WASHINGTON — It’s a scenario that terrifies the American auto industry.
Chinese automakers set up shop in Mexico to exploit North American trade rules. Once in place, they send ultra-low-priced electric vehicles to the United States.
While Chinese electric cars are on sale across the country, American electric cars – which cost an average of $55,000, about double the price of their Chinese counterparts – are struggling to compete. Factories close. Workers are losing jobs in America’s industrial heartland.
Ultimately, 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 will consider the core of their activities in the coming decades.
Low-priced Chinese electric cars represent a potential “extinction-level event” for the U.S. auto industry, the Alliance for American Manufacturing has warned.
Of particular concern, the 2020 U.S.-Mexico-Canada Agreement could allow Chinese cars assembled in Mexico to enter the United States duty-free or at a nominal 2.5% tariff. Either way, China could sell its electric cars well below typical U.S. prices.
To neutralize the threat, the US has options. Customs officials could rule that Chinese electric vehicles do not qualify for the low or tax-free benefits that come with production in Mexico. U.S. policymakers could also pressure Mexico to keep Chinese vehicles out of that country. Or they could ban Chinese electric vehicles from the US because they threaten America’s national security.
Beijing’s threat emerges as U.S. automakers face declining sales of electric vehicles. High prices and a shortage of charging stations are keeping many American consumers away.
Cheap Chinese electric vehicles can help by lowering prices, accelerating sales and encouraging investment in charging stations. “It would be cheaper to let the Chinese cars in, forget about all the tariffs and subsidies and let the market figure it out,” said Christine McDaniel, a senior research fellow at George Mason University’s Mercatus Center. “Yes, that would be disruptive. But electric cars would be on the road in the US much faster.”
It’s about who will dominate the production and sales of zero-emission electric vehicles.
China has taken a huge lead so far. It accounted for almost 62% of the 10.4 million battery-powered EVs produced worldwide last year. The United States made 1 million – less than 10% of the total, according to GlobalData.
Chinese automakers have made remarkable progress in keeping costs in check. The Chinese BYD introduced a small electric car last year, the Seagull which sells 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 per charge on a smaller battery. BYD has said it is considering building a factory in Mexico, but only for the Mexican market.
Critics note that BYD and other Chinese EV makers have achieved their cost-efficiency thanks to heavy subsidies from the Beijing government. The Chinese government spent more than $130 billion on EVs and other green vehicles from 2009 through 2021, according to the Center for Strategic and International Studies.
Last month, President Joe Biden raised tariffs on Chinese electric cars, from 27.5% during Donald Trump’s presidency to 102.5%. It is intended to price even the affordable BYD Seagull out of the US market. (The European Union says it 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 allows vehicles assembled in Mexico by Chinese companies to enter the U.S. at a much lower rate or not at all. If Mexican-made cars met the requirements of the USMCA, they could enter the United States duty-free. At least 75% of a car and its parts should come from North America. And at least 40% of that must come from places where workers make at least $16 an hour.
Still, it would be difficult for a Chinese EV maker like BYD to qualify for duty-free treatment under the USMCA. “Even North American automakers are struggling to meet those thresholds,” said Daniel Ujczo of the law firm Thompson Hine.
But there’s an easier way Chinese EV makers could use Mexico to avoid Biden’s killer 102.5% import tax: They would only have to pay 2.5% — the tax levied on most cars sold in the United States. States are being imported – if they could show that assembling their EVs in Mexico brought about a “substantial transformation” that essentially transformed them from Chinese to Mexican cars.
U.S. officials may reject the idea that any substantial transformation occurred during the assembly process. But the U.S. would struggle to prevail if that decision were challenged in the U.S. Court of International Trade, “given the substantial changes that typically occur at auto assembly plants,” said David Gantz, a fellow at the Baker Institute for Rice University Public Policy. has written.
The “most effective and fastest” way to keep Chinese electric vehicles out of the United States, Gantz argues, would be to block them on national security grounds. After all, today’s electric vehicles are packed with cameras, sensors and other technological gadgets that can collect images from the cars’ surroundings and sensitive personal information from EV drivers. And China is not just an economic competitor. It is a geopolitical opponent – and possibly 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 Ministry of Commerce to investigate the technology in Chinese ‘smart cars’ ‘ a possible prelude to blocking Chinese electric vehicles for national security reasons.
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AP Auto Writer Tom Krisher in Detroit contributed to this report.