Why is the auto industry split on free trade deals?

Bloomberg
Bloomberg

Summary

Commerce minister Piyush Goyal says free-trade agreements (FTAs) with Japan and South Korea have cost India billions, with South Korean automakers importing “indiscriminately” into India

Commerce minister Piyush Goyal says free-trade agreements (FTAs) with Japan and South Korea have cost India billions, with South Korean automakers importing “indiscriminately" into India. Mint explains the auto sector’s complicated relationship with FTAs.

How do FTAs impact the auto sector?

India is the world’s third largest auto market. FTAs, which remove or lower import duties for Indian-made vehicles, can offer access to new markets for Indian automakers. FTAs also aid technology transfers and are a positive for the auto components trade. However, the reduction in duties on Completely Built Units (CBUs)—fully-built vehicles—coming into India can impact local manufacturing as global manufacturers get the opportunity to import vehicles at competitive prices into India. This can potentially slow down future investment in localization.

What about the UK and EU?

The UK and EU members are manufacturing states; they have a large base of auto makers who have a market in India. For instance, the UK is home to high-end automakers like Rolls Royce, while Japanese original equipment manufacturers (OEMs) such as Toyota and Nissan also have a significant manufacturing presence there. Reducing import duties on fully built-up cars could impact their manufacturing plans in India. EU automakers such as Audi, Skoda, Volkswagen and Mercedes Benz have a big market in India. Local manufacturing could suffer if India accepts lower import duty for CBUs.

Are the FTAs with Australia and UAE better for India?

UAE and Australia are markets for Indian car exports. Domestic OEMs can benefit from reduced tariffs for CBU exports. FTAs can potentially give them greater access to these markets and at a far lower cost than if they had to set up manufacturing in these countries. Additionally, auto companies based in these two nations do not compete with India’s domestic industry.

Has competition strengthened auto?

The liberalization policy of the 1990s drew in foreign investment and tech, but also exposed automakers to competition. However, the influx of multinational OEMs resulted in manufacturers becoming more efficient and competitive, which in turn increased the size of the market. Hyundai and Toyota set up factories in India, as the cost of CBUs was still high. The free-trade policy also led to the growth of the auto component industry, resulting in cost-efficiencies for domestic manufacturers.

Where do auto makers stand on future FTAs?

India and the UK have had several rounds of talks on a potential FTA, and the country has also resumed FTA discussions with the EU. For the Indian side, to give automakers from these regions access by way of CBUs, at a time the industry is in a period of transition to electric vehicles, could be detrimental to the investments domestic players are making to prepare for this transition. For European OEMs, an FTA could mean cheaper access to India’s EV market: they can test the waters by importing vehicles they already sell in other markets.

 

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