Is it a good idea to put tariffs on Chinese cars?

Last week, Bloomberg reported that the Mexican government is about to announce the imposition of tariffs on products imported from China, particularly footwear, textiles, and automobiles. In theory, it sounds like a good idea. It's about protecting local industry, because Mexico's economic vocation is similar to China's: producing goods for export. Of course, the difference in scale between the two countries is so stark that it's pointless to compare them. The issue with the automotive industry is more complex than with other industries, partly because it's a much broader industry and full of variables. Imposing tariffs on the Chinese can be a very good idea or a terribly bad one, depending on how it's done.

President Claudia Sheinbaum has already said that Chinese automotive investments are welcome in Mexico, but that it would be better if they truly developed local supply and complete manufacturing. She said this at a time when BYD and MG were talking about building their factories in the country, and the former has already "backed out," or at least postponed the move indefinitely.

Today, Chinese vehicles represent more than 20% of total new car sales in the country, including imports of non-Chinese brands such as General Motors, Ford, Stellantis, and Kia, for example. If we add Chinese brands that do not report to INEGI, such as BYD, Geely, and others, those numbers approach 30% of the total, meaning that more than 400,000 Chinese vehicles are sold in Mexico each year today.

The impact of these potential tariffs will depend on the tax percentage determined. Currently, Chinese cars pay 20% tax to be sold in Mexico. If the additional tax is 10%, calculations made by artificial intelligence sites estimate that vehicle prices could rise by about 8%, which would represent nearly 10,000 fewer cars sold per year. If the tax were 30%, the price increase could be 25.5%, implying 41,000 fewer sales and the loss of 1,400 jobs. If the tariff were 80%, the cost would rise by 72%, 72,000 fewer cars would be sold, and 4,800 jobs would be lost. Will it be so?

Shock absorbers

Personally, I think a tariff between 10 and 20% would be absorbed by the Chinese, who urgently need to get rid of their excess car inventory. More than that, and we'd see significant increases.

Rising prices on Chinese imports would initially result not only in higher prices but also in job losses and product shortages. Low-volume Chinese brands would be the most affected and could consider leaving the country. The more established brands, such as BYD, MG, Chirey, and Geely, are unlikely to suffer as much. There would be a reconfiguration of the dealer network, with dealerships closing or replacing them with other brands.

In the medium term, Mexico would need to strengthen its internal competitiveness by improving its infrastructure, energy production, and better distribution and use of water, which is excellent, but costly. This increased competitiveness could ultimately convince Chinese brands like BYD or GWM, which have just opened factories in Brazil, to invest more in Mexico, but this raises another problem, and a very serious one: the United States didn't find this interesting at all, because they believe the Chinese want to use Mexico's trade agreement with the United States and Canada to invade those countries with their cars, paying little or no tariffs because they are produced in the region.

Traditionally, Mexico has been a partner with its northern neighbor. Its automotive industry has been designed primarily to satisfy US appetites, so much so that nearly 80% of what we manufacture goes there. While, on the one hand, it's interesting to avoid this excessive dependence, on the other, this would be a very long and expensive process, so we'll have to think carefully about where we want to export, if not to North America. It's almost impossible to export to China, because they don't need it, nor can we compete on price. It's difficult to compete with Europe on quality, although there are exceptions. We need cars that make sense for Japan and Korea.

Yes, imposing tariffs on the Chinese sounds nice, it sounds like a desire to protect domestic industry, but if it's not done with surgical precision, the harm to the patient may outweigh the benefit achieved by the surgery.

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