Mexico Gets Cold Feet Over New Chinese EV Plant After Trump Win

The plans put Mexico in a dilemma, made worse by Trump’s threat Monday to impose a 25% tariff on Mexican goods. The country is already a major car-manufacturing center and generally welcomes foreign investment for the jobs it brings. BYD, which rivals Tesla as the biggest electric-vehicle maker in the world, would normally be a prize catch.

But Mexican officials fear a BYD plant would send the wrong message to Trump and the trade hawks around him by suggesting that Mexico wants to be a backdoor for Chinese companies to sell to Americans. The president-elect is also taking aim at Mexico over immigration and smuggling of fentanyl, the issues he cited in the tariff threat.

Mexico says it isn’t aiming to be a conduit for Chinese-made goods and has made strides in addressing illegal immigration. It needs to persuade the U.S. and Canada of that when talks begin next year on extending the U.S.-Mexico-Canada Agreement on free trade reached during the first Trump administration.

“At this time, investments from China have to be analyzed with extreme caution,” said Eduardo Solís, a consultant who previously led Mexico’s automotive industry association. “Mexico has to present itself with a business card that says: reliable partner of North America.”

Trump earlier threatened to impose a 200% tariff on Chinese companies’ cars if they are manufactured in Mexico. Mexico’s concern over Chinese investment is another example of how Trump’s election is already forcing governments and companies to rethink their strategies. Canadian officials are trying to isolate Mexico to align themselves more closely with Trump.

BYD has long dreamed of bringing its vehicles to the U.S. as Asian carmakers such as Toyota and Hyundai did before it. But each possible avenue has run into barriers.

Exporting from China is nearly impossible after the Biden administration imposed roughly 100% tariffs on Chinese-made EVs this year. Trying to build a passenger-car plant in the U.S. like those of Japanese and South Korean automakers would undoubtedly meet stiff resistance, given anti-China sentiment in the U.S.

BYD has had an electric bus factory in Lancaster, Calif., for a decade, and it is North America’s largest electric-bus manufacturer, with annual production capacity of about 1,500 vehicles. But that area is less politically sensitive than cars sold to consumers.  

BYD’s most recent thinking, according to people at the company, is to build a plant in Mexico, initially to serve Mexican and other Latin American car buyers, while awaiting a shift in the political winds that would allow exports to the U.S. Now even this strategy is uncertain.

Building a plant in Mexico would require buy-in from both the state in which it is located and the federal government, and that is where problems have emerged. 

Several Mexican states have dialed back the incentives they are offering to BYD to attract the plant, such as local tax benefits and cheaper water, said people familiar with the matter. 

The federal government isn’t happy with BYD’s timing and doesn’t want to provoke Trump, said one Mexican official. Federal consent would be essential for any BYD project in Mexico because the company would need environmental and import permits as well as other government support.

The USMCA, signed by Mexico, the U.S. and Canada in 2018, propelled Mexico to become the world’s fourth-largest exporter of light vehicles, shipping nearly 2.6 million vehicles to the U.S. last year.

While the USMCA tightened regional content rules—meaning Mexican factories couldn’t merely assemble cars made out of Asian parts—carmakers adapted and expanded the use of parts from Mexico, the U.S. and Canada. Global carmakers such as Jeep parent Stellantis and BMW have been expanding in Mexico in compliance with USMCA rules. 

Mexico’s increased share of the U.S. import market means greater scrutiny, and the main point of contention in USMCA talks will be “how to shield the North American trade bloc from China’s influence,” J.P. Morgan said in a recent note to investors.

Treasury Secretary Janet Yellen visited Mexico in late 2023 to discuss plans for an investment screening mechanism that would give Mexico greater control over Chinese investment. That topic is likely to be part of the USMCA review, along with proposals to require more regional content.

Mexico has said the U.S. and Canadian concern about a Mexican backdoor is misplaced and lacks evidence. Mexican officials also observe that far more Chinese investment goes to the U.S. and Canada than to Mexico. Any measures to block China should be equitable among the three USMCA members since U.S. carmakers operating in Mexico are also heavy importers of parts and vehicles from China, Mexican officials say.

In the past few years, BYD has zoomed up to become the top Chinese electric-vehicle maker, and it has started expanding around the globe. It has a car factory in Thailand and is building its first Latin American plant at an abandoned Ford site in Brazil. 

In late 2023, BYD started looking for a Mexican site. Initially, executives thought it could make cars for the U.S. market, but they adjusted the plan to focus on Mexico amid escalating geopolitical tensions, according to people familiar with the plans. The company also believes the Mexican plant could share the Latin American market with the Brazil plant, they said.

For now, BYD is targeting Mexico with made-in-China exports. In May, BYD introduced its Shark plug-in hybrid pickup truck in Mexico. It was the first time the carmaker debuted a new model in a country other than China.

BYD initially designed the vehicle for the U.S. market, starting in late 2019, and surveyed American dealers to guide its design and technology, said people familiar with the project. They said they feared Mexico was a poor substitute for the U.S. because few Mexicans can afford the truck’s sticker price of $53,000 and up.

And BYD’s path to sell inexpensive imported EVs to Mexicans is growing more difficult after the government recently reintroduced tariffs ranging from 15% to 20% on EVs made in countries with which it doesn’t have a free-trade deal. One such country: China.

Ryan Felton contributed to this article.

Write to Santiago Pérez at santiago.perez@wsj.com and Raffaele Huang at raffaele.huang@wsj.com