In the face of uncertainty surrounding the future of harsher sectoral tariffs on steel and auto parts imposed by the United States, Indian exporters have pushed the government to investigate and expedite a Free Trade Agreement (FTA) with Mexico, according to a person directly involved in the matter. By doing this, Indian exports may be able to avoid the full effects of increased American tariffs on steel and auto parts.
Some exporters have written to the government that a trade deal with Mexico may help exports of Indian steel and auto products and could also give India access to the US via Mexico at lower tariffs. This is based on expectations that India is unlikely to get an exemption from US President Donald Trump’s sectoral tariffs on steel and auto parts through the mini-trade deal, which is yet to be finalised.
The US levies on steel and aluminium, and certain automobiles and auto parts presently sit at 50 percent and 25 percent, respectively. According an exporter, Mexico is involved in a lot of ancillary manufacturing. If we strike FTA with Mexico, then Mexico can do value addition and sell it to the US, especially on steel products and auto components. It could be a more even deal.
While, India and Mexico have not formally launched talks for an FTA yet, both sides are said to be conducting exploratory studies for one, as per a news report in 2023. Automotive part suppliers from Mexico have been granted limited exemptions from the US. Parts that meet the requirements of the United States-Mexico-Canada Agreement (USMCA) have been spared from the 25-percent duty. To be sure, while Mexico itself is currently subject to the 50-percent steel tariff by the US, both nations are reportedly close to finalising a deal to reduce or eliminate the steeper duties on imports up to a certain volume.
Therefore, under a potential FTA between India and Mexico, Indian steel could be exported either tariff-free or at a lower-duty to the Latin American nation, if the product is further processed there and the volume stays within the potential US quota.
Instead of facing a duty of 50-percent on steel exports directly, India could gain access through Mexico benefitting from the potential quota window to enter the US market, the person familiar with the matter explained. In the absence of an agreement, Indian steel exports presently face import duties ranging from 25 percent to 50 percent from Mexico, while auto parts are subject to a lower rate of 5.5 percent at the most, along with a value-added tax.
While, India is looking to secure a mini-trade deal with US before July 9, the United States, so far, is reluctant to exempt India from sectoral tariffs on steel, aluminium and certain automobiles at least in the mini-trade deal. The more comprehensive first tranche of the Bilateral Trade Agreement (BTA), expected to be agreed upon by autumn, could look into these sectoral tariffs. This has prompted India to take the World Trade Organization (WTO) route, proposing retaliatory tariffs on US duties on steel and aluminium as well as on automobile parts.
