First, please permit me a little bit of digression as always. As many journalists would state, and have, the world is currently on fire regarding regional conflicts that could spiral into WW3 as continuous movement regarding alliances, as well as groups and individuals taking sides has become the focal point around the world. It's also true that as conflict goes, so does trade, quite often to the point of turning it into a weaponized piece of economic clout. Examples would be Russia, cutting off Ukraine's grain, Iran threatening to cut off Irael's oil shipments, and of course, as always, the ongoing trade conflicts with the U.S. and China. Geopolitics at play, the western alliance is fraying a little bit behind Ukraine and Russia's conflict, thanks to Republicans. In the meantime, China, N. Korea, and Iran are making their military might bonding known to the world, as are Japan, Australia, S. Korea, and the U.S. With the current situation boiling over between Israel and Hamas, it does make one wonder about how survival of various countries will play out, even given the nuclear threats via Russia, Iran and N. Korea. Hopefully, China's influence with only slightly cooler heads will prevail over that Hollywood glorified mass destruction of the globe made famous in a variety of films. Gloom and doom aside, obviously, this all spells out a case for due diligence in making one's country much more self-sufficient regarding needed resources. Looking back, one of the bigger obstacles to economic survival during conflict was Germany's situation with upwards of 40% of natural gas being imported from Russia. It was a huge decision when they decided to not engage with the Gazprom2 pipeline through the Baltic from Russia. $16 billon+ dollars spent on that monument to total ownership and potential blackmail, just to be blown off, ouch. Through all of the fallout and sanctions, Russia has stayed the course of "who cares, we didn't need you anyway," as western civilization ponders the timing of Putin's poor health and subsequent imminent death. For better or worse, who takes the reigns remains to be seen.
So, with all of the turmoil, obviously it would behoove select countries caught in the crossfire to strive towards being much more self-sufficient creating a solid protection from a disruption in the economic ties and supply chains globally. The implementation of trade policies in what many consider acts of protectionism and manipulation are the norm, and of course China and the U.S. are a prime example. Solutions include nearshoring, reshoring, and protectionism. It's complicated, so for the purpose of this article, let's stick with nearshoring.
China always comes to mind for me considering the obstacles needed to overcome simply getting imports into the U.S. Namely Section 301 tariffs, and now Forced Labor. Anti-dumping has actually taken a back seat but is still somewhat prevalent. Problem is, you can source just about anything from China, 10x's what can be extracted from the majority of other major players globally. One of the "bad actor fixes" to this was covered by Partner Adrienne Braumiller in a recent podcast regarding Forced Labor. She mentioned that Malaysia has actually turned into a huge transshipment hub, as companies work to circumvent China as the country of origin. Sounds clandestine and like a definitive loophole, but this really doesn't work with Customs being so vigilant, and around $1.9 billion in transshipments have been detained via Malaysia. Honestly, if one is going to be able to follow through on the right course of action, you would possibly be looking at moving manufacturing from China into Mexico. China's labor rates have already creeped into the borderline category of "not so great", and as unions in the U.S. put on display their power to make things even more expensive to produce in the U.S., Mexico, and their current labor rates look rather attractive. Obviously, this game plan is taken into consideration when looking at the data as to how much of one's product is destined for U.S. consumers. If it's substantial, it's worth a look.
I have been on several new business calls with our Mexico legal counsel, who are experts in IMMEX, and they are transparent about how cumbersome some of the tasks involved are with the Mexican government in establishing an IMMEX, but patience, determination and expertise have been the recipe for success for many. Obviously, much lower shipping costs are attractive, possibly getting rid of Section 301 tariffs if they were involved and the product is substantially transformed, and Forced Labor issues hopefully would be a thing of the past. Nearshoring makes sense in this case if the sourcing can be from somewhere else besides China of course. Customs has been very unforgiving when it's discovered that country of origin has been manipulated to any degree, be it shipping or manufacturing. Many Chinese based manufactures are asking the question, "Should we remain in China, and fight the good fight with U.S. Customs, or start looking at what an IMMEX can possibly do for our bottom line." Applicants may select from one of the following five types of IMMEX modalities available: Controller, industrial, services, shelter or third party. You have to be specific in relation to your intentions to produce, manufacture, or provide services. There are over 6141 IMMEX currently in operation. Knock yourself out, here is an EXCEL spreadsheet: IMMEX_SEP2023-DIRECTORIO_20231010-20231010.xlsx (live.com) Also, if you are so inclined to learn more, our Mexico Legal Counsel has covered the IMMEX in several articles such as this one: https://www.braumillerlaw.com/legal-framework-governing-immex-operations/
China trade with the U.S. is still substantial (2022 two-way trade was around $690 billion-and 2023 is expected to have declined by around $130 billion) but has become riddled with issues in compliance due to the aggressive regulations in place. (Microchip ban included) According to Bloomberg, and of course some fairly recent Census data, the U.S. is importing fewer goods from China. Goods imported from China into the U.S. will have declined by roughly 16% overall in 2023, and-that's where the $130 billion comes into play, which represents the lowest share of Chinese goods imported to the U.S. since 2006. Where is a good portion of the business going? Well Canada, and Mexico, primarily because the decline includes nearshoring to the U.S. Vietnam is also benefiting from manufacturing moving out of China. These (3) seem to be the winners, but for the purpose of this article, let's focus on Mexico as in my humble opinion, it has the most potential.
First, another digression please and repeat. As previously mentioned, since the world is currently on fire, according to many international scholars, it goes without saying that trade is bound to follow the turmoil. One addition I'd like to make here is that if China decides to invade Taiwan a little earlier than perhaps originally planned (2025), the ramifications in trade between the U.S. and China will greatly be affected. Right now, the Customs mandate with Forced Labor is the closest you can come to a proclamation of "Stop Doing Business with China." An invasion of Taiwan makes this proclamation black and white. Could the U.S. and China actually afford to cut each other off ("de-couple") in trade to a great extent? A firm practical "no" is the answer, but that doesn't mean that a large portion could be diverted. The U.S. to Mexico and Canada, and China will continue to grow its ASEAN alliances. Economic scholars will tell you that there is far too much $$$$ at stake to go down the path of cutting each other off in trade. Besides, 2022 in two- way trade was a record year at nearly $700 billion and that's why Xi is meeting with Biden this month and is even in current economic talks with Germany. Side note: Calming the volatile rhetoric, a little, as well as the South China sea and air is necessary. Is there such a thing as healthy competition among the superpowers?
Now, back to nearshoring and Mexico. At a glance, in the first quarter of 2023, foreign direct investments (FDI) in Mexico amounted to approximately 18.6 billion U.S. dollars. That represents a considerable decrease in comparison to the FDI stock registered in the same quarter of the previous year, which amounted to nearly 22.8 billion dollars. The United States is among a handful of countries that invest the most in Mexico, which goes primarily to manufacturing in the automotive sector. Reporting from the Bank of Mexico, Direct Investment Abroad fell by 561.9 USD million in Jun 2023, its Foreign Portfolio Investment fell by 5.0 USD billion in Jun 2023.
It's been up and down over the course of the last decade, and according to our legal counsel, the government in Mexico, and its stringent regulations regarding IMMEX is still shooting itself in the foot somewhat. According to a Central Bank survey, a majority (80%) of businesses entertaining residency in Mexico consider the current state regarding the rule of law to be a major obstacle. Here is an excerpt from our Mexico Legal Counsel regarding the application: Within the last couple of years, applying for the IMMEX program has become a complex and burdensome procedure for the majority of companies as the federal government appears to be reluctant to grant and authorize IMMEX applications. The regulations set forth that the authorization should be issued within 15 working days, however, in practice, this time has been extended to a few weeks or even months, as the applicants may need to submit the application request several times, before approval is eventually granted. The Mexican government wants to make sure you are serious about conducting business in their country and have a solid foundation to do so, as well as wanting to secure the funds they are entitled to in the transaction. Our Mexico Legal Counsel will say that things have become somewhat easier in the process as the Mexican government has taken a good look at the incoming annual revenue in the program. A proper thank you to China is in order.
Also from our Mexico counsel, Be aware that the complexity does not stop with completion of the application process because once the IMMEX application has been authorized, the company needs to be ready to ensure full compliance with the law. From a Customs compliance perspective, administering and controlling an IMMEX involves a high degree of knowledge regarding the legal obligations and responsibilities. These include not only the Mexican Customs law and its regulations, but also the Fiscal Code, the Income Tax law, the IMMEX Decree, General Rules of Foreign Trade, the General Criteria and Rules on Foreign Trade, etc. In addition, there are hundreds of legal provisions from other laws, codes, norms, decrees, etc., that may also govern IMMEX operations. These intricacies mean that the legislation is not available in one single place with amendments published by various authorities, but instead within a variety of different publications.
Yes, it can be frustrating, so knowing the challenges in advance contributes to the process, and acceptance of delays. From my perspective, in order to capitalize on global insecurity and the opportunities offered by nearshoring, I say "Mexico, continue to lighten up! Taking into consideration the largest economy in the world is just across the border, nearshoring in Mexico has the potential to be more than just a slow building business trend, but instead, a robust, fast moving international logistics hub adding an additional 2.5-3.0 percentage points to the GDP via manufacturing output. I do recognize regarding history, the IMMEX program was established back in November 2006 and has been subject to several amendments, so the learning curve is over, and the overhaul is taking place. Now, attracting FDI via announcing a more business friendly process with IMMEX, well, the timing is right. Right now.
Check out our new Digital Magazine Get the inside scoop on the Braumiller Law Group & Braumiller Consulting Group "peeps." Expertise in International Trade Compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.