2019 has marked a year of significant change for U.S. manufacturers. From the trade war with China to the updated trade agreement between the U.S., Mexico, and Canada, it’s been a year that has shifted how companies have strategized for 2020. Many are considering their options to either shift international operations from China to Mexico or expand for the first time.
As 2019 comes to an end, it’s important to reflect on how far the industry has come and where it’s headed in the near future, particularly with regards to manufacturing in Mexico. While there’s a learning curve to adapt to, Mexico remains a competitive market for industrial activity with shelter services as prominent as ever.
With a change in government leadership last summer, new Mexico laws will take effect in 2020. One of the most notable is the process of obtaining permits for U.S. (and other foreign) companies that want to start manufacturing in Mexico. The Ministry of Economy personnel formerly held responsibility for the IMMEX program inspections for approval and would conduct site visits to production facilities to ensure compliance prior to the start of a project. This process typically lasted two or three weeks before a manufacturer was approved or received an IMMEX program extension.
However, under the new administration, these physical inspections are now handled by local notaries who do not maintain the experience and expertise in manufacturing and are responsible for submitting their reports to the Ministry of Economy. Their job is to document under oath and in good faith that the company seeking to join the IMMEX program exists and meets the required standards.
The mandate has affected the approval process, which is now stretched beyond the typical two weeks to possibly 30 days or longer, depending on the Ministry of Economy workload and its criteria. If everything is in accordance, your IMMEX program will be approved; if something doesn’t match, then you need to resubmit your application and the clock starts again.
This is one example of more complex rules that companies must abide by, if they wish to manufacture in Mexico. A procedural change such as this further magnifies the value of working with a shelter services company. Starting a production facility in Mexico as a standalone entity is challenging on its own. Navigating changing government regulations adds a degree of difficulty to the mix.
It’s beneficial to work with an experienced shelter service provider like IVEMSA that’s already familiar with the process and maintains the relationships and connections necessary to minimize risk and increase efficiency. Shelter services have always been an important part of Mexico manufacturing, but have now been amplified in the wake of the regulations being rolled out in 2020.
Read more: Understanding Intellectual Property Protection in Mexico.
In addition to helping manufacturers navigate compliance when starting operations in Mexico, one of the initial steps of working with a shelter company is site selection. Although Tijuana has an active market due to its border proximity, there’s a low vacancy rate and building costs have begun to rise.
Alternatively, Mexicali and central Mexico have building rates that aren’t as expensive, but each area is different and prices are determined by demand. Each region is known for a specialized field where skilled labor is already established, as other global companies have already put down roots. With regards to the main areas associated with Mexico manufacturing, here are the cities where they’re most prominent:
A shelter services company can propose regions and facilities that maintain a higher level of cost stability and are conducive to a particular industry.
Read more: Benefits of the IMMEX Program for U.S. Companies.
For decades, China was known for its low labor costs, which attracted U.S. manufacturers to expand its operations overseas. However, salaries in China in the last decade have grown exponentially. Factory wages hit a spike in 2016, which was a 64% increase since 2011, with average hourly wages equaling $3.60 per hour. They continued to increase and are now $4.95 per hour on average as the country also faces its lowest working-age population in a decade.
Mexico offers stability in terms of labor costs, growing at a similar pace as inflation at 4%-5%, with a current average hourly wage equaling $4.00 per hour. Additionally, it upholds a competitive workforce skilled to handle the influx of industrial roles required for emerging technological advances. This helps to meet the demand for technically proficient laborers that are on the decline in the U.S. as well.
Manufacturing opportunities continue to rise in Mexico as companies search for ways to keep operational costs lower and production quality high.
The recent tariff increase on imports from China has caused several U.S. manufacturers to examine alternative routes to handle their operations at the most cost-effective rate. With new tariffs on the horizon, affecting products such as laptops, cell phones, and tablets, many are contemplating or have already taken action to start nearshoring to Mexico.
Logistically, it makes sense. Plus, labor costs in China ($4.95 per hour USD) continue to surpass labor costs in Mexico ($4.00 per hour USD); yet another reason why manufacturers are shifting strategies to either diversify their production or move facilities from China altogether.
Although the ongoing trade war between the U.S. and China has caused companies to heavily consider Mexico as an option, many global manufacturers have been nearshoring to Mexico for decades with great success. Thanks to Mexico’s IMMEX program, U.S. manufacturers receive favorable tax benefits, in addition to other unique advantages including:
Additionally, manufacturers have the benefit of working with a shelter services provider in Mexico to help initiate faster startup times, increase productivity, and reduce costs. Rather than navigating the manufacturing industry in a foreign country alone, shelter services benefit companies by ensuring compliance and efficiency with minimized risk and liability.
The benefits of manufacturing in Mexico vs. China are apparent, but the idea of switching locations may initially seem overwhelming. With the help of a shelter services provider, the process is straightforward, yet flexible enough to accommodate a manufacturer’s changing needs.
First comes the decision of whether to move all or part of operations from China to Mexico. Second, the shelter aids in site selection, employee recruiting, and other HR, accounting, and administrative matters. This is addition to scheduling the transportation of equipment and technology to Mexico from China. The goal is to make the transition as smooth as possible and alleviate the burden from the manufacturer.
Starting a new operational base is less time-consuming and costly when working with a shelter versus being a standalone entity. Additionally, by working under a shelter, companies can defer taxes as part of the IMMEX program when importing raw goods, equipment, and materials as part of their manufacturing process and pay lower or no tariffs when exporting the finished goods back to the U.S.
Part of the shelter services also includes securing all permits and licenses, ensuring customs compliance, and helping to manage operations to run smoothly and efficiently. Expanding operations closer to home allows manufacturers to more easily maintain quality control and visit facilities on a regular basis when necessary. As companies search for cost-effective ways to maintain their production levels, Mexico is quickly becoming the leading alternative to China.
Source: https://www.cnn.com/2019/12/03/politics/tariffs-iphones-cheese-trump/index.html
In 2019, Mexico surpassed China as a top trading partner with the U.S. In the first four months of the year, imports and exports between the U.S. and Mexico totaled over $203 billion, followed by trade with Canada at $198.6 billion, and in third place, China, which came in at $174.6 billion of total trade. The U.S. and Mexico have had positive trade relations in the past, as a result of NAFTA, but Mexico also advanced in the market share, partly as a result of America’s ongoing trade war with China.
There have been prior concerns regarding trade policies regarding the ownership of intellectual property and the transfer of technology between U.S. and China. The current administration imposed a tariff increase that affected $250 billion of Chinese products. In response, China issued its own taxes on $100 billion on U.S.-made imports.
President Trump then ordered an increase of tariffs to 25% on nearly all of the $300 billion remaining goods imported to the U.S. from China, with certain exemptions, such as pharmaceuticals, select medical products, and rare earth materials. China then imposed its own tariffs of 10-20% on over 5,000 products with U.S. origin that valued an estimated $60 billion(Source).
To avoid tariffs and potential production delays, manufacturers have begun to seek diversified options and look to Mexico as a steadier alternative for their operations.
Although earlier this year, the Trump administration threatened an imposed tax increase on all Mexican goods, an agreement was quickly made days later, which indefinitely halted any action from taking place. The proposed tax increase would have negatively impacted U.S. manufacturers in the automotive, medical device, aerospace, and electronics industries, to name a few.
Instead, Mexico continues to be viewed as an alluring solution for companies that wish to expand their operations and save on costs while maintaining quality. According to trade data, Mexico still ranked number one in trade value as of September 2019 with a total of $464.34 billion. Motor vehicle parts, computers, and electrical supplies were all listed in the top ten of imports and exports.
There are several competitive advantages of manufacturing in Mexico versus China. In addition to more favorable trade relations between the two countries, there is also a closer proximity to the U.S. and a more cost-effective and skilled labor force to choose from.
As a neighboring country, U.S. manufacturers can oversee quality control in Mexico more easily when it comes to planning travel and navigating time zones. Plus, Mexico’s increasing population and higher education and specialized training in the manufacturing industry has made it a competitive area when considering expansion.
Manufacturers also have the advantage of working with a shelter services company when operating in Mexico. A shelter partnership helps companies to achieve a setup in 3-4 months versus 6-7 months as a standalone entity. Shelter services include all legal, HR, and operational processes that goes into starting a new facility. This includes, but isn’t limited to, obtaining certifications and permits, recruiting and training employees, and working with customs to ensure an efficient and hassle-free process.
Another benefit of the shelter program is that income tax is waived for the first four years. Additionally, under Mexico’s IMMEX program with VAT Certification, VAT is waived on temporary imports, the products companies transform into finished goods. As more companies are weighing their options when manufacturing outside of the U.S., factors such as these continues to elevate Mexico as a top contender for trade.
U.S. businesses have reaped the benefits of manufacturing in Mexico for years. Currently, Mexico is the third largest trade partner and second largest export market to the U.S. An increasing number of companies have recognized the success and have moved part of their operations to Mexico or plan to do so in the near future. Among the benefits of this economic relationship are lower costs, closer factory proximity, and access to a workforce that is specially educated and trained for this level of work.
The Mexican government has prioritized its investment in education and training. There are higher education institutions where trade skills, design programs, and hands-on experience are part of the curriculum. On average, Mexico graduates 115,000 engineers annually. These skilled workers follow a 48-hour work week, which helps increase production while still delivering top quality. And, many companies automatically save up to 30% when moving operations to Mexico on labor alone due to the difference in hourly wages.
Companies that had previously relied on manufacturing in China to handle part of its operational needs now turn to Mexico due to the more favorable geographical proximity to the U.S. It’s far easier to travel to facilities south of the border versus a flight that requires nearly a full day of travel.
Time differences are also more conducive to business when manufacturing in Mexico versus China. For example, when it’s 8:00 AM in Detroit, MI, it’s 8:00 PM in Shanghai. That means any urgent communication must take place outside of regular business hours or wait until the next day. Typically, U.S. companies communicate with their Mexico factories on the same or similar work schedule.
One of the main industries that manufacture in Mexico is electronics companies, including Samsung and LG. Since the process often contains highly sensitive materials, it’s important for companies to know their intellectual property, such as trademarks, are protected. The country’s IP laws are similar to those enforced by the U.S. and Canada. Whereas, Chinese entities are responsible for between $225-$600 billion annually on intellectual property theft experienced by U.S. companies.
Read more: Understanding Intellectual Property Protection in Mexico
Manufacturing in Mexico means little to no risk, especially when under the guidance of a shelter company. Shelter services include maintaining all permits, licenses and ensuring a company is compliant with Mexican laws. This allows U.S. businesses to “set up shop” without the need to create a Mexican entity. Companies still maintain control of the business in Mexico and oversee factory production. The shelter company does the rest such as site selection, provide a legal presence, and handle all administrative tasks.
Mexico manufacturing is known for the production of high-quality goods in several technical industries, such as automotive, aerospace, and medical devices. Large corporations continue to invest millions of dollars into their facilities to stay competitive with their supply chain. It’s far easier to check on the quality of production first-hand since Mexico is closer than China. As an example, finished goods from a Mexico border city could take 4 to 8 hours to reach the U.S. after leaving your plant in Mexico; from China, it could take nearly three weeks to arrive.
U.S. companies reap benefits in multiple ways when manufacturing in Mexico. This is secured when they partner with a shelter company with decades of experience that knows the ins and outs of what it takes to efficiently and effectively start operations for foreign companies.
Nearshoring in Mexico has become a more common alternative than operating a manufacturing facility in China due to the benefits that come with it. These include better logistics, a highly-skilled workforce, and more cost-effective labor and operations. In addition, travels to China from the U.S. take at least half a day, whereas, Mexico could take mere hours for many.
The cost to ship from China also takes longer and is more expensive.
These are only a few of the main advantages of foreign companies operating in Mexico, which is why many industries have started to shift their manufacturing sites. There is an array of products manufactured in Mexico, but the top trending industries include the following:
Companies have begun to shift manufacturing operations to Mexico due to cost savings and a higher quality of work compared with China. As a result, Mexico is a primary hub for nearshoring and continues to expand due to the favorable trade relations between the U.S and Mexico. It allows U.S. businesses to stay competitive by maintaining their operations and growth. Here are a few examples of companies who have benefited over the years.
Ford has been a longstanding participant in Mexico’s IMMEX (formerly maquiladora) program. They began to expand their manufacturing to Mexico in the early 1920s and have continued expansion throughout the decades. In 2016, Ford announced they’d be moving all small-car production to Mexico over the next few years to help them compete with other small vehicle car manufacturers.
Global food and drink company, Nestle, has also expanded its operations to Mexico. In 2014, they announced a $1B investment in two more manufacturing factories in Mexico over the span of five years to meet the demands of the growing markets of infant nutrition and pet food.
Sabritas, a subsidiary brand of PepsiCo that produces Frito-Lay snacks like Doritos, Cheetos, and Tostitos, made a $5B investment in Mexico to further operations and production. This is in addition to the $3B PepsiCo has invested since 2009, much of which is primarily for the Mexico market.
As markets continue to expand, companies realize they need to keep up with the demand of consumers. As a result, they want a less expensive option that still allows them full control over their operations and delivers a consistently quality product. This goal is achieved when U.S. companies employ a Mexico shelter service company to set up manufacturing south of the border.
The migration of manufacturing facilities from China to Mexico has been slowly growing over the past few years, as labor rates in China have been increased. However, interest has spiked recently due to the tariffs imposed on certain imports from China last year. More and more companies are looking to move their manufacturing from China to Mexico and seeing benefits beyond reduced tariffs.
Although trying to get around tariffs and duties is probably the biggest reason companies decide to move their manufacturing to Mexico, there are other benefits:
Manufacturing in China used to be a fairly easy decision for many companies because labor was so inexpensive. However, labor rates in China have been rising steadily, and surpassed those in Mexico about ten years ago, while rates in Mexico have stayed fairly stable.
Additionally, manufacturing in Mexico, or nearshoring, means more efficient and cost-effective logistics, since it’s so much faster to ship products from Mexico to the United States. Companies also like that it’s easier to communicate with their facilities in Mexico, since the plants are at most four hours behind or ahead of the corporate offices. Trips to their Mexican facilities are faster and less expensive as well—an executive can drive from Los Angeles to Tijuana in just a few hours, compared to a 12-hour flight to China.
Mexico holds ten free trade agreements (FTAs) with 45 countries and 32 Reciprocal Investment Promotion and Protection Agreements with 33 countries. Although the bulk of Mexico’s maquiladora export to the United States and Canada, many companies also use Mexico to reach developing global markets.
Simply put, Mexico’s IP protection laws are far superior to those in China. They exceed the standards set first by NAFTA and now by the USMCA. Mexico’s legal framework offers protection of industry secrets, imposes heavy piracy penalties, and allows companies to patent pharmaceuticals.
Thanks to Mexico’s IMMEX/maquiladora and shelter programs, moving your manufacturing operations from China to Mexico is relatively straightforward. It’s best to work with a shelter provider that has experience helping companies making this move. Here are the basic steps most companies follow:
Working with a shelter provider is usually the fastest and easiest way to establish your operations in Mexico. It also means your company is protected from legal exposure and liability. Once your manufacturing facility is up and running, the shelter provider continues to provide administrative support (HR, accounting, trade compliance, etc.).
For almost any business, long-term strategies or goals are centered around producing better products while keeping costs low. Many methodologies, including Six Sigma, Lean manufacturing, and more aim to achieve this through the pursuit of continuous improvement. Companies seek to constantly look at small ways to incrementally improve their processes and work more efficiently so they can reduce costs without sacrificing quality.
In many companies, especially in manufacturing industries, seeking “continuous improvement” in this way eventually leads them to explore offshoring—often as they start to expand and find that scaling their business in the US is not cost-effective. However, there are many options when expanding, each with pros and cons:
Faced with these choices, many manufacturers instead choose to nearshore and establish operations in Mexico. Manufacturing in Mexico allows companies to pursue continuous improvement because it offers lower operations costs and skilled labor so quality does not need to be sacrificed.
Continuous improvement demands that companies are always looking at the whole picture—seeing the entire process by which they bring products to market—so they understand how tweaking one part (the supply chain for one component, for example)—affects other aspects. It can be easy for executives to just focus on one aspect of the manufacturing process, or the end product, and try to make changes without realizing the effects on the rest of the process.
Before moving manufacturing to Mexico, for example, you’ll want to examine how it will affect your supply chain—what kinds of supplies, equipment, or raw materials will you importing into Mexico? You can also look into customs regulations and trade compliance—will the labor savings offset those potential costs? (Most likely, yes, but it’s always good to get the full picture before making the move.)
Read our tips to build a seamless supply chain when nearshoring.
Once you start manufacturing in Mexico, you can further the process of continuous improvement. One strategy is the Lean manufacturing principle of sorting, which requires companies to review their workflows and look for components of the manufacturing process that can be sacrificed without sacrificing quality. This can lead to more efficient, productive workflows.
Companies can also seek to standardize the production process, which means locking in the step-by-step actions required to complete each product.
We often see companies look to Mexico nearshoring as an option once they have made their fabrication and assembly products as lean as possible. They reach a point where they see diminishing returns or would start to sacrifice quality. At this point, they need ways to lean their labor and supply chains and setting up operations in Mexico is an attractive way to do that.
Once operations are running in Mexico, the money saved in labor costs can then be directed to research and development on new products or innovations or even further continuous improvement efforts.
Mexico is an attractive option for just about any manufacturing or industrial business, including electronics, furniture, textiles, IT, and more. However, three industries are largely responsible for Mexico’s growth in manufacturing: automotive, aerospace, and medical devices. Both foreign direct investment in these industries and the Mexican government’s response have created an environment in which almost any manufacturing industry can thrive.
Here, we’ll take a closer look at these three key industries to understand their success with manufacturing in Mexico:
The automotive manufacturing industry is one of the oldest in Mexico—Buick was the first producer to establish in Mexico in 1921, and the Ford Motor Company followed in 1925. Although the industry declined from the 1960s through the early 1990s, the country’s economic growth and the adoption of NAFTA stimulated auto sales within the country and the export market.
There has been significant growth in the 21st century. Mexico is currently the seventh largest passenger vehicle producer and fourth-largest exporter. There are estimates that vehicle production levels could reach five million units by 2020—a 56% increase from 2014 production levels.
One of the main reasons why Mexico is attractive to automotive manufacturers is the low cost of labor. However, its location—near major US markets and with ports that allows access to Australia, New Zealand, and countries in Asia—and Free Trade Agreements (FTAs) are also significant. Mexico has a network of FTAs and Reciprocal Investment Promotion and Protection Agreements (RIPPAs), allowing manufacturers to export supplies and goods to dozens of countries.
As OEMs and Tier 1 suppliers move or expand to Mexico, the Mexican government has sought to improve infrastructure within the country so companies can more easily manage supply chains and logistical needs. Additionally, Tier 2 and Tier 3 suppliers often follow the OEMs and Tier 1 suppliers, creating a robust supply chain network throughout the country.
The aerospace industry in Mexico is relatively young, with the earliest companies setting up manufacturing operations in Mexico in the 1970s. It has grown in recent decades thanks in large part to NAFTA (now USMCA) and the maquiladora program, which allows businesses to exempt the VAT tax on temporary imports when importing raw goods, materials and equipment. This is key for an industry with expensive components and complex processes.
In the 2000s, the Mexican government recognized the opportunity the aerospace industry offered and created the ProAéreo 2012-2020, which includes strategies and policies to put Mexico in the top ten aerospace industries in the world. Its goals include increasing exports in the industry to $12 billion and employing 110,000 individuals (30-35% with advanced degrees) by 2020.
To do this, the government has launched business incentives, introduced workforce training programs, and opened universities to ensure that the Mexican workforce can meet the demands of the industry.
The medical device manufacturing industry has benefited from the same factors as the automotive and aerospace industries. Mexico’s proximity to the United States (especially, in the case of Tijuana and the rest of Baja California, proximity to the life sciences technology hub in San Diego) mean importing/exporting and other logistics needs are relatively easy. Additionally, the increased investments in training and education mean there are more engineering graduates and workers with highly developed technical skills. Mexico also has strong protections for intellectual property.
All these benefits also come with Mexico’s lower labor costs. It’s no surprise that well-known manufacturers including Medtronic, BD Medical, Philips, Flex, Welch Allyn, Ossur, DJ Orthopedics, Carl Zeiss, and more have established manufacturing operations in Mexico. In 2014, Mexico’s medical device exports totaled $7.7 billion, and it is expected to reach $15.5 billion in exports in 2020. Mexico is the leading medical device supplier to the US and leading exporter to Latin America.
In addition to Baja California, there are industry clusters in Mexico City, Estado de Mexico, Jalisco, Nuevo Leon, and Chihuahua. All of these regions have facilities that are FDA, CE, and ISO 13485 certified and have clean rooms from class 100 to 100,000. They are suitable for producing FDA Class I, II, and III products.
Although foreign investment and government programs or incentives may be targeted at the automotive, aerospace, and medical device manufacturing industries, all manufacturers can see benefits when setting up operations in Mexico. The low cost of labor, geography, free trade agreements, skilled workforce, and more are attractive to any manufacturer.
The electronics manufacturing services (EMS) industry in Mexico is strong and diverse. Across the country, you’ll find everything from Tier 3 suppliers to OEMs manufacturing a diverse range of products, from specialized machinery to consumer goods.
In 2016, Mexico was the sixth-largest producer of electronics worldwide and third-largest producer of computers. Worldwide machinery exports, including components and accessories, totaled $145 billion, according to the Observatory of Economic Complexity.
In 2016 (the most recent year for which data is currently available), the top exports for Mexico’s electronics manufacturing industry included:
This list highlights the diversity of the EMS sector in Mexico.
The US was the top destination for Mexico’s electronics manufacturing exports (only China exports more electronics to the US) in 2016. The other major electronics markets for Mexico include Canada, China, Germany, and Japan.
While you can find electronics manufacturers operating throughout Mexico, certain regions have established strong reputations in the industry.
Tijuana specializes in TVs, radios, and other appliances. The industry here is driven by a well-established supply chain and the proximity to the US/Mexico border. Baja California overall hosts over 200 electronics manufacturers.
Guadalajara has become known as the “Silicon Valley of Mexico.” The city received an estimated $120 million invested in hi-tech startups over a recent four-year span and has several well-regarded public and private universities that specialize in science, technology, engineering, and math (STEM) programs.
Forbes reported that between Mexico’s electronics exports increased by 73% from 2002 to 2012. One of the biggest factors in the growth of Mexico’s EMS sector is the low labor and overall operations costs. KPMG’s Competitive Alternatives report, released in 2016, stated that Mexico offered 11.9% cost savings on manufacturing electronics equipment and components compared to the US.
Electronics manufacturers are also attracted to the skilled labor force Mexico offers. At least 114,000 engineers graduate from Mexico’s universities and technical schools each year.
Mexico also offers strong intellectual property protections, access to global markets through various free trade agreements, and proximity to major established and emerging markets in North, Central, and South America. Experts expect that Mexico will maintain its competitive advantage in electronics manufacturing.
For the last year, businesses through North America and the world have been watching the NAFTA renegotiations that took place between the US, Mexico, and Canada. Now that a new agreement—the United States-Mexico-Canada Agreement, or USMCA—has been signed, we finally have some answers for companies wondering how their nearshore operations will be affected.
The biggest changes, and the ones most pertinent to many companies that have moved manufacturing to Mexico, apply to the automotive industry. There are other significant changes that we feel will affect ecommerce and digital companies. Read on to learn more about these changes and how you can plan to adjust your Mexico operations if needed.
Automotive manufacturers that have moved manufacturing to Mexico especially need to pay attention to the new requirements on regional content. Currently, passenger vehicles and light trucks must be manufactured with 62.5% North American content in order to qualify as “originating” and export vehicles to the US duty-free. Beginning in 2020, that regional content requirement will rise to 66%. It will continue to increase over the next few years until it reaches 75% in 2023. There are also new requirements for steel and aluminum vehicle components.
The goal is to incentivize automotive manufacturers to source more materials and parts from North American suppliers, but before you make dramatic changes to your supply chain, IVEMSA recommends you submit your Bill of Materials for a cost-impact analysis. The duty rate for autos is 2.5%, so it may be more cost-effective to pay the duty fees rather than adjust your suppliers. However, the duty rate for trucks is 25%, so it may be more likely that manufacturers will need to find new suppliers for those vehicles.
Another new provision mandates that 40% of autos must be made by workers earning at least $16/hour. Again, IVEMSA can provide a comprehensive cost-impact analysis for our customers to determine what adjustments they should make to their Mexico manufacturing operations. To complete this cost-impact analysis, we need a complete description of the materials and components, HTS code, origin and unit cost.
Some of the new chapters in the USMCA address ecommerce regulations, digital trade and intellectual property. These were needed because when NAFTA was originally negotiated and signed in 1994, ecommerce wasn’t the industry it is today. New, stronger IP and trade secrets protections will apply to nearly all industries.
Additionally, there are new measures meant to facilitate digital transactions while protecting consumer privacy. With the USMCA, Mexico and Canada are raising their de minimis shipment value levels to USD$50 (Mexico) and C$40 (Canada). Duty-free shipment values will increase to USD$117 for Mexico and C$150 for Canada. This will make it easier for digital and ecommerce brands, especially small and medium-sized businesses, to reach new markets in Mexico and Canada. We also think that digital and ecommerce brands may find new opportunities to scale their business in Mexico by taking advantage of the lower labor rates.
After the seventh round of NAFTA renegotiation talks concluded, US Trade Representative Robert Lighthizer said in a statement, “All three countries agree that NAFTA is outdated, and I believe we should be able to reach agreement on new issues like digital trade, labor, and environment, intellectual property, and much more.”
One of the reasons these talks haven’t made much progress is because several of the US demands—such as doing away with NAFTA’s dispute-resolution panels or making changes to how much North American content a car must have to be duty-free—are non-starters for Mexico and Canada.
Rather than get stuck debating these points, we at IVEMSA feel the talks would make more progress if they focused on other issues. Here are a few ways we think NAFTA can be updated that would benefit all three nations.
When NAFTA was adopted in 1994, e-commerce was barely a blip in the economy. Now, it’s a multi-billion dollar segment that continues to grow rapidly. The NAFTA renegotiations present an opportunity to codify e-commerce regulations to reduce barriers to entry and consumer purchases, such as:
NAFTA’s de minimis rule exempts imports from customs duties if they are valued at or below a certain threshold. One of the biggest changes that could be made is to harmonize these de minimis values to equalize the transaction cost of selling to Mexican and Canadian customers. Currently, imports valued at or below $800 can enter the US without duty payments, but those values are $50 for Mexico and $15 for Canada.
Mexico and Canada have historically resisted raising those values because they argue that doing so would threaten their local retailers. Their concerns can be mitigated if the higher values only apply to goods manufactured in North America—not those that are just packaged and shipped from one of the three countries.
Download: Mexican Manufacturing Cost Fact Sheet
Earlier this year, US and Mexican unions made a formal complaint to the US Department of Labor, claiming that Mexico is in violation of NAFTA’s labor standards. Their goal was to push the US representatives in the NAFTA renegotiation talks to argue for stronger labor rules.
Originally, NAFTA included only a supplemental agreement that allowed each country to enforce its own labor standards. Since its inception, union leaders and human rights organizations have argued that a labor clause should be the central part of the agreement. This is a chance for the three countries to come to agreements on minimum wage, benefits, unionization, and health and safety standards in each country. They should also create mechanisms to investigate complaints and punish violations.
Earlier in the NAFTA talks, Canadian Prime Minister Justin Trudeau called for the Mexican government to brings its labor laws in compliance with international labor standards, arguing that this will increase wages for workers in the US and Canada as well.
Similar to e-commerce, protecting intellectual property has become a bigger issue over the years, and each government has dealt with it in different ways. The NAFTA renegotiation should be an opportunity to codify these protections. It’s important for each country to agree on how to protect companies’ intellectual property, technology, and content, as well as consumer rights and privacy.
Read: Why Mexico Manufacturing Improves the US Economy
In any trade agreement, member countries need to protect the intellectual property of other member countries. These protections are critical to a number of industries, including technology, biopharmaceutical, hospital/medical devices, aerospace, and others. NAFTA’s Chapter 17 addresses this, but it should be strengthened to protect patents and regulatory data and provide speedy mechanisms to investigate and resolve disputes.
Mexico’s IP protection laws, in particular, have been evolving, but more can be done—and in doing so, Mexico may become a more viable option for biopharmaceutical companies.
Find out if moving your manufacturing to Mexico is right for your business.
At this point, it’s tough to predict the outcome of the NAFTA renegotiation talks. Our team at IVEMSA is following each round of talks closely (along with everything that happens in between) so we can support our clients and help them prepare for various possible outcomes. No matter what happens when the negotiations finally conclude, we will be prepared to help our clients stay competitive.
Interested in moving your manufacturing to Mexico? IVEMSA can help. Request a consultation with us today.
To say it’s been challenging to keep up with what’s happening with NAFTA over the past year is an understatement. Since last August, representatives from the US, Mexico, and Canada have officially met seven times now to renegotiate the agreement. As the latest round of NAFTA talks has just ended, we thought it would be a good time to review where things stand with NAFTA.
The North American Free Trade Agreement, or NAFTA, is the first of its kind and, when it was ratified in 1993, created the world’s biggest free trade area between the US, Mexico, and Canada.
NAFTA has been controversial from the start, with opponents in the US saying it would result in jobs leaving the country and supporters claiming it would make goods less expensive and boost the economy. Since 1994, both have happened, but it’s hard to pinpoint to what degree NAFTA is directly responsible. US manufacturers have also set up plants in countries outside of Mexico and Canada (including those with which the US has no free trade agreements), and a large number of manufacturing jobs have been lost due to other factors, such as automation.
However, President Trump made NAFTA a central part of his 2016 presidential campaign, calling it a “total disaster” and “the worst trade deal maybe ever signed anywhere.” Trump claimed that American manufacturing jobs have been lost primarily due to NAFTA and promised to enact protectionist, “America first” policies in office.
This is why representatives from the US, Mexico, and Canada first met in August 2017 to renegotiate NAFTA.
Read: 6 Reasons Why Manufacturing in Mexico Remains Attractive for US Businesses
The A seventh round of these talks ended in early March. At that time, US Trade Representative Robert Lighthizer said he wants to see a deal completed within four to six weeks, but it’s unclear whether or not that will happen.
In May 2017, the Trump administration officially notified Mexico and Canada that it intended to renegotiate NAFTA. Two months later, the administration released a list of goals for renegotiating NAFTA. It included objectives like:
Although the last rounds of NAFTA talks have seen limited progress on certain sections of the agreement, one of the main sticking points involves the automotive industry. Currently, vehicles that have at least 62.5% North American content can travel duty-free between NAFTA countries, and that content can come from any of the three countries. The US wants to change that minimum to 85%, as well as mandate that 50% of the content comes from the US.
The US is also insisting on a “sunset clause,” where NAFTA must be renegotiated every five years or it will expire. Mexico and Canada don’t agree with this, and it brings the possibility of too much uncertainty for businesses.
Trump threw another wrench in the NAFTA talks when he announced the US would impose tariffs on steel aluminum—but later said he would exempt Mexico and Canada from those tariffs if they came to an agreement on NAFTA.
Download: Mexican Manufacturing Cost Fact Sheet
At this point, whether or not the US, Mexico, and Canada will come to an agreement is a coin flip. If Mexico and Canada don’t give in to US demands, or the countries can’t work out a compromise, Trump could simply pull the US out of NAFTA (Article 2205 allows any country to withdraw with six months’ notice). Lighthizer raised the possibility of negotiating separate bilateral deals with Mexico and Canada, but Mexico is not interested in doing so.
Most experts believe that keeping NAFTA is in the best interests of all three countries. NAFTA has helped the three economies become incredibly interdependent, and if one country pulls out, or NAFTA goes away, there would be consequences across many industries. And it’s unlikely that manufacturing jobs would move back to the US in great numbers. It’s more likely that companies would stay in Mexico or move to countries in Asia, since labor and other manufacturing costs would still be lower in those countries.
Although there are no deadlines or timelines imposed by NAFTA itself, the Trump administration has pushed for a speedy resolution. After the seventh round of NAFTA talks, Lighthizer said “Now our time is running very short” and alluded to upcoming political events that could prolong or drastically change negotiations: Mexico’s presidential election is in July, Canada’s provincial elections start in June and run through the end of 2018, and the US has midterm elections in November.
What we do know is that no matter what happens with NAFTA, trade between the US, Mexico, and Canada will not stop. The three economies are too intertwined. Some sectors actually wouldn’t be affected at all (or very minimally): the aerospace and medical/hospital supply industries, for example, have a zero percent duty rate under the WTO (World Trade Organization), whose rules would apply without NAFTA.
Even if tariffs change, the Mexican government has regulations for companies to minimize the duties paid at the border. Our team at IVEMSA is constantly reviewing every change and possible outcome so we can help our clients make the best plans and decisions. We work with each client to perform a duty analysis and overall cost analysis to compare labor rates with tariffs and duty rates, as well as adjust for potential supply chain changes. We are staying on top of both the news about the NAFTA talks and what’s happening within Mexico for maquiladoras to ensure our clients can stay competitive.
Interested in moving your manufacturing to Mexico? IVEMSA can help. Request a consultation with us today.