Chinese Cars Flood Mexico, US Worries About "Backdoor" Strategy

Chinese Cars Flood Mexico, US Worries About "Backdoor" StrategyLed by BYD, China has emerged as a major automotive supplier to Mexico, with exports reaching $4.6 billion in 2023

Chinese Cars Flood Mexico, US Worries About "Backdoor" Strategy

Led by BYD, China has emerged as a major automotive supplier to Mexico, with exports reaching $4.6 billion in 2023. This trend has raised concerns in the US, fearing China might use Mexico as a "backdoor" to bypass tariffs and gain a foothold in the American market.

BYD, which surpassed Honda and Nissan in the second quarter of this year to become the world's seventh-largest automaker, has seen a surge in demand for its affordable electric vehicles. Its new car sales grew by 40% year-on-year to 980,000 units in the quarter, while most major automakers including Toyota and Volkswagen saw sales decline. BYD's rapid growth is largely attributed to overseas sales, which have nearly tripled in the past year, reaching 105,000 units.

BYD is considering Durango, Jalisco, and Nuevo Leon in Mexico as potential locations for its new factory, which is expected to create around 10,000 jobs. The company's Dolphin Mini model, priced at approximately 398,800 pesos (around $21,300) in Mexico, is slightly above half the price of Tesla's cheapest model.

Due to high tariffs imposed by the US on Chinese electric vehicle manufacturers, these companies are unable to directly sell their products in the US. As a result, they have turned their attention to other markets, with Mexico emerging as a key target. The duty-free treatment between Mexico and the US allows Chinese automakers to access the US market through Mexico. This "backdoor" strategy has alarmed the US government.

According to LinkedGlobalSolutions, which specializes in studying the operations of Chinese companies in Latin American nations, Mexico is the second-largest market for Chinese cars globally, only behind Russia.

Both the US and the EU have imposed additional tariffs on specific Chinese goods, particularly in the areas of car and semiconductor chip production. This new geopolitical strategy has led Western companies to seek alternative production locations outside China, known as "nearshoring."

The US has imposed tariffs of up to 100% on electric vehicles manufactured in China, with Canada implementing similar tariffs. The EU began imposing additional tariffs on Chinese electric vehicles in July this year and recently proposed increasing the rate to 36.3%. Facing these challenges, BYD has decided to build a new factory in Turkey to circumvent these tariffs.

For Japanese automakers currently facing challenges, the North American market is becoming increasingly critical. High tariff barriers have kept the penetration rate of Chinese electric vehicles in the North American market extremely low. With demand for electric vehicles slowing temporarily in North America, Toyota and Honda's hybrid models are gaining traction.

For Mexico, automobiles are replacing oil as a major economic pillar. The automotive industry contributes 4.8% to the country's GDP, is a major source of foreign exchange earnings, and directly creates 1 million jobs with an additional 3.5 million indirect jobs. In the third quarter of this year, foreign direct investment (FDI) flowing into the sector accounted for 22% of total domestic investment.

According to the World Trade Organization, Mexico jumped from the fourth to the third position in the global automotive export rankings from 2022 to 2023. This jump is mainly attributed to a significant increase in automotive exports, with an annual growth rate of 14.33%, reaching a total of $189 billion. The automotive sector has become the primary driver of Mexican export growth, accounting for 31% of the country's total exports in 2023.

The automotive industry has not only solidified Mexico's economic growth momentum but has also showcased deep regional integration within the framework of the USMCA, further enhancing the sector's competitiveness and modernization. Mexico's rise in the global automotive export rankings, surpassing Japan and the US to secure the third position, is particularly noteworthy. Meanwhile, the EU continues to hold the lead, while China has moved from fifth to second place. This shift is primarily driven by significant growth in Mexican automotive exports, further cementing its importance in the global automotive industry. The regional cooperation facilitated by the USMCA is undoubtedly a crucial driver behind this achievement.

In 2023, the EU continued to lead global automotive exports, reaching a total of $831 billion. Following closely are China ($170 billion), Mexico ($158 billion), Japan ($157 billion), and the US ($157 billion). These figures encompass exports of light and heavy vehicles as well as automotive components, reflecting the dynamism and competitiveness of these markets in the automotive industry. Notably, Mexico's significant growth in this sector undoubtedly solidifies its position as a major global automotive exporter.