New Mexico textile import rules hamper apparel trade
US manufacturers say a Mexican reference price system to curtail sub-valued goods is causing delays
Mexico is being urged to overhaul a newly expanded set of import reference prices US apparel makers say are hampering trade, causing delays and blocking much-needed fabric imports at a time when the country continues to lose market share to Vietnam and Central America.
The latest move exacerbates anger at a Mexican textiles aid package introduced in December 2014 to cut sub-valued imports and shore up the industry, according to executives and trade lawyers.
The six-part scheme introduced base or minimum reference prices for 413 textile and 317 garment tariff categories. However, a further 212 and 100 categories were added in May, enlarging the list to 662 and 480 categories respectively.
Industry consultant Miguel Angel Andreu said the changes, published last month in Mexico's Official Federation Diary, are having the greatest impact on denim jeans, women's lingerie (notably panties and brassieres), T-shirts, bed sheets and cloth (mainly from Pakistan) and other basic garments priced cents-on-the-dollar.
Jessica Morales, institutional relations and foreign commerce director at clothing industry trade association Canaive, also mentioned denim and cotton pants, trench coats, baby clothes and bed sheets as some of the most important new products on the list.
Soon after Mexico announced the 2014 aid package, US brands complained the rules were difficult to navigate, triggering complaints and delaying merchandise imports into Latin America's second-biggest clothing market.
Stephen Lamar, executive vice president of the American Apparel & Footwear Association (AAFA), says matters haven't improved much, adding that the new prices are unwelcome non-tariff trade barriers.
"I have not heard of any improvement," he says. "Maybe some people have gotten used to them and perhaps that passes as improvement, but my members are not telling me this programme supports their business in Mexico or helps them create jobs. It's a barrier, a continuation to something that has been a problem.
"Mexico tops the list of countries that instituted non-tariff trade barriers and reference prices are right up there."
Ambiguous, unclear definitions
The rules remain ambiguous with unclear reference-price definitions, Lamar adds.
Thomas Travis, managing partner at trade law firm Sandler, Travis and Rosenberg, says the expanded rules could prompt American producers to source elsewhere.
"It's unfortunate," he says. "The programme represents a significant disincentive for global companies doing business in Mexico. If you have time-consuming, unnecessary procedures, why should you expand in Mexico?"
If an importer declares a customs value for a shipment below the reference prices, firms must undergo a lengthy procedure to justify the lower import price to siphon the goods or have them appraised, Travis adds.
Mexico should be using regular World Trade Organization (WTO) customs valuation tools instead of reference prices to stem the entry of under-priced apparel, according to Travis. He rejects views that the measures are needed to tackle widespread customs corruption instead of toughening the rule of law.
"Corruption is not global companies' responsibility," Travis charges, adding that other countries have effectively tackled corruption through customs investigations and tighter merchandise controls. "You don't stop commerce to control undervaluation. Why does Mexico want this? The don't want anymore competition but they are solving the problem with a sledgehammer."
Working to raise prices, streamline system
Arturo Vivanco, who leads Canaive's Jalisco State (Guadalajara) division, says the new rules may be causing delays but that these have declined since the package was introduced. He adds Mexico City is working to raise the measure's original reference prices after a review showed some were too low, blocking much-needed specialised fabric imports. The changes are set to be announced later this month.
The current import system is also being reviewed. Currently, a firm bringing merchandise priced below the reference threshold must either pay tax on it or file a valuation dispute with the SAT tax authority. As part of the process, the company must pay a provisional amount or bond that the government returns after it has investigated the claim.
"They can partially pay the tax while they are investigated to see if their calculation is correct," Vivanco says, adding that duties can range from 5% to 30% depending on whether a fabric or garment's composition involves basic cotton or synthetic fibres.
Vivanco said the rescue package's requirement that importers become part of an official registry has also been streamlined, eliminating many rogue enterprises funnelling illegal goods.
The scheme has worked, slashing sub-valued cargoes to 6% of total trade in the first quarter of this year, down from a whopping 60% in 2014, Economy Minister Luis Videgaray announced recently.
US brands "used to it"
Adrian Vazquez, a trade lawyer with Vazquez, Tercero & Cepeda in Mexico City, says US importers have had 18 months to adapt to the regulations so adding new reference prices to their catalogue should no longer be complicated.
"They are used to it and most of them already have products covered in the regulation," he says. "Companies that do ordinary business with Mexico have sophisticated programmes that have already been tweaked" for the new business landscape.
That said, he agrees the non-tariff barriers violate WTO rules (though he hasn't yet heard of any litigation) and Mexico could explore other options, such as creating a special regime for formal textile and apparel distributors that pay taxes and are in good standing with the government. Already, export maquila manufacturers enjoy a flexible regulatory framework (including expedited customs procedures) through a special "certification" process, Vazquez claims.
VF Corp and Mexican jeanswear giant Kaltex enjoy the maquila provisions. However, most distributors are small and mid-size firms that could benefit from a certification system, according to Vazquez.
So why hasn't Mexico City established this?
"Unfortunately in Mexico, the good people pay for the broken dishes," Vazquez sighs. "These locks [reference prices] show the government is incapable of stopping malandros [Mexican slang for corrupt custom officials] and other criminals. They lack the correct inspection and taxation instruments."
Andreu agrees the new prices are not helping.
"Despite Mexico's geographical advantage and the gains we've made in the quality of our sewing and designs, the government is not helping by adding these non-tariff trade barriers," he says. "They do protect the industry but sometimes, when it comes to prices, we should trust the relationships between the US and Mexico."
Tackling corruption, rising theft
Vivanco agrees Mexico could step up anti-corruption measures to eliminate reference prices, adding that Canaive is working with the administration to find new ways to fix the problem. Currently, six out of 10 garments sold in Mexico are contraband or fake items sold in flea markets, he says.
"We are the world's second most corrupted country," he notes. "That should tell you something. The government has not killed corruption because many elite politicians and bad business people could be harmed. This cannot continue. We need to do something."
Vivanco says the industry is also scrambling to contain rising merchandise theft along key routes. The activity doubled during the second half of 2015 with thread, synthetic and cotton fibres, baby clothing and sweaters registering the most significant increases, he adds.
The increase could stem from difficulties faced by organised crime rings in obtaining the goods to supply black market makers through the reference price system operating in the border.
Mexican brands such as lingerie makers Vicky Form and Ilusion, and sportswear label Avante have had nine trucks robbed in the past 12 months, a sharp increase from prior years, says an industry observer close to the firms.
"If that's happening with just three companies, I wonder what we would hear if we asked the rest," he says.
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