The relocation of foreign manufacturing plants to Mexico represents an opportunity to enhance economic growth and attract the much-needed foreign investment.

After the COVID-19 pandemic and the disruptions in global supply chains, foreign manufacturing plants, particularly from Asia, are looking to reduce logistic and production costs by relocating their operations and have access to the North American market.

Mexico’s geographical proximity to the biggest economic market makes it strategic for manufacturing projects to export final products under very attractive conditions. The opportunity to have duty preferential access under the rules of the United States, Mexico, and Canada Agreement (“USMCA”) is also a main factor that makes Mexico appealing for nearshoring.

Since the enactment of the North American Free Trade Agreement (“NAFTA”), Mexico’s legal framework has evolved becoming a relevant factor for the development of the export manufacturing industry and the creation of supply chains along the US-Mexican border and manufacturing hubs in relevant economic sectors. With the enactment of the USMCA, Mexico improved its offer to foreign manufacturers by providing legal certainty as a key element to developing nearshoring projects.

In this article, we outline some of the relevant trade regulations that should be considered when developing nearshoring projects in Mexico. Additional key aspects, such as labor compliance, securing energy supply, real estate acquisition and logistics, should also be assessed by investors in parallel to foreign trade planning.

USCMA

The USMCA is the fundamental pillar to provide legal certainty to nearshoring projects and create an integral North American manufacturing industry and cross-border supply chains.

Below are some of the most relevant benefits and principles of the USMCA that any nearshoring project should consider.

Access to Market

Chapter 2 of the USMCA provides the framework supporting the trade of manufactured goods between United States, Mexico, and Canada. Some of the principles and rules that are most relevant to nearshoring investments are:

• Duty free treatment for originating goods.
• Rules for transparency in import licensing and export procedures.
• Rules to limit restrictions to use local distributors for importation.
• Rules to eliminate import restrictions on used goods to remanufactured goods.

Rules of Origin

Understanding the scope and application of the rules of origin contained in chapter 4 of the USMCA is essential for nearshoring projects.

Some of the most important manufacturing sectors like automotive, electronics, and textile, depend on foreign imported inputs, parts, and components, particularly from Asian markets, for the manufacturing of final products for export to the North American market.

Under the USMCA, preferential duty treatment shall be granted to originating goods based on the rules of origin contained in chapter 4 of the USMCA.

The general rules to determine if a good qualifies as originating under the USMCA are based on the following criteria:

• The good is wholly obtained or produced entirely in the territory of one or more of the parties to the USMCA (that is, Mexico, Canada, and the United States of America).
• The good is produced entirely in the territory of one or more of the parties using non-originating materials, provided the good satisfies the applicable product-specific rules of origin set forth in the USMCA. The USMCA’s product-specific rules of origin are:
• the tariff shift rule (i.e., non-originating components shall suffer a change of tariff classification); or
• meeting a specific regional value content requirement (“RVC”).
• The good is produced entirely in the territory of one or more of the parties exclusively from originating materials.
• The good is produced entirely in the territory of one or more of the parties, is classified with its materials or satisfies the "unassembled goods" requirement and meets an RVC threshold. Namely, the good is originating if:
  • One or more of the non-originating materials used to produce the good cannot satisfy the applicable product-specific rules of origin because both the good and its materials are classified in the same tariff heading; or
  • The good was imported into the territory of a party unassembled or disassembled but was classified as an assembled good; and
  • The RVC of the good is at least 60% when calculated using the transaction value method, or at least 50% when using the net cost method.

De Minimis Rule

Like other free trade agreements, the USMCA establishes a de minimis rule allowing non-originating materials to be used in a good up to a 10% threshold without it being determined as non-originating.

In other words, producers in Mexico, the United States and Canada may use non-originating materials or components (i.e., materials produced in third-party countries) in the production process of a good, up to 10% of the good’s value, without the good being disqualified for preferential treatment under the USMCA.

This rule provides greater flexibility to producers in the North American region, promoting trade and the utilization of the benefits of the USMCA as it increases the de minimis threshold provided in its predecessor, NAFTA.

Namely, under the de minimis rule a good will be deemed as originating as follows:

• if the value of all non-originating materials used in its production that do not undergo an applicable change in tariff classification is not more than 10% of:
  • the transaction value of the good, or
  • the total cost of the good.
• a good that is otherwise subject to an RVC requirement will not be required to satisfy such content requirement if the value of all non-originating materials used in its production does not exceed:
  • 10 percent of the transaction value of the good, or
  • the total cost of the good.

IMMEX Program

For decades, Mexico has developed a legal framework and an export promotion policy that favors export manufacturing projects. Under this framework, Mexico has created the conditions for developing a strong manufacturing platform by providing tax and regulatory benefits that have favored the establishment of plants manufacturing final products for export in relevant economic sectors.

In this context, Mexico established the IMMEX program as part of its policy for attracting investment in manufacturing projects and promote exports.

IMMEX-Maquiladora Structure

The IMMEX is essentially:

• a duty deferral program.
• a temporary import customs regime for the manufacturing, transformation, and repair of foreign goods for export.

Parties may obtain individual authorizations to operate under the IMMEX program by complying with specific requirements. Under an IMMEX authorization, a Mexican wholly owned subsidiary of a foreign manufacturing group may import on a temporary basis foreign inputs owned by the foreign resident group under a manufacturing export agreement referred as Maquila Agreement.
The foreign resident provides components and equipment retaining title, and the IMMEX maquiladora company manufactures the final products for export to the foreign resident’s customers.
A recent trend for nearshoring projects is the acquisition by foreign groups of facilities operated by Mexican companies that hold IMMEX authorizations and an ongoing manufacturing operation. A proper due diligence would help interested investors to identify the relevant regulatory aspects that an IMMEX manufacturing operation entails and evaluate the feasibility of the relevant project.

Relevant Types

The are different types or modalities of an IMMEX program but the more used for nearshoring projects are the following:¹

• Industrial IMMEX. This is the most relevant type of IMMEX used to develop an industrial process for the manufacturing, production, or transformation of goods into final products for export. Under this modality, foreign companies may enter into a Maquila Agreement with a Mexican subsidiary (holder) and provide equipment and raw materials for the manufacturing of final products for further export.
• Services IMMEX. Under this type of IMMEX, a Mexican company provides services to export goods (i.e., manufactured by another IMMEX company) or only with respect to certain authorized activities (i.e., storage, distribution, testing).

Indirect Tax Aspects

• Value Added Tax (“VAT”). IMMEX companies are eligible to obtain a special certification from the tax authorities to apply a VAT tax credit at the time of importation. This is perhaps one of the most relevant tax benefits for an IMMEX company since, in practical terms, it entails the non-payment of VAT at the time of the importation of the foreign materials that otherwise would impact the cash flow and financial viability of the manufacturing activity, considering that it depends on intensive volumes and constant flow of foreign materials.
• Exports of Services. Manufacturing/maquila-dora services shall be invoiced at a 0 % VAT rate as export of services since they will benefit a foreign resident with no permanent establishment in Mexico.

Duty Deferral Structures

Other legal structures that may be considered during the planning of a nearshoring project in Mexico are the duty deferral mechanisms regulated by Mexican law, which offer alternatives to reduce logistic costs associated with the establishment of manufacturing plants that depend on foreign raw materials. These duty deferral mechanisms are:

• Strategic foreign trade zones (recinto fiscalizado estrategico) (“SFTZ”). Similar to the concept of foreign trade zones in other jurisdictions, a SFTZ is an authorization to introduce goods into an area under a customs regime that entails the transformation, repair, maintenance, or storage of goods deferring applicable duties until the goods are withdrawn from the SFTZ for definitive importation or export. The holder of the SFTZ obtains the authorization for the administration of the zone where parties may act as operators of specific areas within the SFTZ to perform activities related to the goods or provide services (i.e. storage of IMMEX goods). A SFTZ is also eligible to obtain a certification to apply a VAT tax credit to imports of foreign goods under this customs regime. The SFTZ has been an important structure for the development of industrial parks in different regions of the country where suppliers of manufacturing plants have established their operations.
• In-bond warehouse (depósito fiscal). This is a customs regime that entails the introduction of foreign goods into an authorized warehouse and the deferral of applicable duties/VAT until the goods leave the warehouse to be imported or exported.

Tehuantepec Interoceanic Isthmus Corridor (CIIT)

In 2018, Mexico announced a strategy to develop certain infrastructure for different industrial projects in a southern region of the country called the Tehuantepec Isthmus (Istmo de Tehuantepec) located in the states of Oaxaca and Veracruz. This geographical region is the narrowest area of the country between the Pacific and Atlantic oceans, which has been identified as an area for the development of nearshoring projects depending on imported goods from Asian countries. In order to develop this strategy, the government relaunched an old milestone project called the Tehuantepec Interoceanic Isthmus Corridor (Corredor Interoceánico del Istmo de Tehuantepec or CIIT).   

In June 2023, the current administration issued a package of public tenders to award different areas or development poles within this region under a concession regime. Interested investors will be awarded a concession to develop specific projects in different economic industries, with the possibility of obtaining title to the site after 2 years and subject to an approved investment project.

As part of the strategy, the government has also enacted a series of federal tax incentives, as well as permitting support from the authorities, to make more attractive the development of projects in that area. To be eligible, the proposed project shall comply with a minimum job creation threshold.

The federal government has also announced that it will be adding infrastructure to support logistics in the region by developing highways, railroads, and seaports projects.

The first package of concessions comprises the following areas:

• PODEBI - Coatzacoalcos I (257 Ha)
• PODEBI - Coatzacoalcos II (131 Ha)
• PODEBI – Texistepec (467 Ha)
• PODEBI - San Juan Evangelista (360 Ha)
• PODEBI - Salina Cruz (89 Ha)

If this first stage of the CIIT project is successful, it will certainly attract other nearshoring projects and investments that may be attractive for specific economic activities.

Final Thoughts

For decades, Mexico has been developing the legal framework and conditions to establish a platform for export manufacturing projects. Foreign manufacturing groups will need to evaluate the different legal aspects that are relevant to the development of their nearshoring strategy. From the establishment of a new manufacturing operation or the acquisition of a running IMMEX or manufacturing facility, investors should consider the different legal alternatives available to the develop their projects and assess their feasibility with a proper due diligence process.

As the nearshoring strategies develop, Dentons’ experienced team in Mexico is ready to advice clients in all relevant legal aspects of a nearshoring project in different sectors of the manufacturing industry, including M&A, customs regulation, labor compliance, securing energy supply, real estate acquisition and logistics.