Legal Implications Expansion into Mexico

Memorandum
In Brief
It is important to note, from the onset, that there are many commercial benefits that our company could reap by expanding internationally. Thus, the expansion into Mexico is not only timely, but also well considered. However, in engaging in the said expansion, the company ought to be aware of the pertinent aspects of both the U.S. and Mexican law. It is with this in mind that this memo highlights the most likely compliance issues or concerns in as far as the various aspects of law and ethics specific to Mexico are concerned.
Pertinent Aspects of U.S. Law
There are a number of laws and certain legal provisions specific to our expansion into Mexico. Key amongst these include, but they are not limited to; USMCA (which replaced NAFTA a month ago), Customs and Border Protection (CBP) laws, and laws relating to engagement in corrupt practices and money laundering.
For a long time, 26 years to be specific, businesses have had to comply with the specific requirements of the North American Free Trade Agreement (NAFTA). However, beginning 1st of July this year, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). Failure to comply with the various provisions of the USMCA could have a negative impact on our operations as well as reputation. Towards this end, it would be prudent on our part to ensure that we are aware of (and comply with) not only the rules of origin, but also prepare the company for the relevant audits and ensure that our compliance programs are modified accordingly. There are, however, various obligations of NAFTA that will survive under the new dispensation. Examples of the various provisions of the USMCA that we should be aware of include customs administration as well as trade facilitation, rules of origin and origin procedures, labor, intellectual property, investment, etc. For instance, with regard to labor, employers have specific obligations especially as it relates to discrimination and coercion avoidance. Further, when it comes to the certification of origin, we should have templates of certification of origin.
With regard to custom and border protection, it is important to note that the company ought to be aware of the various laws enforced by CBP on behalf of the government’s various agencies. For instance, there are specific restrictions on goods that must not be permitted to find their way into the US. Some of the said items include, but they are not limited to, those items likely to threaten public safety or occasion harm to the nation’s flora and fauna. More specifically, some of the CBP policies that we ought to be aware of relate to; the flow of various cargo via the various POEs of the country and the enforcement of custom as well as trade laws.
Yet another law we ought to be aware of is the U.S. Foreign Corrupt Practices Act. This is particularly important given that concerns have been raised over the level of corruption in Mexico. The law was enacted with an aim of “making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business” (Department of Justice, 2020). We also ought to be aware of the money laundering laws in place at present. This is a key consideration as it would ordinarily relate to the transfer of financial assets within the two countries. For instance, we would be expected to take all precautions to ensure that suspicious financial transactions are reported. Some of the rules still in effect include the “know your customer” regulations.
Yet another aspect of law that would be of relevance on this front is the World Trade Organization regulations. In basic terms, these are roles that seek to govern global/international trade which our company will essentially be engaging in by virtue of expanding to Mexico. It is important to note that thanks to the various provisions of WTO, the company would amongst other things be protected from various forms of protectionism that the Mexican government could undertake via the utilization of technical standards or regulations. WTO regulations also protect the company from treatment deemed discriminatory. The key areas of greatest relevance in as far as WTO regulations are concerned are Trade-Related Aspects of Intellectual Property Rights (TRIPS), General Agreement on Trade in Services (GATS), and the General Agreement on Tariffs and Trade (GATT) (WTO, 2020).
We also ought to be aware of, and take into consideration, key employee rights in as far as our conduct of business in Mexico is concerned. Of great interest on this front would be Title VII. Towards this end, the U.S. Equal Employment Opportunity Commission – EEOC (2020), points out that “U.S. citizens who are employed outside the U.S. by a U.S. employer – or a foreign company controlled by an U.S. employer – are protected by Title VII…” It should, however, be noted that those persons who are not citizens of the U.S. are not advanced the said protections. It therefore means that Title VII would apply to U.S. citizens working in Mexico but would not apply to any non-U.S. citizens that we hire in the course of our engagement in the said country.
In the course of doing business, the company could also want to protect its inventions and creations. To protect ourselves against copycats, we ought to be well versed on the relevant intellectual property laws. This is more so the case as it relates to copyright, trademark, as well as patents. The U.S. Customs and Border Protection office would come in handy in our efforts to record copyrights as well as trademarks registered within the U.S. Already, there is in place a U.S. and Mexico trade agreement relating to IP protection as initiated by the WTO. It would, thus help, to be familiar with the so called Trade-Related Aspects of Intellectual Property Rights (TRIPS).
The Sherman Act would also govern our operations in Mexico. This is particularly the case when it comes to undertakings likely to result in the restriction of competition as well as commerce in the marketplace. Specifically, in as far international operations (specifically trade with Mexico) are concerned, it would help to be aware of the specific provisions of Section 1 of the Act, 15 U.S.C. 1 as well as Section 2 of the Act, 15 U.S.C. 2. Last, but not least, our conduct of business in Mexico would also be governed by the U.S. Export Administration Regulations. This is particularly the case given that the advancement of our interests into Mexico could involve the transfer of technology, software, or even certain products from the U.S.
Legal Implications
From a legal perspective, the decision to launch operations in Mexico has upsides and downsides. To begin with it should be noted that ‘employment at will’ is not recognized in Mexico (Gomez, 2018). In basic terms, employment at will means that “employer does not need good cause to fire” (Gomez, 2018, p. 173). It therefore follows that in establishing operations in Mexico, our company will be losing on this front. For instance, it would be challenging for us to fire workers who perform poorly at the workplace. This is more so the case given that we cannot terminate or end the employment relationship without giving an explanation – which is in some cases potentially litigious because ‘just cause’ is subject to diverse interpretations.
We could, however, benefit from a favorable tax regime in Mexico. For instance, thanks to FIBRA E, there are quite a number of benefits that the company could gain access to in as far as taxation is concerned. For instance, according to Deloitte (2019), “dividends from operating companies to shareholders are not subject to certain provisions in the Income Tax Law (ITL) and can be paid free of Mexican dividend withholding tax” (05). Further, as an operating enterprise, we would not be obligated to make income tax settlements (provisional) on a monthly basis (Deloitte, 05).
In as far as foreign investment is concerned, Mexico does not have sweeping limitations or restrictions relating to capital repatriation or dividends remittance. This is definitely of great relevance to us. We could also seek to set up operations in special economic zones so as to access a wide range of benefits in relation to regulation, customs duty, and tax. The said special zones were created in 2016 in an attempt to attract investment and alleviate poverty, amongst other things, within the identified regions – which were categorized as underdeveloped. For instance, imports into the identified zones attract a 0% value added tax rate. It should also be noted that there is a tax exemption for export goods from the special economic zones.
Thanks to NAFTA, our enterprise would be having enhanced rights as it ventures into Mexico. This is more so the case as it relates to the elimination of investment as well as trade barriers between Mexico and the US. As a consequence, we are likely to reap the benefits of minimized cost of commerce. Further, it should be noted that given that Title VII advances protection to U.S. citizens in our employ in Mexico, we will be able to maintain human resources best practices and, thus, motivate our skilled U.S. employees who accept to relocate. Lastly, the fact that the U.S. and Mexico have in place a trade agreement relating to IP protection is a great incentive in as far as our innovation efforts are concerned. Thanks to the IP chapter in the USMCA, we can deploy IP investments to further promote our competitiveness in the marketplace.
To ensure that we are in full compliance with Mexican laws, we should consider hiring a Mexican law firm to help us navigate the legal maze. To a large extent, this could be an additional cost on our part.
Ethical Implications
Although it makes great economic sense to expand into Mexico, we ought to be alive to the ethical implications of such a move. This is more so the case given that as a company, we are not driven by profits alone but by the impact we have on the community as well. To begin with, according to the Human Rights Watch (2019), human rights violations are rampant in Mexico. This is despite the high hopes for change following the election of the incumbent president. Indeed, in the words of Human Rights Watch, “human rights violations committed by security forces—including torture, enforced disappearances, and abuses against migrants—have continued under the administration of President Andrés Manuel López Obrador, who took office in December 2018.” Would our expansion into Mexico be interpreted to mean that we are in support of the goings on in the country with regard to lack of respect to basic human rights? Would we appear to be in support of a regime that brutalizes its own people? Despite these questions, we ought to also consider whether there is something that we can do upon setting up operations in the country to inform change.
Yet another ethical concern we ought to be aware of relates to corruption. According to Graycar (2020), one of the main concerns that foreign corporations have to contend with upon moving into Mexico is corruption. In the words of the authors, “bribery is widespread in the country’s judiciary and police… business registration processes, including getting construction permits and licenses, are negatively influenced by corruption” (Graycar, 2020). This is a serious concern. It therefore follows that some of the questions we ought to ask ourselves in this case is whether we shall be required to, at any point, make any payment so as to get things done. As I have pointed out elsewhere in this text, being a US business, we are bound by the U.S. Foreign Corrupt Practices Act – effectively meaning that the company cannot pay to access favors that it would not have otherwise accessed were it not for the said payments.
There are also a number of political factors that ought to be taken into consideration in the establishment of operations in Mexico. According to the U.S. Department of State (2019), “U.S. relations with Mexico are strong and vital.” It is, however, important to note that since his election, President Trump has largely been on the warpath against Mexico especially when it comes to immigration policy. It is also instructive to note that the President has adopted an America first stance – in which case businesses are encouraged to invest more within the country. With Trump constantly citing better prospects for businesses in America and linking continued investments within the borders to job creation, the message has resonated well with the American public. It therefore follows that our forays into Mexico might not be welcome. To a large extent, our company could be branded anti-American. Thus, we need to come up with strategies to counter any backlash.
Case Studies
There are numerous US companies operating in Mexico at present. These include, but they are not limited to, Nestle, Volkswagen, and Ford. All the listed companies had to comply with US laws in relation to starting operations in Mexico. For instance, when it comes to Ford, the automaker expanded its operations into the country under NAFTA. It was able to take advantage of the ‘maquiladora’ program and import raw materials duty-free. It also appears that the company has complied with the U.S. Foreign Corrupt Practices Act. This is more so the case given that there have been no reports of underhand business dealings on the part of the company in an attempt to skew decisions in its favor. The companies have sought to address compliance issues by embracing change and adapting internal processes. For instance, following the rollout of the USMCA, Stuart (2018) pointed out that production costs would most likely raise thanks to various provisions of the agreement. According to the Struat, however, Ford embraced USMCA from the onset by focusing on areas that would be aided by the law and how it could benefit. In its forays into Mexico, Nestle actively took advantage of the shelter programs that smoothed its entry into the country. Thanks to NAFTA, the company has also benefited from favorable national tariff schedules. Volkswagen has scaled up its operations in Mexico since the year 2013. We could learn a thing or two about how VW has been able to navigate the complex political equation so far – amid Trump’s America first policies.
References
Deloitte (2019). 1.0 Investment Climate. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-csg-a-guide-to-investing-in-mexico-2019-en-190428.pdf
Department of Justice (2020). Foreign Corrupt Practices Act. Retrieved from https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act
Gomez, O.D. (2018). Labour and Employment Compliance in Mexico. New York, NY: Wolters Kluwer.
Graycar, A. (2020). Handbook on Corruption, Ethics and Integrity in Public Administration. Northampton, MA: Edward Elgar Publishing.
Human Rights Watch (2020). Mexico Events of 2019. Retrieved from https://www.hrw.org/world-report/2020/country-chapters/mexico
Stuart, O. (2018). How Will the Shift from NAFTA to USMCA Affect the Auto Industry? Retrieved from https://www.industryweek.com/the-economy/article/22026500/how-will-the-shift-from-nafta-to-usmca-affect-the-auto-industry
U.S. Equal Employment Opportunity Commission – EEOC (2020). Employee Rights When Working for Multinational Employers. Retrieved from https://www.eeoc.gov/laws/guidance/employee-rights-when-working-multinational-employers
U.S. Department of State (2019). U.S. Relations with Mexico. Retrieved from https://www.state.gov/u-s-relations-with-mexico/
WTO (2020). Understanding the WTO: The Agreements. Retrieved from https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm