US policy makers are growing concerned over Chinese EVs potentially flooding the US market, outcompeting with domestic producers. Carmakers view China’s potential entry into the domestic electric vehicle market as a possible catastrophe.
What is China planning? How will going through Mexico bypass current tariff schedules? And what are the possible responses to this perceived threat?
These are all questions we’ll explore below. But first, let’s talk about China.
China has a history of gutting US domestic production by flooding the market with cheap products. Over the past quarter century, cheap goods from China and other Asian countries have made it increasingly difficult for US manufacturers to keep up. As a result, much of US manufacturing has packed up and gone elsewhere.
China’s government subsidizes these producers to keep prices unrealistically low. And because of this, some have said that what China is doing is not actually competition but cheating. President Trump sparked a trade war with China by raising tariffs on their goods to historic highs. And President Biden has continued this policy.
In fact, just a month ago, President Biden raised Trump-level tariffs on Chinese EVs from 27.5% to a staggering 102.5%. The move will likely have little impact on China’s EV exports to the US, because there is very little trade in that industry at the moment. But it underscores just how afraid policy makers and car makers alike are that Chinese EVs are coming.
And it’s no surprise. Currently, the average electric vehicle made in the US sells for about $55,000. But Chinese-made EVs can sell for less than half that. Furthermore, the US currently sells only about one million EVs per year, second placed to China, where over 10.4 million are manufactured annually. Naturally, China sees a significant opportunity in coming to the US. But crippling tariffs make that impossible.
That’s where Mexico comes in.
China wants to partner with Mexico to manufacture EVs for export to the US. Why? Because, under the USMCA, electric vehicles manufactured in Mexico may be sold duty free to any other member country (the US or Canada). As long as 75% of the vehicle comes from North America and at least 40% of the vehicle is made by workers earning at least $16/hour, a Mexican-made EV is duty free in the US.
This holds true regardless of where the company making the car is based. As a result of this close partnership between Mexico and the United States, Chinese companies are beginning to see an opportunity to set up maquiladoras in Mexico to manufacture Chinese EVs for the US market – bypassing the 102.5% tariff currently in place.
And Mexico has a lot to offer anyone manufacturing in the EV industry. Currently the country boasts:
Now, keep in mind, unlike EVs made in China, EVs made in Mexico by Chinese companies still must meet USMCA requirements. They must use primarily North American parts. This contributes to demand for manufacturing labor and materials in the US and all of North America. But it also allows Chinese-owned EVs a foothold in the US.
And as they struggle for dominance, China is betting big that Mexico can keep them in the manufacturing game.
The US has several potential ways to respond to this potential threat. Some are calling on policymakers to create some form of ban on Chinese EVs coming in from Mexico. How to craft this so it would not run afoul of the trade treaty is the tricky part.
And even if banning Chinese EVs made in Mexico were to work, Chinese companies could still find a way to modify the vehicles to show a “substantial transformation,” thus making them Mexican EVs, not Chinese. This would allow the vehicles to be imported into the US at only a 2.5% tariff.
Another option is to ban them based on national security concerns. It has been noted that modern electric vehicles are highly capable of carrying out spy functions. Cameras and GPS sensors could theoretically be used to monitor many things in the US. There is even the concern they could be operated or disabled remotely. As such, banning them as a threat to national security is being discussed.
A third option is to revise the USMCA trade agreement to exclude Chinese companies. The agreement comes back up for revision in 2026. And the three signatories could choose to revise it or let it expire outright.
But a final way of responding that may not be as popular is to simply allow the free market to decide. As some economists and analysts have pointed out, yes, Chinese EVs will be disruptive for US automakers. But it would also open up the market much faster than current trends, which show the US quite hesitant to adopt EVs. They may actually create more demand for EVs in the long run.
China is currently building EV factories in Mexico. They are certainly targeting the US. But the question few are asking is, will there even be a market for them? Americans are so wary of this new technology. So, while Chinese EVs may undercut US domestic prices, they may also rapidly pave the way for an EV market in a country that might otherwise take decades to adopt it.
