December 7, 2021
Mexico is ratcheting up pressure against electric vehicle (EV) tax credits for American-built cars, a measure in President Biden’s signature Build Back Better bill that some Mexican officials are comparing to former President Trump’s threat to impose tariffs on Mexico.
The Mexican government is actively lobbying against the tax credits, saying they contravene the United States-Mexico-Canada (USMCA) trade deal by granting undue advantages to U.S.-built vehicles.
The Canadian government is also lobbying against the tax credits, which were included in the House-passed version of the bill.
“This measure could be equivalent to a tariff that’s even higher than the one proposed by President Trump,” said Luz María de la Mora, the undersecretary for foreign trade in Mexico’s Secretariat of Economy.
“President Trump at the time proposed to implement a national security measure to impose a 25 percent tariff on all imports to the United States. This proposed measure could be equivalent to a tariff that’s higher than the 25 percent that Trump proposed at the time and that we all thought was a crazy idea,” added de la Mora.
Trump in 2019 threatened Mexico with up to 25 percent tariffs on its products if migration through Mexico to the United States did not decrease.
That threat was ultimately quelled by a bilateral migration agreement and the pandemic’s effects on regional migration, but it sent shudders through the continent’s integrated supply chains.
The House-passed version of Biden’s climate and social program spending bill includes the tax incentive proposal, which would raise EV credits up to $12,500 per vehicle, plus $500 for American-made EV batteries.
The $12,500 credit would include a $4,500 credit for union-made vehicles.
The tax credits would start in 2027, and apply to EVs assembled in the United States with at least 50 percent U.S.-made parts.
The value of tax credits could account for up to a third of the sales price of a vehicle that’s eligible for the credits, compared to one that is not.
The measure has drawn criticism from Canada, Mexico and Tesla Motors’s Elon Musk, whose company leads in EV production, but does not have a unionized workforce.
Still, de la Mora praised the tax credit’s intent to accelerate the electrification of private transportation.
“I think it’s very legitimate that we search for a way to move toward electric vehicles and toward electromobility. That issue is not up for discussion, it’s not being questioned that the industry is moving in that direction,” said de la Mora.
“And if it’s done using fiscal incentives, we also don’t disagree. What we do disagree with, that worries us, is that these fiscal incentives are conditional on the vehicles being produced in the United States,” she added.
Mexico and Canada view the country-of-origin conditions for the tax incentive as an undue subsidy contrary to the USMCA.
The United States Trade Representative did not respond to a request for comment on this story.
Mexican Secretary of the Economy Tatiana Clouthier last week told reporters that Mexico would litigate the provision in its national courts, as well as under the USMCA’s conflict resolution rules and the World Trade Organization.
“We are evaluating all kinds of retaliation,” said Clouthier.
Mexico’s reaction has been swift and brusque in part because the auto industry is the hallmark of North American economic integration, with supply chains that span the continent, relatively unencumbered by international borders.
The auto industry employs nearly 1 million workers directly in Mexico, a vast majority of whom work in the production of auto parts that are later assembled into the final product in plants throughout the continent.
But the Mexican government was also taken aback by the tax credits’ inclusion in the more than 2,000-page Build Back Better bill, without significant pushback from the large contingent in Congress that’s usually wary of disturbing continental trade.
“We are surprised that the Senate of the United States would treat its main commercial partners, Mexico and Canada, this way. The truth is we do not expect that treatment from them,” said de la Mora.
And Mexican officials are peeved over the proposal’s timing, after Mexican President Andrés Manuel López Obrador opened his participation in last month’s North American Leaders’ Summit with a geopolitical defense of North American economic integration.
“Economic integration, in full respect for our sovereignty, is the best instrument to face the competition stemmed from growth in other regions of the world, especially the productive and commercial expansion of China,” López Obrador told Biden and Canadian Prime Minister Justin Trudeau, adding a warning about China’s increasing economic footprint compared to North America’s.
“If the trend seen in the last decade should prevail for the next 30 years, by 2051 China would account for 42 percent of the world market and United States, Mexico, and Canada would remain with 12 percent, which would not only an unacceptable disproportion in the economic sphere, it would keep the temptation alive to bet on sorting out the disparity with the use of force, which would put us all in danger,” López Obrador said.
Clouthier and de la Mora both said Mexico is actively lobbying members in the House and Senate to make the case for changing the language before it becomes law.
Because of the scope of the bill, the danger for Mexico’s case is that the provision’s language could be overlooked as Democrats haggle over more politically salient issues.
The EV tax credit is a long-term prospect, as it’s written to enter into force in 2027, and internal combustion vehicles still account for more than 90 percent of global auto sales.
That could take heat off the provision’s effects on Mexico and Canada if the Build Back Better Act passes this year, as Senate Democratic leadership intends.
But the long-term effects of the move, according to the Mexican government, could weaken the economies of the three countries in an increasingly competitive and regionalized global economy.
“By disarticulating supply chains in an emblematic sector that generates great opportunities in the three countries, we go against a competitive and integrated North America,” said de la Mora.