U.S. Trade Representative Letter Suggests an Increased Effort to Exclude Chinese EVs from the U.S. Market

By Matthew McMullan
Jan 18 2024 |
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The Biden administration’s trade representative hints any revised tariffs will coincide with the Section 301 review.

The Biden administration appears to be planning to crack down on Chinese electric vehicle (EV) imports, according to a letter from the U.S. Trade Representative to the House Select Committee on the Chinese Communist Party.

The letter from Ambassador Katherine Tai, dated January 4 and first obtained by Politico, is in response to a November letter from the committee outlining its concerns about a potential surge in Chinese EV and EV component imports. Tai’s response suggests those imports could face further tariffs when the administration completes its review of the Section 301 tariffs on more than $300 billion worth of Chinese goods. Those tariffs were originally raised by the Trump administration in 2018 and have largely been maintained by the Biden White House. The review is expected to keep them in place.

“The statutory review, which I expect we will conclude in the next few months, provides an opportunity for USTR to make a full assessment of the Section 301 tariffs, and their effectiveness in changing China’s behavior and counteracting China’s unfair policies and practices,” wrote Tai.

She continued:

As you note (in your earlier letter), the substantial 301 tariffs have also encouraged Chinese firms to set up operations outside China, whether in the United States or in other jurisdictions. Existing rules of origin have left openings for those Chinese firms to benefit from MFN treatment (avoiding Section 301 tariffs) or preferential treatment under free trade agreements (avoiding MFN tariffs). Given the openness of our market to goods from key trading partners and to foreign investment, we will need to work closely together with the Congress on evaluating and addressing these challenges.

What Tai is referring to here is the growth of Chinese investment in and exports to countries like Mexico, which has a trade agreement with the U.S. and Canada – the USMCA, the revision and update to 1993’s NAFTA that went into effect in 2019. Chinese EV sales have boomed in the Mexican market this year and, combined with the new factories Chinese auto manufacturers are building there, the likelihood that Chinese EVs and their components will begin appearing in the United States has risen.

And yet! Even as Mexican exports to the U.S. have increased significantly under the USMCA and amidst the U.S.’s implementation of its Section 301 tariffs on Chinese imports, so too have Chinese exports to Mexico. That suggests the Section 301 tariffs and the USMCA have made nearby Mexico a more palatable place for companies in the U.S. market to establish supply chains. It also suggests Chinese companies are looking to reroute their goods through Mexico to avoid those tariffs.

Some of this is above board. Indeed, the USMCA’s rules allow manufacturers to import cars to the U.S. duty free as long as 75% of the vehicle’s parts were built in North America. And some of it isn’t; studies have contended that a portion of Mexico’s increased U.S. exports are just rerouted Chinese-made products.

But while U.S. tariffs on Chinese EV imports have kept them from swamping the U.S. EV market, as they’ve done in Europe, Chinese manufacturers are being proactive in getting around the barrier the tariffs present – and Mexico isn’t the only place they’re setting up shop to do so. Polestar, Fortune notes, has opened a factory in South Korea, and the luxury EVs it will make there will avoid the U.S. tariffs. It also plans to build them at a factory in South Carolina.

It all falls in line with the Chinese government’s plans to manufacture its way out of its relative economic doldrums, and it plans to focus on emerging industries like EVs, batteries and renewable energy products to do it. From the Wall Street Journal:

The hope is that growth in what Chinese officials refer to as the “New Three” industries and other favored sectors will help China’s economy banish the specters of deflation and Japan-style stagnation as a real-estate crunch weighs heavily on construction, investment and consumer confidence.

Longer-term, Beijing wants these and other high-tech manufacturing industries to be in the vanguard of its push to eventually unseat the U.S. as the world’s largest economy, while also helping it grow richer and weather the pressure of an aging and shrinking population.

The review of those Section 301 tariffs, which will likely mean an increase in tariffs on some product categories like EVs and EV components, is highly anticipated in Washington.