Tax & Accounting Blog

The Future of Industrial Development Programs in Mexico

Blog, Global Trade, ONESOURCE October 13, 2017

Despite the fact that Mexico has achieved its insertion as an important player in the international trade scene; there are internal organizations that consider there still to be many obstacles and laws that are impeding a more equitable development; laws that are hindering a sustained growth for Mexican industries.

One of these organizations is the Federal Economic Competition Commission (COFECE), who carried out an investigation around fair trading in Mexico last June. COFECE issued a document with a series of recommendations to the Mexican government to eliminate some regulations that were, in their opinion, overprotecting some of the sectors of the industry and prohibiting free competitiveness.

COFECE proposed a 180° turn in order to rethink the way Mexico protects their industries with the ultimate goal that this will open the economy towards free and fair trade.

One of the suggestions made by the organization is to eradicate the Program of Sectorial Promotion (PROSEC). PROSEC allows Mexican companies from certain sectors (such as textiles, footwear, electronics, automotive, toys, etc.) to import raw materials under a preferential Duty Rate. This preferential duty rate is geared toward those countries where Mexico does not have signed Free Trade Agreements (FTA), in order to help foster national manufacturing.

This might sound crazy, but after reading the justification from the COFECE about this proposition, we can understand where it comes from.

The Commission suggests that by making it easy for national manufacturers to import goods from countries for which Mexico does not have signed FTA’s (especially Asian countries), the Mexican government is creating a trade deviation, leading companies to use FTA’s less and less. Mexico currently has in place 12 Free Trade Agreements with 46 nations, plus, 42 agreements for investment promotion and protection which include 33 countries as well as 9 agreements in the Latin American Association for Integration[1]

This coincides with the recent statements made by the U.S. Secretary of Commerce, Wilbur Ross, who said that the products imported by the U.S. from Mexico and Canada have less and less American content.

However, even though it is believed that getting rid of PROSEC would be a bold move towards free and fair trade; it is not an easy decision to take. As the industry is highly integrated with Asian markets at a supply chain level, it would be difficult for Mexican manufacturers to cut off their relations with their overseas suppliers.

In order to do so, Mexican companies would need to guarantee supplying capacity from suppliers in countries with existing FTAs. Adjustments to such agreements are needed in order to ensure competitive conditions for the national industry.

An example of such adjustments to the FTAs could possibly be happening right now in the NAFTA renegotiations with the U.S. and a twist on the beginning of PROSEC as an example; we can see a suggestion made by the International Chamber of Commerce (ICC) to remove Article 303 from the text of the Agreement. In fact, it was the implementation of this article in 2001 that created the PROSEC program.

It is safe to conclude that the future of the PROSEC and other industrial development programs will depend largely on the modernization of current FTA networks that Mexico currently has.

However, even if the current efforts to modernize existing FTAs don’t work out, Mexico will need to continue seeking the simplification of trade.

[1] Since Mexico began liberalizing trade in the early 1990s, its trade with the world has risen rapidly, with exports increasing more rapidly than imports. Mexico’s exports to all countries increased 515% between 1994 and 2016, from $60.8 billion to $373.9 billion. https://fas.org/sgp/crs/row/R40784.pdf