Up until now the threat posed by imported Chinese electric vehicles (EVs) to established Western automakers has been seen as a mainly European problem. European tariffs on such imports are 10 percent, U.S. tariffs 27.5 percent. Moreover, smaller Chinese EVs may be better suited to European tastes.
However, via Reuters (February 14):
China’s BYD Co Ltd will set up a new electric vehicle . . . factory in Mexico, Nikkei reported on Wednesday, citing the company’s Mexico head, as the EV maker aims to establish an export hub to the United States.
BYD, known for its cheaper models and a more varied lineup, recently overtook its biggest rival Tesla Inc to become the world’s top EV maker in terms of sales.
According to the Nikkei report, BYD has launched a feasibility study for the Mexican plant and is currently negotiating with officials over terms, including the factory’s location. . . .
The carmaker’s Mexico office declined to comment.
Major U.S. automakers have warned that Chinese cars could spell doom for their own prospects, among them Elon Musk’s Tesla.
Last month, Tesla’s chief executive predicted that Chinese automakers will “demolish” global rivals without trade barriers.
Musk’s view is echoed by a leading advocacy group.
“The introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the U.S. auto sector,” according to a forthcoming report by the group Alliance for American Manufacturing.
That report is now out, and in it the Alliance has set out its objections in more detail, arguing, as Reuters reported on February 24, that “the United States should work to prevent automobiles and parts manufactured in Mexico by companies headquartered in China from benefiting from a North American free trade agreement.”
The authors of the report maintain that “the commercial backdoor left open to Chinese auto imports should be shut before it causes mass plant closures and job losses in the United States.” They also point out that “vehicles and parts produced in Mexico can qualify for preferential treatment under the U.S.-Mexico-Canada trade agreement as well as qualifying for a $7,500 electric vehicle (EV) tax credit.”
And as Reuters reports, there is another twist to the story:
Tesla announced plans almost a year ago to build a factory in the northern Mexican state of Nuevo Leon. In October, Mexico said a Chinese Tesla supplier and a Chinese technology company would invest nearly a billion dollars in the state.
Reuters continues:
A bipartisan group of U.S. lawmakers has urged the Biden administration to hike tariffs on Chinese-made vehicles and investigate ways to prevent Chinese companies from exporting to the United States from Mexico.
A group of lawmakers urged U.S. Trade Representative Katherine Tai to boost the 27.5% tariff on Chinese vehicles and said her office “must also be prepared to address the coming wave of (Chinese) vehicles that will be exported from our other trading partners, such as Mexico, as (Chinese) automakers look to strategically establish operations outside of (China).”
Alliance for Automotive Innovation CEO John Bozzella has said that proposed U.S. environmental regulations could let China gain “a stronger foothold in America’s electric vehicle battery supply chain and eventually our automotive market.”
“U.S. environmental regulations” is a reference to the proposed EPA rules that would squeeze sales of new internal-combustion-engine cars, something that the Alliance for American Manufacturing was (rightly) complaining about last year (I wrote about it here).
I’m not normally sympathetic to calls for tariffs, which distort markets and operate as a tax on consumers, but the situation in this case is not so clear-cut. China is a hostile power attempting to take advantage of the forced transition to EVs to build a dominant position in the global auto market. Beijing has provided substantial assistance to its EV manufacturers in order to enable them to achieve this aim.
Meanwhile, in the U.S. the (increasingly) coerced transition to EVs is divorcing the auto sector from basic market disciplines. Companies are being “encouraged” by the Biden administration and some states to manufacture cars that they don’t want to make and that most consumers do not want to buy.
So, what to do about the possibility that Chinese EVs could dominate this state-created “market” in the U.S., devastating the U.S. auto sector, and taking large numbers of jobs with it?
The most obvious solution is the one that will not happen. It begins by scrapping the rules designed to “force” consumers to buy EVs. Ideally, that should be accompanied by sweeping away the subsidy regime designed to encourage the manufacture and purchase of EVs in the U.S. If EVs are as good as we are so often told, and if consumers are so keen to (supposedly) save the planet as we are so often told, then car manufacturers, spurred by having to compete with the internal combustion engine, should need no “encouragement” to develop EVs beyond the niche product pioneered by Tesla into something with genuine mass-market appeal. This is something that U.S. automakers ought to be able to manage without the need to build new tariff walls between the U.S. and Mexico.
And if, absent government carrots and sticks, EVs are unable to become a mass-market product, then there will be no reason to fear “Chinese” imports coming from Mexico, and, again, no need to build new tariff walls between the U.S. and Mexico.
If, on the other hand, those looking to compel the U.S. to switch over to EVs do not change their course, there is a distinct possibility that Mexican-made Chinese EVs could mean real trouble for American auto manufacturers. If Chinese EV manufacturers succeed in penetrating the American market from Mexico, they could also win consumer acceptance for “made in China” EVs, which may be cheap enough to be able to price in a 27.5 percent tariff while still being competitive.
Under those circumstances, it is hard to see how the administration would be able to resist hiking tariffs on EVs from China, and on “Chinese” EVs from Mexico. Doing the former could lead to a trade war with China, doing the latter risks making a mess of USMCA (the successor to NAFTA) with adverse consequences for U.S. companies beyond the auto sector and for the U.S. relationship with Mexico. However, doing either (or both) will mean that American car buyers will pay more for the EVs that they will be compelled to buy.
The current forced transition to EVs is, in its way, a classic example of central planning at work. This new story is yet another reminder that, like most classic examples of central planning, it will end up in a very bad place.