The prospect of low-priced Chinese EVs coming to the US from Mexico poses a threat to automakers

WASHINGTON – It’s a scenario that terrifies the American automobile industry.

Chinese automakers have set up shop in Mexico to exploit North American trade rules. Once implemented, they ship ultra-low priced electric vehicles to the United States.

As Chinese electric vehicles go on sale across the country, domestically produced electric vehicles in the United States — which cost an average of $55,000, roughly double the price of their Chinese counterparts — are struggling to compete. Factories close. Workers lose jobs across America’s industrial heartland.

Ultimately, it would all become a painful repeat of how government-subsidized Chinese competition has devastated American industries, from steel to solar equipment, over the past quarter century. This time, it would be electric vehicles, which North American car manufacturers see as the core of their business in the coming decades.

Low-priced Chinese EVs represent a potential “extinction event” for the American auto industry, the Alliance for American Manufacturing has warned.

Especially concerning: The 2020 U.S.-Mexico-Canada Agreement would potentially allow Chinese cars assembled in Mexico to enter the United States duty-free or with a nominal 2.5% tariff. Either way, China could sell its electric vehicles well below typical US prices.

To neutralize the threat, the US has options. Customs officials could decide that Chinese EVs do not qualify for tax relief or tax exemption benefits because they are manufactured 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 entering the US, claiming they would threaten America’s national security.

Beijing’s threat is emerging as U.S. automakers face a slowdown in electric vehicle sales. High prices and a shortage of charging stations are turning off many American consumers.

Cheap Chinese EVs can help by reducing prices, accelerating sales and encouraging investment in charging stations. “It would be cheaper to just let Chinese cars in, forget about all the tariffs and subsidies, let the market figure it out,” said Christine McDaniel, a senior fellow at the Mercatus Center at George Mason University. “Yes, it would be disturbing. But EVs would hit U.S. roads much faster.”

At stake is who will dominate the manufacturing and sale of zero-emission electric vehicles.

So far, China has taken a frightening lead. It accounted for nearly 62% of the 10.4 million battery-powered electric vehicles produced worldwide last year. The United States made 1 million – less than 10% of the total, according to GlobalData.

Chinese automakers have made notable strides to keep costs down. China’s BYD launched a small EV called the Seagull last year which is sold for just US$12,000 in China (US$21,000 for a version sold in four Latin American countries). The Seagull’s lightweight design allows it to go further per charge with a smaller battery. BYD said it is considering building a factory in Mexico – but only for the Mexican market.

Critics note that BYD and other Chinese electric vehicle 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 to 2021, according to the Center for Strategic and International Studies.

Last month, President Joe Biden raised tariff on Chinese EVs, from the 27.5% established during Donald Trump’s presidency to 102.5%. The goal is to eliminate even the cheap BYD Seagull from the US market. (The European Union says it plans to impose interim tariffs of up to 38.1% on Chinese EVs for four months starting in July.)

The U.S.-Mexico-Canada Agreement, however, potentially allows vehicles assembled by Chinese companies in Mexico to enter the U.S. with a much lower tariff or no tariff at all. If cars manufactured in Mexico met USMCA requirements, they could enter the United States tax-free. At least 75% of a car and its parts would have to come from North America. And at least 40% of this value must come from places where workers earn at least $16 per hour.

Still, for a Chinese electric vehicle maker like BYD, it would be difficult to qualify for tax-exempt treatment under the USMCA. “Even North American automakers struggle to meet these limits,” said Daniel Ujczo of law firm Thompson Hine.

But there’s an easier way for Chinese electric vehicle makers to use Mexico to try to dodge Biden’s 102.5% import tax: They would have to pay just 2.5% — the tax levied on most cars imported into the United States – if they could show that assembling their EVs in Mexico involved a “substantial transformation” that essentially transformed them from Chinese cars to Mexican cars.

US authorities could reject the notion that a substantial transformation occurred during the assembly process. But the U.S. would have difficulty prevailing if that decision were challenged in the U.S. Court of International Trade, “given the substantial changes that typically occur at automobile assembly plants,” said David Gantz, a fellow at Rice University’s Baker Institute for Public Policy. he wrote.

The “most effective and quickest” way to keep Chinese EVs out of the United States, Gantz argues, would be to block them for national security reasons. After all, today’s EVs are loaded with cameras, sensors and other technological devices that could collect images of the cars’ surroundings and sensitive personal information of EV drivers. And China is not just an economic competitor. It is a geopolitical adversary – and potentially a military one as well.

“US fears about the possible use of connected vehicles to spy on military installations or power plants are not unreasonable,” Gantz wrote. In February, Biden ordered his Commerce Department to Investigate Technology in Chinese “Smart Cars” ‘ a potential prelude to blocking Chinese EVs on national security grounds.

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AP Auto Writer Tom Krisher in Detroit contributed to this report.