Leibowitz on trade: electric vehicles – the Mexican connection

In 2023, Mexico emerged as the United States’ largest trading partner – larger than Canada and even China.

The growth of trade with Mexico has been truly historic: Mexico has never captured the title of largest exporter to the US. At $475 billion this year, the value of U.S. imports from Mexico surpassed China’s by nearly $50 billion. According to the report, US imports from China fell by 20% last year New York Times.

The dilapidation

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 inflows of about $35 billion last year. And there’s more to come.

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

One of Mexico’s main draws 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 penetrate the US market. Electric vehicles (EVs) are a prominent concern for the US.

The prospect that additional North American production will compete with American-made electric cars 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 electric vehicles. BYD recently confirmed its plans to build a manufacturing facility in Mexico. No timetable has been announced, but the company says it is exploring suitable locations.

The friction

A number of legal developments play a role here. EVs made in Mexico may not qualify for duty-free entry into the United States under the USMCA rules of origin. The ‘regional value content’ (North American parts) of cars must be equal to or greater than 75% to gain duty-free entry into the US. But the tariff on imported cars in the US is currently 2.5%.

However, electric vehicles made in China are subject to a 25% US tariff under the Section 301 action against imports from China, which has been in effect since 2018. That action is currently under review by the U.S. Trade Representative’s office. The rates may be continued, terminated or changed due to this review.

If BYD or another Chinese company builds a factory in Mexico to make electric cars – even if the vehicles do not meet USMCA origin requirements – US law would consider the electric cars to be of Mexican origin rather than Chinese, meaning the regular US rate of 2.5% would apply, but not the Section 301 rate.

Potential barriers in motion?

To counter this perceived threat, members of Congress have proposed raising tariffs on electric cars 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 cars produced by a Chinese company, regardless of where the vehicles were made. Such a provision would be contrary to WTO agreements – but that issue is virtually irrelevant today.

U.S. and international tariff laws generally apply to products from the country in which they are made. For example, a car made in Mexico is considered Mexican as long as the car has been “substantially transformed” in Mexico. The USMCA eligibility rules are stricter than the “substantial transformation” rules.

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

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

China will undoubtedly respond to this kind of legislation by claiming that the US (and the West in general) fears Chinese competition. And so it goes…

But still the irony of it all

The idea that China will benefit from the rush to put electric vehicles on the ramp is ironic. If all the world needs is electric vehicles to prevent frying in a warming climate, then we’d want everyone to have one or two. If China can make a good electric car for less money, that will help accelerate the transition.

But the administration is also concerned about creating (or preserving) American jobs, especially in unions. Auto companies are more than a little concerned about a rapid transition from combustion engines, which are more labor-intensive, to electric vehicles, which are less so.

The profits of American car manufacturers come almost entirely from gas-guzzling vehicles (SUVs and pickup trucks). While very few people in Washington are eager to talk about the logical divide between trade policies to suppress China and climate policies (aimed at replacing gasoline vehicles with electric vehicles), the divide is still there.

Since we are currently in Silly Season (a year before the presidential election), the responses will continue to pour in, regardless of whether they make sense or are consistent with other responses during Silly Season.

As all these inconsistencies continue to play out, we could see a major uproar over trade policy.

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

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