WASHINGTON (AP) — It’s a scenario that’s terrifying for the American auto industry.
Chinese automakers are setting up factories in Mexico to take advantage of North American trade rules, and when they’re complete, they’ll be able to pump a steady stream of super-cheap electric cars into the United States.
As Chinese-made EVs begin to sell across the US, American-made EVs, which average $55,000 and cost nearly twice as much, will struggle to compete. Factories will close and workers in America’s industrial heartland will lose their jobs.
Ultimately, this could be a painful repeat of the past quarter century when government-subsidized Chinese competition devastated American industries from steel to solar power equipment — this time targeting the electric vehicles that U.S. automakers envision as the core of their business for decades to come.
“We have seen time and again that the Chinese government has introduced heavily subsidized products into the marketplace with the intent of undermining domestic manufacturing,” Sen. Sherrod Brown, D-Ohio, wrote in an April letter to President Joe Biden calling for a total ban on Chinese-made electric vehicles in the U.S. “We cannot allow the same to happen with EVs.”
The Federation of American Manufacturing has warned that low-cost Chinese-made EVs could pose an “extinction-level event” for the US auto industry.
A trade pact that China could potentially exploit, the United States-Mexico-Canada Agreement, was negotiated by the Trump administration and came into force in 2020. Provisions in the pact allow Chinese-made cars assembled in Mexico to enter the US duty-free or at a nominal tariff rate of 2.5%. Either way, China could potentially sell EVs for much less than the regular price in the US.
To mitigate the threat, the U.S. has options. Customs officials could determine that Chinese-made EVs cannot benefit from the low or no tariffs that come with assembling them in Mexico. U.S. policymakers could pressure Mexico to stop Chinese-made vehicles from being imported. Or they could ban Chinese-made EVs from entering the U.S. on the grounds that they pose a threat to U.S. national security.
Meanwhile, Donald Trump told Time magazine in April, “I’m going to put a 100% tariff on them, because I’m not going to let them steal the rest of our business.”
But whatever steps the U.S. government takes, it will likely face legal challenges from companies wanting to import Chinese-made EVs.
The threat from Beijing comes as U.S. automakers face slowing EV sales. Despite investing billions of dollars in EV production, they are making a big bet that battery-powered cars will be embraced in the U.S. in the coming decades. Relatively high prices have dampened EV sales, despite federal tax incentives for buyers, as has public anxiety about a shortage of charging stations, which is likely contributing to the decline in U.S. sales. Cable theft at charging stations on the rise.
Optimists say the influx of ultra-cheap Chinese-made EVs could spur more electric vehicle purchases in the U.S. and spur investment in charging stations, driving down prices.
“It’s cheaper to import Chinese cars, forget about tariffs and subsidies and let the market take its course,” said Christine McDaniel, a senior fellow at George Mason University’s Marketas Center who served as a trade official in the George W. Bush administration. “Yes, there will be disruptions, but EVs will take off in the U.S. more quickly.”
At issue is a crucial question: Who will have a monopoly on manufacturing and selling zero-emission electric vehicles?
So far, China has a commanding lead: Of the 10.4 million battery-powered EVs produced worldwide last year, China accounted for nearly 62%. The second-placed United States produced about 1 million, less than 10% of the total, according to GlobalData, a consulting and analytics firm.
Chinese automakers have made remarkable progress by achieving technological innovation while keeping costs down. China’s BYD unveiled a small EV called the Seagull last year. It will retail for just $12,000 in China ($21,000 for the version sold in Latin American countries). Its lightweight design, a marvel of engineering efficiency, allows the Seagull to travel longer distances on a single charge with a smaller battery. BYD has said it is considering building a factory in Mexico, but only for the Mexican market.
U.S. policymakers and auto companies are less reassured.
“You just look at China and you see how big the market share of EVs is,” Ford Motor Co. Chief Financial Officer John Lawler said at Deutsche Bank’s Global Automotive Industry Conference this month. “China is a big competitive threat that we have to address. Their development process is much faster, 24 months.” (By contrast, U.S. cars are typically developed over four to five years; EVs are developed in three years or less.)
Critics say BYD and other Chinese EV makers have only achieved cost-efficiency thanks to heavy government subsidies: Beijing spent 953 billion Chinese yuan (more than $130 billion at current exchange rates) on EVs and other eco-friendly vehicles between 2009 and 2021, according to researchers at the Center for Strategic and International Studies.
“This is not a competition,” Biden argued last month. “This is rigged.”
last month, Biden to drastically raise tariffs on Chinese-made EVsThe tariff has been increased to 102.5%, up from 27.5% set under the Trump administration, a price that will make even the cheaper BYD Segal unaffordable in the U.S. market. (Europeans are worried, too: The European Union has said it plans to impose tariffs of up to 38.1% on Chinese-made EVs for four months, starting in July.)
But under the U.S.-Mexico-Canada Agreement, cars assembled in Mexico can potentially be imported into the U.S. at much lower or even no tariffs, even if they’re made by European or Asian automakers. If Mexican-made cars meet the requirements of the USMCA, they can be imported into the U.S. tariff-free. At least 75% of the cars and their parts must be made in North America. And at least 40% of them must be made in places where workers earn at least $16 an hour.
Still, Chinese electric vehicle makers like BYD may have a hard time qualifying for tax exemptions under the USMCA even if they try to source parts in North America.
“Even North American automakers have a hard time reaching these standards,” said Daniel Uichou, senior counsel at the law firm Thompson Hine in Columbus, Ohio.
But there’s an easier way for Chinese EV makers to use Mexico to avoid Biden’s frightening 102.5% import tax: If they can prove that assembling an EV in Mexico requires a “substantial change” that essentially turns the car from Chinese to Mexican, they’ll only have to pay the 2.5% tax that’s levied on most cars imported into the US.
U.S. officials can deny that significant changes were made in the assembly process, but the U.S. would have a hard time winning if the decision were challenged in the U.S. Court of International Trade, because “significant changes are typically made in auto assembly plants,” wrote David Ganz, a trade lawyer and fellow at Rice University’s Baker Institute for Public Policy.
Still, Gantz said in an email, “My conclusion is that the U.S. would be successful in excluding Mexican/Chinese EVs if it were to use one or more of the trade and national security mechanisms available to the U.S. government.”
Ganz argues that the “most effective and swift” way to keep out Chinese EVs is to block them on national security grounds. After all, today’s EVs are equipped with cameras, sensors, and other technological gadgets that can collect images of the car’s surroundings and sensitive personal information about the driver. And China is not just an economic competitor; it’s a geopolitical and potentially military foe, too.
“U.S. concerns that connected cars could be used to spy on military installations and power plants are not unreasonable,” Ganz wrote.
Biden warned that EVs “could be remotely controlled or disabled.” Commerce Department to investigate China’s “smart car” technology This could be a precursor to blocking Chinese EVs on national security grounds.
McDaniel of the Marketas Center argues that given Mexico’s reliance on the United States as its largest export market, the U.S. has a lot of room to do what it wants.
“I can imagine a scenario where the U.S. says to Mexico, ‘Don’t even think about allowing this (Chinese EV) investment into Mexico,'” she said. “‘The U.S. is not going to import these cars.'”
“What’s stopping the White House, whether it’s now or the next administration, from issuing a new document, an executive order, saying, ‘We will no longer approve products from USMCA partners that contain more than X percent products from foreign companies of concern, including China?'” McDaniel said.
The US has further leverage as the USMCA is due for review in 2026. If the US were to try to amend the agreement, perhaps adding provisions to ban or restrict imports of Chinese-made EVs from Mexico, but fail to do so in negotiations with Canada and Mexico, it could let the USMCA lapse.
McDaniel noted that the World Trade Organization, which was created to enforce global trade rules, has become all but powerless. The WTO’s Appellate Body (its highest court) effectively ceased functioning in December 2019 after the US blocked the appointment of new judges to the body. Now, trade cases are left indefinitely unresolved.
“We’re not in a WTO world anymore,” McDaniel said. “It’s a ‘might makes right’ world. That’s the world we live in.”
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AP Auto Writer Tom Krisher in Detroit contributed to this report.
