The Prospect of Low-Priced Chinese EVs Reaching the US from Mexico Poses a Threat to Automakers

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The American auto industry faces a daunting scenario: Chinese carmakers establishing operations in Mexico to exploit North American trade rules, then flooding the United States with ultra-low-priced electric vehicles (EVs).

As these Chinese EVs hit the US market, domestically produced EVs — which cost an average of $55,000, roughly double the price of their Chinese counterparts — struggle to compete. Factory closures and job losses ripple across America’s industrial heartland.

This situation echoes past episodes where government-subsidized Chinese competition wreaked havoc on American industries, from steel to solar equipment. Now, it’s electric vehicles that US automakers see as the linchpin of their future business.

Senator Sherrod Brown, an Ohio Democrat, expressed concern in an April letter to President Joe Biden, urging an outright ban on Chinese EVs in the US. He cited China’s history of dumping highly subsidized goods into markets to undermine domestic manufacturing.

The Alliance for American Manufacturing has labeled low-priced Chinese EVs a potential “extinction-level event” for the US auto industry.

The US-Mexico-Canada Agreement (USMCA), negotiated during the Trump administration and enacted in 2020, could inadvertently enable Chinese autos assembled in Mexico to enter the US either duty-free or with a nominal 2.5% tariff. This would allow China to undercut typical US prices for EVs.

To mitigate this threat, the US has several options. Customs officials could disqualify Chinese EVs from low-duty or duty-free benefits tied to Mexican assembly. Policymakers might pressure Mexico to keep Chinese vehicles out or invoke national security grounds to bar Chinese EVs from the US.

Former President Donald Trump even suggested a 100% tariff on Chinese EVs to protect American business interests.

However, any US government action would likely face legal challenges from companies seeking to import Chinese EVs.

This threat coincides with US automakers grappling with slowing EV sales despite massive investments. High prices, even with federal tax incentives, hinder EV adoption. Concerns about charging station availability, compounded by cable thefts at stations, add to the challenges.

Optimists argue that an influx of ultra-low-priced Chinese EVs could spur US EV purchases, accelerate charging station investment, and drive down prices.

Christine McDaniel, a senior research fellow at George Mason University’s Mercatus Center, suggests that allowing Chinese cars in without tariffs or subsidies could expedite EV adoption, even if it disrupts the market.

The stakes are high: Who will dominate the zero-emissions EV market?

China currently leads the way, accounting for nearly 62% of the 10.4 million battery-powered EVs produced worldwide last year. In contrast, the United States produced approximately 1 million EVs, less than 10% of the total, according to consulting firm GlobalData.

“Chinese EVs and the US-Mexico Trade Dilemma: A Battle for Market Dominance

In their pursuit of technological breakthroughs while keeping costs low, Chinese automakers have made remarkable strides. BYD, a Chinese company, introduced the Seagull, a small electric vehicle (EV), which sells for just $12,000 in China (or $21,000 for a version sold in some Latin American countries). The Seagull’s lightweight design allows it to travel farther per charge using a smaller battery, making it an engineering marvel. BYD is now considering building a factory in Mexico, but with a focus solely on the Mexican market.

However, US policymakers and auto companies remain concerned.

John Lawler, Ford Motor’s chief financial officer, highlighted China’s dominant market share in EVs during this month’s Deutsche Bank Global Auto Industry Conference. He emphasized the need to address significant competitive threats posed by China, whose development process for EVs is much faster (around 24 months) compared to the traditional four to five years for US vehicles (though this has been reduced to three years or less for EVs).

Critics argue that BYD and other Chinese EV manufacturers have achieved cost efficiencies through heavy government subsidies. Beijing reportedly spent over 953 billion Chinese renminbi (equivalent to more than $130 billion) on EVs and green vehicles between 2009 and 2021.

President Joe Biden recently raised the tariff on Chinese EVs from the 27.5% established under the Trump administration to a staggering 102.5%. This move aims to price even the budget-friendly BYD Seagull out of the US market. Meanwhile, Europeans are also concerned, as the European Union plans to impose tariffs of up to 38.1% on Chinese EVs starting in July.

Enter the US-Mexico-Canada Agreement (USMCA), negotiated during the Trump era and enacted in 2020. Under the USMCA, vehicles assembled in Mexico — even if made by European or Asian automakers — can enter the US with significantly lower tariffs or even duty-free. To qualify, at least 75% of a car and its parts must come from North America, and 40% must originate from areas where workers earn at least $16 an hour.

However, even for Chinese EV makers like BYD, meeting the USMCA’s requirements for duty-free treatment could be challenging, especially if they attempt to source parts in North America.

There’s another potential loophole: Chinese EV manufacturers could use Mexico to avoid Biden’s 102.5% import tax. By demonstrating that assembling their EVs in Mexico involves a “substantial transformation,” essentially turning them into Mexican cars, they could pay only the standard 2.5% tariff imposed on most imported vehicles.

While US officials could reject the notion of substantial transformation, prevailing in a legal challenge at the US Court of International Trade might be difficult due to the significant changes typically occurring during automotive assembly.

Trade lawyer David Gantz believes that the US will ultimately succeed in excluding Mexican/Chinese EVs by leveraging available trade and national security mechanisms.

The battle for market dominance in zero-emissions EVs continues, with China currently leading the way, accounting for nearly 62% of global battery-powered EV production last year. The United States, at No. 2, produced only about 10% of the total.

Addressing the Challenge of Chinese EVs: National Security Concerns and Trade Leverage

David Gantz argues that the most effective and expedient way to prevent Chinese EVs from entering the US market would be to block them on national security grounds. Modern EVs are equipped with cameras, sensors, and other technological features that could potentially collect sensitive information from their surroundings and drivers. China, beyond being an economic competitor, also poses geopolitical and potential military risks.

President Joe Biden has expressed concerns about the possibility of connected vehicles being used for espionage at military installations or power plants. In February, he instructed the Commerce Department to investigate the technology in Chinese “smart cars,” signaling a potential move to block Chinese EVs based on national security grounds.

Christine McDaniel from the Mercatus Center believes that the United States has considerable flexibility, particularly considering Mexico’s reliance on the US as its top export market. She envisions a scenario where the US advises Mexico not to allow Chinese EV investments within its borders, effectively preventing those cars from entering the US.

McDaniel questions why the White House, whether in the current administration or the next, couldn’t issue an executive order stating that products from USMCA partners would no longer be recognized if they contain more than a certain percentage of content from foreign entities of concern, including China.

The USMCA, set for review in 2026, provides additional leverage. If the US seeks to modify the agreement — perhaps by banning or limiting Chinese EVs from Mexico — but fails to secure agreement from Canada and Mexico, it could allow the USMCA to expire.

Notably, the World Trade Organization (WTO), originally established to enforce global trade rules, has lost effectiveness. Its Appellate Body, akin to a supreme court, ceased functioning in December 2019 due to the US blocking new judge appointments. Trade disputes now languish unresolved.

In this evolving landscape, McDaniel concludes that we’re no longer in a WTO-centric world; instead, it’s a realm where “might makes right.”

Source: AP