What Every Multinational Company Should Know About …Tariff Increases in Mexico and Their Potential Impact on Your Supply Chain
On April 22, 2024, Mexico’s president increased import duties in the range of 5% to 50% on 544 Harmonized System (HS) codes, affecting a significant number of product categories such as steel, aluminum, textiles, plastics, glass, chemicals, electric, and transportation materials, among others.
The increased import duties will be in effect for two years, beginning on April 23, 2024, and apply exclusively to products that originate in countries with which Mexico does not have a Free Trade Agreement (FTA). Whether or not companies may be directly and immediately affected by the tariff increase, they should carefully evaluate the potential consequences of such increases to their business operations and supply chains.
There are two scenarios worth highlighting:
1. Are goods affected by the tariff increase used as an input in manufactured products destined for the U.S. or Canadian markets?
Though it is commonly believed that IMMEX (in English, “Manufacturing, Maquiladora and Export Services Industry”) companies in Mexico enjoy a blanket exemption from paying import duties on their inputs, the destination of the finished good is of vital importance.
Under the USMCA´s “Lesser of the Two” rule, import duties could be reduced or exempted in an amount not exceeding the lesser of: (i) the duties to be paid on the non-FTA raw materials imports into Mexico or (ii) the duties payable in the USMCA country upon importation of the finished goods.
Under this rule it is likely that, in most cases, duties paid in Mexico will be neither reduced nor exempted given that, except for Chinese goods, there are no duties to be paid upon the importation of final products into the U.S. or Canada.
It is further worth noting that the 5% to 50% tariff increase could be reduced for IMMEX companies that enjoy a Sectorial (PROSEC) or Eighth Rule program. Under these programs, specific inputs are authorized to be imported at reduced (even 0%) import duties if used to manufacture a limited amount of goods for specified economic “sectors,” such as automotive (automobile and auto parts), steel, electronics, and chemicals, among others.
Do you know whether and how the recent tariff increase and USMCA´s “Lesser of the Two” rule may affect your IMMEX operation, or your IMMEX supplier´s operations?
2. How are tariff increases treated in the relevant Terms and Conditions (T&Cs) of your supply chain contracts?
Supply chains continue to suffer from the disruptive effects caused by the COVID-19 pandemic. Many companies have learned from this experience and have taken steps to adjust their T&Cs to cover unforeseen circumstances, including adding provisions to address sharp increases in import duties. However, there also are many companies that have not.
Even if your operations are not directly affected by the tariff hikes, your company still should consider how these added tariffs could impact your supply chain. Due to the breadth of covered products subject to tariff increases, there is a high probability that some link in your supply chain is considering its commercial and legal options to deal with these additional costs.
Do you know which party within your supply chain will be responsible for any tariff increases per current T&Cs? Do your current T&Cs anticipate situations like the recent tariff increases?
If you have questions about how Mexico´s tariff increases may affect your company´s supply chain, or if you want to be sure that your company is taking steps to mitigate against this or similar situations, please contact the authors of this article or your Foley relationship attorney.
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