The Risk of Manufacturing Chinese EVs in Mexico

The concern for Canada and the United States

The threat posed by the People's Republic of China to the rules-based international order is due to infiltrate a new market: electric vehicles (EVs). The North American automotive industry and the principles of free and fair trade are on a collision course as Chinese EVs attempt to circumvent American tariffs through their plans to manufacture in Mexico, violating the agreement (and spirit) of CUSMA. This will not only raise serious national security concerns related to consumer privacy and domestic manufacturing capability, but it will also negatively impact North American competitiveness, innovation, and workers' rights. We must support workers in Canada and ensure cheap, foreign goods that aren't made to the same environmental, labour, or regulatory standards aren't dumped into our market.

Why tariffs are in place

Critical components used in the manufacturing of Chinese automobiles, such as steel, plastic, rubber, or electronics, are regularly produced using the least environmentally considerate ways possible. Workers' rights are often irrelevant, and access to a fair wage is, in most cases, an oxymoron. Coal power drives the massive smelters in China, and the Chinese Communist Party's (CCP) tight control over its populace ensures minimal disruptions to production. Chinese companies are known to receive significant state subsidies to undercut international markets and have routinely dumped their products around the world.

The combined force of environmental, labour, and regulatory exploitation has resulted in BYD Auto Co. being able to produce EVs at a seriously discounted rate. For example, a Rivian R1S (manufactured in Illinois with components sourced from across the North American market) costs CAD $112,000. In comparison, the BYD Dolphin EV costs USD $14,000. This significant discount in price is directly due to the unfair trade practices implemented by China via the state's support for its auto industry. In response to such trade practices, there is currently a 25% tariff on imports of BYD vehicles into the United States, with bi-partisan support to increase the tariff. 

Circumventing tariffs

In February, it was reported that Chinese executives from BYD were exploring moving auto manufacturing to Mexico to circumvent American tariffs. Under CUSMA, vehicles manufactured in Mexico would only be subject to a 2.5% tariff, not a 25% tariff. However (this is key), the steel and other resources required to manufacture that automobile aren't expected to come from Canada, the United States, or Mexico. Many, if not all, of the components will be produced in China for final assembly in Mexico. This is a violation of the text and spirit of CUSMA. 

A secondary challenge Canadian workers face is Mexico's routine labour-law violations and a general failure to adhere to the rapid response mechanism (RRM) established under CUSMA. This will undoubtedly be a serious topic of negotiation during the trade deal's 2026 review. If a BYD automobile is manufactured in Mexico with below-market wages; there is currently no guarantee that Mexico will follow the RRM process to protect workers' collective bargaining agreements in North America before permanent damage is done to workers in Canada.

Impact on Canadian workers and the economy

From an economic standpoint, the shift towards Chinese-manufactured EVs in Mexico poses several concerns for Canada. First, there's the issue of unfair competition. Chinese EV manufacturers, backed by significant state support and access to a vast supply of critical raw materials like lithium, could outcompete North American manufacturers. This could reduce market share for Canadian EV makers, affecting jobs and investment. Moreover, the strategic positioning of manufacturing facilities in Mexico will undermine Canada's efforts to protect and nurture our domestic EV industries from foreign competition, particularly from China.

Security Concerns

Beyond economic and environmental considerations, strategic and security concerns are associated with China's involvement in the North American EV market. The automotive industry is not just an economic sector but strategically important, given its role in innovation, technology development, and national security. Integrating advanced technologies in EVs, including artificial intelligence and data connectivity, raises concerns about data privacy, cybersecurity, and the potential for technology transfer that could have military applications. On February 29, 2024, President Biden initiated a Department of Commerce investigation into BYD over national security concerns of user and data privacy. 

For Canada, ensuring that our automotive industries remain competitive and innovative in the face of Chinese competition is more than just economics; it's also about maintaining technological leadership and safeguarding national security.

Looking forward

China's move to manufacture EVs in Mexico represents a multifaceted challenge for Canada and the United States. It threatens jobs, environmental stewardship, and data privacy. While the transition to EVs is a positive development in the fight against climate change, it also introduces new complexities into the North American automotive landscape. Addressing these challenges requires a nuanced and multifaceted response, combining domestic policy measures, international diplomacy, and strategic cooperation. 

As the EV market continues to evolve, the ability of Canada and the United States to navigate these challenges will be crucial in shaping the future of the automotive industry and their economic and strategic positions in the world.