It’s a scenario that terrifies the American auto industry.
Chinese automakers are moving into Mexico to exploit North American trade rules. Once in place, they are shipping ultra-cheap electric vehicles to the United States.
While Chinese electric vehicles are sold across the country, American electric vehicles, which cost an average of $55,000, nearly double the price of their Chinese counterparts, have struggled to compete. Factories are closing. Workers are losing their jobs across America’s industrial heartland.
In the end, it would all be a painful repeat of how government-subsidized Chinese competition has devastated American industries from steel to solar power over the past quarter-century. This time, it would be electric vehicles, which American automakers envision as their core business in the decades ahead.
Cheap Chinese electric vehicles pose a potential “extinction-level event” for the U.S. auto industry, the Alliance for American Manufacturing has warned.
What is particularly concerning is that the 2020 agreement between the United States, Mexico and Canada would potentially allow Chinese cars assembled in Mexico to enter the United States duty-free or at a rate of nominal duty of 2.5%. Either way, China could sell its electric vehicles well below typical U.S. prices.
To defuse the threat, the United States has options. Customs officials could rule that Chinese electric vehicles are not eligible for the low-tax or tax-free benefits of manufacturing in Mexico. U.S. policymakers could also pressure Mexico to exclude Chinese vehicles from that country. Or they could ban Chinese electric vehicles from entering the United States on the grounds that they threaten American national security.
The threat from Beijing appears just as American automakers face a slowdown in electric vehicle sales. High prices and a shortage of charging stations are keeping many American consumers away.
Cheap Chinese electric vehicles could help by lowering prices, speeding up sales and encouraging investment in charging stations. “It would be cheaper to just let Chinese cars come in, forget about all the tariffs and subsidies, and let the market take care of it,” said Christine McDaniel, a senior researcher at George University’s Mercatus Center Mason. “Yes, that would be disruptive. But electric vehicles would be put on the road much more quickly in the United States.”
The issue is who will dominate the manufacturing and sale of zero-emission electric vehicles.
China has so far taken a considerable lead. It produced nearly 62% of the 10.4 million battery-electric vehicles produced worldwide last year. The US produced 1 million, less than 10% of the total, according to GlobalData.
Chinese automakers have made remarkable progress in controlling costs. Last year, Chinese company BYD launched a small electric vehicle called Seagull, selling for just $12,000 in China ($21,000 for a version sold in four Latin American countries). The Seagull’s lightweight design allows it to go further on a charge with a smaller battery. BYD said it plans to build a factory in Mexico, but only for the Mexican market.
Critics note that BYD and other Chinese electric vehicle makers have achieved profitability thanks to heavy subsidies from the Beijing government. The Chinese government spent more than $130 billion on electric and other green vehicles between 2009 and 2021, according to the Center for Strategic and International Studies.
Last month, President Joe Biden increased tariffs on Chinese electric vehicles from 27.5% to 102.5%, up from the 27.5% set under President Donald Trump. This measure aims to exclude from the American market even the BYD Seagull model, the price of which is very advantageous. (The European Union has announced plans to impose provisional tariffs of up to 38.1% on Chinese electric vehicles for four months starting in July.)
The U.S.-Mexico-Canada agreement, however, would allow vehicles assembled by Chinese companies in Mexico to enter the U.S. with much lower tariffs, if any. If cars made in Mexico met the requirements of the USMCA, they could enter the U.S. duty-free. At least 75 percent of a car and its parts would have to come from North America. And at least 40 percent of those parts would have to come from countries where workers earn at least $16 an hour.
For a Chinese electric vehicle maker like BYD, however, it would be difficult to qualify for the duty-free treatment provided by the USMCA. “Even North American automakers are struggling to meet these thresholds,” said Daniel Ujczo of law firm Thompson Hine.
But there’s an easier way for Chinese EV makers to use Mexico to try to avoid Biden’s deadly 102.5% import tax: They would only have to pay 2.5%. – the tax imposed on most cars imported into the United States – if they could demonstrate that the assembly of their electric vehicles in Mexico underwent a “substantial transformation” that essentially transformed them from Chinese cars to Mexican cars.
U.S. officials could reject the idea that substantial transformation occurred during the assembly process. But the United States would have a hard time prevailing if the decision were challenged in the United States Court of International Trade, “given the substantial changes that typically take place at automobile assembly plants,” David Gantz, researcher at the Baker Institute for Public Policy at Rice University. wrote.
According to Gantz, the most effective and fastest way to prevent Chinese electric vehicles from entering the United States would be to block them on national security grounds. After all, today’s electric vehicles are equipped with cameras, sensors, and other technological gadgets that can collect images of the cars’ surroundings and sensitive personal information about EV drivers. And China isn’t just an economic competitor. It’s a geopolitical adversary — and potentially a military one, too.
“US fears about the possible use of connected vehicles to spy on military installations or power plants are not irrational,” Gantz wrote. In February, Biden ordered his Commerce Department to investigate Chinese “smart car” technology, a potential prelude to blocking Chinese electric vehicles on national security grounds.