The signing of the US-Mexico-Canada Agreement (USMCA) combined with its unique geographical advantage adjacent to the US has positioned Mexico as a popular trans-shipment country for Chinese enterprises seeking access to the US market.
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Blossom & Credit Law Firm
Leading enterprises in China’s home furnishings industry such as Gujia and Sunon – as well as giants like TCL and Skyworth in the home appliances industry – have successively invested in establishing manufacturing plants in Mexico.
These enterprises have set up plants in Mexico for local processing or assembly of product components or semi-finished goods transported from China, which are ultimately exported to the US with zero tariffs, after undergoing the necessary local processes.
However, in recent years the impact of the Sino-US trade war has made China a primary target of anti-dumping and anti-subsidy investigations by the US. This means that for such Mexico trade and investment endeavours to fully benefit from the associated incentives, enterprises must adhere to certification rules and requirements outlined within the USMCA.
Certification rules
Whether under the old version of the North American Free Trade Agreement (NAFTA) dating back to 1994 or the USMCA implemented in 2020, both agreements explicitly state that when trading products among the three member countries – the US, Canada and Mexico – importers and manufacturers must provide proof of origin that conforms to prescribed standards.
This is necessary to enjoy tax-exempt benefits offered by the importing member country.
For Chinese enterprises establishing manufacturing in Mexico, one of the most crucial tasks is obtaining certification of origin from Mexico. According to the NAFTA and the USMCA rules for determining country of origin, products can be classified into four main categories eligible for origin certification:
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Blossom & Credit Law Firm
- Products are solely obtained or produced within the free-trade area of North America (FTANA) and do not incorporate any non-FTANA materials;
- Products are crafted entirely from materials originating within the FTANA, even if these base materials can be derived from non-NAFTA sources;
- Products made from non-FTANA materials can still be classified as originating from the region if they meet criteria of the tariff shift rule. This rule means the product undergoes changes in name, attribute or utility, shifting from one tariff code commodity to another; and
- Products that may not qualify for the tariff shift rule but have experienced a significant increase in their regional value by a predefined proportion.
Country of origin
Based on the above-mentioned rules for determining country of origin, trade strategy employed by Chinese enterprises establishing Mexican factories to circumvent US tariffs is evidently vulnerable. If only a small portion, or even the final processing or assembly stages, are conducted in Mexico the product’s origin is likely to still be attributed to China.
To avert the risk of failing to obtain origin certification and dissipating upfront investment costs, enterprises must meticulously verify the sources of origin materials.
When utilising non-FTANA materials, they should tactically apply principles like the tariff shift rule and regional value addition to set up sources of origin materials and plan the stages of product processing.
Supply chain choices
The updated version of the USMCA, building on the NAFTA, imposes higher requirements for the proportion of regional value in the automotive sector’s origin certification.
This means that to meet the criteria for origin certification, Chinese enterprises must increase their share of locally sourced materials. This shift indicates that the US is leveraging the USMCA to disrupt the pathway through which Chinese enterprises sought to leverage Mexico for duty-free entrepot trade.
In the future, Chinese enterprises won’t be able to rely solely on processing or assembling foreign-origin materials in Mexico to attain origin certification. Instead, they’ll need to allocate considerable funds for local procurement to potentially achieve tax exemptions.
Clearly, enterprises should conduct a comprehensive assessment of the geopolitical landscape, market regulations, operational considerations and commercial environments. Armed with this understanding, they can navigate towards most effective supply chain solutions.
Establishing a factory
Local supplier cultivation. Given the increasingly stringent rules for determining products of origin, companies considering factory establishment can proactively engage or cultivate a portion of their raw material suppliers. This approach seeks to secure price advantages and preemptively manage the costs of procurement at origin.
Labour force management. Mexico offers a relatively robust labour environment characterised by high mobility, higher wage and benefit demands, and significant influence exerted by local labour organisations and unions in employee rights protection and labour negotiations. Enterprises need to strategically plan the types and numbers of local workers, and budget accordingly for labour costs.
Environmental regulations. Mexico maintains strict requirements concerning environmental issues such as emissions and wastewater. Enterprises must obtain relevant permits from both state and municipal governments (e.g. emission permits and hazardous waste discharge permits) before engaging in operational activities. Manufacturing-oriented enterprises are also required to submit health and safety plans, as well as fire safety plans, for approval.
Tax assessment. The Mexican taxation system is intricate, with rigorous tax regulation. Major categories are central government taxes that are generally non-deductible. Enterprises contemplating investment and factory establishment must meticulously evaluate the tax types and fees involved.
As the US Department of Commerce intensifies its efforts against scenarios involving goods processed and developed in a third country before being exported to the US – while US Customs and Border Protection tightens scrutiny on false reporting of origin, misclassification of goods, and trans-shipment through third countries – the path of entrepot trade for Made in China products has become increasingly arduous.
Enterprises must not only meet higher standards of origin certification of products but also remain vigilant to the risks of anti-circumvention investigations.
While Mexico boasts a relatively buoyant market economy, nationwide issues also persist concerning corruption and the rule of law.
Beyond commissioning specialised agencies for comprehensive pre-risk assessment and research – and gaining deep understanding of local legal frameworks and practices relevant to investment projects – Chinese enterprises investing and co-operating in Mexico must also adhere to legal requirements in establishing and operating companies, and launching and running factories, while striving to realise product localisation and boost regional value proportions.
Enterprises already invested in Mexico producing goods for export to the US are recommended to stay informed about the latest regulations and cases, strengthen pre-supervision and prevention efforts, and proactively address investigations conducted during and after the process.
Wang Yidan and Li Tong are associates at Blossom & Credit Law Firm
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