WITA Panel Examines Protections for US Automakers, Cautions of Trade-Offs

Panelists from the U.S. and Mexico said that cars assembled in Mexico by Chinese-owned firms can't enter the U.S. with USMCA benefits because of the stringent rules of origin, but spent less time talking about how cars manufactured outside China, including in the U.S., could enter under 2.5% most favored nation tariffs.

Two Chinese automakers send knock-down kits from China for final assembly in Mexico, but that doesn't include enough value-add in Mexico to count as a Mexican car.

Scott Paul, president of the union-backed Alliance for American Manufacturing, told a Washington International Trade Association webinar audience that hiking the MFN tariff will have to be looked at.

Kenneth Smith Ramos, a former lead Mexican trade negotiator, who asserted there is no Chinese-ownership auto manufacturing in Mexico, said it's just rumors or announcements that Chinese firms are going to set up full-fledged auto manufacturing plants in Mexico. He said Chinese firms may not have established manufacturing in Mexico because they could set up in South Korea and get free trade benefits with less stringent rules.

Smith Ramos said Chinese overcapacity is a big challenge to all automakers -- he noted that 22% of total USMCA trade is in the auto sector.

He said Mexican business interests are quite concerned about Chinese industrial competition, whether for Mexican exports to the U.S., or in the Mexican market. He said Chinese goods are frequently the subject of trade remedy cases in Mexico, and, instead of reopening USMCA, Mexico, Canada and the U.S. should consider cooperating on a trade remedy approach.

Paul argued that by the time you can win a trade remedy case, the damage is done. He said the U.S. should revive China-specific safeguards that were proposed to deal with import surges almost 25 years ago when China joined the World Trade Organization.

Panelist Michael Dunne, who leads an advisory firm on electric vehicles, said Chinese factories could build 40 million vehicles a year -- half of all new vehicle sales -- and the Chinese market is only absorbing 25 million annually. (U.S. buyers purchased fewer than 16 million last year).

Dunne said there are price wars in China, and so automakers can't profit there. They exported 5 million vehicles last year, becoming the world's biggest automotive exporter, he said.

"I could easily see them going to 10 million a year," Dunne said. "No one in the world can compete with the Chinese on cost."

Dunne said because of overcapacity and subsidization, Chinese firms have a virtual monopoly on solar panels. "What is going to stop China from doing the same with autos?"

Paul agreed, saying if the U.S. doesn't block Chinese firms' cars from the U.S. -- no matter where they are manufactured -- the U.S. auto industry will go the way of the domestic solar panel industry.

"We have seen this show before," he said. He praised the administration's recent announcement it is working to write a rule to address national security concerns over the data collected by advanced vehicles, such as EVs, and noted bills introduced in the Senate that add tariffs for Chinese-owned firms' cars assembled outside China.

American Automotive Policy Council President Matt Blunt asked rhetorically how the U.S. could justify excluding firms from a particular country from qualifying as the product of a different country. Not only does that violate World Trade Organization rules on discrimination, he is worried other countries would copy the action and discriminate against General Motors cars made abroad.

Smith Ramos agreed that other countries might copy that kind of discrimination, and, that if the U.S. hiked its MFN rate, they might do the same. He also noted that 75% of GM vehicles sold in Mexico are Chinese-made.

Smith Ramos said that while the three countries do need to analyze what trade defenses they need in light of Chinese overcapacity, they should not neglect a positive agenda for their auto sectors. He said incentives and policies to lessen North America's dependency on Asian semiconductors and Chinese EV batteries are a good example.

"Rather than right off the bat talking about changing the USMCA rules, there are other cooperation initiatives that we could look at."

Blunt, whose trade group represents Ford, GM and Stellantis, said the best way to compete with China's auto sector is by increasing regional suppliers to automakers in North America, and more integration of the Mexican, Canadian and U.S. auto industry.

Panelist Ilaria Mazzocco, who studies the Chinese economy at the Center for Strategic and International Studies, said that the EU, which is considering trade remedies against Chinese autos, will have a difficult time disentangling how much of China's price advantage is due to smart business moves -- such as vertical integration and investing heavily to develop innovative EV batteries in order leapfrog other countries' automakers in the EV space -- and how much is government subsidies. Chinese firms can receive grants, tax credits, below-market financing, financing that doesn't make commercial sense, land below cost, public procurement contracts, equity injections, subsidized minerals or battery components.

"That complicates the response," she said.

Moderator Wendy Cutler, vice president of the Asia Society Policy Institute, asked Smith Ramos if the announcement after Treasury Secretary Janet Yellen visited Mexico City means Mexico will scrutinize foreign direct investment from China into its auto sector.

Smith Ramos replied that Mexico has an open investment climate. So far, Chinese-owned auto parts factories in Mexico are a small portion of the FDI in Mexico, but it's growing.

Mazzocco said, "It’s hard to tell countries not to accept foreign direct investment. It’s not just a question of loopholes, but also a question of compliance" with customs rules, she said.

"Do we really want to regulate companies based on their ownership rather than where they’re producing? That’s a slippery slope," she said, adding that it's "also very complicated based on how companies are structured these days."

Dunne argued that the talk of building higher trade barriers to Chinese autos, made in or outside China, is no overreaction. He said that Volvo, which is Chinese-owned, already has a plant in South Carolina, and because it exports some of those cars to Europe, it is able to offset the duties paid to Europe with imports of Polestars, its Chinese-made EVs.

Mazzocco said Polestars are 2% of all imported EVs in the U.S. She also noted that the single largest exporter of EVs from China is Tesla.

She said that economic interests -- the U.S. automaking sector is about 3% to 4% of GDP -- and national security interests are being conflated.

She argued that the U.S. industry hasn't been as innovative as China has been in the transition from fossil fuels, and if you protect the U.S. industry, it will have less impetus to innovate.

She added that policymakers should keep in mind the trade-offs inherent in protecting domestic firms.

Cutler, a longtime USTR staffer, noted that there were government officials listening to the program, and she also urged them to consider the trade-offs of possible actions.