U.S. FIRMS BRACING FOR MEXICO DUTY RISE

Byline: Jim Ostroff

WASHINGTON — U.S.-based apparel and retail firms are preparing for major operational changes in Mexico when it imposes steeply higher import duties — the latest in a series of setbacks visited upon the companies doing business there.
Although two weeks have passed since Mexican President Ernesto Zedillo decreed on Feb. 28 that import duties for apparel, footwear and leather accessories would rise from 20 percent to between 35 and 50 percent, business officials there report the new tariffs are yet to be published. These changes would apply only to imports from nations with which Mexico does not have a free-trade agreement.
A Washington-based trade analyst, who asked not to be identified, said Mexico’s delay in implementing the higher duties are due to flak “it is receiving from the Europeans and the Japanese.” The analyst said the higher duties likely would take effect soon, though, adding this, coupled with the peso devaluation, negates the great advantage U.S. retailers had with their extensive global sourcing networks.
Consequently, the analyst said several U.S.-based retailers operating in Mexico are at a minimum “making contingency plans” to reduce Far Eastern sourced apparel and footwear and substitute U.S.- or Mexican-made products where possible.
Over the next few months, Levi Strauss de MAxico — the Mexican arm of the U.S. jeans giant and one of the largest apparel operations in Mexico — believes it has little choice but to pay higher import costs.
“While this is not an attractive prospect, if we need to do this to meet our product requirements for this market, we will,” said Yvonne Hall, general manager of the Mexico City-based firm. “But certainly, these higher duties, coupled with the peso’s 40 percent devaluation, are a powerful incentive for us to realign our sourcing over the next 12 months…,” Hall said in a telephone interview.
While Levi de MAxico sources virtually all shirts from Pacific Rim nations, she said 90 percent of the Levi’s jeans it sells in Mexico are made in the U.S. Jeans the firm manufacturers in Mexico are for export only, she said. Levi’s currently pays — under the North American Free Trade Agreement’s five-year phaseout of tariffs on denim apparel originating within the continent — a 12.5 percent duty on denim apparel imported from the U.S. The same goods made elsewhere are dutiable at 20 percent until the Zedillo decree takes effect.
Now, Hall said, Levi’s is looking to source jeans in Mexico for sale there, too.
“There are many entrepreneurs here desirous of expanding their business, but for us, not only do we need to increase product production, but at the same time insure they meet Levi’s standards for sewing and finishing,” she said.
A large-scale sourcing shift to the U.S. is not likely, Hall said, noting, “There is a large and knowledgeable work force in the U.S., but frankly, Mexico’s devaluation has made the U.S. a very difficult trading partner for Levi de MAxico, because all of our bills are paid in dollars.”
Beyond the one-year time frame, Hall said Levi de Mexico’s sourcing realignment may include increased sourcing from Latin American nation’s that have free-trade pacts with Mexico: Costa Rica, Colombia, Chile, Venezuela and Bolivia.
Meanwhile, Mexico’s decision last fall to require all merchandise imported there to bear original certificates of origin has not been a problem for Levi de MAxico, since it imports Far Eastern-made apparel directly to Mexico, rather than first shipping it to U.S. warehouses, she said. U.S.-based retailers operating in Mexico continue to push the government to modify last fall’s certificate ruling.
Robert Hall, a National Retail Federation vice president who has spearheaded several retailer trips to Mexico City on the certificate issue, said the higher import levies “are another major problem for companies trying to do business in Mexico.”
“This is a protectionist move that at least violates the spirit of the GATT accord,” he said.
Hall, who is not related to Levi’s Hall, added, “with the higher import duties, Mexico has dropped both shoes, adding a tariff barrier to a non-tariff barrier.”
Levi’s Hall further noted that with the general economic deterioration within the country, other headaches have developed.
“In the past two months, hijackings have been a continuing problem for us,” she said; more than 100,000 pairs of jeans have been stolen.
Nonetheless, Hall asserted Levi’s retains its commitment to the Mexican market. “We will still be here when the dust settles,” she said, but made it clear it will not sit permanently still for the duty hikes.
“Over a period of time, if you ask whether it is a good business decision to pay 50 percent duties, I’ll say no,” she said. “We have to look elsewhere.”
— Fairchild News Service

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