US Concern Over Musk’s Call for Chinese Suppliers in Mexico

Elon Musk, CEO, Tesla, has extended an invitation to Chinese suppliers to establish plants in Mexico, aiming to replicate his company’s supply chain model in Shanghai. This move has raised concerns in Washington about the potential threat it poses to the national automotive industry and its workers.

Tesla’s construction of a massive facility in the state of Nuevo Leon in Mexico to assemble a more affordable next-generation electric vehicle has been facilitated by local government incentives totaling US$153 million. As Trump-era tariffs compel Chinese auto-parts manufacturers to adopt nearshoring policies, many are setting up plants adjacent to Tesla’s factory.

Musk views Chinese automakers as the most competitive globally, stating: “They will pretty much demolish other car companies if there are no trade barriers established”. He has expressed apprehension about Tesla's ability to compete against Chinese carmakers, prompting him to align with them.

Tesla already sources Chinese auto parts manufactured in Mexico for its Austin assembly line, a practice also adopted by several other US automakers. The surge in demand for these parts has led to the recent arrival of Chinese companies such as Ningbo Tuopu Group, Suzhou Dongshan Precision Manufacturing, Chinaust Group, Shanghai Bayon Precision Automobile Component, and Zhejiang Yinlun Machinery.

According to National Auto-parts Industry Association (INA), Chinese auto parts manufactured in Mexico and exported to the United States saw a 15% increase in 2023 compared to previous year, reaching US$1.1 billion. Of these 33 Chinese auto parts makers operating in Mexico, 18 export to the United States.

United States?Wary of Automotive Industry's Future

The United States is apprehensive about its automotive industry’s future, particularly due to the entry of inexpensive Chinese parts and cars, even those manufactured in Mexico. Concerns stems from? their comparatively low prices and the threat they pose to automotive industry workers, exacerbated by substantial subsidies granted by the Chinese government.

In November 2023, Katherine Tai, USTR representative, wrote a letter urging the Office of the United States Trade Representative (USTR) to consider launching an investigation into these practices and their impact on the American automotive industry and American workers, emphasizing the need for countermeasures against China’s industrial strategy to “dominate the global automobile market”.

US representatives anticipate that China will flood global markets with cheap electric vehicles, further compounded by the plans of automakers such as BYD, MG, SAIC Motor, and Chery Automobile to establish facilities in Mexico.

Chinese Carmakers Exploit USMCA Policies

Chinese automakers leverage USMCA policies, benefitting from incentives and trade agreements. EVs assembled in Mexico qualify for a US consumer tax credit of US$7,500 under the USMCA trade agreement, in addition to other benefits. Chinese manufacturers adhere to strict limits on the amount of foreign materials, enabling them to exploit free trade benefits when exporting auto parts made in Mexico to the United States.

The Biden administration is considering various options, including the restriction of all imports of Chinese "smart cars" regardless of where they are assembled, due to safety concerns regarding data collection and potential national security threats. Other options under consideration include strategic tariffs and amendments to the USMCA free trade agreement during the upcoming 2026 review.