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What Is The Maquiladora Industry Prosec Program?

By Expert Author: Alan Russell

Before the NAFTA agreement came into effect, Mexico’s maquiladora industry rules once allowed inputs from virtually any country to be duty free. Regardless of their country of origin, materials and components used in the manufacturing of end products for export were imported completely duty-free, since the materials were considered to be in Mexico only temporarily (the only condition on this tariff waiver being that the materials be exported out of Mexico before their export deadline).

However, things changed with NAFTA, to establish a similar system, but only among member nations. Without restricting tariff waivers to member nations only, NAFTA members might be able to import their maquiladora industry materials from non-members, which would undergo assembly and then possibly enter the US or other member nations duty free. In other words, NAFTA necessarily excluded from non-members the privileges its members enjoyed. Otherwise, there would be no incentive for signers of the North American Free Trade Agreement to use materials from other NAFTA members.

In particular, Article 303 of the NAFTA treaty required that non-NAFTA materials imported into a NAFTA country into a duty-deferral program be subject to the same duty rates that they would ordinarily be subject to, if they were permanently imported into the NAFTA country. Previously accustomed to manufacturing products in Mexico from duty-free inputs, the maquiladora industry would have to raise tariff rates and the price of the finished goods for export in order to account for these materials being subject to the duties faced by materials imported into Mexico permanently. Since the standard tariffs for inputs have been between 15% and 25%, the maquiladora industry had to find a work-around.

The answer came in the form of the Promotional Sector Program or PROSEC. A PROSEC was created for each of several industries vital to the Mexican manufacturing industry, including electronics, automotive, aerospace, and textiles. Each PROSEC has a list of HTS classifications that are covered by the program. In turn, the usual tariffs these industries would be subject to in importing materials without any sort of waiver had been drastically lowered, or even eliminated. This way, the crisis of a spike in cost for end products using inputs from non-member nations was averted. Non-member nations may not be able to get their duties waived, but the duties they now face are either completely gone or reduced below 5% as long as the materials can be found under the specific HTS classifications in their industry’s PROSEC.

Still, not all HTS classifications that a maquiladora industry plannt may use are listed in the PROSEC for their industry, but there are other options in that scenario. For those HTS classifications not in the PROSEC list and thus face the standard duty, a maquiladora may still be given a special status under Mexico’s “Regla Octava” or “Rule 8,” which may grant a 0% duty. Maquiladoras can apply for this preferred status by petitioning the Mexican government. If the Mexican government finds the Mexican national supply, availability, and level of quality of the specific material to be lacking or unsatifactory, their potential 15+% tariff would be reduced to a 0% duty rate.

K. Alan Russell, President and C.E.O. of the Tecma Group of Companies. manufacturing in Mexico, Mexico manufacturer, Mexico supply chain

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