By Charles Benoit, CPA Trade Counsel
All nations with a domestic car industry want to come out ahead in the transition to electric vehicles (EVs). But the truth is there will be winners and losers. Some are playing to win, and others aren’t.
In this article, we’re going to take a look at India, a country unafraid of using tariffs for the betterment of its people by driving competition in both domestic manufacturing and sales.
Background: India never fell for the “lower your tariffs for growth” siren song
India has a 125% (yes, one-hundred and twenty-five percent!) tariff on cars and trucks [PDF link]. Put simply, if you want to sell it in India, you build it there. Imagine that! In the United States, we have a mere 2.5% tariff on cars.
You might ask: but wait, isn’t India part of the WTO? How come they get to effectively ban imports of cars?
The answer is yes, they’re a longstanding WTO Member, and the reason they’re able to block car imports is because we (and Europe) gave them a free ride for the last seventy-five years.
India joined the General Agreement on Tariffs and Trade (“GATT”), the predecessor to the WTO, in July 1948. Between 1948 and 1994, during eight tariff-reducing GATT/WTO rounds, the U.S. and Europe continually lowered our tariffs for every other GATT/WTO nation. India, smartly, stood in the room with its arms crossed, giving up nothing. They got the benefit of our tariff concessions without expectations of tariff reciprocity. A free ride.
The “Doha Development Round” that failed throughout 2001-2015 was the last GATT/WTO tariff negotiating round. But all the “developing countries” knew they’d secured a sweetheart deal by sitting on their hands during the prior eight tariff rounds, and we’ve been stuck with the 1994 tariff commitments ever since.
(It’s important to understand that the GATT/WTO isn’t just a rule-book, it’s also a “free trade” tariff agreement we’ve signed with the whole world, except there’s no reciprocity. If we raise our car tariff above 2.5%, we’ve violated Article I of the GATT, and India or anyone else can sue.)
India hasn’t made any tariff ceiling commitment on a quarter of its tariff schedule, meaning it can set tariffs to whatever they want, anytime, without needing any kind of rationale (e.g., anti-dumping). For products where India has promised maximum tariff rates to the world (so called “bound” tariff rates”), its average bound tariff sits at 50.8%. Conversely, the United States has bound 100% of tariff schedule, and we’ve bound ourselves down to a lowly average of 3.4%. It’s nothing. One-way free trade.
India has boomed with high tariffs and open-FDI laws
While India has always enjoyed high tariffs, its economic development and potential were held back for most of the 20th century due to policies that favored national champions and inhibited competition. It wasn’t until the 1990s that India really opened up to foreign direct investment (FDI), inviting foreign manufacturers to set up shop, transfer technology, and help unleash the potential of India’s people.
Since then, India has averaged seven percent annual economic growth, super-charged by its high tariff policy. In 2019, India overtook Germany to become the world’s fourth largest car market with over four million units sold, and virtually all of them made domestically.
India was smart to ignore the siren song of globalists and keep their high tariffs. High tariffs give them ample tariff water, an amazing flexible policy tool. America gave this up this tool for nothing.
What is “tariff water” and what is India doing to Tesla?
“Tariff water” is the spread between the max tariff percentage (“bound” rate for a particular good) a country has promised to the WTO (like a price ceiling) on the one end, and the tariff the country unilaterally, freely chooses to apply on the other. It’s a great policy tool to encourage domestic manufacturing, as India is proving right now.
On July 23, 2021, Indian Youtuber Madan Gowri tweeted to Elon Musk “please launch Tesla cars in India ASAP!”. Elon responded as follows:
But we are hopeful that there will be at least a temporary tariff relief for electric vehicles. That would be much appreciated.
— Elon Musk (@elonmusk) July 23, 2021
See that second tweet right there? While taxpayers in the USA and Europe have to dig deep to subsidize individual car factories in the hopes of getting them built (pitting state against state in a race to the bottom), India can merely dangle a brief reprieve in its high tariffs as an incentive to foreign car makers.
According to Reuters, Tesla sent a letter to the Indian government arguing that a 40% tariff “would be more appropriate” and “at 40% import duty, electric cars can become more affordable but the threshold is still high enough to compel companies to manufacture locally if demand picks up”. Good to know!
Elon confirmed that if India can at least temporarily lower its tariffs, then Tesla would build a factory in India
If Tesla is able to succeed with imported vehicles, then a factory in India is quite likely.
— Elon Musk (@elonmusk) July 23, 2021
In the USA, we take it for granted that to get a new car factory built here as opposed to Mexico, American taxpayers will have to foot the construction bill for the obliging car company. But by flexing their tariff water, Indian officials don’t have to get into the company-specific subsidy game (‘picking winners and losers’). India’s Money Control quoted senior Indian officials reacting to Elon’s tweet as follows:
“Over the past four years, multiple demands were made by a large US-based firm to open up the market at lower import duties as well. Now, they locally produce in India and are ramping up capacity,” one official said.
The official was hinting at Cupertino, California-based Apple, which had pitched for market access for its products and special concessions to begin manufacturing in India. It now produces at least four mobile phone models in India through contract manufacturers Winstron in Karnataka and Foxconn in Tamil Nadu.
But a misunderstanding of how tariff water works by some in the media led to inaccurate headlines that Tesla wouldn’t get what it was asking for. Tariff schedules apply to products, not companies, so India can honor its policy of not subsidizing particular foreign companies while still using tariff water to incentivize domestic manufacturing.
Sure enough, on August 9, Reuters reported “India considers sharp import tax cuts on EVs after Tesla lobbying – sources”: Reuters cited sources saying that “the government is in favor of a cut if it can see companies such as Tesla providing some benefit to the domestic economy – manufacture locally, for example, or give a firm timeline on when it would be able to”.
On August 10, Reuters quoted Volkswagen AG’s Indian head as saying a lowering of the tariff on EVs to 25% “would help drive investment”. (Kudos to Volkswagen CEO Herbert Diess, who along with Elon Musk, has spoken in a refreshingly candid fashion about tariffs’ effective role in encouraging localization. Unlike most American politicians, both CEOs have publicly complained that America puts up with asymmetrical WTO tariffs.)
Deepak Jain, president of India’s Automotive Component Manufacturers Association, told reporters “We will always promote localization” and that his association was “in talks with the government to identify which EV parts can be manufactured locally”.
It didn’t take long to see India’s flexing of their tariff water pay off. On August 30, Reuters reported “Indian auto parts makers’ shares gain on report of talks with Tesla”:
Tesla, which is looking to set up a factory in India if it is successful with imported vehicles, is holding early talks with some companies for the supply of components such as instrument panels, windshields, differential gears, brakes and power seats, the Economic Times reported on Sunday.
Bharat Forge Ltd, Sona BLW Precision Forgings Ltd and Sandhar Technologies Ltd are understood to be among the Indian companies already supplying components to Tesla, according to the report. Shares of the three Indian firms rose as much as 6.2% to 13.7% on Monday.
India’s enviable position: profit from multinationals while getting them to build locally
While American taxpayers are on the hook every time an automotive factory gets built here, consider that India’s use of tariff water is going to net the Indian treasury money while driving foreign investment. With a 125% tariff, imports are a mere trickle, arranged by the ultra-wealthy who simply must have a particular luxury model inaccessible to most. So the 125% tariff isn’t making any real money for India; it serves to force companies to manufacture locally. But if India does wind up lowering its tariff on EVs to 40% or 25% for a few years to allow Tesla and others to test demand locally while arranging localization, then the Indian treasury will see a substantial bump in government coffers. President Trump’s 25% China tariffs (which violated WTO rules because we’re bound at a 3.4% average) led to an almost $100 billion windfall for the U.S. Treasury while incentivizing divestment from China.
The Indian government’s decision won’t be without parochial political costs. Tata Motors, part of the giant Indian conglomerate and the largest passenger vehicle manufacturer in India, opposes any tariff reduction. India is a democracy, its politicians need to get elected, and Tata has a big microphone. But India, like most of the developing world, already made the mistake in the 20th century of trying to keep out all foreign competition. They were left with dreary, unproductive ‘national champions’ that failed to serve their market.
However, now in the 21st century, India and other developing countries marry effective tariff policy and foreign investment rules to ensure robust domestic market competition in both manufacturing and sales, enjoying the bountiful economic growth and prosperity that ensues.
Meanwhile, America stands by neutered, totally brainwashed by an obviously failed economic ideology that only benefits international capital. India freely and openly discusses and deploys tariffs to drive domestic manufacturing, while the word cannot even be uttered by the vast majority of American political leaders.