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Maquiladora Near-shoring will Continue in 2017 and there are Material Handling Winners Set to Benefit

by Thomas R. Cutler   |   January 9, 2017

Beyond walls and the political spectrum, the manufacturing industry continues to grow and many companies are looking for economically efficient solutions to manufacture their products. The trend over previous years has been US companies transferring the manufacture of their product overseas. But the cost of shipping, changes in political and economic environments, difficulty of doing business and the changes in the US consumer demands often outweigh the price of manufacturing. Now, several companies are choosing to manufacture their products at a nearshore location that is both close in proximity to the United States and more cost-effective in a total cost analysis: Mexico.

In the manufacturing industry, Mexico has an edge that several countries do not have, and that is the Maquiladora. The Maquiladora program was structured to allow foreign companies, primarily US, to set up a manufacturing operation utilizing tariff agreements between the United States and Mexico. It consists of a manufacturing plant that is based in Mexico, typically close to the Mexico-U.S. border, and is run by a U.S. company.

The Maquiladora program was established in 1942 and solved the problem of rising unemployment while giving U.S. companies a source of lower cost, motivated and effective labor. This system provides both countries the best of both worlds, which is why Maquiladoras have taken over tourism as the main source of foreign income in Mexico over the past 20 years.

The home base of the manufacturer is in the United States and the supplies and equipment used to produce products are sent across the border to the maquiladora. At the maquiladora factory site, thousands of products are produced, from tennis shoes and clothing to automobiles and airplanes. The products are then shipped back to the United States under the trade agreements with no additional tax, when applicable, and are distributed to the client.

Maquiladoras are a significant component of Mexico's economy. These manufacturing sites give employees a safe working environment and a sustainable income to provide for their families. In turn, US manufacturers benefit from the proximity of an efficient workforce, which permits faster lead times and requires less inventory. This leads to job growth in the areas of engineering support and logistics. The US consumer, in turn, benefits from more affordable goods.

In the United States, thousands of manufacturing jobs go unfulfilled because companies are finding it difficult to find the labor force to sustain productivity. Maquiladoras serve as the perfect solution to ensure that U.S. - based companies are fulfilling their manufacturing needs in an efficient and cost effective manner. Companies who utilize the maquiladora can trust that once they provide the raw materials for their products, they will be produced to the highest of quality.

As the manufacturing industry in Mexico evolves, the partnership of the maquiladora and the United States will continue to help support both the Mexican and US economies while providing high quality manufactured goods at a cost-effective price to companies in the United States and the US market place.

Mexico, US reach agreement on maquiladora taxation

US companies with maquiladora operations in Mexico will be able to avoid double taxation by entering into a unilateral advance pricing agreement (APA) with Mexico's tax agency, the Servicio de Administraci?n Tributaria (SAT), the US's Internal Revenue Service (IRS) announced.

The IRS's position comes as a result of two years of negotiations between the US and Mexican competent authorities to address a backlog of approximately 700 pending APA requests from the maquiladora industry. Maquiladoras, mostly located along Mexico's border with the United States, manufacture goods for export, typically under a contract manufacturing arrangement with a foreign multinational.

The new agreement between the countries updates and expands on a 1999 agreement, which governed transfer pricing and other aspects of maquiladoras owned by US multinational corporations. Under the new agreement, the two countries are implementing a transfer-pricing framework that both countries have agreed will produce arm's-length results. It allows qualifying taxpayers with pending unilateral APA requests to elect to apply the new framework, and the IRS will treat the transfer-pricing results as arm's-length under Sec. 482 of the Internal Revenue Code.

Taxpayers that elect not to apply the new framework may apply the safe harbors provided for in the 1999 agreement or request a bilateral APA from the Mexican and US competent authorities under the provisions of IRS Rev. Proc. 2015-41.

The SAT is expected to release details of how to make the election and the steps taxpayers must take regarding pending unilateral APA requests shortly. The IRS also said it will release future guidance on the tax consequences of the unilateral APAs.

NAFTA by the Numbers

Since the implementation of NAFTA (North American Free Trade Agreement), trade between the U.S. and Mexico has grown from approximately $159 billion in 1994 to over $532 billion in 2015. According to U.S. government estimates, approximately 45 percent of this represents U.S. exports to Mexico, and the remaining 55 percent represents imports from Mexico to the U.S. Approximately 81 percent of Mexico's exports in 2015 went to the U.S.

Increased bilateral trade and production sharing between the U.S. and Mexico has resulted in stronger economic integration, rising foreign direct investment and increasing business-cycle synchronization. For example, estimates indicate that approximately 40 percent of content in U.S. imports from Mexico originates in the U.S.

Mexico is the number one destination for Texas exports. In 2015, Texas exported approximately $92.5 billion of goods to Mexico. Dallas Fed research indicates that trading collaboration with Mexico has materially improved Texas' global competitiveness.

Today, many Texas border cities benefit from increased U.S.-Mexico economic integration. Roberto Coronado is head of the El Paso branch of the Dallas Fed and has done extensive work trying to better understand this economic integration. His research suggests that growth in manufacturing activity in northern Mexico has generated substantial job growth in border cities such as El Paso and McAllen. Job gains have been concentrated in services and transportation, resulting in better wages and improved standards of living for Texas border residents.

Regardless of political rhetoric, the growth areas for near-shoring include AGVs (automated guided vehicles), conveyors, industrial carts for automotive kitting, light weight hand trucks for increasing direct store delivery (DSD) and last mile delivery for increasing e-Commerce operations.
Thomas R. Cutler is the President & CEO of Fort Lauderdale, Florida-based, TR Cutler, Inc., (www.trcutlerinc.com) Cutler is the founder of the Manufacturing Media Consortium including more than 6000 journalists, editors, and economists writing about trends in manufacturing, industry, material handling, and process improvement. Cutler authors more than 500 feature articles annually regarding the manufacturing sector and is the most published freelance industrial journalist worldwide. Cutler can be contacted at trcutler@trcutlerinc.com and can be followed on Twitter @ThomasRCutler. See More Details.

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