This is a guest post from David A. Gantz, JD, JSM, Will Clayton Fellow for Trade and International Economics, Rice University’s Baker Institute for Public policy, Houston and Michelle Michot Foss, PhD, Fellow in Energy, Minerals and Materials, Baker Institute
Introduction: The Proposed Regulations
On Monday, September 23, The U.S. Department of Commerce (DOC) issued wide-ranging regulations which, when finalized, likely before the end of 2024, would significantly restrict U.S. imports of software and hardware for “connected vehicles,” whether separately or imbedded in either electric (EV) or internal combustion engine (ICEV) powered vehicles (Connected Vehicles Proposed Regulations). The ban applies to software or hardware originating in either China or Russia, although we are not aware of any such products currently imported from Russia. “Connected" is a term of art that typically refers primarily to the sophisticated computers that are essential for control of EVs, but they are also found in one form or another in most modern ICEVs. The EV computers are more sophisticated than most systems in gasoline powered vehicles and can, if properly programmed, update the vehicle’s software as well as record and transmit driver data and photos (e.g., of military bases, ports or electric power plants) to the manufacturer (or perhaps others such as agents of the Chinese Communist Party). Tesla and some other US-made EVs already have such systems. For example, Tesla uses them to transmit software exports to Tesla vehicles and to receive driver data.
Baker Institute non-resident fellow Simon Lester has provided an excellent summary of what the notice provides. It would:
- (1) prohibit VCS [Vehicle Connectivity System] hardware Importers from knowingly importing into the United States certain hardware for “VCS hardware” . . .
- (2) prohibit connected vehicle manufacturers from knowingly importing into the United States completed connected vehicles incorporating certain software that supports the function of VCS or ADS (VCS and ADS software are collectively referred to herein as “covered software,” as further defined below);
- (3) prohibit connected vehicle manufacturers from knowingly selling within the United States completed connected vehicles that incorporate covered software; and
- (4) prohibit connected vehicle manufacturers who are owned by, controlled by, or subject to the jurisdiction or direction of the PRC or Russia from knowingly selling in the United States completed connected vehicles that incorporate VCS hardware or covered software. (China Trade Monitor Summary).
Vehicles made by American companies in China and exported to the United States (e.g., Tesla, General Motors and Ford) whether EVs or ICEVs would presumably incorporate VCS hardware that is not capable of Chinese spying in the United States. However, many owners and prospective owners of passenger vehicles capable of directly communicating with the manufacturers may be concerned about potential violations of operator privacy. Such concerns seem justified in light of the revelation earlier in 2024 that General Motors was using its “Onstar” communications system to record driver data and sell it to insurance companies (Your car is spying on you).
It seems wise of the DOC to focus on imports of software and hardware for "connected" vehicles, rather than just the vehicles themselves. The new regulations could cut a wide swath, including, for example, the Buick ICEV SUVs that GM has been importing for several years and Tesla vehicles coming into the U.S. from China. (Those imports are likely to cease anyway because of the recently ordered 100% tariffs) (White House Fact Sheet). However, the proposed regulations, because of the grace periods, noted below, do not appear to effectively address Volvos (both ICEVs and EVs) and Polestars (EV only) produced in South Carolina, with both brands controlled by Chinese auto maker Geely (Polestar and Volvo US Production).
The EV import numbers for both brands are apparently very small at present, but our understanding is that about 128,000 Volvos (almost all ICEVs) were sold in the US last year (Volvo's US sales). Some were made in South Carolina and some in the EU and a few in China but all have computer systems and are potentially under the ultimate influence of Geely and thus potentially the Chinese Communist Party. Thus, all or nearly all of those vehicles are capable of recording data and communicating it to Volvo (whether or not they are actually doing so), and some will have cameras, although we of course have no way of knowing whether any of the computer systems are or will be used for suspect purposes.
The proposed regulations, when adopted later in 2024, would not be effective for software until the 2027 model year and the hardware for them 2030 model year. The lead time is probably necessary for the industry to make sourcing changes but if Polestar sales increase now that they are being assembled in SC a lot more vehicles potentially capable of spying could be on the road in the next several years.
One does not need EVs to be concerned about connectivity (or autonomous driving if that is the end game). Late model ICEVs are loaded with technical equipment that seems to fly under the radar, so to speak, since no one pays much attention to it. Others worry about cybercrime and have tried to bring attention to those potential vulnerabilities.
The Biden administration, in Executive order 13873, is acting under authority of the International Emergency Economic Powers Act (IEEPA), “to deal with any unusual and extraordinary” foreign threat to the United States’ national security, foreign policy or economy, if the President declares a declares a national emergency…(Proposed Rulemaking)
These bans on connected automotive technology issued on national security grounds will have broad bipartisan support, including Biden/Harris and Trump, although some critics would have liked to see action sooner. A prohibition of this kind could arguably be justified under the USMCA Article 32.2 exception, which permits a Party to take actions to protect its “own essential security interests.” The US could decide without any review by other parties or in a USMCA panel. Otherwise, it would probably be a USMCA violation. (National Security under USMCA) The US use of Section 232 to restrict steel and aluminum has survived several court challenges.
Mexico and Other Potential U.S. Suppliers of Connected Vehicles, Software and Hardware
For the time being—at least until the beginning of 2026 and probably longer—there will be no Chinese EV production in Mexico. It also seems exceedingly unlikely that the Chinese origin software or hardware relating to the “connected” technology covered by the regulations is or will be produced in Mexico, although trans-shipment may be a potential concern.
This DOC proposed action is focused on China rather than on Mexico or other potential exporters of Chinese made EVs to the United States, although the prospect of manufacturing of EVs for export to the US by BYD or other Chinese manufacturers is obviously of serious concern to the US auto industry and policymakers (Mexican EV threat). As noted above, a ban on such imports based on national security grounds would be difficult to attack under the USMCA. (Among other reasons, Lopez Obrador has cited national security as a broad basis for attacking objections to constructing the Mayan Tourist train) (National security for Mayan train).
Despite the global breadth of the regulations, Mexico may ultimately be affected more than any other U.S. trading partner, except China. The Mexican auto/auto parts industry has been the most significant driver of Mexico's manufacturing sector since before NAFTA went into effect in 1994 and established an integrated North American automotive market, amounting for about 22% of total trade under the USMCA, and 17.4% of total world auto production (North American auto industry).
Still, the trade situation goes way beyond Mexico and will probably frustrate other auto-producing governments. For United States and European original equipment auto manufacturers, these US restrictions remind many of the flooding of US and EU markets by Japanese and Korean auto producers on steroids, recalling in particular the huge inroads made in the United States market by major Japanese auto producers and the various steps the United States took 40 years ago to protect the U.S. automotive industry (US-Japan Auto Deal 1985).
If nothing else, the likelihood that the next US president will impose high duties on imports of EVs made by Chinese firms in Mexico or elsewhere (see below) may convince BYD that their proposed Mexican facility should be further postponed. It is uncertain whether Elon Musk could convince Donald Trump that Tesla vehicles from Mexico could be imported at low duty rates into the US; otherwise, the proposed Tesla Nuevo León plan might also be abandoned altogether, after having been postponed once already.
It is worth keeping in mind that many Chinese auto parts imported into or manufactured in Mexico are routinely used in producing autos sold in the US, without any apparent concern by the US government (or even Mr. Trump). Under the USMCA rules of origin, up to 25% of a vehicle's components (down from 35% under NAFTA) can come from outside North America, e.g., China, India, Korea or elsewhere) (USMCA automotive sector).
U.S. Tariffs and Presidential Uncertainties
At this writing, a few weeks before the U.S. Presidential election, policies in 2025 toward US imports of EVs will depend in major part on who is president, although the Biden administration’s 100% tariffs on EVs from China and the DOC regulations banning software and hardware imports from China and Russia would probably be continued in force. If one can rely on campaign rhetoric—which is always problematic—a second Trump administration is likely to affect US motor vehicle imports, both ICEVs and EVs, and parts and components, from every U.S. trading partner, given that the proposed across the board 10%-20% new tariffs would apply to autos and auto parts as well as other goods (10-20% Proposed Trump Tariffs). Whether these tariffs if imposed would survive court challenges, even if national security were cited, or possible Congressional challenges, is uncertain.
Trump promised on September 23 that if elected he would impose 100% customs duties on all passenger vehicles imported from Mexico, both ICEVs and EVs (although he may not know or care about the full implications) (100% tariffs on Mexican autos). The objective stated by Trump apparently has nothing to do with national security. He says he would be delivering jobs to the US. Such duties particularly against Mexico alone would be illegal under WTO, USMCA, and US customs law, and likely would be enjoined by the Court of International Trade, a federal court which has exclusive jurisdiction over trade and customs cases. However, one can question whether the proposal would survive beyond November 5. Mr. Trump is beholden to many executives in the US automotive industry and their lenders, so it so it seems to us unlikely to be implemented.
Ms. Harris if elected would probably impose 100% duties on Chinese/Mexican EVs to match the Chinese tariffs (if they have not already been imposed by Biden), which could probably be done on the same national security grounds as the DOC regulations discussed herein. Once final DOC regulations are published, probably by December 2024, “connected” EVs, including Mexican EVs with imbedded “connected” software and hardware made by Chinese-owned factories, will be banned from the US. One could argue that with the US ban on imports of connected vehicle software and hardware the 100% tariffs are not necessary, but a Trump administration typically loves tariffs, and a Harris administration could take a “belt and suspenders approach.” Separately, Harris has complained that the USMCA negotiated by Trump has made it “far too easy” for auto companies to outsource jobs and promised (without providing any details) to address her concerns in the 2026 USMCA review (Harris on auto rules). Her pronouncements, like Trump’s 100% tariff proposal, do not distinguish between ICEV and EVs.
It might also be considered advisable by Harris to apply the 100% duties to potential Chinese-produced EV imports into the United States from Turkey, the EU, Thailand and Brazil among others, where Chinese-owned EV factories are or will soon be producing EVs. (ICEVs made by Mercedes, BMW and Audi also have sophisticated computer systems, although EU privacy rules may limit their scope, and their spying capabilities are far less suspect.) As far as we can tell, there has been some handwringing about potential spying within the EU, but the proposed penalty duties of up to about 40% are focused on Chinese subsides and protecting the EU industry and its workers (EU auto tariffs).
With current imported Chinese-origin EV sales in the EU accelerating, it is probably too late for the EU to respond effectively. The EU reportedly imported about 300,000 EVs from China in 2023, although more than half of were made by Tesla or BMW, Renault and other EU-controlled facilities in China (EU imports of Chinese EVs). If we were the US military, we would not want any of those EVs visiting the many U.S. bases in Europe, and US policy makers should be wary about re-export of some of those EVs to the United States.
Finally, if one is sufficiently cynical, one can argue that a Harris administration, even if would never impose 100% tariffs on all autos imported from Mexico, would generally favor a “Buy American-invest in America-Employ Americans” policy that may not differ in major respects from Trump’s except in tone.
The 2026 USMCA “Review and Revision”
EV rules of origin will very likely be on the agenda for the mandatory 2026 USMCA "review and revision," at the request of the United States or the other Parties although it seems unlikely that the US would wait until 2026 to deal with this critical trade issue. Based on their statements to date, it seems likely that either a Harris or a Trump administration would be pushing for rules of origin that are even more favorable to the US than those negotiated in the USMCA and subsequently advocated by the United States, even though some observers have urged increased flexibility on automotive trade rules within North America (Looking Forward). We recall that when the Trump administration was negotiating a replacement agreement for NAFTA, its original auto rule of origin proposal was for 85% North American content, of which 50% would have had to be US content.
In any event, it seems unlikely that the Parties (with the US demurring) will be able to agree in 2026 to extend the USMCA for 16 more years due to disagreements on autos or other key issues. More likely, there will be no agreement on changes in 2026, making another review necessary in 2027 and perhaps thereafter, until 2036, when the USMCA would terminate unless the Parties agree on a 16 year or any other extension which would have unanimous support (USMCA article 34.7). We believe this is the most likely case whether Harris or Trump is president from 2025-29.
Conclusions
The prospective regulations banning US imports of “connected” software and hardware, whether imported alone or imbedded in vehicles, should greatly assist the US government in protecting the United States from the dangers of the presence of such vehicles in the United States. The delay in imposing the bans until the 2027 and 2030 model years is somewhat troubling but probably inevitable. U.S. policy in this area has been far more proactive than in the EU and is welcome.
That said, the rapidly expanding ability of adversarial interests to attack microelectronics like those in vehicles in order to undermine and threaten economic and national security in the United States and among allied nations currently exceeds our abilities to invoke broad, economy-wide anti-tampering tactics. Strategies are needed at the materials science level (and are being addressed at Rice University), for “smart materials” research and development, to harden critical systems. As well, there are huge considerations beyond autos when it comes to market penetration of electronic devices with telecommunicating capacity that present any number of both competitive and security concerns and rivalries. Whether ICEVs or EVs, a goal is “vehicle to everything” or V2X systems integration, which increases the need for anti-tampering and other hardening even more. We doubt that the United States has the capacity, anywhere, to handle all of this, even if our inertia could easily be overcome. Thus, going forward we expect these fragilities to become deeply embedded in politics and policies surrounding international trade, well beyond that in automotive vehicles.
With the USMCA, it is problematic whether the agreement would survive four more years of Mr. Trump if either the 10%-20% increased tariffs on all goods including autos and auto parts were imposed, let alone the 100% tariffs on all auto imports. The Harris proposals to date raise fewer concerns, since it has been widely assumed for some time that no U.S. administration would permit the importation of connected vehicles into the U.S. from Mexico or anywhere else. While USMCA tariffs are zero if a product meets the rules of origin, the MFN tariff otherwise applicable to passenger cars imported into the United States (except currently from China) is only 2.5% (other than China), and an insignificant barrier to auto imports from Mexico, Europe or elsewhere (US import duties).
The combination of US concerns about Chinese origin connected vehicles, U.S. “Buy American” policies and Mexico's return to an autocratic, single-party state with an anemic rule of law (Judicial "Reform" and the rule of law) could together become a devastating blow to the Mexican economy in general, leading to the worst recession in many years. This has serious negative implications for the United States as well, particularly with regard to controlling illegal immigration, but also to the continued global competitiveness of the North American automotive sector.
