IMMEX, Maquiladoras, Nearshoring, USMCA: Terms Explained10.19.22
The manufacturing industry moves quickly with changes frequently occurring, though its terminology remains constant. It is part of the foundation of what to expect when manufacturing in Mexico and is used frequently in discussions regarding the future. Though most may be recognizable, it’s important to have a refresher on the common terms that outline the manufacturing process and the ways they’re being used today.
IMMEX is the shortened reference to Mexico’s Manufacturing, Maquila, and Export Services Industries (IMMEX) program, formerly known as the maquiladora program. It was established in the 1960s to encourage foreign direct spending in Mexico and increase manufacturing activity to boost the economy.
The key benefit coinciding with the IMMEX program is Mexico’s value-added tax (VAT) exemption that you can only obtain when you are approved for the IMMEX program and you are also a VAT-certified company. This exempts foreign manufacturers from the 16% VAT on approved, temporarily imported goods, equipment, and machinery, and offers significant savings. A common misconception is that acceptance into the IMMEX program automatically makes a company duty-free, which is not the case. The IMMEX program can only help companies avoid VAT tax on all temporary imports.
However, a manufacturing company must first apply and be approved into the IMMEX program before applying for VAT certification. The only exception is if a foreign company decides to partner with a shelter operation. A shelter already has all required certifications in place, which means companies can skip the application paperwork and benefit from the tax advantage from day one.
A maquiladora is a term for a manufacturing factory in Mexico. To operate as a maquiladora in Mexico, foreign operators must establish a legal entity to conduct business. It requires establishing what kind of production will be performed, the types of products, and where the facility will be located.
Foreign manufacturers can decide to set up a standalone entity or set up operations under a shelter. Either way, IVEMSA can guide companies through the process by offering administrative services, such as HR, accounting, and trade operations, and securing all permits and certifications.
Nearshoring has resurfaced as a trending term due to the shift of foreign operations from China to Mexico. It is often used interchangeably with other terms like ally shoring and reshoring, as North American countries continue to relocate and/or expand their portfolio to Mexico.
For decades, the U.S. relied heavily on China as its main foreign trade partner. However, events over the past few years have led many to begin manufacturing in Mexico instead. One of the reasons for the shift is the trade conflict between the U.S. and China stemming from 2018. With retaliation and uncertainty regarding tariffs, it caused many U.S. manufacturers to retreat to closer proximity to their central market.
Additionally, the COVID-19 pandemic stalled and/or shut down many supply chains overseas. This disruption caused many U.S. and other foreign manufacturers to become hesitant about their sole reliance on China as a trade option. It led to portfolio diversification and/or a complete move of operations to Mexico, making nearshoring the more favorable strategy in terms of supply chain security.
The United States-Mexico-Canada Agreement (USMCA) is the revised trade agreement between the three countries. Following the success of NAFTA, the USMCA was officially enacted in July 2020. It establishes specific trade protection and regulations in North America, making it advantageous for U.S. manufacturers to switch their partnerships with China to those in Mexico.
The USMCA contains provisions for original content production, intellectual property protection, digital trade, and anti-corruption practices, which encourage North American trade to benefit all economies and provide greater oversight over new technologies and opportunities.
A shelter refers to a third-party entity that allows foreign manufacturers to operate in Mexico. Working with a shelter partner is the most popular way to set up operations due to its cost-effectiveness and efficiency. Additionally, it provides U.S. and other foreign manufacturers with the security and support they need to succeed.
A shelter company like IVEMSA is equipped to help manufacturers even if they choose to operate as a standalone entity. Though, as a standalone, there’s full exposure to Mexican fiscal, labor, and trade authorities, companies can still receive the same services to help with incorporation, including recruiting and hiring, taxes and accounting, and all other administrative responsibilities necessary to start production.
Part of manufacturing in Mexico is getting familiar with the lingo. IVEMSA helps to reduce the learning curve for foreign operators in all areas and ensures they have everything they need to operate.