Mexico Hits India With 50% Tariffs. This Will Be Most Impacted Sector

After the United States, Mexico has decided to impose tariffs as high as 50 per cent on the import of select goods from India and other Asian nations that do not have a trade deal with Mexico City. The move comes at a time when Mexican President Claudia Sheinbaum's government is under immense pressure from Washington to curtail business with China, despite opposition from local business groups warning that higher tariffs will raise costs.

New duties have been imposed on imports of auto parts, light cars, toys, clothing, textiles, plastics, furniture, footwear, steel, household appliances, leather goods, aluminum, paper, trailers, glass, soaps, cardboard, motorcycles, perfumes, and cosmetics.

India-Mexico Trade And The Most Affected Sector

Despite their geographical difference, India and Mexico have developed a robust trade partnership. Trade between the two nations climbed from $7.9 billion in 2019-20 to more than $8.4 billion in 2023-24, according to data from the Confederation of Indian Industry (CII).

The new duties will impact several trade categories, with many goods witnessing an increase of up to 35 per cent, but the automobile sector is expected to be most affected by Mexico's move. The import duty on cars will rise to 50 per cent from 20 per cent, dealing a significant blow to India's largest vehicle exporters to Mexico, including Volkswagen, Hyundai, Nissan and Maruti Suzuki.

The new tariffs are expected to impact shipments worth $1 billion from major Indian car exporters, including Volkswagen and Hyundai, according to a report by Reuters.

The Society of Indian Automobile Manufacturers, an industry group that counts VW, Hyundai and Suzuki among its members, had reportedly urged India's commerce ministry in November to press Mexico to "maintain the status quo" on tariffs for vehicles shipped from India, according to a copy of the letter.

"The proposed tariff hike is expected to have a direct impact on Indian automobile exports to Mexico...we seek the Government of India's support to kindly engage with the Mexican government," the industry body said in its letter to the commerce ministry before the tariff was finalised.

It was not immediately clear what steps the carmakers, industry body and Indian government will take next.

The tariff hike could force Indian automakers to reevaluate strategies reliant on Mexico, which is India's third-largest car export market after South Africa and Saudi Arabia. Car manufacturers in India have relied on exports to ensure production is maximised and there are economies of scale. Some also rely on exports to cushion slower domestic sales or improve margins - a business strategy that may need to be redrawn.

The tariff hike, which mirrors a rise in global tariffs, including levies championed by US President Donald Trump, could also complicate Prime Minister Narendra Modi's efforts to market India as a low-cost manufacturing alternative to China. 

Piyush Arora, chief of VW's Indian unit, Skoda Auto Volkswagen, said India has been a strong export base for many years and the company ships to more than 40 countries from here.

"Mexico has consistently been one of our important export markets, given the rising demand there and the traction of our India-made models," Arora said before the tariffs were approved.

Volkswagen To Be Most Affected

India shipped goods worth $5.3 billion to Mexico in the last fiscal year, of which cars made up close to $1 billion, according to the letter and commercially available customs data.

Skoda Auto accounts for nearly 50 per cent of India's total car shipments to Mexico. Hyundai shipped cars worth $200 million, Nissan's exports stood at $140 million, and Suzuki's at $120 million, the data showed.

In meetings with government officials last month, carmakers said the majority of shipments from India to Mexico are compact cars with an engine size of less than one litre, which are designed for the Mexican market and not for further export to the U.S., one of the sources said.

"Indian-origin vehicles are not a threat to Mexican local industry, as Indian vehicles do not cater to high-end segments manufactured by Mexico for serving the North American market," the industry group said in its letter.

Car makers also told Indian officials that of the 1.5 million passenger vehicles sold in Mexico each year, about two-thirds are imported, and India's shipments make up "just about 6.7 per cent" of the total sales, according to the first source and the letter.

Why Mexico Is Imposing Tariffs On India

Mexico's Claudia Sheinbaum government has sought to strengthen the domestic market and reduce dependence on imports, though opponents of the tariff plan warned it could lead to price hikes at home.

There were 35 abstentions on the vote, which came amid heavy pressure from US President Donald Trump, because senators said the bill was rushed and needed more analysis on its impact on inflation.

The lower house of Congress approved the proposal by 281 votes to 24, with 149 members not voting, arguing that further discussion was needed.

But, "the real reason has to do with the United States; it has to do with the review of the USMCA (free trade agreement) that is coming up, with the negotiations to obtain reductions, exemptions from the tariffs that Mexico is facing at this moment to access the US market," Oscar Ocampo, director of economic development at the Mexican Institute for Competitiveness, said while talking to the Associated Press. 

Mexico still faces US tariffs on the automotive sector, steel, and aluminum.

But Ocampo said Mexico was bending to an unpredictable U.S. President Donald Trump and changing its commercial policy "in the wrong direction." 

He said the government was creating problems for several sectors, including auto parts, plastics, chemicals, and textiles, because the tariffs would create disruptions in supply chains and could push inflation up at a time when the economy is slowing.