The automotive industry in Mexico provides a critical case study of the expected nearshoring catalyzed by policy changes, specifically the renegotiation of the North American Free Trade Agreement, or NAFTA, into what is now the United States-Mexico-Canada Agreement (USMCA). This renegotiation resulted, among others, in the strengthening of the rules of origin on vehicles, specifically designed to ensure that a significant portion of vehicle production occurs within the USMCA region.

USMCA’s rules of origin on vehicles increased the Regional Value Content requirements, included a Labor Value Content requirement, created the concept of Core Parts subject to a Regional Value Content requirement, and mandated a minimum steel and aluminum content to be sourced from North America, definitively reshaping North American trade dynamics.

Nevertheless, the much-awaited and expected relocation to Mexico of a large portion of the supply chain for vehicle assembly for export to the United States has been facing relatively new external and internal challenges, preventing it from reaching its full potential. These new challenges add to those already extensively discussed, including production and logistics infrastructure investment, energy provisioning, access to water, and security.

United States Onshoring Process

The United States is undergoing a process to relocate within its territory the production of certain merchandise it considers essential for its economic future and national security, including electric vehicles (EVs), semiconductors, aluminum, and steel. As part of this process, the Biden administration announced in May 2024 a significant increase in tariffs on such products originating from China.

While this measure against China might seem unrelated to Mexico, it clearly shows the United States' willingness to effectively relocate certain vehicles and components within its own territory, excluding not only China but also Mexico. The manufacturing of many products traditionally performed in Mexico or destined to be is now being relocated to the United States despite the cost increase.

Steel and Aluminum Tariff Increases

On April 22, 2024, the Mexican government decided to temporarily increase import tariffs on 544 Harmonized System Tariff Codes for many products, including steel and aluminum, not covered by a Free Trade Agreement. These materials are essential for components in the automotive industry. While the tariff increase is grounded in the need to protect national production and benefit from nearshoring, it is unclear whether there are national suppliers for many of these relevant products. If not, it would increase vehicle production costs.

Additionally, certain existing legal frameworks used by Mexican producers of parts or components for direct or indirect export have ceased to be implemented by governmental decision, causing not only an increase in costs but also scarcity.

Strengthening the Export Legal Framework

Many of the Mexican suppliers in the automotive industry for export operate under a specially designed legal framework providing them with important logistics, tariff, and tax benefits. This framework includes adhering to the Decree for the Promotion of the Manufacturing, Maquiladora, and Export Services Industry (commonly known as the IMMEX program) and the Registration in the Corporate Certification Scheme for VAT and Excise Tax (VAT Certification).

Certain relatively new amendments have complicated an already complex framework, limiting the flexibility and agility inherent to international trade operations. While these amendments aim to establish different tax and customs controls, they have resulted in complicating the establishment of new investments or the expansion of existing ones. Furthermore, new regulations have generated concerns regarding the scope of controls and the legal grounds for suspending or canceling related approvals.

It is imperative to emphasize the importance of adhering to all formal and substantive requirements stipulated in tax incentives and tariff preference regimes. Failure to comply can result in significant penalties, which can be mitigated by the implementation and regular review of comprehensive compliance programs.

Governmental Auditing and Financial Implications

The Mexican government has initiated a highly ambitious and rigorous auditing and review of the tax and customs operations of Mexican entities engaged in manufacturing for export within the automotive industry. These reviews, which often result in substantial fines, relate not only to customs operations, including the legal stay in Mexico of all fixed assets and the timely return abroad of temporary imports, but also to the tax treatment of income tax and value added tax applied to different sorts of transactions.

While the importance of the government monitoring Mexican producers to ensure full compliance with the applicable legal framework is clear, the approach should consider the companies engaged in the automotive sector, which is, by far, the most important economic sector. Overregulation and excessive review may result in an adverse environment, deterring potential foreign investors from establishing in Mexico and preferring to invest in the United States or Canada despite higher production costs.

The Mexican automotive industry stands at a crossroads, influenced by both internal and external factors. While the USMCA has set the stage for nearshoring opportunities, recent policy changes and external pressures present significant challenges. For Mexico to fully capitalize on nearshoring, it is crucial to address these challenges through strategic investments in infrastructure, clear and supportive legal frameworks, and fostering a business environment conducive to attracting and retaining foreign investment. Balancing regulation with growth incentives will be key to positioning Mexico as a pivotal player in the North American automotive industry.