Why Do American Manufacturers Move Operations to Mexico?

For decades, American manufacturers have benefited from the low cost of industrial labor and the convenient location Mexico offers to expand their production and meet growth demands. Now, Mexico is also following suit with what the U.S. has imposed on China with regard to duties.

The Mexican government recently announced a modification to its import law with a temporary measure to raise tariffs anywhere from 5% to 50% for 544 HS codes. These trade classifications include steel, aluminum, plastics, and electrical materials, among others.

Enforcement of this increase began on April 23, 2024, and will remain in effect through April 23, 2026. Though this affects imports from non-free trade agreement (FTA) countries, including China, the increase in import duties will not apply to manufactured goods that comply with a certificate of origin due to the USMCA agreement. This benefit also applies to materials and goods coming from countries with free trade agreements with Mexico.

Rather, it further promotes Mexico’s alignment with the U.S. and Canada as part of the USMCA trade bloc. The USMCA allows American manufacturers to benefit from the elimination of tariffs on trade for qualifying goods between the three countries, further incentivizing American manufacturers to expand or relocate production from China to Mexico.

Closing the Competitive Gap Between China and Mexico

In addition to Mexico imposing additional tariffs for non-FTA countries, the U.S. has continued restricting trade with China, prompting many to move operations to Mexico, thereby helping to close the competitive gap.

China was once the preferred trade partner of the U.S. due to cheap labor costs. However, struggles with supply chains and inflated transportation expenses have caused U.S. manufacturers to consider nearshoring to Mexico instead.

The trade war between the U.S. and China has also gained new momentum. In 2022, due to national security concerns, the U.S. Department of Commerce barred American companies from shipping equipment to Chinese manufacturers producing advanced chips. Rather, the administration encouraged U.S. manufacturers to establish their own opportunities through the CHIPS and Science Act.

The CHIPS Act is intended to strengthen economic growth with investment in regional innovation throughout the country, to help ensure “what’s invented in America is made in America.” As the U.S. tightens up national security by restricting trade with China, it reveals the early stages of what will eventually be a more segregated trading bloc among North American countries.

Fortunately, with the availability of shelter manufacturing services, American operators can set up production in Mexico quickly and efficiently while also maintaining ownership over processes, equipment, and all intellectual property.

The Unique Advantage of Shelter Services in Mexico

Shelter services in Mexico have been a cost-effective strategy for U.S. companies, especially those that no longer wish to partner with China for resources or manufacturing. With an expert team of advisors, a shelter can help American manufacturers set up operations in approximately three to four months compared to the six to seven months it takes to establish a standalone entity.

Shelter manufacturing services include all the administrative departments necessary to set up production in Mexico, such as HR, accounting, and trade compliance, among others. And, for manufacturers transitioning from China to Mexico, a shelter company like IVEMSA can assist with finding local resource partners and estimate the cost of what it will be to transfer production to Mexico.

Considering Mexico Manufacturing? IVEMSA Can Help

The incentives of Mexico manufacturing continue to grow. American companies that wish to save money on operational expenses while maintaining the protection and benefits under the USMCA can rely on this opportunity as a long-term solution.

Interested in what shelter manufacturing services have to offer? Contact IVEMSA to learn how our team can support your goals.

Sources:

https://www.trade.gov/market-intelligence/mexico-tax-and-tariff-increase-2024

https://www.reuters.com/technology/us-may-soon-unveil-list-chinese-chip-factories-barred-receiving-tech-2024-03-28/