Deputy AUSTR Says Chinese FDI in Mexican Auto Sector Likely Will Be Hot Topic in Negotiations

Justin Hoffmann, deputy assistant U.S. trade representative for market access and industrial competitiveness, had been asked if the U.S. would raise the issue as part of the USMCA sunset review in 2026 -- he also said it's likely to be part of that review.

Hoffmann was one of the speakers at Automotive Futures' Globalization at a Crossroads conference April 24.

Sergio Ornelas, MexicoNow editor, who also spoke at the conference, said that thus far, Chinese auto manufacturers have been more aggressive about selling to Mexican consumers than building vehicles in the country. He said there are 20 light vehicle brands from China being sold in Mexico, 10 brands of heavy vehicles, and despite a 10% tariff and a 16% sales tax, 10% of cars sold in Mexico last year were Chinese brands. He said their cars are fairly good quality and have "very aggressive pricing."

Ornelas said China has to export aggressively, because its auto sector has 40% idled capacity.

Although vehicle assembly by Chinese brands hasn't taken off, Chinese parts manufacturers have been opening factories quickly over the last three years. He said 43% of FDI has come from China in recent years, and 22% from the U.S.

He said about half of the new Chinese factories that have opened in Mexico are making automotive parts.

"Mexico welcomes any foreign direct investment," he said, and has programs where a company can move into a building that was built on spec, and can start operations 60 days after equipment arrives.

Still, he noted, there are some obstacles to winning nearshoring business, including limited electricity supplies, and limited renewable energy. He said that has stalled some projects.

The biggest electric vehicle brand in the world, BYD, has announced it will manufacture in Mexico, but has not begun construction yet.

"BYD, they continue to say they don’t, by any means, intend to reach the U.S. market," he said, instead saying they want to use Mexico as a production hub to sell into Central and South America.

"But eventually, you know, they are paving the way to do that," he said. "Their strategy is to build a supply chain of their own, slowly. I think their idea would be eventually to qualify for the rules of origin in USMCA."

Hoffmann was asked about if the auto rules of origin were written with the knowledge that the EV battery supply chain is Asian, not North American.

He said that although other core parts have to have 75% North American content to qualify, batteries can qualify through a tariff shift rule -- so as long as the cell is made in North America, no matter how much of its value is imported, and the cells are assembled into the finished battery in North America, that battery will qualify.

He said USMCA's rules of origin have spurred investments in the region to make internal combustion engines, stampings, EV drive motors and EV batteries.

As USTR prepares a report on how USMCA is affecting North American auto manufacturing, it received suggestions from stakeholders on how to better align USMCA's rule of origin with the battery investments that have been made. They have also received comments that the core parts list for electric and hydrogen vehicles should be modified.

He said the tariff shift rule for EV batteries may be revisited in the future as the regional supply chain develops.

Hoffmann acknowledged that even with new production capacity, the total value of products claiming USMCA duty benefits has declined as a share of Mexican and Canadian exports, when compared with when NAFTA was in effect.

"That’s something we’re looking at a bit more carefully," he said. It could be because automakers' supply chains have not shifted enough to North America, or it could be models that were built to qualify for NAFTA don't qualify now.

"There could be a variety of reasons," he said.

Bruce Belzowski, managing director of Automotive Futures, asked Ornelas if Chinese auto parts manufacturers are setting up in Mexico to support future Chinese auto assembly plants or to export parts to the U.S.

"It’s very hard to pinpoint the Chinese strategy," Ornelas replied, adding: "They don't talk much." Some may be to sell into Latin America; many of them are already exporters to the U.S., and making the parts in Mexico avoids Section 301 tariffs on their goods.

Hoffmann said Chinese investment in Mexican auto sector production is "something that we are monitoring closely. Are these investments geared toward becoming part of the North American supply chain? A way to circumvent tariff actions?"

Experts in supply chain risk assessment said that after the semiconductor crisis -- which caused many companies to lose 10% to 23% of sales because they couldn't complete cars without chips -- companies are changing their just-in-time, lowest-cost approach to supply chains.

Jeremy Kay, who advises on operations resilience from the Boston Consulting Group, and who serves many automotive clients, said: "They have more visibility than they used to. They’re thinking more about risk and resilience than they did five years ago."

But he said he heard recently from a major automaker client that their monitoring system is great, but it's not really working to improve resiliency "because nobody’s willing to make different decisions or make decisions differently than they used to be in the past."

Kay said the longer we go without a significant supply chain disruption, the more likely it is that companies backslide to the lowest-cost, single source approach.

"Companies shouldn’t take their foot off the gas," he said. "When you have a disruption it’s too late to dual source something."

Amy Rebecca Broglin-Peterson, a Michigan State adjunct professor and Win*x supply chain consultant, said that although there has been a lot of talk about nearshoring and reshoring, companies are not exiting China, and figures are just beginning to show diversification away from China. She said, "I think in five to ten years we might see a different footprint than we see today in automotive."