Leibowitz on trade: Electric vehicles—the Mexican connection

The run-down

The US-Mexico-Canada Agreement (USMCA), which replaced the 1990s NAFTA in 2020, has been a catalyst for trade growth. And Mexico has attracted a lot of foreign investment, with an inflow of about $35 billion last year. And there is more to come.

There are early moves in Congress and the Biden administration to allow for the expansion of USMCA to other Western countries.

One of the key attractions of Mexico is USMCA, which gives goods produced in Mexico duty-free access to the US market. This is starting to worry some in Congress and the Biden administration. China has noticed that Mexico can be a springboard to penetrating the US market. Electric vehicles (EVs) are a prominent source of concern to the US.

The prospect of additional North American production competing with American-produced EVs is far from theoretical. Last year, China was confirmed as the world’s largest EV producer. One company, BYD, surpassed Tesla as the largest corporate producer of EVs. BYD recently confirmed its plans to construct a production facility in Mexico. No timetable has been announced, but the company says it is exploring suitable sites.

The rub

A couple of legal developments come into play here. EVs made in Mexico might or might not be eligible for duty-free entry into the United States under the origin rules of the USMCA. “Regional value content” (North American components) of automobiles must equal or exceed 75% to obtain duty-free entry into the US. But the tariff on imported autos into the US is currently 2.5%.

EVs made in China, however, are subject to a 25% US tariff under the Section 301 action against imports from China, which has been in place since 2018. That action is under review by the Office of the US Trade Representative. The tariffs may continue, be terminated, or changed because of this review.

If BYD or another Chinese company builds a plant in Mexico to make EVs—even if the vehicles fail to meet USMCA origin requirements—US law would consider the EVs to be of Mexican origin rather than Chinese, meaning that the regular US tariff of 2.5% would apply, but not the Section 301 tariff.

Potential barriers in-motion?

To counter this perceived threat, members of Congress have proposed hiking tariffs on EVs made in Mexico by Chinese-owned companies. Sen. Josh Hawley (R-Mo.) introduced such a bill last month, which would impose a 100% tariff on passenger vehicles produced by a Chinese company regardless of where the vehicles were made. Such a provision would violate WTO agreements—but that issue is almost irrelevant these days.

US and international tariff laws generally apply to products from the country in which they are made. A car made in Mexico, for example, is considered Mexican, so long as the car was “substantially transformed” in Mexico. The rules for USMCA eligibility are more stringent than the rules on “substantial transformation.”

But US Customs and Border Protection has ruled that the Section 301 tariffs only apply to goods that are “made in China.” Cars made in a Mexican factory are Mexican for tariff purposes. Sen. Hawley’s bill, and others that have been or may be introduced would change a fundamental rule of tariff law. Sen. Hawley’s bill would increase the tariff on imported cars to 100% if they are made in China or by a company based in China, regardless of where the cars are made.

There are, of course, arguments, ranging from weak to compelling, that China merits special attention and more tariffs, because of things like intellectual property theft, massive subsidies from the Chinese Communist Party and the like.

China will, no doubt, respond to legislation like this by claiming that the US (and the West generally) is afraid of Chinese competition. And so, it goes…

Yet the irony of it all

The idea that China will benefit from the rush to put EVs in driveways is ironic. If EVs are all that is required for the world to avoid frying in a warming climate, then we should want everyone to have one—or two. If China can make a good EV for less money, that will help make the transition faster.

But the administration is also concerned about creating (or keeping) American jobs, especially union jobs. Auto workers are more than a little apprehensive about a rapid transition from internal combustion engines, which are more labor intensive, to EVs, which are less so.

The profits of America’s auto producers come almost entirely from gas-guzzling vehicles (SUVs and pickup trucks). Although very few people in Washington are anxious to talk about the logical disconnect between trade policy to stifle China and climate policy (aimed at replacing gasoline-powered vehicles with EVs), the disconnect is still there.

Because we are currently in Silly Season (a presidential election year), comments will continue to flow, regardless of whether they are logical or consistent with other comments during Silly Season.

We could see major dustups over trade policy while all these inconsistencies play out.

Editor’s note: This is an opinion column. The views in this article are those of an experienced trade attorney on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.