While U.S. and other companies manufacture in Mexico to save money, it is not wise to skimp on customs compliance, one expert asserts.
Jim Clarke is vice president of new business development for FOCUS Business Solutions, Inc., a Michigan-based firm assisting companies in more effectively handling their import processes.
“I have been working 18 years in this program and see how many companies struggle in this area,” Clarke notes. “Resources and expertise – or knowledge they once had to ensure compliance with NAFTA and other free-trade agreement requirements – are no longer at the company,” he adds. “In such instances, companies that manufacture in Mexico need customs assistance.”
Companies manufacturing in Mexico routinely moving items across the border in both directions usually operate smoothly when they have professional assistance in navigating customs, Clarke observes. But it is not uncommon for companies without guidance to issue incorrect tariff classifications for their manufactured goods, or to claim an item qualifies for NAFTA status without proper substantiation. If values of shipped goods are stated incorrectly or other errant information is supplied, it starts to raise red flags with customs personnel.
Most often, audits are a product of recurring errors, Clarke says.
“Usually there is some ability to understand that an investigation is under way; formal information requests will be sent to a company,” he notes. “If a knowledgeable customs specialist is not on staff, sometimes (audit notices) can sit on a desk within the company for a prolonged period of time. The customs service will get annoyed. When this happens, they begin to pay close attention. Sometimes this is how the investigation ball gets rolling.”
Audit notification can be anywhere between two months’ and two years’ lead time, Clarke says. Businesses receiving these notices need to be prepared “not just for the internal review process, but also in order to determine the time commitment that it may take for the customs department (operations), and senior management to prepare.”
“If errors and omissions are found and understood, there is an opportunity in each country to file a voluntary disclosure in which they will formally communicate their findings to customs prior to the audit,” he adds. “Making customs aware of such things may help to avoid a fine and prevent the loss of revenue.”
Even if a company’s goods qualify for duty-free treatment, companies still can be penalized if they are not adhering to the letter of the law.
“This is an area where a lot of companies don’t understand that they have to make this work,” he says. “There is confusion as to why a company should spend time doing such a declaration if, in fact, payment of customs duties is not involved. But customs compliance can be managed proactively with assistance from practitioners who understand these issues. This does not need to be an area of great stress and concern.”
Understanding and managing the risks seems worth the rewards. A recent AlixPartners survey named Mexico as the least-expensive place outside of the States to manufacture for the U.S. market. Boston Consulting Group estimates China’s average manufacturing wage now surpasses Mexico’s when productivity and proximity are factors. (Mexican workers typically produce more per hour than their Chinese counterparts, and close proximity allows for faster shipping and lower costs to American consumers.) And moving business to Mexico from China also is good for America, as U.S. companies earn 37 cents for every dollar Mexico exports – due to Mexican companies’ dependence on U.S.-manufactured parts.