Mexico is Raising Tariffs on Chinese Auto Imports

That's a big deal for the U.S. auto industry. Here's why.

Although the United States' tariffs have been making headlines, we're not the only country making some big trade policy changes. Last Wednesday Mexico announced it would raise its tariffs on cars from China, as well as other Asian countries. These tariffs were set previously at 20%; now they are set to be raised to 50%. Although they still must be passed by the Mexican congress, they have already made waves, with China's Ministry of Commerce warning that countermeasures may be taken.

This is clearly significant news for the Mexican auto market, but it also affects the United States. These tariffs will have an extremely important impact on protecting the U.S. automobile industry, even though it's not a policy Washington enacted.

To understand why these tariffs are so important, you first must understand the current situation with the Chinese auto industry.

In a word: Overcapacity.

Like many other industries in China, the China's automakers (and especially those in the electric vehicle sector) face chronic overcapacity. In this case, overcapacity isn't just a country producing a lot of a particular good. It describes when companies don't have to worry about producing unused goods or how it will impact their profit margins because the government allows them to operate regardless.

Companies in China are heavily subsidized by the government, meaning they can make as many products as they want, often at artificially low prices. The practice of producing products at these artificially low prices and then bringing these products to the global market is known as "dumping." It's illegal in international trade law, but that hasn't stopped China from engaging in it.

Electric vehicles are the main specialty of the Chinese auto industry, and they are no exception to the practice of being sold at an artificially low price. Build Your Dreams (BYD) is the largest electric vehicle manufacturer in the world, surpassing Tesla in 2023. In February 2024, it brought an electric vehicle to market at a price of $14,000. It's clear one of the reasons it can offer this vehicle at such a low price is subsidies. If this car were to be brought to the U.S. market, the impacts on our auto industry and its supply chain could be potentially catastrophic.

The American auto industry represents 3% of American GDP and employs more than 1 million people in well-paying jobs averaging at $29 an hour. Being forced to compete with these unfair prices could contribute to a collapse of this industry. Another reason that the American auto industry can't fairly compete with Chinese cars is China's dependence on forced labor. Aluminum from China is often sourced from Xinjiang, where a 2024 Alliance for American Manufacturing (AAM) report noted "at least 100,000 Uyghurs and other ethnic minorities" are being subjected to forced labor. According to Human Rights Watch, any aluminum from that region should be assumed to be tainted. Since aluminum is critical in auto production, the same should be assumed of cars made in China or using Chinese aluminum inputs.

Luckily, the United States has put into place stringent trade barriers to protect our auto industry. In 2024, former President Joe Biden imposed a 100% tariff on Chinese EVs in an effort to prevent their entry into the market. However, this may not be enough. This is where Mexico comes in.

Another potent barrier

Tariffs are calculated based on where the manufacturing was done. Because of this, a practice known as transshipment has arisen: Companies will ship their unassembled goods to another country that has lower tariffs imposed on it and claim this third country is where their products are manufactured. Mexico has often been used as a such a way station, by which Chinese companies can avoid paying higher tariffs. The fear is that Mexico will be used to gain back-door access to the U.S. auto market, with transshipment being a way that Chinese auto manufacturers can navigate around U.S. tariffs.

All of this is why the news about Mexico's 50% tariff on Chinese automobiles is so encouraging. Although this tariff is still lower than the 100% tariff Washington has imposed, it still represents a tightening of trade policy around this issue. It will make it much harder for Chinese-made products to sneak their way around U.S. trade barriers, since the benefit for doing so will be that much smaller than it was.

It's worth noting that this move comes as the United States-Mexico-Canada Agreement (USMCA) is up for review. Mexico may be hoping that by making this move that will benefit the U.S., the Trump administration may be more amenable to favorable conditions for Mexico in those negotiations.

Regardless of Mexico's motivations, AAM is encouraged to see action on this issue. We hope that this will be coupled with action from lawmakers in Washington to further protect the U.S. auto industry from China's unfair trade practices.

(To learn more about the role Mexico has played in China's threat to the U.S. auto industry and our policy recommendations, check out our Feb. 2024 policy report here.)