Mexico: China's evasion

 

China is trying to circumvent U.S. restrictions in several technological areas, and in Latin America, Mexico and Brazil are serving that purpose.

Chinese auto parts manufacturers are joining the wave of companies setting up shop in Mexico to help Tesla and others produce vehicles destined for the U.S. market.

According to preliminary data from Mexico's domestic auto parts industry, the value of Chinese auto parts manufactured in Mexico and exported to the United States reached $1.1 billion in 2023, up 15 percent from the previous year. Last year, there were 33 Chinese auto parts manufacturers registered in Mexico, 18 of which exported to the U.S. In fact, Tesla CEO Elon Musk invited Chinese suppliers to replicate the local supply chain of its Shanghai Gigafactory in Mexico.

For some observers, it is a story of how the U.S. government's trade rebalancing policy has solutions or shortcuts for the ICT and automotive industries.  That is not enough, and Latin America, particularly Mexico, Brazil, and Argentina, are making similar moves.

In the case of Mexico, electric vehicles with parts made in Mexico can qualify for a U.S. consumer tax credit of up to $7,500 under the Inflation Reduction Act of 2022, the Biden administration's flagship climate bill. To do so, they must meet strict limits on the amount of battery materials sourced from "foreign entities of concern" or companies with ties to rivals such as China.

However, U.S. tax lawyers have even found a way for a Chinese-owned subsidiary based in Mexico to build complete electric vehicles that would qualify for the $7,200-$7,500 U.S. tax credit, if the minerals or battery components did not come from China.

This also opens an opportunity to intensify strategic mineral activities between Latin American countries, especially Brazil and Mexico.

In any case, if Trump wins the election, this challenge will enter the diplomatic desks and could somehow set the agenda for relations not only with Mexico, but with the entire region. A Trump in power, if he gets there, but also any Democrat, could be much tougher, given that the Chinese challenge is already a bipartisan policy.

Mexico and Brazil would be in the crosshairs, and not a few diplomatic conflicts can be expected, although it is true that the relationship between these powers is not reduced to trade and industry. It is more complex, but with Trump, the simplification of this relationship towards conflict is possible. It would be unpredictable and would increase uncertainty.