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The Impact of US Tariffs on North American Auto Manufacturing and Implications for USMCA

Alisa Shapiro — Tue, 13 May 2025 20:41:25 +0000

Overview

Since coming into office, President Donald Trump increased U.S. tariffs on all imports from China to 145% (only to agree with China to 115% tariff reduction for 90 days on the most recent tariffs) and applied a global 10% tariff to the rest of the world and a global 25% tariff on imports of autos and steel and aluminum. Additional so-called reciprocal tariffs on the rest of the world except Canada and Mexico were announced on April 2 and then subsequently paused for 90 days. When it comes to Canada and Mexico, Trump imposed a 25% tariff on all imports from Canada and Mexico that do not comply with the United States-Mexico-Canada Agreement (USMCA) and applied a 25% tariff on autos imported under USMCA, but only on the non-U.S. content. Significantly, Trump did not impose additional so-called reciprocal tariffs on Canada and Mexico. As a result, the majority of U.S. imports from Canada and Mexico that are USMCA compliant continue to enter the U.S. duty free.

This mix of relatively higher China tariffs compared to tariffs on many of the U.S. imports from Canada and Mexico will have various implications for trade and investment across North America. For one, higher U.S. tariffs on China will also create a stronger incentive for China to circumvent U.S. tariffs by entering the U.S. via Mexico and Canada, and this incentive may extend to other countries that also face higher U.S. tariffs. The following outlines how Trump’s recent tariffs will affect trade and investment across North America with a particular focus on autos, and the implications for the 2026 review of the USMCA.

A snapshot of US tariffs

Following the 90-day pause in U.S. tariffs of 145% on all imports from China, China now faces tariffs ranging from 47.5% for autos, 50% on steel and aluminum, and 30% tariffs on all other imports. The U.S. has also applied a 25% tariff on all imports of autos and steel and aluminum. When it comes to U.S. auto imports from Canada and Mexico that are USMCA compliant, there is a 25% tariff. The rest of U.S. imports from Canada and Mexico that are consistent with USMCA enter the U.S. duty free, covering around 50% of Mexico’s exports to the U.S. and 40% of Canada’s exports to the U.S. In addition, on April 2, Trump announced reciprocal tariffs on the rest of the world (but not Canada and Mexico) ranging from 46% on imports from Vietnam, 36% on imports from Thailand, and 20% on imports from the EU, though these tariffs have been paused for 90 days to give countries time to strike a trade deal with the United States. Trump has also applied a 10% global tariff.

New tariffs are also likely. The Department of Commerce has six national security-focused Section 232 reviews on copper, semiconductors, lumber, pharmaceuticals, critical minerals, and trucks, all of which could lead to additional tariffs on these products. A 25% tariff on non-U.S. content on auto part imports from Canada and Mexico is also planned.

Retaliation by other countries against U.S. tariffs has, except in the case of China, been restrained so far. China applied 125% tariffs on imports from the U.S., (that have been paused for 90 days), banned exports of various rare earths and critical minerals, added 29 U.S. companies to their entities list, and stopped orders of Boeing airplanes. Canada retaliated with a 25% tariff on non-USMCA compliant autos and a 25% tariff on $21 billion worth of steel and aluminum imports. Further retaliation from other countries is also likely should U.S. tariffs remain. For instance, Mexico, the EU, and Brazil have announced a list of retaliatory tariffs on U.S. imports, and Canada is likely to retaliate further in the event that the U.S., Canada, and Mexico are unable to reach a deal.

The impact of US tariffs on North American trade, investment, and auto manufacturing

By July 2026, all three governments must review the USMCA and agree to extend the agreement for another 16-year term. Should an agreement not be reached, the three governments have until 2036 to reach an agreement, and failure to do so will lead to the expiration of the USMCA. The agreement’s review will be an opportunity to assess the USMCA’s operation, and it will also be an opportunity to update the agreement. For the U.S., the goal will be to update the agreement in part to force more manufacturing back into the U.S. The following outlines the key implications of current U.S. tariffs for trade and investment in North America. The next part analyzes what these developments might mean for the 2026 USMCA review.

More trade within North America will be channeled through USMCA as costs of non-compliance with USMCA increase. Under USMCA, the U.S., Canada, and Mexico agreed to reduce tariffs to zero. Trade between the three countries can also happen outside of the agreement, but in that case, imports are subject to the tariff rate the U.S. applies to all other World Trade Organization (WTO) member countries—the so-called WTO most-favored-nation (MFN) rate. As a general matter, the higher the WTO MFN rate, the greater the incentive for traders in Canada and Mexico to comply with USCMA to enter the U.S. duty free. For a product to comply with USMCA requires meeting the agreement’s rules of origin (ROOs). USMCA ROOs prevent traders in countries not party to the agreement from accessing the duty-free tariff rate by merely transshipping goods through Canada, Mexico, or the U.S. to reach another USMCA country. USMCA ROOs generally require some amount of manufacturing or processing to take place in either Canada, Mexico, or the U.S. to benefit from the zero USMCA tariff.

Until recently, the U.S. WTO MFN rate applied to auto imports was 2.5%. The effect of this was that as the costs of complying with the USMCA ROOs increased, companies increasingly decided to pay the 2.5% tariff instead of meeting the USMCA ROOs. During the negotiation of USMCA (which replaced NAFTA), the U.S. insisted on tighter ROOs aimed at forcing more auto manufacturing back into the U.S. For instance, USMCA increased the Regional Value Content (RVC) for cars and light trucks from 62.5% to 75%—the amount of North American content that must be used to manufacture a car. USMCA also eliminated the so-called deeming rule that had allowed auto parts not on a list created when NAFTA was negotiated to be “deemed” as originating in North America for the purposes of the RVC calculation. USMCA also introduced new requirements that 70% of the steel and aluminum in cars be sourced in North America, and that 40% of the Labor Value Content (LVC) used to produce a car must have a wage of at least $16 per hour.

The costs of complying with these tighter USMCA ROOs led to increasing car imports into the U.S. from Canada and Mexico that were not complying with USMCA and instead entered the U.S. by paying the WTO MFN 2.5% tariff. Indeed, since 2020, the share of vehicles imported into the U.S., which paid the 2.5% duty, went from 0.5% in 2019 (pre-USMCA) to 8.2% in 2023.

The new 25% U.S. tariff on autos is in part a response to this trend by auto companies to pay the WTO MFN tariff instead of complying with USMCA ROOs. The higher auto tariff should lead to higher levels of compliance with USMCA ROOs, and by extension more auto manufacturing in North America. The new 25% tariff on the non-U.S. content on imports from Canada and Mexico will further push more automotive manufacturing back into the U.S. at the expense of Canada and Mexico. The recent announcement by Honda that it would manufacture its next-generation Civic hybrid model in the U.S. instead of in Mexico is an example of this trend.

The overall impact of higher tariffs on auto manufacturing in the U.S. is unclear, with potential to be net negative. Higher U.S. tariffs create an incentive for car manufacturers to avoid the tariff by manufacturing more in the U.S. When it comes to Canada and Mexico, the new auto tariff on non-U.S. content is inconsistent with existing USMCA ROOs, which instead counts production within North America as counting toward the RVC requirement.

However, this tariff could also have various negative impacts on auto manufacturing in the U.S. For one, tariffs will increase the cost of manufacturing automobiles in the U.S., which could lead to less innovation, more costly cars, and lower sales. No other auto manufacturing region in the world has ROOs as restrictive as those under USMCA.

The auto tariff could also lead to retaliation by other countries, which could globally segment the auto market and result in less auto manufacturing in the U.S. for export. As noted, China had imposed tariffs of 125% on all U.S. exports. In 2024, the U.S. exported $4.93 billion of autos to China, which was the U.S.’ third largest market. EU retaliation on U.S. autos is also likely should U.S. auto tariffs on EU imports persist. The EU is the U.S.’ second largest auto market worth $12.4 billion in 2024. EU tariffs on auto imports from the U.S. could lead to EU auto manufacturers, such as BMW and Mercedes that currently manufacture in the U.S. for export to Europe (and globally), to relocate some manufacturing back to Europe. For example, the BMW plant in Spartanburg, South Carolina manufacturers SUVs for sale to Europe, employs 11,000 people, and in 2023 was the largest auto exporter from the U.S. by value.

The current U.S. tariffs could increase investment in Canada and Mexico as a base for export. Proposed U.S. “reciprocal” tariffs on imports from a range of other countries—combined with continuing zero tariffs applied to USMCA consistent trade—will likely lead to even more investment in Canada and Mexico. As countries face higher U.S. tariffs, they will likely invest more in Canada and Mexico to produce goods for export to the U.S.

Canada and Mexico could also see increased investment by companies as a base for export globally. The extent to which this happens will depend on whether countries retaliate and raise tariffs on U.S. exports. When this happens it will create an incentive to export from Canada and Mexico to avoid tariffs that would apply when exporting from the U.S. Existing trade agreements between Canada, Mexico, and third countries also provides trade policy certainty and makes it unlikely that Canada and Mexico will face new tariffs. Canada currently has 15 free trade agreements, including with the United Kingdom, the EU, and countries within the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Mexico has 13 trade agreements, including with the EU, Japan, and members of the Central America-Mexico Free Trade Agreement.

The increase in U.S. tariffs on China increases the incentive for circumvention by China, and possibly other countries as well. Since the U.S. raised China tariffs in 2018, China was incentivized to circumvent these tariffs by entering the U.S. market via Mexico and Canada. This incentive is likely to grow as the U.S. expands and increases tariffs on imports from China. As noted, if the U.S. also implements “reciprocal” tariffs on other countries, this will create added incentives for these countries to also circumvent these tariffs by producing in Canada and Mexico for export to the U.S.

Implications of tariffs for USMCA review

These developments in U.S. tariffs will have various implications for the upcoming USMCA review. The fact that Canada and Mexico were exempt from the April 2 reciprocal tariffs suggests that Trump is not looking to pull out of the USMCA, and that existing tariffs on Canada and Mexico may ultimately be used as leverage during the upcoming USMCA review. The following does not attempt to address all the issues that will come up during the USMCA review and instead focuses on what these new U.S. tariffs might mean for the USMCA review—with a focus on autos—and how to address the incentives these tariffs create to circumvent them via Canada and Mexico. Getting to a new deal on autos will be critical for a successful USMCA review. Auto trade within North America comprises 17% of total trade across North America and is a major industry in all three countries that employs 13 million people.

A deal on autos will be central to any USMCA review. As noted, the impact of the current U.S. tariffs on U.S. auto manufacturing is unclear and could be net negative, depending on the extent to which other countries retaliate. The current U.S. tariffs on non-U.S. auto content on imports from Canada and Mexico are inconsistent with the United States’ current USMCA commitments, and if allowed to stand, could lead to more automotive manufacturing in the U.S. at the expense of Canada and Mexico. For this reason, a key objective for Canada and Mexico will be for the U.S. to calculate content from the U.S., Canada, and Mexico as counting toward USMCA ROOs. Progress on this issue will also matter for automakers that have built manufacturing supply chains across North America. Failure to reduce tariffs on auto imports within North America will also harm all three countries. Economic modeling of a U.S. 25% tariff on auto imports from Canada and Mexico finds that U.S. exports of automobiles to Canada and Mexico would contract by 25% and 23%, respectively. In the event that Canada and Mexico retaliate, U.S. automotive exports to Canada and Mexico would shrink by up to 55% and 65%, respectively.

Given the stakes of getting to a deal on autos, the following assumes that the U.S. agrees to continue to count North America content toward USMCA auto ROOS. In parallel, it is also assumed that the U.S. will continue to apply a higher tariff on all non-USMCA compliant autos. Without the former, a deal on autos is unlikely. Higher tariffs on non-USMCA compliant auto imports will, however, be needed if the U.S. is to meet its goal of increasing auto manufacturing. With this as background, there are three potential pathways toward a new USMCA outcome on autos:

No change to USMCA auto ROOs.
No change to the USMCA ROOs as written, but Canada and Mexico agree to an interpretation of these ROOS that the U.S. has been pushing, which would have the effect of requiring more auto manufacturing in North America.
Amend USMCA ROOs to be even more restrictive.

The following outlines these options in more detail.

No change to USMCA ROOs. The argument for this outcome is that it is too early to assess the impact of existing ROOs on auto manufacturing. One reason is that USMCA auto ROOs have not come fully into effect. For example, 13 companies were given until 2025 to gradually meet the RVC and LVC standards. Notwithstanding this, 2023 analysis by the U.S. International Trade Commission found that the new USMCA ROOs had already led to higher profits, wages, and manufacturing in U.S. autos. Companies have also reported challenges meeting existing auto ROOs, particularly in the context of the transition to electric vehicles (EVs) where many of the critical minerals needed to produce batteries are not domestically produced in the U.S. Given all of this, sustaining the current UMSCA ROOs with agreement to revisit may be the most prudent approach.

Adopting the U.S. interpretation of USMCA ROOs. The three governments could tighten existing USMCA ROOs by agreeing to accept the U.S. interpretation of their operation (an interpretation that was struck down by a USMCA panel). Under the U.S. approach, non-USMCA content in “core parts”—engine, transmission, chassis, axle, suspension, steering, advanced batteries—would not count toward the overall RVC of a car. Adopting this approach (perhaps with agreement to phase in over time), would prevent auto companies from counting non-USMCA content in core parts toward overall USMCA RVC requirements. The net result being that more North American content would be needed to meet the RVC requirements.

Adopting new and stricter USMCA ROOs. It is also possible that the three governments agree even tighter USMCA ROOs. In this case, a staged approach seems critical given challenges complying with existing ROOs. New ROOs for EVs also seem necessary given developments in technology and challenges in securing North American supplies of the critical minerals used in batteries.

The following addresses additional issues raised by these new tariffs for the USMCA review.

Aligning with U.S. tariffs on China will be important but challenging. Since Trump applied 20% tariffs on imports from China in his first term, there has been an incentive for China to circumvent these tariffs on Chinese products by entering the U.S. market via Mexico and Canada, taking advantage of USMCA zero tariffs where possible. Addressing Chinese circumvention has become an increased focus, and as outlined above, the new U.S. tariffs on China will increase the incentive for China to circumvent these tariffs via Mexico and Canada. Mexico and Canada understand this risk and have been moving to align with U.S. on China tariffs in some areas. For instance, in 2024, Canada applied a 100% tariff to EVs and 25% tariffs on steel and aluminum products from China, and Mexico agreed to require melting and pouring of steel and smelting and casting of aluminum to be restricted to North America. In April 2024, Mexico also increased its tariffs on countries with which it does not have a free trade agreement, including China, on products such as steel and aluminum and some auto parts. The bottom line is that closer alignment between Mexico and Canada with U.S. China tariffs has begun, but more will be needed to address the incentives for circumvention. Yet, the recent expansion and increase in U.S. tariffs on imports from China will make alignment difficult, given that Chinese imports remain important inputs into a range of manufacturing sectors.

Another related issue is Chinese foreign investment into Mexico and Canada, which can be another means of circumventing U.S. tariffs. Trump’s executive order on investment policy signals further restrictions on Chinese investment into the U.S. across a range of critical industries. Canada is already well aligned with the U.S. foreign investment screening for China, but Mexico lags. In 2024, President Joe Biden and Mexican President Claudia Sheinbaum signed a memorandum of intent to establish a working group on investment screening and its role in national security. This progress will likely be an important part of the USMCA review.

Additional U.S. tariffs on other countries might also need to be addressed in the USMCA review. The proposed U.S. reciprocal tariffs on 58 countries (including the 27 EU members) have been paused. But new tariffs are likely, even in the event of successful deals with individual countries. U.S. tariffs on third countries will create a new incentive for these countries to enter the U.S. market via Mexico and Canada. However, getting Mexico and Canada to address circumvention by applying similar tariffs to these countries, or to screen out their foreign investment, will be resisted. Unilateral Mexican and Canadian tariffs against other countries would be in breach of their WTO commitments, and in many cases their free trade agreements with many of these countries. Mexico and Canada will also be reluctant to undermine trade relations with third countries at a time when Trump has sent a clear signal to Canada and Mexico of the imperative of reducing their trade exposure to the U.S., while necessitating more, not less, trade with other countries.

USMCA review will also need to resolve bilateral trade barriers. There are various bilateral trade barriers that are well known and should be largely resolvable during a good faith effort to update USMCA. The Office of the U.S. Trade Representative in its 2025 National Trade Estimate (NTE) Report listed the trade barriers of most concern for the United States. For Canada, this includes its supply-management system for dairy (that has also been subject to a USMCA dispute), various digital trade issues, and access to U.S. agricultural products. For Mexico, trade barriers include access to U.S. agricultural exports, including biotech corn, intellectual property (IP) protection, and various barriers to services and energy exports. For Canada and Mexico, Buy American provisions, including ones that prioritize U.S. businesses, have been another long-standing issue. Perhaps even more important for Canada and Mexico will be the United States’ commitment to minimizing the risk of new tariffs. While this will be seen by some in the Trump administration as inhibiting freedom of action, it is of self-interest to set realistic boundaries on future trade actions against Canada and Mexico in order to restore business confidence in North America.

Conclusion

USMCA is the most important trade agreement for the U.S., Canada, and Mexico. In a world of competition with China and high tariffs that point to further decoupling of the U.S. and Chinese economies, finding ways to strengthen opportunities for trade and investment within North America will be critical. A successful review of USMCA will be needed if the U.S. is to restore confidence in North America. Recent U.S. tariffs on Canada and Mexico are relatively targeted, but agreeing on autos will be critical if the USMCA review is to succeed. Moreover, these tariffs raise new challenges, including the impact of circumvention from China and potentially from other countries that are likely to face higher U.S. tariffs. Fortunately, there are various paths to reaching a successful USMCA review that can achieve the dual goal of both increasing manufacturing and successfully competing with China. The question is whether the U.S. is willing to take it.

To read the full research as published by the Brookings Institution, click here.

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The Road to a New European Automotive Strategy: Trade and Industrial Policy Options

Matthew Murphy — Mon, 27 Jan 2025 21:08:31 +0000

Navigating the Trilemma of Decarbonization, Competitiveness, and Economic Security

The European automotive industry stands at a crossroads, facing three concurrent challenges: decarbonizing to tackle climate change, maintaining global competitiveness in a fierce market, and safeguarding economic security amid rising geopolitical tensions. At the heart of the European economy, the automotive sector directly employs 1.4 million people and supports 13 million jobs indirectly across the EU, with implications extending far beyond the industry itself. The transition from internal combustion engine vehicles (ICEs) to electric vehicles (EVs) presents profound challenges, as structural adjustments to production processes and supply chains will significantly affect European employment and economic prospects.

The EU has established a legislative framework for transport sector decarbonization, and the automotive industry has invested substantially in this transition. However, evolving market conditions have created a trilemma of competing objectives: decarbonization, competitiveness, and economic security. Successfully navigating this transition requires a unified yet adaptable European strategy that addresses trade-offs between the objectives, balances short-term priorities with medium- and long-term investments, and coordinates action between private and public sectors.

Each aspect of the trilemma presents both opportunities and challenges for the automotive sector, its supply chain, and the broader European economy. Addressing these issues comprehensively will require coordinated international trade and industrial policies.

The EU aims to achieve 100% zero-emission mobility for all new vehicles by 2035, in line with its commitment to climate neutrality by 2050. This target requires substantial investment in EV infrastructure, battery production, and consumer incentives. However, EV adoption rates vary significantly across member states, creating an uneven transition.

Key challenges include high costs and consumer hesitancy. EVs remain significantly more expensive than comparable ICEs, limiting widespread adoption. Inadequate charging infrastructure and high electricity prices create additional barriers. Europe must also scale up battery production to compete with China’s dominance of the global battery supply chain.

The EU automotive industry faces three major challenges to its competitiveness: high production costs, innovation gaps, and significant regulatory burdens. Labor and energy costs in Europe are substantially higher than in China, making it difficult for European manufacturers to compete on price. The transition to electric mobility strains supply chains, particularly for small and medium-sized enterprises (SMEs) dependent on internal combustion engine technologies. Moreover, strict regulatory decarbonization targets must be accompanied by corresponding support measures to avoid overburdening the industry.

External challenges include fierce competition from China and protectionist policies in the United States. China’s dominance in EV and battery production, supported by strategic subsidies and economies of scale, poses a formidable challenge to European competitiveness. The US Inflation Reduction Act diverts investments from Europe, while tax cuts planned by the new US administration may intensify competitive pressures.

Rising geopolitical tensions threaten European automotive supply chain stability, particularly through potential US tariff increases that could cause trade diversion and supply disruptions. The EU’s reliance on China’s consumer market, raw materials, and battery components creates vulnerability to economic coercion and supply disruptions. While efforts to build resilience through export market diversification, production localization, and domestic capacity scaling are underway, Europe continues to lag in mining, refining, and processing capabilities for critical raw materials.

The integration of digital technologies in modern cars and EV charging infrastructure creates new vulnerabilities, including cybersecurity risks and potential foreign government data collection. The decarbonization process also threatens social and political stability through potential job losses across the ICE supply chain.

This report examines policy measures to support the industry’s transition while aligning with EU objectives, providing a toolbox for balancing the strategic triangle outlined in the analytical section. Drawing on more than 70 interviews and stakeholder events, the policy options are organized across four key areas: regulatory measures, trade policy instruments, industrial incentives, and infrastructure investments.

Regulatory measures address coherence across the EU, revision of decarbonization targets, introduction of regulatory incentives for EV adoption, launch of public awareness campaigns, and fair access to in-vehicle data.

Trade policy instruments include notably negotiating new trade agreements, accelerating the adoption of critical raw material agreements, deepening cooperation with Japan and South Korea on battery supply chains, and implementing trade remedies and enforcement actions.

Industrial policy measures include consumer subsidies, support for corporate fleet decarbonization, phase-out of fossil fuel subsidies, increased research and development (R&D) funding, direct subsidies to help SMEs navigate industry changes, and workforce transition assistance.

Infrastructure measures focus on improving charging infrastructure and electricity grids, increasing battery material recycling, and developing hydrogen refueling infrastructure.

This report outlines four potential scenarios based on the interplay between global tensions and international cooperation, ranging from intense conflict and isolation to low tensions and robust collaboration. These scenarios highlight critical factors influencing the automotive industry’s future: government support, technological advances, supply chain resilience, and consumer demand.

Actual trajectories will likely combine elements from multiple scenarios, shaped by political and economic developments – particularly decisions made by the new US administration. The EU must navigate these challenges to ensure its automotive industry remains competitive, resilient, and sustainable.

The transition to electric mobility presents a critical opportunity for the EU to achieve its climate goals and maintain industrial leadership. With a narrow window of opportunity, the EU must act decisively to create a competitive and sustainable automotive ecosystem that can rival its global competitors. Active pursuit of market access opportunities will enable European automotive firms to benefit from growing global demand for sustainable mobility. A clear roadmap will facilitate investments required for the transition, particularly from manufacturers. Without decisive action, the EU risks both industrial decline and loss of technological edge in a sector that will define the future of mobility. A holistic strategy combining regulatory, trade, industrial, and infrastructure measures is essential to bridge the innovation gap and ensure the long-term competitiveness of the European automotive industry. The policy options identified in this report, grounded in extensive stakeholder consultations across the EU automotive industry, can also inform the EU’s Strategic Dialogue on the Future of the European Automotive Industry. The time to act and future-proof the European automotive industry is now.

Jacque Delors Institute - Friday Focus

To read the report as it was published by the Jacques Delors Institute, click here.

To read the report PDF as it was published by the Jacques Delors Institute, click here.

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The Road to a New European Automotive Strategy: Trade & Industrial Policy Options

Saba Wali — Mon, 27 Jan 2025 14:24:45 +0000

Infrastructure measures focus on improving charging infrastructure and electricity grids, increasing battery material recycling, and developing hydrogen refueling infrastructure.

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To read the report as it was posted on the Jacques Delors Institute website, click here.

To read the PDF as it was published by the Jacques Delors Institute, click here.

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On a Collision Course: China’s Existential Threat to America’s Auto Industry and its Route Through Mexico

Thomas Nielsen — Tue, 20 Feb 2024 12:28:30 +0000

A Bad Bargain

The introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the U.S. auto sector, whose centrality in the national economy is unimpeachable.

The U.S. auto sector accounts for 3% of America’s GDP. It is annually responsible for tens of billions of dollars of annual research and development spending. It supports an entire ecosystem of manufacturers, from steelmaking to semiconductor fabrication. And for nearly a century, it has provided reliable, well-compensated employment for millions of American workers of various levels of educational attainment, making it a pillar of the American middle class. As such, the U.S. auto industry’s health has been the years-long focus of U.S. trade policy, and a more recent focus of U.S. industrial policy. This includes longstanding tariffs on imported light trucks, and more recent rules of origin (ROO) content requirements for vehicle imports from Mexico and Canada, as well as clean vehicle consumer tax credits that reward domestic production as U.S. automakers undertake an industry-wide pivot to the manufacture of EVs.

The U.S. auto sector and its extensive domestic supply chain, however, face a growing threat from Chinese competitors, buoyed by the Chinese state. While direct imports of Made in China automobiles have until now been extremely limited, China’s auto sector is hardly the uncompetitive laggard of decades past. Thanks to the Chinese Communist Party’s (CCP) industrial planning and generous assistance that began in the wake of the 2009 financial crisis, its state-owned and state-supported manufacturers are poised to dominate the burgeoning global EV market. China is estimated to have spent tens of billions of dollars to create an auto sector ready to take advantage of the clean energy shift, with support including tax breaks, favorable lines of credit, land use agreements, extremely limited import competition, and often direct subsidization. Chinese automakers have also benefited from mandatory joint ventures with and forced technology transfers from foreign firms seeking to gain access to the vast Chinese auto market. And, most egregiously, they benefit from the use of forced labor in their supply chains.

The state support has paid off. The Chinese auto industry’s growth has been exponential. The country became the world’s leading auto exporter in 2023, selling cars in Europe, Australia, Africa, Mexico and Southeast Asia, and Chinese automakers lead the world in EV production and sales by wide margins. China’s technological lead and its extensive supply chains, particularly for critical battery raw materials and components, are deep and secure because of its defined and deliberate industrial policies. Beijing has prioritized reducing dependencies on other countries, which in turn makes the world increasingly dependent on its own supply chains.

The CCP’s objective is no secret: Global market dominance, made explicit in economic blueprints like Made In China 2025 and China’s most recent Five Year Plan. And the results of China’s industrial bets – mammoth entities like BYD, SAIC Motor and battery maker CATL – are this effort’s champions. They are expanding rapidly, without consideration to supply and demand and basic market forces, so much that the Chinese auto sector is estimated to have a production overcapacity of millions of vehicles per year. That overcapacity is now facing outward, in search of new markets to soak up the largesse.

China’s automakers currently face significant barriers to entry into some western markets, including the United States. The European Union in 2023 began an investigation into the raft of subsidies that underpin Chinese auto exports’ competitiveness, while U.S. tariffs have successfully kept these cars, electric or otherwise, off American highways.

But Chinese automakers are not idle. BYD, which became the world’s largest EV manufacturer in 2023, is building a factory in the heart of the European Union and is among half a dozen Chinese companies preparing to manufacture in Thailand, thereby gaining access to nearby markets through regional trade pacts.

More alarming, however, are Chinese firms’ heavy spending on plants in Mexico, through which they can access the United States by way of the more favorable tariffs under the United States-Mexico-Canada Agreement (USMCA). This strategy is, in effect, an effort to gain backdoor access to American consumers by circumventing existing policies that are keeping China’s autos out of the U.S. market.

This is an auto industry backed by the Chinese state. It has invested heavily in foreign markets in order to access more of them. And there is cause for alarm that Chinese vehicles and parts will only increase their access to the U.S. market, overcoming existing tariffs and evading existing trade enforcement measures, to directly challenge domestic automakers and threaten the jobs of millions of American manufacturing workers.

The United States must adopt a proactive and evolving strategy to stymie the CCP’s penetration. Washington should raise tariffs further on Made in China vehicles, tighten and fully enforce the USMCA’s ROO so they are not allowed to leak in, and exclude from the pact’s preferential treatment components and vehicles made by companies headquartered in non-market economies like China. Washington must strictly enforce its own industrial policies, like the clean vehicle tax credits included in the Inflation Reduction Act, so that upstream content and raw materials from China do not benefit. Washington also must fully implement and enforce the Uyghur Forced Labor Prevention Act to keep goods and inputs produced in the Chinese police state of Xinjiang and by other oppressed minority ethnic groups out of the U.S. market, so that none of this content reaches American consumers.

The threat posed to the American auto industry by heavily subsidized Chinese imports is significant, and the level of its severity will depend greatly on how federal policymakers respond to it. A dedicated and concerted effort to turn those imports back requires greatly strengthened trade enforcement and fully implementing existing domestic industrial policies. This effort should be undertaken immediately; there is no time to lose.

on-a-collision-course-report-final-022324

To read the introduction and takeaways as it is posted on Alliance for American Manufacturing’s website, click here.

To read the full report published by Alliance for American Manufacturing, click here.

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How to Make EV Subsidies Work

Nolan Johnson — Wed, 24 May 2023 15:23:39 +0000

Subsidies to support electric vehicle purchases are a long-standing means of reducing carbon emissions. Since the 1990s, for example, the Norwegian government has actively encouraged the adoption of electric cars using tax exemptions and other measures, including permission to use HOV lanes, exemption from regional road tolls, access to half-price parking, and more.

Over the past two decades, the United States has pursued a similar—albeit less generous—approach. For example, the “qualified plug-in electric drive motor vehicle credit,” which resulted from legislation first established by the Energy Improvement and Extension Act of 2008, offers up to $7,500 in financial relief for going electric. Although the recently passed Inflation Reduction Act of 2022 has changed the qualification criteria for the credit (and changed the name of the program), the premise remains the same: if you go electric, Uncle Sam will support you.

It’s a nice idea. Electric cars are less polluting than gasoline autos. Less pollution means cleaner air, and cleaner air makes for a healthier planet. So why not use public funds to back EVs?

In a new study, the Breakthrough Institute’s Ashley Nunes, along with two co-authors, scrutinizes the economic efficiency of such subsidies. Emissions reductions are important, of course, but what matters even more (particularly as the national debt sits in the trillions of dollars), is how much these vehicles are driven and how often EV batteries must be replaced. Both factors influence how much emissions are reduced for each dollar of government spending. Nunes’s work finds that:

Offering blanket EV subsidies can be an economically inefficient means of reducing emissions.
Replacing an EV’s battery detracts from the vehicle’s emissions advantage.
Cleaning up the national electric grid only does so much to make EVs less polluting on a per dollar basis.

None of these findings imply that EV subsidies are a universally bad idea. In fact, subsidies can maximize emissions reductions per dollar spent under specific conditions. Namely, when subsidies are targeted at high utilization vehicles (e.g., taxis and single-vehicle households), the expenditures are far more likely to reduce both emissions and produce net financial benefits. Offering subsidies for those who drive high utilization vehicles has particular significance for communities of color who are disproportionally represented in the taxi and mobility-on-demand industry.

As Congress debates whether EV subsidies should endure and, if so, for how long, Nunes’s study highlights the need to ensure these programs are targeted in ways that do the most good. His findings suggest that will mean moving away from universal subsidies for anyone interested in buying an EV and limiting subsidies to those who use EVs enough to realize the vehicle’s emissions advantage. Moreover, given that those who drive high utilization vehicles also have lower average incomes, offering EV subsidies as refunds, rather than nonrefundable tax credits, likely promotes greater EV adoption among the households that would maximize EVs’ emissions benefits.

To read the full summary, please click here.

To read the full original report, please click here.

Ashley Nunes is the Director of Federal Policy, Climate and Energy, at the Breakthrough Institute. His work examines the economics of clean technology adoption, with a focus on socioeconomic impact assessment. Previously a research scientist at the Massachusetts Institute of Technology, Ashley holds academic appointments in the Department of Economics, at Harvard College, and in the Labor and Worklife Program, at Harvard Law School.

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Global Trade Update

Rachel Accorsi — Wed, 21 Oct 2020 18:24:56 +0000

How are some of the world’s major economies faring?

Official statistics for some of the world’s major trading economies further indicate the extent of the downturn in international trade caused by the COVID-19 pandemic. During 2020, none of the major economies has been spared.

China’s trade patterns have diverged from other economies. After falling in the early months of the pandemic, Chinese exports stabilized in Q2 2020 and rebounded strongly in Q3 2020, with year-over-year growth rates of almost 10 per cent. Overall, the level of Chinese exports for the first nine months of 2020 was comparable to that of 2019 over the same period. On the import side, the Chinese demand for imported products recovered following a decline in Q2 2020. Contrary to other major economies, Chinese imports stabilized in July and August then grew substantially in September.

Regional trade trends

The sharp and widespread decline in international trade in Q2 2020 has been similar for developing and developed countries. However, trade in developed countries appears to have fallen marginally faster, both in relation to imports and exports. Trade among developing countries (South-South) has been relatively more resilient with a decline of about 16 per cent in Q2 followed by a decline by 8 per cent in July.

No region has been spared from the decline in international trade in Q2 2020. However, trade in East Asia appears to have fared relatively better than in other regions. This trend is even more evident for the month of July. On the other hand, the sharpest decline has been for the West and South Asia region, where imports have dropped by 35 per cent, and exports by 41 per cent. As of July, the fall in trade remains significant in most regions.

Global trade at the sectoral level

Economic disruptions brought about by COVID-19 have affected some sectors significantly more than others. In Q2 2020, the value of global trade in the automotive and energy sectors was about half of what it was in Q2 2019. Trade also declined significantly in chemicals, machineries, metals and ores, and precision instruments. On the other hand, imports increased in office machinery and textiles and apparel. Such increases are linked to the COVID-19 pandemic as these sectors include home office equipment and protective equipment such as masks.

The data for July and August 2020 indicates similar patterns. The value of international trade in the energy and in the automotive sectors was still substantially below its levels of 2019. On the other hand, increases in demand of home office equipment and personal protective gear resulted in positive growth rates for trade in the communication equipment, office machineries, and textiles and apparel sectors.

To download the full report, please click here.

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Section 232 Auto Investigation

Jasmine Mitchell — Mon, 17 Jun 2019 15:23:57 +0000

On May 17, 2019, President Trump announced his Administration’s determination that U.S. imports of automobiles and certain automotive parts threaten to impair U.S. national security. Under Sec. 232 of the Trade Expansion Act of 1962 (19 U.S.C. § 1862, as amended), this determination gives the President broad authority to respond to the threat, including potentially imposing unilateral import restrictions. The President is seeking a negotiated solution, instructing the U.S. Trade Representative (USTR) to reach agreements with Japan and the European Union (EU) to address the threat. The USTR is to report on its progress within 180 days.

autocongressional report

[To view the original report, click here]

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Trump Has Gotten China to Lower Its Tariffs. Just Toward Everyone Else.

Alec Escobar — Wed, 12 Jun 2019 15:52:44 +0000

China increased its retaliatory tariffs hitting US exports on June 1 in response to President Donald Trump’s latest escalation of his trade war. Yet, this action is only half of the bad news for US exporters. The other half is that China has begun rolling out the red carpet for the rest of the world. Everyone else is enjoying much improved access to China’s 1.4 billion consumers, a fact that has been little noticed or reported in accounts of the US-China economic confrontation.

While Trump shows other countries nothing but his tariff stick, China has been offering carrots. Beijing has repeatedly cut its duties on imports from America’s commercial rivals, including Canada, Japan, and Germany.

Trump’s provocations and China’s two-pronged response mean American companies and workers now are at a considerable cost disadvantage relative to both Chinese firms and firms in third countries. The result is one more eerie parallel to the conditions US exporters faced in the 1930s.

Another important implication of China’s action is that Americans are likely suffering more than President Trump thinks due to his trade war. Inflicting such punishment on Americans may be one factor motivating China. A separate motivation may be that it is trying to minimize the harm to its own economy by importing vital goods at better prices from other parts of the world.

CHINESE TARIFFS THROUGHOUT THE TRADE WAR

China has increased tariffs on US exports to an average 20.7 percent. But also striking for American farmers, companies, and workers is that China has reduced tariffs on competing products imported from everyone else to an average of only 6.7 percent (figure 1).

As recently as early 2018, firms in both the United States and the rest of the world competed in China with each other on a level playing field, facing an average Chinese tariff of 8.0 percent. Figure 1 summarizes how the Chinese tariff differential has arisen over the course of Trump’s trade war.

On April 2, 2018, China retaliated against US exports in response to Trump imposing tariffs on steel and aluminum imports under Section 232 of the Trade Expansion Act of 1962. Without waiting for authorization from the World Trade Organization (WTO), China imposed new duties on $3.0 billion of US exports. Like all of the retaliatory duties to date, the April tariffs were imposed in addition to the normally applied most favored nation (MFN) tariffs. As a result, China’s average tariff on US exports increased to 8.4 percent.

Later in 2018, China’s retaliation against $110 billion of US exports increased the average Chinese tariff on US-based production ultimately to 18.3 percent. This hike came in three waves, and each was an immediate response to Trump imposing a round of tariffs on China under Section 301 of the Trade Act of 1974. China’s retaliatory tariffs hit $34 billion and $16 billion of US exports on July 6 and August 23, respectively. More duties covered an additional $60 billion of US exports on September 24.

Yet, throughout 2018, China also lowered its tariffs on imports from all other WTO members. The headline involved China reducing its tariff on auto imports on July 1. But on the same day, China also cut tariffs on 1,449 other consumer goods like farm and fish products, cosmetics, clothing, and home appliances. On November 1 it reduced duties on 1,585 industrial products, including chemicals and machines.

By then, China had lowered its tariffs on imports from the rest of the world from 8.0 to 6.7 percent. Consumers in China now had another reason to switch away from American suppliers.

[To view the original research, click here]

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