Mexico Nearshoring Trends Across the Manufacturing Landscape
Many of the certainties to which businesses had grown accustomed over the last decade have been shaken, and there are a number of issues over which companies have absolutely no control. In this article we provide a path for companies to begin addressing international manufacturing in an incessantly changing world.
The demand is still out there, likely under new challenges, and your company´s ability to fulfill it may need some readjustment. Such rearranging may involve repositioning your global resources based on proximity to where they will be needed, rather than primarily focusing on cost of production (practice commonly referred to as “nearshoring” or “reshoring”).
Many North American companies looking to employ a nearshoring or reshoring strategy are studying Mexico as a possible location for production. This article considers several of the key issues that companies should ponder when evaluating a closer-to-home strategy and, in particular, considerations for doing business in Mexico.
Choose Your Markets and Locations for Production
The first step for any company considering a reshoring or nearshoring strategy is to determine where in the world lies the demand that your company will be supplying. In other words, which shore?
Most companies will begin with their current markets; however, if they are languishing or if a company needs some room to grow, the logical way to go about it is to look for new target destinations with an appetite for exactly the type of products you are offering. One simple way to do this is to look into publicly available information regarding the largest import markets for your company’s production.
The Harmonized Tariff Schedule (HTS) groups global imports and exports at the same six-digit levels and then grows within each country up to 10- or 12-digit numbers that allow a user to identify more details in that six-digit tree trunk. Once companies have identified their potential untapped markets (largest importers of your products), they can use publicly available information to look into the country´s national apparent consumption, that is, the result of domestic production plus imports minus exports, to determine the true size of the market.
The decision as to what markets a company should target will then drive where to locate production in order to shorten supply lines. For companies serving the U.S., but for which local production is not an option, a logical choice is to consider Mexico as a manufacturing location.
Mexico offers a number of advantage as a nearshoring location — these are relatively known, yet they make a compelling case for the country when read together:
Mexico benefits from access certainty to the USMCA region, a rare advantage in recent times;
Mexico represents the lowest-cost manufacturing site within USMCA;
Mexico’s workforce has significant experience in heavy and complex manufacturing;
Import duties are practically nonexistent, delivery lead times are hard to match by any other country in the world, time zones largely coincide with those in the U.S., and main manufacturing locations have direct flights out of the U.S.;
Mexico offers a number of trade facilitation programs that have been proven to work throughout the years;
Mexican-origin exports enjoy preferential tariff access to the world´s most attractive destination markets, due to the extended net of Free Trade Agreements; and
The USMCA grants Mexican exports favorable treatment regarding potential trade remedies and U.S. national security measures.
Take Advantage of the Manufacturing Efficiencies of Several Countries at the Same Time
When deciding on a location for production, there are many cost elements that must be considered. In addition to cost of labor, utilities, raw materials, etc., companies must consider the impact of various tariffs, duties, and non-tariff regulations1 that will apply when importing material/components into the country where goods are produced, plus any additional charges associated with export/import of the final goods.
While some costs cannot be changed, there are ways in which companies can affect the tariffs, duties, and non-tariff regulations to which they are subject. This can be done through the lawful “engineering” of Rules of Origin, that is, working around the amount of inputs, processing, and overall transformation that foreign-made inputs have to go through in order to be considered Mexico-originated and enter the U.S. under a reduced — which can be as low as 0% — import duty rate, as per the USMCA.2
We should always keep in mind that all cost-saving venues bring with them a naturally associated level of compliance red-tape that your company should be fully observant of. This requires an orderly effort and, as your company is usually busy as an active manufacturer, it ordinarily needs outside professional help of some sort.
Opportunities in Mexico to Replace Tariff-Penalized Chinese Goods
Although some have argued that Vietnam and other nations could be the winners in the U.S.-China trade war3, Mexico has many advantages that may tip the odds in its favor. It is important to note that during 20194 the sum of tariff rates and transportation cost rates regarding imports into the United States was 1.09% for Mexican products, as opposed to 14.28% for Chinese products, and 10.62% for Vietnamese products.5 6
Most companies would agree that by now the U.S. China trade war has made the Chinese-origin goods less attractive due to increased tariffs. Recent data holds that, as of mid-2022, the average import duty rate for Chinese exports was 19.3%,7 while for Mexico was virtually non-existent when complying with USMCA rules or origin requirements. Regarding transportation, the average price for shipping a container from China into the U.S. was approximately $10,000, while the cost for crossing a truck from Mexico into the U.S. could be as low as $250 8 9
This creates an opening that may be filled by other exporting countries. Dussel-Peters has identified a list of six-digit HTS subheadings — 77 in total — in which the Chinese share of imports into the United States fell beyond its -3.51% average during 2017–2019, and in which the Mexican imports increased above its 0.97% average during the same period, 2017–2019.10 The relevance of these 77 subheadings is that Mexico already counts with the for-export production capacity to replace the void left by the Chinese imports; this means that the capacity is already there for exporting into the U.S.
Finally, Mexican manufacturing heavily relies on trade promotion programs, which require significant periodic filings to the Government; 11 in addition, as Mexico utilizes over 1/3 of foreign content 12 in its manufacturing exports — with electronics, automotive, and auto parts standing out for their high levels — it is vital to be counseled properly in order to maintain an orderly manufacturing operation in the country.
1 Special permits, reference prices, quotas, previous notices, etc. may be required for a product to be imported.
2 Another way to look into this is working around the overall processing done in Mexico to bring the semi-finished product to be completed in the U.S. and considered as a Made in USA product.
3 Enrique Dussel-Peters “TRADE OPPORTUNITIES FOR MEXICO IN THE CONTEXT OF THE TENSIONS BETWEEN THE UNITED STATES AND CHINA SINCE 2017”. OCTOBER 2021. Tenaris Tamsa. p. 10.
4 Unfortunately, the latest available data at this level of detail. More recent facts below.
5 Breakdown of the sum of tariff rates + transportation cost rates regarding imports into the United States from Mexico: tariff rate of 0.20% + transportation cost rate of 0.89% = 1.09%. For imports from China: tariff rate of 9.81% + transportation cost rate of 4.47% = 14.28%. And for Vietnamese products: tariff rate of 6.56% + transportation cost rate of 4.06% = 10.62%..
6 Dussel-Peters. “TRADE OPPORTUNITIES FOR MEXICO...” pp 9 and 10.
7 https://www.piie.com/research/piie-charts/us-china-trade-war-tariffs-date-chart, consulted May 27, 2022.
9 https://www.ivemsa.com/mexico-competitive-manufacturing-costs/, consulted May 27, 2022.
10 Dussel-Peters. “TRADE OPPORTUNITIES FOR MEXICO...” Appendix 9, https://dusselpeters.com/357.pdf, consulted May 27, 2022.
11 Namely the Maquila program (all Maquila authorizations have by now converted into IMMEX permits which stand for Manufacturing, Maquila, and Export Services Industries Program), 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).