How Connected Vehicle Regulations May Impact US Automotive Imports

Introduction: The Proposed Regulations

On Sept. 23, the U.S. Department of Commerce (DOC) issued broad regulations that, when finalized — likely in January 2025 — would significantly restrict U.S. imports of software and hardware for “connected vehicles,” whether separate or embedded in electric vehicles (EVs) or internal combustion engine vehicles (ICEVs). The ban applies to software or hardware originating in either China or Russia, although it is unclear if any such products are currently being produced in Russia.

“Connected” is an industry term that typically refers 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. EV computers are more sophisticated than most systems in older gasoline-powered vehicles and can, if properly programmed, remotely 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 People’s Liberation Army or the Chinese Communist Party). Tesla and some other U.S.-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 nonresident fellow Simon Lester has created an excellent summary of what the notice provides. It would:

• Prohibit VCS (Vehicle Connectivity System) hardware importers from knowingly importing into the United States certain hardware for connected vehicles.
• 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).
• Prohibit connected vehicle manufacturers from knowingly selling within the United States completed connected vehicles that incorporate covered software.

Prohibit connected vehicle manufacturers who are owned by, controlled by, or subject to the jurisdiction or direction of the People's Republic of China (PRC) or Russia, from knowingly selling in the United States completed connected vehicles that incorporate VCS hardware or covered software.

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 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 confirmed revelation earlier in 2024 that General Motors was using its OnStar communications system to record driver data and sell it to insurance companies. GM has discussed, with one of the authors of this brief, its broad, strategic view on the value and use of data collected from its onboard systems, ranging from market research to road conditions, for both legacy ICEV and future EV fleets. Auto manufacturer ambitions regarding connected vehicles, as we discuss later, add considerable complexity to the issues at hand.

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 because of the recently ordered 100% tariffs. 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 ultimately controlled by Chinese auto maker Geely.

The EV import numbers for both brands are apparently very small at present, but the understanding is that about 128,000 Volvos (almost all ICEVs) were sold in the U.S. last year. Some were made in South Carolina, 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. Some of those vehicles may be capable of recording data and communicating it to Volvo (whether or not they are actually doing so), and some will have cameras — although, of course, there is no way of knowing whether any of the computer systems are or will be used for suspect purposes.

The proposed regulations, when adopted, would not be effective for software until the 2027 model year and for hardware until the 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 South Carolina, more vehicles potentially capable of spying could be on the road within the next several years

EV imports from China, directly or via Mexico, are not the only basis for concern 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 national emergency. The IEEPA gives a president the authority to take actions involving, inter alia, international commerce, with significant review by Congress or the courts.

These bans on connected automotive technology issued on national security grounds will likely have broad bipartisan support, including President-elect Donald Trump, although some critics would have liked to have seen 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 U.S. could decide to invoke the exception without any review by other parties or in a USMCA panel. Otherwise, it would probably be a USMCA violation. The broad authority afforded the president under the IEEPA has been used in the past both by President Biden and Trump.

Mexico and Other Potential US 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. Under such circumstances, unlike the additional tariffs of 10-20% proposed by Trump on U.S. imports from any source, the connected vehicle regulations would have no impact on passenger vehicles currently produced in Mexico and exported to the United States.

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 anywhere for export to the U.S. by BYD or other Chinese manufacturers is obviously of serious concern to the U.S. auto industry and policymakers. As noted above, a ban on such imports based on national security grounds would be difficult to attack under the USMCA. Among other reasons, Mexico’s former president Andrés Manuel López Obrador has cited national security as a broad basis for attacking objections to constructing the Mayan Tourist train and some other policies.

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. Mexico exports 88% of its 3.5 million passenger vehicles produced annually, or about 2.66 million vehicles, to the United States.

Still, the trade situation goes well beyond Mexico and will probably frustrate other auto-producing governments. For American and European original equipment auto manufacturers, these U.S. restrictions remind many of the flooding of U.S. 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.

If nothing else, the possibility that President-elect Trump will impose high duties on imports of EVs made by Chinese firms in Mexico or elsewhere may convince BYD that their proposed Mexican facility should be further postponed. It is uncertain whether Elon Musk could convince Trump that Tesla vehicles from Mexico could be imported at low duty rates into the U.S.; otherwise, the proposed Tesla Nuevo León plan might also be abandoned altogether, after having been postponed once already.

It is worth noting that many Chinese auto parts imported into or manufactured in Mexico are routinely used in producing vehicles sold in the U.S. without any apparent concern by the U.S. government. Under the USMCA rules of origin, up to 25% of a vehicle’s components — down from 35% under NAFTA — can be sourced from outside North America (e.g., China, India, Korea, or elsewhere), with some exceptions.

US Tariffs and Presidential Uncertainties

At this writing, before President-elect Trump has taken office for the second time, policies in 2025 toward U.S. imports of EVs will depend in major part on decisions his administration will make, although the Biden administration’s 100% tariffs on EVs from China and the DOC regulations banning software and hardware imports from China and Russia will likely be continued in force, possibly in modified form. If one can rely on campaign rhetoric, a second Trump administration will affect U.S. motor vehicle imports — both ICEVs and EVs — along with parts and components from all U.S. trading partners, given that the proposed across-the-board 10%–20% new tariffs could apply to vehicles, auto parts, and other goods. Whether these tariffs, if imposed, would survive court challenges, even if national security were cited, or possible Congressional challenges, remains uncertain.

On Sept. 23, 2024, Trump threatened that, if elected, he would impose 100% customs duties on all passenger vehicles imported from Mexico, both ICEVs and EVs. However, Trump’s objective may not be about national security. Instead, he has said he would be delivering jobs to the United States. Such duties, particularly against Mexico alone, would be illegal under WTO, USMCA, and U.S. customs law, and could 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 creates a significant risk of action. Trump is beholden to many executives in the U.S. automotive industry and their lenders, which have billions of dollars invested in Mexican production facilities, so it seems unlikely to be implemented.

Once final DOC regulations are published, EVs, including Mexican EVs with embedded “connected” software and hardware made by Chinese-owned factories, will be banned from the United States. One could argue that, with the U.S. banning imports of connected vehicle software and hardware, the 100% tariffs are not necessary, but a Trump administration could take a “belt and suspenders approach.” Separately, Vice President Kamala Harris charged during the campaign 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. Her pronouncements, like Trump’s 100% tariff proposal, did not distinguish between ICEV and EVs, and seemed to be factually unjustified.

The connected software and hardware regulations would apply worldwide to EV imports into the United States assembled in 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. 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.

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 were made by Tesla, BMW, Renault, and other EU-controlled facilities in China. Presumably, these Chinese vehicles would be a cause of concern to the U.S. as well because they could spy on the many U.S. bases in Europe. U.S. policymakers should also be wary about the reexport of these EVs to the United States.

The 2026 USMCA “Review and Revision”

EV rules of origin will almost certainly be on the agenda for the mandatory 2026 USMCA “review and revision,” at the request of the United States or the other parties. Still, it seems unlikely that the U.S. would wait until 2026 to deal with this critical trade issue. Based on their statements to date, the Trump administration is likely to advocate for rules of origin that are even more favorable to the U.S. than those negotiated in the USMCA and subsequently interpreted favorably by the United States. This comes despite calls from some observers for increased flexibility on automotive trade rules. 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 U.S. content.

In any event, it seems unlikely that the parties will reach an agreement in 2026 to extend the USMCA for another 16 years, given ongoing disagreements over vehicles and 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 under Article 34.7 the USMCA would terminate unless the parties agree on a 16-year or another extension, which would need unanimous support. Should the Canadian and Mexican governments accede to most of the U.S. demands, the situation could change.

Conclusions

The prospective regulations banning U.S. imports of “connected” software and hardware, whether imported alone or embedded in vehicles, should greatly assist the U.S. government in protecting the country from the risks associated with such vehicles. The delay in imposing 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 U.S. and among allied nations, currently outpaces the country’s abilities to invoke broad, economy-wide anti-tampering tactics. Strategies are needed at the materials science level, including “smart materials” research and development, to harden critical systems and are currently being addressed at Rice University. There are also significant concerns when it comes to the market penetration of electronic devices with telecommunicating capacity that present any number of competitive and security issues and rivalries. Whether ICEVs or EVs, the goal is “vehicle to everything” (V2X) systems integration, which increases the need for anti-tampering and other hardening even more. It is doubtful that the United States has the capacity, anywhere, to handle all of this, even if its inertia could easily be overcome. Thus, going forward, these fragilities could become deeply embedded in politics and policies surrounding international trade, extending well beyond the automotive sector.

The USMCA faces uncertainty, as it is unclear whether the agreement will survive four more years of Trump, especially if the 10%–20% increased tariffs on all goods, including vehicles and auto parts, are imposed — let alone the 100% tariffs on all auto imports and threatened 25% tariffs on imports from the U.S. and Mexico tied to immigration and fentanyl issues. It seems virtually certain that the Trump administration, like Biden’s, will prohibit 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 most favored nation (MFN) tariff otherwise applicable to passenger cars imported into the United States (except currently from China) is only 2.5% and an insignificant barrier to auto imports from Mexico, Europe, or elsewhere.

The combination of U.S. 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 could deal  devastating blows to the Mexican economy, potentially leading to the worst recession in years. This has serious negative implications for the United States as well, particularly with regard to controlling illegal immigration and the probability of repatriating tens of thousands of undocumented immigrants from Mexico, as well as for the continued global competitiveness of the North American automotive sector.

The actions related to connected vehicles are, of course, among several trade-related steps being undertaken by the outgoing Biden Administration. As mentioned above, many, if not all, of the Biden Administration decisions target China, directly or indirectly. These issues revolve around highly sensitive industries and businesses such as advanced microchips and goods that have defense industry applications. But even prominent apparel makers can be affected. Given very public indications of the continued use of trade “big sticks” by the incoming Trump Administration to correct what is widely viewed as a most uneven playing field when it comes to U.S. trade with China, the Chinese government is already responding. China has options, including anti-trust reviews (Intel and Tower, Nvidia), banning (PVH), and restricting exports of key minerals and materials. Mexico and many other trade partners are likely to get caught in the crosshairs as global trade comes under increasing scrutiny.

This is a revised and updated version of an issue brief that was originally published in the International Economic Law and Policy Blog on Oct. 6, 2024.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.