Understanding the areas of the North American Free Trade Agreement is invaluable should your company is manufacturing in Mexico.
Many believe NAFTA – enacted in 1994 to erode trade and investment barriers involving the United States, Mexico and Canada – makes working in Mexico duty free. While most companies shipping merchandise to some manufacturing plant in Mexico may be eligible for a tariff-free status on the products, certain customs paperwork requirements have to be met to make sure businesses are aligned with NAFTA policies.
“Not everything visiting Mexico is duty free,” notes Steve Haywood, president of FOCUS Business Solutions, Inc., a nationally licensed U.S. Customs broker agent specializing in NAFTA Customs-regulations issues. “As you recognize, Mexico has something called Sectoral Programs, also referred to as PROSEC. Materials qualified for PROSEC might be able to enter just as one import, Mexico-duty-free, or could possibly be subject to tariffs all the way to five percent.”
PROSEC was implemented with the Mexican government as an approach of overcoming challenges faced by international factories, or maquiladoras, in Mexico after NAFTA took root. The maquiladoras’ trials stemmed from NAFTA’s Article 3, which states participants cannot waive or reduce import tariffs conditioned upon the export in the finished goods to a new NAFTA country.
While PROSEC is really a measure allowing foreign or domestic producers to petition government entities for either tariff reduction or elimination irrespective of whether the finished product are going to be sold in the country or exported, it only pertains to certain sectors from the Mexican economy – including automotive, textiles and electronics.
Companies working in Mexico usually takes advantage of PROSEC with no NAFTA certificate. Still, when a business intentions to manufacture and ship products on the States for consumption, NAFTA certificates need to be secured with the raw materials used.
Businesses shipping goods back and forth from Mexico from non-NAFTA-regulated countries also could take advantage of “Regla 8” or Rule 8 – another tool provided from the Mexican government inviting imports across its border duty free. When them are shipped on the United States after assembly, however, they’re able to encounter U.S. tariffs and could not necessarily be eligible for a NAFTA treatment, Hayward suggests.
To reap NAFTA benefits, claim PROSEC status or utilize Regla 8, a firm producing goods in Mexico for shipment for the States must first file a Certificate of Origin, which states items covered with the certificate are “originating” goods as defined in NAFTA Chapter 4. For preferential tariff consideration, the certificate have to be completed through the exporter and become in the importer’s possession once the declaration is done. Incorrect or fraudulent Certificates of Origin often means penalties to the exporter should a Customs audit occur.
Free trade – or reduced-duty trade – is a useful one business. U.S. government sources cite Canada and Mexico because top two consumers of U.S. exports this season, spending $248.2 and $163.3 billion on American goods, respectively. The United States concurrently purchased $276.4 billion in Canadian products and spent $229.7 billion on Mexican imports. Moreover, bilateral trade between Mexico as well as the States has greater than quadrupled from the last 20 years.