By Richie Lin    Photo： Joey Kyber

Mexico has surpassed China to become the biggest trading partner of the United States. The evolution of global supply chains, driven by factors like near shoring and resilience considerations, has propelled Mexico into a pivotal position. Mexico’s manufacturing landscape experienced notable growth in various sectors, such as automobiles, electronics, medical devices, home appliances, and machinery.

According to the statistics, every year, there are over USD 600 billion in automotive, machinery, electronics, consumer goods, medical equipment and other goods flow into USA across southern border with Mexico. Mexico, particularly its northern states, is a favorite destination for companies that aim to position their own operations or link with suppliers closer to the US, a process known as nearshoring which often means shifting production capacity away from China. Sometimes, too, it’s Chinese companies setting up in Mexico to avoid American tariffs. In the meantime, under the incentives of The Inflation Reduction Act and American Jobs Plan, many companies related to clean energy, electric vehicles, broadband infrastructures decided to invest another supply chain in Texas, Arizona and California. Therefore, we are witnessing the emerging manufacturing centers in the Southern United States and Northern Mexico. There is a nearly 3000 kilometers border line between the southern states of USA such as Texas, Arizona and northern states of Mexico.

Along the border line, there are six major urban agglomeration along the border to be the inland ports transferring the products from Mexico to USA and from USA to Mexico. These six urban agglomerations are San Diego–Tijuana, Mexicali–Calexico, Nogales–Nogales, El Paso–Juárez, Laredo–Nuevo Laredo, Reynosa–McAllen.

When companies are evaluating the advantages and disadvantages of setting up the supply chain, they have to compare several factors such as land costs, labor costs, laws, taxes, transportation costs. It is comparatively easy to transfer the supply chain to southern states of USA. However, it is quite complicated if any company try to get their factories established in northern Mexico. Henceforth, Mexico introduced the Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry (IMMEX Decree) in 2006, although the original Maquiladora Program dates to the 1960s.  A “maquiladora,” or “maquila,” is defined as a foreign-owned factory, typically staffed by low-wage workers. Maquiladoras have also become known as “border factories,” since most of them are located near the US-Mexico border. They have proliferated since the introduction of the North American Free Trade Agreement (NAFTA) in 1994, replaced by the United-States-Mexico-Canada Agreement (USCMA) in 2020. IMMEX offers several tax benefits to program participants. These benefits include

1. Duty-free imports. Companies don’t incur duties levied on temporarily imported raw materials or imported machinery.

2. VAT exemption. Temporarily imported raw materials and fixed assets are not subject to value-added tax (around 16 percent).

3. Lower corporate tax rates.

Under certain conditions, a company that qualifies for the program can benefit from a special tax regime offering preferential rates. And if any company doesn’t want to set up a Mexican entity in the first place, they can also choose the Shelter Program. Shelter program means a non-resident manufacturer that can benefit from operations in Mexico without having to set up a legal presence in the country. The shelter company assumes all risks and liability and acts as the legal representative of the business.

Under the big scope of USA vs China trade war and the importance of supply chain resilience, the ideas like China plus one, nearshoring, reshoring have penetrated into the minds of each single part in the supply chain. Setting up factories in the southern states of USA and Northern states of Mexico might bring opportunities of tax benefits and shorter transits. However, multiple supply chain locations mean the logistics will become more and more complicated. The challenges will be how to manage and coordinate the manufacturing and shipping of different parts of supply chain. In the past, people might separate different logistics providers to handle different parts of worldwide logistics.

However, this will cause the waste of time on collecting multiple information and more problems of broken chains. This is the time to find a single logistics window which can provide all services you need, all information you require, and all problems you face.

Appreciate if you could share TGL Blog among your friends who are interested in first-hand market information of supply chain and updated economic incidents.