US auto industry concerned about potential arrival of low-cost Chinese EVs from Mexico

WASHINGTON (AP) — It’s a scenario that terrifies the American auto industry.

Chinese automakers are setting up shop in Mexico to take advantage of North American trade rules. Once there, they ship ultra-low-cost electric vehicles to the United States.

As Chinese electric vehicles (EVs) go on sale across the country, American-made EVs — which cost an average of $55,000, roughly double the price of their Chinese counterparts — are struggling to compete. Factories are closing. Workers are losing their jobs in America’s industrial heartland.

In the end, it could all turn out to be a painful replay of how government-subsidized Chinese competition devastated American industries from steel to solar panels over the past quarter-century. This time, it would be EVs, which American automakers see as the core of their business for decades to come.

“Time and time again, we have seen the Chinese government dump highly subsidized products into markets in order to undermine domestic manufacturing,” Sen. Sherrod Brown, D-Ohio, wrote in an April letter to President Joe Biden calling for a complete ban on Chinese electric vehicles in the U.S. “We cannot allow the same to happen when it comes to EVs.”

Low-priced Chinese electric vehicles represent a potential “extinction-level event” for the U.S. auto industry, the Alliance of American Manufacturing has warned.

Taking advantage of the T-MEC

The trade deal that Beijing could potentially exploit — the U.S.-Mexico-Canada agreement — was negotiated by the Trump administration and enacted in 2020. Its rules could allow Chinese cars assembled in Mexico to enter the U.S. either tariff-free or at a nominal tariff rate of 2.5%. Either way, China could sell its EVs well below typical U.S. prices.

To defuse the threat, the United States has options. Customs officials could rule that Chinese electric vehicles do not qualify for the benefits of low or duty-free tariffs because they are assembled in Mexico. Lawmakers could also pressure Mexico to keep Chinese vehicles out of the country. Or they could ban Chinese electric vehicles from entering the United States on the grounds that they would threaten the nation’s national security.

Donald Trump told Time magazine in April: “I’m going to put 100% tariffs on them. Because I’m not going to let them steal the rest of our business.”

Whatever steps the US government takes, however, it will likely face legal challenges from companies that want to import Chinese EVs.

Beijing’s threat comes just as U.S. automakers face a slowdown in EV sales even as they invest billions of dollars to produce them in a costly bet that Americans will embrace battery-powered cars in coming decades. Comparatively higher prices, despite federal tax incentives for buyers, have weakened U.S. EV sales. So has public anxiety over a shortage of charging stations, potentially exacerbated by rising cable thefts at them.

Optimists suggest that an influx of mega-low-priced Chinese electric vehicles could accelerate EV purchases in the United States, hasten investment in charging stations and force prices down.

“It would be cheaper to just let Chinese cars in, forget all the tariffs and subsidies, let the market figure it out,” said Christine McDaniel, a senior fellow at George Mason University’s Mercatus Center who was a trade official during the George W. Bush administration. “Yes, it would be disruptive. But EVs would take off in the U.S. much faster.”

Overwhelming advantage

A question of enormous consequence is at stake: who will dominate the manufacturing and sale of zero-emission electric vehicles?

China has taken an overwhelming lead so far. It accounted for nearly 62% of the 10.4 million battery-powered EVs produced worldwide last year. The U.S., at No. 2, made about 1 million — less than 10% of the total, according to the consulting and analytics firm GlobalData.

By making technological advances while keeping costs down, Chinese automakers have made remarkable strides. China’s BYD last year introduced a small electric vehicle called the Seagull that sells for just $12,000 in China — and $21,000 for a version sold in some Latin American countries. Considered a marvel of engineering efficiency, its lightweight design allows the Seagull to go farther per charge with a smaller battery. BYD has said it is considering building a factory in Mexico — but only for the Mexican market.

American lawmakers and auto companies are not at all reassured.

“Just look at China: Look at how big their share of the EV market is,” John Lawler, Ford Motor’s chief financial officer, said at Deutsche Bank’s Global Auto Industry Conference this month. “Those are significant competitive threats that we have to deal with. They have a development process that is much faster — 24 months.” (By contrast, U.S. vehicles typically go through four to five years of development, though that time has been cut to three years or less for EVs.)

Critics point out that BYD and other Chinese EV makers have achieved cost efficiencies thanks to heavy government subsidies. Beijing spent 953 billion yuan (more than $130 billion at current exchange rates) on EVs and other green vehicles between 2009 and 2021, according to researchers at the Center for Strategic and International Studies, a bipartisan nonprofit that promotes ideas that solve global challenges.

“It’s not competition,” Biden said last month. “It’s cheating.”

Concern in Europe

Last month, Biden dramatically increased tariffs on Chinese EVs, from the 27.5% set under Trump to 102.5%. He aims to drive even BYD’s bargain-basement Seagull out of the U.S. market. (Europeans are also worried: The European Union says it plans to impose tariffs of up to 38.1% on Chinese EVs for four months starting in July.)

However, the United States-Mexico-Canada Agreement (USMCA) potentially allows vehicles assembled in Mexico — even if they are produced by European or Asian automakers — to enter the United States with a much lower tariff or no tariff at all. If cars made in Mexico meet USMCA requirements, they could enter the United States duty-free. To do so, at least 75 percent of a car and its parts must come from North America. And at least 40 percent must originate in places where workers earn at least $16 an hour.

However, for a Chinese EV maker like BYD, qualifying for duty-free treatment under the USMCA could be difficult even if it tried to source parts in North America.

“Even American automakers have a hard time meeting those thresholds,” said Daniel Ujczo, a senior attorney at the law firm Thompson Hine in Columbus, Ohio.

But there’s an easier way Chinese EV makers could use Mexico to try to skirt Biden’s deadly 102.5% import tax. They would have to pay just 2.5% — the tax that applies to most cars imported into the U.S. — if they can prove that assembling their electric vehicles in Mexico involved a “substantial transformation” that essentially turned them from Chinese cars into Mexican cars.

U.S. officials might reject the idea that a substantial transformation occurred during the assembly process. But the U.S. would have a hard time prevailing if that decision were challenged in the U.S. Court of International Trade, “given the substantial changes that typically take place in auto assembly plants,” wrote David Gantz, a trade lawyer and fellow at Rice University’s Baker Institute for Public Policy.

Still, Gantz said via email: “My conclusion is that by using one or more of the trade and national security mechanisms available to the U.S. government, the United States will successfully exclude Chinese/Mexican EVs.”

National security

The “most effective and quickest” way to keep out Chinese electric vehicles, Gantz argues, would be to block them on national security grounds. After all, today’s EVs are loaded with cameras, sensors and other tech that could collect images of the cars’ surroundings and sensitive personal information from drivers. And China isn’t just an economic competitor. It’s a geopolitical adversary — and, potentially, a military one, too.

“The US fears about the possible use of connected vehicles to spy on military facilities or power plants are not irrational,” Gantz wrote.

Biden has even warned that electric vehicles “could be remotely accessed or disabled.” In February, he ordered his Commerce Department to investigate Chinese “smart car” technology, a possible prelude to blocking Chinese EVs on national security grounds.

McDaniel of the Mercatus Center argues that the United States has a lot of leeway to do what it wants — especially given Mexico’s dependence on the United States, its No. 1 export market.

“You could imagine a scenario where the U.S. says to Mexico, ‘Don’t even think about allowing this investment (in Chinese EVs) into Mexico,’” he said. “We will not allow those cars to come into the U.S..”

“What’s stopping the White House, either right now or during the next administration, from issuing a new document, an executive order, saying, ‘We will no longer recognize products from our USMCA partners if they have more than X percent content from foreign entities of concern, including China? ‘” McDaniel said.

The United States has an added advantage because the USMCA is up for review in 2026. If it seeks to alter the agreement — perhaps to add a provision banning or limiting Chinese electric vehicles from Mexico — but fails to prevail after negotiating with Canada and Mexico, it could simply let the USMCA expire.

McDaniel noted that the World Trade Organization, which was created to enforce global trade rules, has become largely ineffective. Its Appellate Body — its highest court — effectively ceased to function in December 2019 because the United States blocked the appointment of new judges to the panel. Trade cases now remain unresolved indefinitely.

“We’re not in a WTO world anymore,” McDaniel said. “It’s ‘peace of the land’ — that’s the kind of world we’re in.”