By Diego Oré
       MEXICO CITY, April 18 (Reuters) - Mexico's federal
government, under pressure from the U.S., is keeping Chinese
automakers at arm's length by refusing to offer such incentives
as low-cost public land or tax cuts for investment in EV
production, three Mexican officials familiar with the matter
said.
    The last meeting between top Mexican officials and a Chinese
automaker was in January, the sources said, with executives of
BYD Co             - one of the world's largest electric vehicle
makers by sales.
    At the meeting, Mexican officials made clear they would not
give incentives like those awarded to automakers in the past and
that officials would be putting on pause any future meetings
with Chinese automakers, said the sources, who asked not to be
identified.
    The office of Mexican President Andres Manuel Lopez Obrador 
did not immediately respond to a request for comment. The
Mexican Economy Ministry declined to comment.    
    BYD officials and the Chinese embassy in the Latin American
country did not immediately respond to a request for comment. A
White House spokesperson said U.S. President Joe Biden will not
let Chinese automakers flood the market with vehicles that pose
a threat to national security.
    Reuters was not able to ascertain which Chinese automakers
have requested meetings since. Mexican government officials
typically do not disclose subsidies given to the companies for
plants.
    About 20 Chinese automakers now sell cars in Mexico but none
yet have a plant in the country. Chinese vehicles constitute
about a third of the total brand offerings in Mexico.
    The sources attributed the move to U.S. government pressure,
specifically from the Office of the United States Trade
Representative (USTR), to keep Chinese automakers out of the
free trade zone established under the North American Free Trade
Agreement. 
    A USTR official's response to Reuters did not address the
reported pressure, but the official said the United
States-Mexico-Canada Agreement (USMCA) was not meant to "provide
a back door to China and others who may be seeking to access our
market without paying ... tariffs." 
    The official said the USTR is focused on that issue as it
relates to autos, steel and aluminum.
    The U.S. intervention reflects increasingly acute fears from
its automotive industry, unions and U.S. political circles that
Chinese automakers such as BYD, SAIC            , Geely, Chery
and JAC aim to use Mexico as a back door to sell cheap electric
cars in the United States without paying steep U.S. tariffs, now
at 27.5%.    
    U.S. Trade Representative Katherine Tai said on Wednesday
the U.S. must take decisive action to protect EVs from
subsidized Chinese competition.
    
    CAUGHT IN CROSSFIRE 
    Mexico, Latin America's second-largest economy, is caught in
the crossfire between the world's two biggest economies and car
markets.
    Last month, Republican U.S. Senator Marco Rubio proposed
legislation seeking much higher tariffs on Chinese vehicle
imports. Two days later, three Senate Democrats from auto
manufacturing states urged the Biden administration to hike
import tariffs on Chinese EVs.
    Chinese automakers can get around U.S. tariffs by setting up
shop in Mexico, as long as they meet rules for how much of a
vehicle must be produced locally. 
    "A sizeable proportion of the goods arriving in Mexico by
ocean will likely be trucked into the U.S., which gives rise to
the suspicion that the increase in trade we are witnessing is
due to importers trying to circumvent U.S. tariffs," said Peter
Sand, chief analyst with research firm Xeneta.
    In order to avoid U.S. tariffs, goods must have a certain
percentage of regional assembly and components, varying
depending on the product and the sector. At least 75% of core
vehicle parts - like engine or transmission - must be originated
in the North American region.
    Despite the headwinds, Chinese automakers like BYD are still
looking to put down roots in Mexico.
    In late February, BYD insisted that any factory in Mexico
would serve the local market and not ship to the U.S. But many
industry officials are skeptical.
    One of the sources told Reuters that BYD was now chasing
incentives from state governments instead even though they are
substantially less beneficial than the federal ones.
    Industrial states like Durango, Jalisco, Mexico State and
Nuevo Leon are looking for Chinese automakers to open assembly
plants, offering a wide range of incentives. Nuevo Leon last
December approved $153 million in incentives for a Tesla plant.
    Federal incentives have in the past been generous, including
free land, water and energy facilities and help in hiring
workers, said Francisco Bautista, a partner at EY in Mexico. 
    Bautista added that these kinds of incentives have been
reduced under the current government, but some have still been
given to major investors like Volkswagen's             Audi. 
    In September, Mexican officials from the Economy and the
Foreign Relations ministries traveled to Washington to meet with
U.S. Commerce Department, Department of State and USTR officials
as part of U.S.-Mexico high-level talks.
    In the meeting, the subject of Chinese automakers
establishing EV production in Mexico was raised for the first
time although it was not on the agenda, the sources said.
    The officials met again in January 2024 in Toronto, where
another request was made by U.S. officials to hinder Chinese
automakers. 
    The Mexican Foreign Relations ministry did not immediately
respond to a request for comment.
    Mexican officials said that although Chinese investment
could help the local economy, the government is concerned about
angering Washington with USMCA up for revision in 2026.
    Under the "sunset clause," in July 2026 the three countries
will decide whether to extend the USMCA for another 16 years.
Mexican officials fear U.S. officials could seek to overhaul the
trade pact to Mexico's detriment, one of the sources said.

 (Reporting by Diego Oré in Mexico City
Additional reporting by David Lawder and Jeff Mason in
Washington and Zhang Yan in Shanghai
Editing by Ben Klayman and Matthew Lewis)