No Dogs or EVs: The North American Trade Bloc and YOU.

A ban on Chinese EV makers is coming.? What – if anything – does this mean for nearshorers?

End of the Story First:? Highly placed US trade representatives (including President Biden) have been dropping hints that a ban on Chinese Electric Vehicles (EVs) is imminent.? BYD seems to agree – they have made it clear that they do not have designs on the US market, but plan to move forward in Mexico and Brazil.??

What will this mean to manufacturers in the USMCA zone – or the North American Trade Bloc?

1. ?Little to nothing.? This is just reinforcing the status quo. There are no Chinese EV makers in the top 10.???
2. Compliance and customs headaches.? There is a clear trend towards restricting certain types of Chinese trade, and we’ll see it play out on the border of Nuevo Leone and Texas.??
3. Brave New North America.? Barriers to entry, new technologies, streamlined border logistics – the future is bright for entrepreneurs and innovators in the New North America.?

A Civilized Exchange of Views. Our Method:

Over the coming weeks, Brian Dennis (Brian Dennis | LinkedIn ) and I will discuss the implications of this latest trend of new trade restrictions on China.? While we both agree that the news is interesting OVERALL, we come at this issue from contrasting points of view – and differing recommendations for managers. I am a former business school professor and international negotiator with a formal finance background. I am originally from NY but spent 20 years in Asia.? I’m now based in Western Mexico. And I am old.

Brian is an entrepreneur and global supply chain professional, who has spent more than a decade in China working in manufacturing and international trade.? And he is young.??

We are going to look at the same set of issues, and then deliver two different analyses and courses of action.??

• I’m taking a risk-analysis POV, looking at a longer-term strategy (5 – 10-year? time horizon).??
• Brian approaches problem-solving from a practical standpoint, focusing on everyday sourcing and logistics challenges. He prefers innovative solutions for present-day issues while also strategically positioning companies’ supply chains for future opportunities.

Brian’s View:

China is here to stay. There has been a lot of hype in the media recently around concepts like reshoring, nearshoring, and diversification away from China. The truth is that the country's extensive manufacturing options, control over critical components and raw materials, and steadfast commitment of its government to advanced manufacturing ensure its role as a crucial supply base for the next 10-20 years.

That being said, the Biden Administration is very likely to raise tariffs on Chinese-made EVs. China's surplus in manufacturing, driven by its state-directed model, is exacerbated by economic and political pressures, unemployment challenges, and post-COVID strategic plans, fueling its aggressive pursuit of market share in the global EV market.

We’ve seen this over-capacity in other industries before and the inevitable waste it creates. One need only recall the haunting images of abandoned Chinese bicycle graveyards to grasp the extent of non-market-driven production in China. Nations are justified in protecting their burgeoning domestic EV industries from China's state-subsidized attempts to dominate international markets.

However, EV imports remain relatively small compared to the overall automotive imports, and all other imports in general. A rough calculation based on 2023 US imports from China shows that US imports of EVs may be as low as 0.02% of overall trade with China.

It's crucial to bear in mind that we're in an election year, a time when nations often unite by directing attention toward an external adversary. Undoubtedly, China poses challenges to the United States and its interests. However, amidst the media frenzy and political rhetoric, it's imperative not to succumb to exaggerated fears. Instead, we should reflect on past instances of market overreactions driven by irrational exuberance.

Brian’s action plan / What this means to you:

I recommend that supply chain leaders adopt a prudent approach toward the anticipated trade restrictions on Chinese EV imports. Simultaneously, they should gradually diversify and fortify their supply chains to mitigate potential geopolitical risks arising from tensions between Beijing and Washington. This balanced strategy ensures preparedness without yielding to undue panic.

Andrew’s View:

The US government is getting ready to ban Chinese EVs. ( Statement from President Biden on Addressing National Security Risks to the U.S. Auto Industry | The White House ?) President Biden is following his standard playbook – 1. Worrying out loud 2. Ordering a high-level study, and 3. Instituting sweeping trade restrictions.? That’s what he did before UFLPA and the semiconductor embargo.??

What are the implications for nearshorers and newcomers to Mexico?? Welcome to the New North American Trade Bloc.

Overall, a Chinese EV ban is another in a long line of indicators that the US is shifting to a protectionist stance.? US-based brands (and the suppliers in US-destined value chains) will benefit from this - in the short term. ? Geopolitical tension and the protectionism that accompanies it are rarely simple or straightforward, and the consequences of this new escalation are going to ultimately land right on the Mexican-Texas border.? Nearshorers have a good news / bad news scenario on their hands.??

This is what the Chinese EV ban will mean to Nearshorers:

First - we have confirmation of the protectionist characteristics of the USCMA zone. For a while, it looked like China was going to be one of the big beneficiaries of North American nearshoring as it scrambled to set up its own logistics base in Northern Mexico.? I’m thinking specifically of Hofusan Industrial Park in Salinas Victoria, Nuevo Leon,? just north of Monterrey -- but there are other big projects on the drawing board.?

Many nearshoring managers don’t recognize the importance of this move because it doesn’t seem directed at them.? After all, the initial impact of this rule will be confined to Chinese EV makers — and BYD has already stated that they don’t plan on marketing to the US - from Mexico or China.??

The US using national security as a rationale for banning an entire class of products is, in fact,? a turning point for US-China relations.? This may be the final straw that moves us from “strategic competitors” to just flat-out “adversaries”.? I’m worried about tit-for-tat retaliation - but I’m more concerned about what happens next on the US side as politicians and populists try to claim that anything made in China is a security risk.??

In the short term, expect more compliance and customs headaches.? The USMCA /T-MEC provides for low/no-duty exports from China if you can comply with all of the rules.? As the US continues to use trade restrictions to prosecute its China agenda, the burden will fall on exporters.? You will have to demonstrate that you are complying, and the more materials and components from China, the harder that will be.? This will also be a problem with those using Vietnam and SE Asian factories that are closely tied to China.? Collecting the data to show you are complying with UFLPA and other restrictions will be more of a challenge.

Longer term, you might be the beneficiary of protectionism and exclusionary trade blocs.? If this ban is effective at thwarting China’s plans, we can expect to see more applications of protectionist rules.? If the US can pressure Mexico to make China less comfortable investing in North America (and there is evidence that that is exactly what is happening), then the USMCA will be the most profitable trade bloc in the world.? Let China try to sell its excess production in Africa or Central Asia.? You have exclusive access to the spendiest market in the world.

?Andrew’s action plan / What this means to you:

This new wave of protectionism may be the start of an extinction-level event for China-based SME producers targeting the US.? For those who have already made the nearshoring leap, it may be the opportunity for you to level up your brand and supply chain.? The USMCA will be the most coveted market in the history of the world – and the most protected.? If you’re already inside the walls, then you should be positioning yourself now to a) defend your existing supply chain in the short term, and b) use your preferred market access to leapfrog competitors.??

Final Word:

A ban on Chinese EVs won’t move the needle much in terms of daily trade numbers, but it has some powerful implications for the future.? If the “national security” rationale gets politicized within the US, we could see more restrictions and compliance headaches. ? It may turn out to be an empty threat or an unenforceable bottleneck. ? Going forward, however, it seems clear that trade restrictions aren’t going away. ? Merely complying with trade rules is a B+ response that will keep you level with the pack.? Smart bosses, however, will see disruptions like this as an opportunity to build long-term competitive advantages.??