Over the last two decades, Mexico has made substantial strides within the global manufacturing economy. Thanks to fluctuating market forces and changes in trade agreements, a steady tide of American manufacturers have fled China in lieu of closer proximity and a friendlier business climate with their southern neighbors.
If you also are considering relocating your manufacturing facility or in the process of setting up manufacturing in Mexico, there are several complex matters worthy of serious deliberation. Chief amongst these are the various manufacturing laws that you should be aware of. To aid you in that quest, read on below and find out everything you need to know about complying with manufacturing requirements in Mexico.
Manufacturing Requirements & Laws in Mexico
In 2018, the NAFTA trading partners sought to amend and update the original deal. This came about in the form of the United States-Mexico-Canada (USMCA) free trade agreement. According to the National Review:
The agreement would bring a much-needed update to the rules, with modernized intellectual property (IP) provisions and chapters on digital trade, anticorruption, customs and trade facilitation and other improvements. It would maintain Mexico’s status as an attractive place to manufacture.
Now, the 1,100 behemoth of a trade agreement covers various and sundry subjects and sets forth a variety of new laws, regulations, and requirements that each trading partner must adhere to. That said, there are three critical changes that will have a significant impact on any business with manufacturing operations in Mexico. These include:
The Rule of Origin
Under the original NAFTA, 62.5% of an automobile’s components were required to be made in North America. USMCA updated the material requirements by bumping that number up to 70% – 75%, depending on the type of vehicle being manufactured. A 2019 study by the Baker Institute stated the following:
Rules of origin are designed to ensure that goods that enjoy duty-free trade status in the region (“originating goods”) have substantial regional content rather than being transshipped from Asia or assembled from parts and components that are completely or largely imported from outside of North America. Thus, for example, a finished product made in China and imported
into the United States would not qualify for duty-free entry into Mexico or Canada unless the product was considered duty-free under Mexico and/or Canada’s World Trade Organization tariffs.
Both analysts and government officials agree that the data shows more than 70% of Mexico’s automotive exports are already in compliance with the amended rule, which means that it will very likely receive the brunt of the manufacturing production exodus out of Asia. Because of this change, if you’re currently operating a business that does not comply with the rule of origin, it’s essential that you reposition your manufacturing practice while the three-year compliance window remains open.
Labor Value Content
The USMCA also introduced a labor value content (LVC) requirement that would be phased in over time. This law stated that 40% to 45% of the content of a vehicle be fashioned by workers that are earning at least $16/hour. This LVC rule was separated into three divisions:
- High-wage material and manufacturing expenditures
- High-wage technology expenditures
- High-wage assembly expenditures
According to a CSIS analysis:
Through the wage requirement, the administration aims to assuage concerns that auto industry jobs will leave the United States for Mexico because of that country’s relatively low wages. The labor value requirement hamstring’s Mexico’s automotive industry unless it manages to pay its workers $16 an hour, well above the current average wages in the industry there. The intention of the wage rule is to encourage Mexico to raise wages for its auto workers or risk losing business, while not requiring companies in the United States and Canada to undertake massive changes.
Although there has been a steady hourly wage increase in Mexico, on average, it still falls far below the LVC requirements. Naturally, this has put downward pressure on demand for laborers in both parts and vehicle production. As a result, if you’re manufacturing in Mexico, particularly automobiles, it’s essential that you strategize ways to achieve LVC compliance with your various manufacturing facilities spread between Mexico and the U.S.
Product Safety Regulations
In order to ensure safety standards and quality control in production and products, Mexico’s consumer protection agency, PROFECO, had its powers significantly augmented. This granted it the ability to force manufacturers into compliance via mandatory recall by taking any of the following four actions:
- Place sanctions on manufacturers that were out of compliance.
- Conduct product safety investigations.
- Eliminate unsafe items from production.
- Require that defective products be repaired.
While this may increase some of your input costs in the short-term, over the long-term, the assurance that products are safe and of the highest quality will result in the following:
- Increased consumer satisfaction
- Increased consumer trust
- Decreased liabilities
- Decreased recall or repair costs
In order to bring Mexico into compliance with U.S. labor practices, several changes have been made to labor laws in Mexico. All of these seek to improve the lives of workers. Naturally, this results in higher labor costs on your end; although, it remains dramatically cheaper than labor within the U.S. These changes include:
- The formation of unions – There has been a concerted effort to loosen strictures and allow Mexican workers to unionize in order to better their working conditions and wages. This not only improves the lives of workers in Mexico but somewhat levels the playing field for American manufacturers who were hamstrung by America’s more stringent labor laws.
- Corporate sharing – Mexico was forced to add a mandatory 10% annual profit-sharing mechanism with employees. It was also required to remove loopholes that allowed them to avoid doing so. Now, if you do conduct operations in Mexico, it’s necessary that you provide that corporate sharing percentage or suffer the consequences.
- Punitive damages – Previously, Mexico had done little to allow for the pursuit of personal injury cases, particularly those caused by corporations. However, today, changes have been made to allow labor suits or indemnification cases to be taken to court in order to better protect factory workers.
Maquiladora VAT Certification
In 2013, Mexico passed tax reforms that would have a serious impact on manufacturing businesses, unless they passed a VAT exemption certification. Those that failed to pass, would be forced to pay a 16% VAT import tax.
Today, you can achieve a certification of “A,” “AA,” or “AAA.” Naturally triple-A certification has the most stringent manufacturing compliance regulations and thus the most benefits. In order to pass the certification, the Mexican Tax Authorities (SAT) need to confirm that your business is taking actions such as:
- Being tax compliant
- Using digital seals
- Installing and upkeeping inventory controls for tracking materials and goods
- Register all employees with the Social Security Institute (IMSS)
- Show that the business has financially invested in Mexico
- Allow customs officials to inspect shipments
- No VAT refund request denials in previous 12-24 months
- No tax liability assessments in the previous 12-24 months
- Working with suppliers that are tax compliant.
For further detail, this study by Nicolas Guzman thoroughly covers the requirements and benefits of the three levels of VAT certification.
Mexico has also required maquiladoras to transition to electronic invoicing and tax reporting. A business that fails to switch their accounts payable from manual to electronic management could face the following penalties:
- $300 to $4,500 fine per missing or incorrect e-invoice
- $15 to $4,000 fine per invoice that fails to match accounting records
- $200 USD fine for every transaction that should’ve been in the inaccurate or delinquent columns.
- 80% to 100% tax filing fine.
In addition, improper filing for VAT tax returns could lead to a revocation of your VAT certification, which would have severe cost ramifications on your business.
Labeling and Marking
According to the laws set out by NAFTA and USMCA, every product that is meant to be sold for retail in Mexico is required to have a Spanish label before being imported into Mexico. Per Global Trade.net: “Most NOMs require commercial information to be affixed, adhered, sewn, or tagged onto the product, with at least the following information in Spanish:
- Name or business name and address of the importer,
- Name or business name of the exporter,
- Trademark or commercial name brand of the product,
- Net contents (as specified in NOM-030-SCFI-2006 DOF November 4, 2006),
- Use, handling, and care instructions for the product as required,
- Warnings or precautions for hazardous products.
This information must be attached to the product, packaging or container, depending on the product characteristics. This information must be affixed to products as prepared for retail sale. Listing this information on a container in which a good is packed for shipment will not satisfy the labeling requirement.”
Complying with Mexican Manufacturing Requirements
The USMCA agreement and other legal changes within Mexico have made the option to manufacture in the country extremely enticing, particularly when compared to current-day China. While it’s important to know the pros and cons of the USMCA agreement, it’s equally important to understand the various rules and regulations in the manufacturing process that you must comply with to enjoy all the benefits of USMCA.
Adhering to foreign processes can be a tricky wire to balance. Therefore, should you need help or guidance in this transition, it’s time to reach out to the experts at NAPs. Over the years, we have successfully worked with hundreds of U.S. companies doing business in Mexico, helping them not only set up manufacturing operations management but then also to remain in compliance with Mexican laws. We’re here to help you navigate the changing landscape of manufacturing in Mexico and help you grow your business. Reach out today!