Ford's and GM's Largest Threat Could Set Up Shop Next Door

Decades ago, foreign automakers were clamoring to get into the Chinese market. The market was blossoming and would become the world's largest automotive market by 2009. However, the Chinese forced foreign automakers into joint ventures with domestic companies to earn their way into the market.

Because of these joint ventures, the Chinese automakers developed quickly, and years later, through government subsidies and other incentives, became advanced, particularly with electric vehicles (EVs). The problem for the likes of Ford Motor Company (NYSE: F) and General Motors (NYSE: GM), among others, is that now Chinese automakers are able to undercut on pricing and, due to an aggressive price war in China, are rapidly expanding across the globe.

Making matters worse for the two Detroit automakers was a recent shift in North American trade policy that could mean Chinese brands are a mere step away from the lucrative U.S. market.

What's going on?

Last week, Canadian Prime Minister Mark Carney announced a new strategic partnership with China that essentially reopens Canada to Chinese EVs. This is a reversal of recent history, as for the past two years, Canada has stood beside the U.S. regarding Chinese EV tariffs. After the Biden administration implemented 100% tariffs on Chinese EVs, Canada followed with similar moves -- but that's changing.

Tucked away in a much broader trade agreement between Prime Minister Carney and Beijing, China, last week, Canada agreed to let in an annual quota of just under 50,000 Chinese EVs into the country at a tariff rate of only 6.1%. In return China will lower tariffs on Canadian canola seed from about 85% down to 15%, and to remove restrictions on lobster and crab.

At first glance, investors might brush this off due to the low annual volume, which represents less than 3% of the new-vehicle market in Canada. But brushing this development off could be a mistake.

Image source: Getty Images.

This could be the first step of opening the Chinese EV floodgates into part of North America, especially with the government's prediction that within five years, "more than 50% of these vehicles will be affordable EVs with an import price of less than $35,000," a price range that should remain competitive. Canada is attempting to lure some big Chinese companies to set up shop up north, with a closer eye on the lucrative U.S. market and smaller tariff headaches.

What it all means

The truth is that Chinese automakers are developing, producing, and selling some of the world's most advanced and most affordable EVs on the planet, and not only are the brands making inroads overseas in Europe, they have eyes on the U.S. market. It's likely not a matter of if, but when, Chinese brands enter the U.S. market, and Detroit automakers don't have long to prepare, adjust, and innovate to compete at the necessary price points and quality levels.

Years ago, analysts had scattered warnings about foreign automakers needing to pull back in China, but now the warnings are that the Chinese are heading to America, and long-term investors should keep an eye on these developments because Chinese vehicles in the U.S. will dramatically alter business, market share, and profitability and make returns much more uncertain.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.