United States: Nearshoring Trends And Important Considerations When Looking To Mexico

Nearshoring refers to the transfer of certain business operations to a "nearby" country in preference to a more distant one. This article will explain the nearshoring trends and important considerations when looking to Mexico.

Nearshoring Benefits

Mexico boasts a number of proven advantages for companies looking to nearshore certain operations. Mexico is a nearshore prime manufacturing location with benefits across shipping, logistics, and labor - areas where many automotive companies are experiencing pain points in other manufacturing locales. Products originating from Mexico have preferential tariff access to the world's largest markets, and its trade facilitation programs have been benefitting manufacturers for years.

Whether spurred by a long-term strategic plan or from lessons learned during the COVID pandemic, there is an increased focus on supply chain, and many companies are looking to revamp their supply chain and operational footprint. Global supply chains are already being transformed under the following principles: (i) resilient (secure, redundant, diverse) supply chains is the new name of the game; (ii) alternate purveyors will be preapproved, over a race to the bottom; (iii) provider adaptability will be favored over lean inventories; and (iv) increased transparency and preventive stress testing regarding purchaser's needs and the supplier's ability to fulfill them¹.

Nearshoring Challenges

Despite the increased attention on supply chain issues and the operational headaches that manufacturers are facing, companies may be hesitant to overhaul their existing supply chain footprint or may not consider the long-term benefits of undertaking a more moderate nearshoring effort. Changing the supply base is extremely complicated. Supply chains are built on economic efficiencies, with many important inputs anchored in other faraway locations and companies committed to long-term contracts. However, there are a number of mounting pressures - including price increases, supply chain shortages, labor issues, and freight increases - that are converging to make automotive companies reassess the viability of their existing supply base and operations.

Companies that are considering nearshoring into Mexico immediately face the challenge of having to choose the most appropriate trade facilitation program to achieve the principles outlined above.

Even though a Maquiladora is usually chosen, this program is actually the most complex, burdensome, and risk-filled of those available². In addition to the maquila program (now IMMEX for Manufacturing, Maquila, and Export Services Industries Program), there are a number of trade facilitation programs with varying degrees of complexity, namely, the Sectorial Promotion Program (PROSEC), Eighth Rule Permit, Refund of Import Duties to Exporters (Drawback), Inspection at Origin (Clearance Registry), and Integral Companies Certification Scheme (Certified Companies Registry).

Even though each company should carefully evaluate the proper model for their planned Mexico manufacturing operations, the following items should always be top of mind when conducting such an evaluation: (i) greater control over supply chains (shorter) and operations (closer), (ii) import duties, (iii) overall taxation (iv) Value Added Tax, (v) antidumping duties, and (vi) mandatory technical standards.

1. Shorter and Closer Product Inputs and Operations

Shorter supply chains reduce risk. Additionally, operations that are closer in proximity ensure greater access and oversight. Minimizing the distance and opportunities for shipping delays, logistical problems, etc., also lessens the number of issues that can be encountered and allows a manufacturer to react more quickly when there are complications.

2. Import Duties

Temporary importation of goods into Mexico is subject to payment of import duties, to the extent that the end products are exported to a relevant Free Trade Agreement country, most importantly due to market attractiveness those in the USMCA, the European Union, and the European Free Trade Association³.

There is a means to receive a refund for the lesser of the inputs' import duties or those of the resulting products.

3. Overall Taxation

While nearshoring into Mexico, companies or investors can benefit from the important network of treaties signed with more than 60 nations to avoid double taxation. Provided that they are applied correctly, such treaties could yield advantages to repatriate profits and to reduce the overall tax exposure in Mexico. The current corporate income tax rate in Mexico is 30%, which could be seen as high in comparison to other countries. (Note that there is no local or state income tax on corporate earnings.) However, IMMEX manufacturing facilities can benefit from safe-harbor tax rules that could yield tax savings because the aforementioned rules often mean diminished manufacturing tolling fees to be paid for the Mexican facility, which in most cases is the main, if not the only, source of revenue for the Mexican operation.

Deciding the corporate structure of Mexican operations is quite relevant. For example,  (i) a Limited Liability Company may confer tax benefits in the U.S., provided a number of requirements are met; (ii) a Stock Corporation could offer more flexibility from a legal corporate perspective for the shareholders; or (iii) a branch has the disadvantage that the parent company would be directly responsible of all its liabilities.

4. Value Added Tax (VAT)

Goods that are temporarily imported to Mexico for processing are subject to the payment of Value Added Tax, yet qualifying companies that obtain a VAT Certification benefit from fiscal credits in the exact same amounts of such tax. Alternatively, posting a bond or letter of credit may also avoid this levy.

5. Antidumping Duties⁴

Temporary imports into Mexico would be subject to antidumping duties exclusively when the corresponding Final Determination expressly determines that they are included in their scope. It is important and recommended that the Mexican Diario Oficial be researched.

6. Mandatory Technical Standards⁵

Until late 2020, the importation of inputs to be utilized in production processes, or of products that would not be sold to the public in the same shape or form as imported, were permitted to enter without proof of Norma Oficial Mexicana (NOM) compliance under "exemption letters." As of today, importers must comply with all relevant NOMs, either prior to importation through duly certified compliance evaluations or after the importation process, using an existing contractual obligation with an authorized verifier to finalize such process within forty (40) days.

Even though virtually all for-export manufacturing makes use of at least one of the mentioned trade-facilitation programs, careful analysis of each is necessary to ensure appropriateness for each individual operation. How each program interacts with the items we have briefly described should always play a critical role in such an evaluation.

After all pros & cons have been weighed, it is hard to ignore (i) that Mexico enjoys access certainty to the USMCA region, (ii) that Mexico represents the lowest-cost option within the region, (iii) that delivery lead-times and logistics are hard to match by any other country in the world; and (iv) that USMCA grants Mexican exports favorable treatment regarding trade remedies and U.S. national security measures.

Footnotes

1 See Foley & Lardner, LLP, Global Supply Chain Disruption and Future Strategies Survey Report (September 2020).

2 The terms "maquila" and "IMMEX" are often thought to correspond to two different programs, yet they are the same, with maquila being the original name that was later officially substituted with IMMEX. All of the original maquila permits, some of which are still functioning, have automatically been transformed into IMMEX permits.

3 The European Free Trade Association members are Switzerland, Norway, Liechtenstein, and Iceland.

4 Antidumping duties are determined on a country-by-country basis after an investigation concludes that specific unfairly traded imports caused damage to the relevant domestic industry.

5 NOM is the name of the official, compulsory standards and regulations for diverse goods, products, and services in Mexico that may affect or represent a risk to the physical integrity and health of consumers, well-being of laborers in the workplaces, food safety, the environment, and other legitimate policy objectives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.