What makes China the top car supplier to Mexico and its implications for the U.S.

Washington officials are concerned that Mexico may be used as a "backdoor" to the U.S. market by Chinese electric vehicle makers, who have been blocked from selling their high-tech cars in the U.S. due to tariffs.

Last year, China was the leading car supplier to Mexico, with $4.6 billion worth of vehicles exported to the country, according to the Mexican Ministry of Economy. Despite initial hesitation towards EVs, customers have been swayed by affordable price tags. Rival BYD offers its Dolphin Mini in Mexico for around 398,800 pesos, or about $21,300, which is significantly cheaper than the cheapest Tesla model.

"Juan Carlos Baker, former Mexican deputy minister for international trade, stated that the Chinese automakers entered the country with great aggression. He praised their promotions and emphasized that their product was of high quality and sold at a reasonable price."

In Mexico, some Chinese EV makers, including BYD, are exploring factory sites in Durango, Jalisco, and Nuevo Leon as they seek to expand their presence in North America. This foreign investment could provide an economic boost to Mexico, with BYD stating that a plant there would create approximately 10,000 jobs.

Officials in the U.S. are concerned that Chinese automakers may be using this move as part of a larger plan to circumvent trade restrictions and gain access to the American market.

"According to Scott Paul, president of the Alliance for American Manufacturing, Mexico is an appealing production platform not only for Chinese companies but also for other companies due to its free trade access to the American market. Additionally, Mexico can perform a trade technique known as circumvention."

The USMCA, a revised version of the NAFTA, eliminated tariffs on many goods traded between North American countries starting in 2018. Under the agreement, foreign auto companies can export goods to the U.S. virtually duty-free if they manufacture in Canada or Mexico and source building materials locally.

"China has demonstrated this practice in various manufacturing sectors, including appliances, auto parts, and steel, as stated by Paul," said Paul. "For over a decade, the United States and China have engaged in a high-stakes game of whack-a-mole regarding trade policy tariffs."

The potential scenario of not meeting the USMCA requirements is terrifying for U.S. lawmakers and auto companies.

American automakers would face an imminent threat from Chinese EV makers if they set up in Mexico due to lower costs, according to Michael Dunne, CEO of Dunne Insights.

In May, President Biden declared a 100% tariff on Chinese electric vehicles.

"The U.S. is in the early stages of expanding its electric vehicle (EV) industry, making it an "infant industry," according to Paul. As such, it requires significant protection during its developmental stage."

Experts advise that Mexico must balance its relationship with the U.S. while remaining amenable to Chinese investment, given the pressure from the U.S.

The next administration may affect EV trade policies in Mexico, which has become a popular location for Chinese auto companies.