Biden’s Tariffs Will Keep Chinese EVs out of the United States, and Mexico Will Not Serve as a Backdoor

President Biden has unveiled a new series of tariffs targeting Chinese imports in strategic sectors. One of the most high-profile of these is an increase on the tariff on Chinese Electric Vehicles (EVs) from the current rate of 25% to 100%. This comes following warnings from the Alliance for American Manufacturing (AAM) lobbying group that “cheap Chinese autos” could become an “extinction-level event” for the U.S. auto sector. There is broad cross-party support for greater restrictions on imports of Chinese cars, including from Biden’s fellow presidential nominee, former President Trump, who has also called for a 100% tariff on Chinese cars.

These tariffs are mostly preventative and partly symbolic, as the United States imports very few EVs from China: just 12,362 in 2023, accounting for 3% of all U.S. EV imports. The only Original Equipment Manufacturer (OEM) selling significant quantities of Chinese-made EVs in the United States is Geely-owned Polestar, which sold 12,215 units of the Polestar 2 in the United States last year, all of which were produced in China. Polestar is able to offset these tariffs as its sister company, Volvo, exports U.S.-made vehicles from its factory in South Carolina. This means that these tariffs will not disrupt the current operations of any Chinese OEMs, and while they may upset some plans, no Chinese OEM has made any firm commitments to enter the U.S. market. These trade measures have simply reinforced the status quo and will ensure that the U.S. automotive industry is insulated from the competitive advantages of Chinese OEMs.

There has been much discussion about the potential for Chinese OEMs borrowing a strategy from their American counterparts and producing vehicles in Mexico to take advantage of the North American free trade zone and avoid tariffs. There is, however, no chance that this actually happens. If there is any potential for Chinese OEMs to make inroads in the United States, new tariffs or policies will be put in place to stop them. This is already being proposed: Trump has claimed that he will put a 100% tariff on cars made in Mexico by Chinese companies, while Senator Hawley and Senator Rubio have separately introduced bills that would place a 125% tariff or a flat US$20,000 tariff on imports of all cars made by Chinese companies, irrespective of country of production. Most recently, there are reports that Mexican authorities are withdrawing incentives from Chinese automakers under pressure from the United States Trade Representative.

The U.S. government has many tools in its arsenal, and if these “soft” measures fail, it will just ban Chinese OEMs, as it has already done with Huawei, and is trying to do with TikTok. The political will to keep Chinese companies out of critical industries is immense, and this is only compounded by the nature of the auto industry: it has powerful unions, is responsible for more than 1 million jobs, and has a strong symbolic significance for the American economy. Chinese automakers are well aware of this, and they are not going to invest resources in getting around trade barriers by setting up in Mexico.

The Chinese auto industry is, however, still interested in Mexico. BYD is currently choosing a location in Mexico to set up a factory with an annual capacity for 150,000 units and has recently launched a Plug-in Hybrid Electric Vehicle (PHEV) pickup truck in Mexico. Other OEMs, including SAIC-owned MG, Chery-owned Jaecoo, and GWM, have similar intentions; and JAC Group is already there through a joint venture with a local producer. If they are planning on entering the U.S. via Mexico, they will be disappointed, and will leave billions of dollars’ worth of assets vulnerable to the whims of the U.S. authorities that have already made their opposition clear. There is, however, an opportunity in Mexico as a lucrative market in its own right, with 1.36 million Light Vehicle (LV) sales in 2023.

Chinese OEMs are already very successful in Mexico. In 2023, they sold 129,329 units in the country, equivalent to 9.5% of all LV sales, and up 63% from 2022. Thanks to the export of China-made vehicles to Mexico by OEMs like General Motors (GM), 19.5% of LVs sold in Mexico were made in China. Chinese OEMs are well-positioned to dominate in emerging markets because China is itself an emerging market. Low-cost cars are a core part of their business, so this is an area it focuses on and invests in heavily. This is particularly true for the EV sector: Western OEMs are still unable to produce EVs at low costs or at high scales, so they are concentrating their resources on more expensive large cars and premium models.

There is an ongoing global trend of Chinese OEMs moving into emerging markets and rapidly taking market share; this will be compounded by Chinese dominance in the EV segment. EVs have low penetration rates across Latin America, but Chinese OEMs are doing very well in this emerging sector. Costa Rica is the regional leader with Battery Electric Vehicles (BEVs) accounting for 12% of sales in 2023; Chinese brands accounted for nearly two-thirds of these sales and six of the ten most popular models.

Mexico is a relatively minor market for the American OEMs that operate in it: in 2023, it accounted for 3.0% of GM’s sales, 1.6% of Stellantis’, and 1.3% of Ford’s. They think of Mexico first as a destination for manufacturing offshoring, rather than a market to sell cars in. There are many smaller markets, however, across South America, the Middle East, Africa, and Southeast Asia that, collectively, account for a decent quantity of sales. Chinese OEMs will keep eating away at their market share in these regions, unless American OEMs commit to them by developing new EV models, setting up local EV production plants, and establishing battery supply chains.

Serious questions need to be asked of these OEMs about which overseas markets they are going to defend and in which they will sell off assets or enter a managed decline. At home, they can call on their governments for protection, but in emerging markets, they will have no such advantages and will have to compete on their own merits. In January 2024, GM announced investments of US$1.4 billion to electrify its business in Brazil, its third-largest market. GM will be competing with BYD and GWM, and their upcoming Brazilian EV plants with capacities of 150,000 and 100,000 units, respectively. Until now, electrification has been centered around a handful of countries, but emerging markets in Latin America will be a new battleground with hot competition that will drive regional and global EV sales.