Mexico Threatens US With Tariffs Over EV Incentives

The Mexican Ministry of Economy is prepared to commercially retaliate against the US if the country passes the fiscal incentives for the purchase of electric vehicles (EV) proposed under US President Joe Biden’s “Build Back Better Act.”

“To defend our automotive industry and the regional compromise, we would take commercial reprisals. It is not fair to pretend that we are associates but only when it is beneficial,” said Tatiana Clouthier, Mexico’s Minister of Economy. Clouthier called the tax breaks “discriminatory” and “totally contrary to free trade,” as it favors EV manufactured in the US with US-produced batteries. Mexico recently discovered the world’s largest deposit of lithium in the northern Sonora region and is hoping to capitalize on it through the production of batteries of EVs across the region.

The response comes after US President Joe Biden did not remove an incentive of between US$7,500 and US$12,500 for the purchase of US union-made EV, which was introduced to comply with a carbon neutral emissions goal. The US is trying to have 50 percent of vehicles in transit being electric. The Build Back Better Act has received support from the House of Representatives and now awaits approval from the Democrat-majority Senate.

However, Mexico and Canada alike have voiced their strong opposition to the incentives as they believe they violate compromises signed up through the USMCA. Clouthier had previously suggested the proposal be modified to benefit all North American automotive content and assembly, but President Biden has not announced any modifications to the tax incentives despite strong opposition from its trade partners and US-based EV manufacturers, which would not qualify for the tax reforms in vehicle sales.

The topic was brought up during the “Three Amigos” summit, in which the leaders of the three North American countries came together for the first time in five years to discuss different issues affecting the region. Following the meeting, Canadian authorities spoke of bringing the concern to US officials, while Mexican attendees only spoke of the positive solutions reached during the summit in topics such as vaccine distribution.

The Mexican government claims it will solicit a panel for the resolution of controversies between member countries of USMCA and might raise the concern to the World Trade Organization (WTO) if necessary. Additional disputes include a disagreement over the percentage of regional value content needed in order for vehicles to qualify for USMCA tariff breaks.

While it may seem like the Act has a clear pathway towards being passed into law by a Senate in which the President’s political party has the majority, disagreements within Democrat Senators have already set back many of President Biden’s original inclusions. One future revision could very easily be the exclusion of the EV tax breaks.

Clouthier has not specified what the sanctions would be. She did mention that the course of action is not desirable but that the country will do whatever it needs to support its automotive industry, particularly after a year of challenges including the ongoing semiconductor shortage and a decrease in sales due to the pandemic.