Navigating Customs Complexity: Insights into Nearshoring to Mexico

Navigating Customs Complexity: Insights into Nearshoring to Mexico

Navigating Customs Complexity: Insights into Nearshoring to Mexico

Customs processes are known for being tedious and complex, yet they sit at the center of international trade, and the US-Mexico border is no exception. Nearly 35,000 trucks cross through it every day, a number expected to increase as companies seek to reduce costs, improve flexibility, and enhance responsiveness to market demands. Mexico is set to emerge as a winner from the nearshoring trend, and favorable trade agreements and customs regulations are expected to play a key role in enabling it. However, every opportunity comes with its set of challenges. Here’s how customs play a role in nearshoring from China to Mexico.

Customs Duties and Origin Rules: An Intricate Landscape

65% of the world’s GDP trades with Mexico duty-free, fueled by the country’s extensive network of trade agreements and tax incentives, including the USMCA (formerly known as NAFTA), the IMMEX or Maquiladoras program, the European Union-Mexico Free Trade Agreement, and the Agreement for Trans-Pacific Partnership (CPTPP), among many others. In North America, the impact of this favorable trading environment is bringing a new level of intra-regional collaboration. Over the past two years, Mexico and Canada have become the top trading partners of the United States, with trade volumes 44% higher than U.S. goods trade with China.

Reducing or eliminating customs duties is therefore one of the primary advantages of nearshoring to Mexico from China. As one of the cornerstones of the USMCA, creating a more open and competitive trading environment hinges on reducing or eliminating tariffs on a wide range of products, encouraging regional sourcing and production.

Challenges in Determining Origin

While the benefits of reduced customs duties are evident, the challenge lies in navigating the complex origin rules as supply chains become more globalized and products increasingly have components sourced from various regions. This complexity demands a thorough understanding of origin requirements and the application of duties and taxes. Determining the origin of the final product includes a meticulous analysis of each component's origin and its compliance with the rules specified in the applicable trade agreements. This process can become challenging as the number of components and countries involved increases. Here, experienced customs brokers play a crucial role in helping businesses comprehend the intricacies involved in determining the origin of their products and securing the most favorable conditions for trade.

"Rules of origin and trade agreements are inherently complex. They are dynamic, subject to constant updates, and often pose challenges due to varying interpretations by different nations. For instance, in July, US lawmakers urged President Joe Biden to assess a surge in Mexican aluminum and steel imports, potentially prompting a reconsideration of duties on such imports. Furthermore, a recent dispute between Mexico and the US highlights the different interpretations of rules, exemplified by disagreements over the Regional Value Content (RVC) for cars and trucks, demonstrating the intricate nature of international trade regulations."
Jay Gerard, Head of Customs, Nuvocargo

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Technology Adoption in Customs Processes

The world’s attention on Mexico as the “next China” has highlighted the country’s need for stronger technological investments, particularly around the “black box at the border.” While adoption has been gradual, the changing landscape indicates a growing recognition of the importance of technology in facilitating efficient customs operations. According to a report by McKinsey & Company “some 87 percent of shippers reported maintaining or growing their technology investments since 2020, and 93 percent said they plan to maintain or increase their spending over the next three years.”

Globally, there’s already significant investment in Customs Technology both by the trade and governments. For example, the European Union is using Data Hub for goods to move across borders with minimal interference, while Dubai is implementing blockchain technology to analyze risk and manage vast amounts of information and documentation. In the US, Distributed Ledger Technology (DLT) is used to establish secure and transparent platforms.

In the trade, Nuvocago, for example, is investing time and resources into Optical Character Recognition (OCR) and Artificial Intelligence to maximize efficiency and compliance regarding how data is captured, presented, and transmitted to government agencies around the world.

As shippers looking to relocate to Mexico increase in size and sophistication, further investment in breakthrough innovative technologies like green initiatives, blockchain, and cybersecurity is a must to remain competitive, guarantee trade efficiency, and provide smoother, more secure operations.

“We are optimistic that Mexico Customs will begin to invest in some or all of this type of technology as we continue to see momentum in the nearshoring movement, with security and reducing friction at the border becoming even more of a priority for Agencia Nacional de Aduanas de México (ANAM), as well as all customs agencies around the globe.” -
Jay Gerard, Head of Customs, Nuvocargo

With a heightened interest in exploring the opportunities presented by nearshoring to Mexico, a strategic and informed approach to customs processes will be key to success. In the midst of an international shipment transaction, customs brokers act as the crucial bridge between shippers, importers, forwarders, and warehouses. Their expertise in navigating complex origin rules, understanding applicable duties and taxes, and leveraging technology ensures a smooth and secure transfer of goods across borders. All of this becomes vital in the context of nearshoring, where efficient customs processes are integral to the success of the supply chain.

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