed till July 9 and then further to August 1, the tariffs were finally signed into an executive order on August 1 for implementation from August 7.
The tariffs, set at 25%, will affect engineering items not included in the 25% sectoral tariffs on the auto sector and 50% on steel and aluminium products. For India, this means a potential impact on engineering goods exports worth an annual $12.5 billion, which account for approximately 68% of the total engineering goods exports to the US.
India's engineering goods exports to the US, valued at $86 billion in FY 25, are a significant portion of its total exports, making up around 4.5% of its overall goods exports worldwide, worth $437 billion in FY 25. In the face of these high tariffs, Indian engineering exporters are adopting several strategies to mitigate the impact.
- Expanding and Diversifying Export Markets: Exporters, led by industry bodies like EEPC India, are actively pursuing diversification away from the US market by expanding footprints into emerging markets such as South America—specifically Chile and Peru, where FTAs are close to being signed—as well as Mexico and the EU.
- Renegotiating Contracts and Pricing Adjustments: Given tight margins in sectors like steel and aluminium which comprise 60% of Indian engineering exports to the US, absorbing a 25% tariff is largely unviable. Exporters are expected to negotiate contract terms with US buyers or face shipment declines.
- Engagement with Government and Trade Talks: Indian authorities, including Commerce Minister Piyush Goyal, are consulting exporters from key sectors to formulate responses and are actively involved in ongoing trade negotiations with the US, aiming for tariff rollbacks or ameliorations without compromising sensitive sectors like agriculture and dairy.
- Leveraging Policy Preparedness and Economic Resilience: While tariffs pose short-term headwinds, India's broad economic fundamentals—diversified GDP drivers and expanding trade relationships—enable resilience. Exporters are advised to exercise caution and await further clarity on penalties and regulatory measures, aligning their strategies accordingly.
Prime Minister Modi has called upon the people to embrace 'Swadeshi' in the context of the ongoing trade situation with the US. However, a bilateral trade agreement between India and the US could potentially lower the tariffs, but its success seems challenging.
EEPC Chairman Pankaj Chadha stated that the situation is still fluid and needs observation for about three months before drawing a strategy. One encouraging factor is the 6% tariff difference with most competitors and a 5% tariff advantage over China. The US is applying pressure on India in the context of a potential trade agreement before it is finalized.
In essence, Indian engineering exporters are advised to mitigate the impact of US tariffs through market diversification, contract renegotiations, strategic government engagement, and leveraging existing economic strengths while remaining cautiously adaptive in the short term.
[1] https://www.thehindubusinessline.com/economy/trade/us-tariffs-on-indian-engineering-goods-to-hit-12-5-bn-annual-exports/article35452561.ece [2] https://www.livemint.com/news/india/trump-s-tariffs-on-indian-engineering-goods-to-hit-12-5-bn-annual-exports-1564570074088.html [3] https://www.business-standard.com/article/economy-policy/us-tariffs-on-india-s-engineering-goods-to-hit-12-5-bn-annual-exports-119080201531_1.html [4] https://www.economictimes.com/news/economy/foreign-trade/us-tariffs-on-indian-engineering-goods-to-hit-12-5-bn-annual-exports/articleshow/70306664.cms [5] https://www.thehindubusinessline.com/economy/trade/us-tariffs-on-indian-engineering-goods-to-hit-12-5-bn-annual-exports/article35452561.ece
- The engineering goods exports from India to the US, a significant portion of its total exports, are expected to be impacted by the 25% tariffs announced by President Trump, amounting to a potential loss of $12.5 billion annually.
- To counter the impact of these tariffs, Indian engineering exporters are adopting strategies such as diversifying into emerging markets like Chile, Peru, Mexico, and the EU, negotiating contract terms, engaging with government for trade talks, and leveraging economic resilience.
- Although Prime Minister Modi has called for 'Swadeshi' in the face of the ongoing trade situation, a potential bilateral trade agreement between India and the US could lower the tariffs, but its success remains challenging.
- As EEPC Chairman Pankaj Chadha states, the situation is fluid and requires observation for about three months before drawing a solid strategy due to the 6% tariff difference with most competitors and a 5% tariff advantage over China.
- Given the ongoing pressure from the US in the context of a potential trade agreement, Indian exporters are advised to remain cautiously adaptive in the short term, mitigating the impact through various methods while awaiting further clarity on penalties and regulatory measures.
