We have posted enough about supply chains and trade agreements that it is hopefully very clear that we recognize the importance of manufacturing trade in North America both to manufacturing and to the region’s integrated economy. We also take it as a matter of fact that Mexico’s economy was founded on global trade, in 1521, and its comparatively brief experiment with protectionism during the PRI dictatorship is largely regarded as having turned out pretty bleak.
We do still have something more to share about tariffs, though. Or more accurately, technical barriers in exporting to Mexico. Recently a Washington, DC partner at an international trade law firm (sorry!) shared observations about what actions and preparations are actually being taken in US Congress and among White House advisors. Her take was that if US ruling party is to make legislated corporate tax cuts a reality, it needs to make up the budget somewhere, and that it may well do so with a universal import tax. She even mentioned a number: 10 percent.
This realization hit us on a personal level not for work or social reasons, but rather because our managing consultant recently lived the dreaded experience of getting hit with customs taxes entering Mexico at the Mexico City airport. Remodeling an apartment, she was carrying about 500 USD (Mexico’s de minimis for hand-carried merchandise) worth of lighting and electrical fixtures in her suitcase that she had obtained coinciding with a visit to her parents in the United States. Somewhat blithely for a gringa who has lived in Mexico for 15 years, she was not carrying the receipt for them. Together with the internet and the customs official, the total cost of her lighting equipment was actually over 500 USD, and as such, and because she had not proactively declared the overage, she was punitively charged Mexico’s VAT tax for the entire amount (not just the overage).*
Which is to say, we realized Mexico already kind of does what the US might do with a threatened universal 10 percent tax.**
This lighting fixture would have been much more than 179 USD + VAT had it not been purchased in the US. Image: Wayfair.com
By the way, the di minimis on e-commerce coming into Mexico is 100 USD. Recipients of shipments over 100 USD don’t only pay 16 percent VAT on amounts over, but senders and forwarders also slap on handling charges. Likewise, the less proactive the payment, the more punitive the charge. Compared to the US’s attitude towards taxing consumer goods, these practices hearken back to the days when vinyl records pressed outside of Mexico were taxed so heavily that the local music industry created a whole genre of Spanish-language covers of popular, would-be imported songs. And of course there was a thriving black market for the untaxed foreign recordings.
All of this to say that unlike the United States currently, Mexico, and any other nation with VAT, already charges more than 10 percent tax on inbound items. Granted, Mexico also levies the same on domestic items (if and when those items are declared in the formal economy, which they often are not).
Recently we attended a talk with the American Chamber in Mexico about IMMEX 4.0, which is the update to the IMMEX*** program both to root out rampantly misappropriated IMMEX certifications (companies that are getting import taxes waived without reexporting or without complying with reexport terms) and to automate and otherwise digitize several steps in the IMMEX process. It was quite a technical town hall discussion with companies such as Johnson Controls and Magna asking very specific questions about how their own use cases will be taken into account.
During the discourse, it became clear that Mexico is updating IMMEX not just because it needs an update, but also so it can more “surgically” manage import treatments. We anticipate this is because there will be increased scrutiny and expectations of trade compliance as things heat up with Chinese investment, regardless of whatever happens with Trump, but also because Mexico has been brewing its own focus on the domestic economy over the last 6-7 years. Not to mention an interest and need by the Mexican Government to make customs processes more agile, clear and fair.
Mexico would not call it protectionism, but it could potentially say it is putting Mexico first. The Mexican Government official who was the featured guest, from a relatively new unit within the economic secretariat to facilitate foreign commerce, excused himself for using the term “import substitution” as it was outdated, but that he needed to refer to that concept with respect to selecting which commodities are going to be okay to retaliate on and which commodities need to remain unburdened in Mexico’s international supply chains. This process of whipping its customs exemptions process into shape was we think incubating during the AMLO administration, and it hatched with Sheinbaum; before Donald Trump was elected US president.
* Even paying VAT on the whole amount, the products were still cheaper bringing them in than they would have been sourcing them in Mexico. This is mainly due to the size of the middle class market in the US, which allows for widespread discounting of consumer goods to encourage inventory rotation.
** We assume a US 10 percent universal import tax will have important supply chain exemptions (like Mexico’s VAT does)
**Companies operating under IMMEX can import necessary materials without paying import duties or VAT as long as the finished product is exported within a specified timeframe.
The Chopo music and merchandise exchange still exists in Mexico City, and was founded partly on demand driven for imported music recordings that were unaffordable except on the black market. Image by Jubilo via Wikimedia Commons.
