Industrial machinery and machine tools are highly related sectors. Industrial machinery includes farm, packaging, construction, mining, oil and gas field, textile, paper, printing, and food products machinery, as well as refrigeration and heating equipment. Machine tools includes metal-working machine tools, wood-working machine tools, and machine tools for working other hard materials, including minerals, ceramics, concrete, glass, hard rubber and hard plastic.

Mexico's need to modernize its industry has directly resulted in its demand for foreign machining and industrial equipment. Improvement in Mexico's highway system, modernizing of its ports, and the expansion of its farms and their becoming more mechanized has increased demand for construction and farming machinery. Additionally, the need for more packaged and refrigerated food in Mexico has increased as its consumer market grows.

During the period 1989 to 1991, U.S. exports of industrial machinery to Mexico rose by 71%; exports of construction machinery rose by 165%; and exports of gas and oil machinery rose by more than 85%. Also during the same period, U. S. exports of machine tools rose 14% to $185 million worth.

In 1991 Mexico became one of the fastest growing markets in the world for U.S. exports of construction and mining machinery. The United States currently supplies Mexico with more than two-thirds of its imports of farm, construction, and mining machinery, and air conditioning and refrigeration equipment. In 1991 alone, Mexican consumption of metal-working machine tools was $255 million whereas domestic production was $15 million. This huge disparity not only reflects Mexico's inability to produce such capital-intensive goods for itself, but its ardent need to import them in order to industrialize.

Selling Machine Tools in Mexico

To begin introducing machine tools in Mexico, new-to-market U.S. companies must have a service-oriented, long term commitment to the market. The traditional way to sell machine tools is through representatives and distributors. Large end-users sometimes buy directly from manufacturers.

New- to-market companies may wish to participate in trade shows, prepare brochures and promotional materials in Spanish, contact companies directly with sales agents, if possible in Spanish, join local associations and chambers of commerce, put on technical seminars to inform manufacturers about new technologies and innovations, set up a representative office in Mexico and/or establish a joint venture with a reputable Mexican firm. Financing, price, quality and delivery times are extremely important selling factors.

The demand for imports comes from manufacturers in the automotive, steel, railroad, hand tool, electric consumer goods and other industries. These industries are heavily dependent on imports of metal cutting and metal forming machine tools. The end-user market includes some 140,000 manufacturing industries and metal working shops. The majority of end-users are small metal working shops that use 15 to 20 year-old machine tools and machinery. Approximately 200 companies considered medium and large end-users have modern machine tools, often custom made outside of Mexico.

A great majority of end-users are located in Aguascalientes, Chihuahua, Celaya, Guaymas, Guadalajara, Hermosillo, Lazaro Cardenas, Leon, Mexico City, Monclova, Monterrey, Puebla, Queretaro, Saltillo, San Luis Potosi, Santiago Tianquistenco, Tampico, Toluca, and Veracruz.

Mexican importers often prefer 60 to 90 day credit terms. However, large companies that order custom-made machine tools usually pay 20% of the total value when placing the order, 30% when the machine is completed and 50% when the machine is delivered and tested. High value sales usually are made through letters of credit. Note that the supplier's reliability is a priority over price.

Mexican Tariffs and Non-Tariff Barriers

Prior to Nafta's implementation, Mexico's effective trade-weighted duties on U.S. industrial products ranged from 10.1% for textile machinery, to 15% for construction machinery, to 16.7% for refrigeration and heating equipment. According to the Petroleum Equipment Suppliers Association, U.S. companies that did not have a manufacturing facility in Mexico faced stiff obstacles in doing business there. Thus, prior to Nafta, most Mexican imported oil field machinery was assessed a duty of 20%. Mexican tariffs on U.S. machine tools averaged 13%.

For the majority of U.S. machine tool exports to Mexico, the effective rate of duty was 13%. However, for products such as the metal-working machines, most important for manufacturing operations, the effective rate of duty was 17%. The majority of machine tools subject to the higher tariffs were concentrated in a few categories of metal-cutting machine tools (horizontal lathes and certain drill presses, and numerically-controlled multistation transfer machines) and in a wide range of metal-forming machine tools (machines specifically designed for punching, stamping, bending, shearing, and pressing). These machines are extremely important for the further development of Mexican manufacturing. To illustrate, these metal-working tools accounted for 83% of U.S. exports of machine tools to Mexico in 1991. Mexico's need for such tools and equipment is essential for its continued industrialization.

Rules of Origin for Industrial Machinery and Machine Tools

North American materials used to build machinery constructed in North American will undoubtedly qualify for preferential Nafta treatment. Industrial machinery may qualify if 1) the value content is satisfied, or 2) the non-North American materials are not classified in a tariff provision that specifically provides for parts of machinery.

In general, parts of industrial equipment would qualify under the rules of origin if they are sufficiently processed in North America -- requiring a change in the tariff classification from one heading to another. Note that other requirements and exceptions apply to various parts and subassemblies. Compared with the rules or origin established in the United States-Canada Free Trade Agreement, Nafta rules applicable to industrial machinery are similar, but more stringent with regard to value content.

For machine tools, the rules of origin are generally more stringent than the rules for other industries. Nafta preferential treatment is limited to those that contain originating parts. For example, machine tools which incorporate non-North American electric motors, pumps, electrical control panels, lasers, and major structural elements from which machine tools are built will be denied Nafta treatment. Additionally, a subassembly for a machine tool containing non-North American parts will not be considered a North American product and therefore denied preferential access to the United States, Mexico or Canada. It should be noted, however, that exceptions to the rules exist which allow goods to qualify for preferential treatment even though they do not meet Nafta's origin requirements.

Nafta's Impact on the U.S. and Mexican Industrial Machinery and Machine Tool Sectors

Under Nafta, almost all U.S. duties on Mexican imports of industrial machinery were eliminated immediately on January 1, 1994. Due to the fact that U.S. trade barriers on these goods were minimal, their removal under Nafta is expected to have little impact on U.S. imports.

Upon implementation, Nafta eliminated duties on 54% of Mexican tariff classifications on U.S. industrial machinery exports. This included eliminating duties on approximately 80% of U.S. textile, paper making, printing, and farm machinery, and 85% of food products machinery. Additionally, approximately 17 to 33% of U.S. exports of mining, oil and gas field machinery, and refrigeration and heating equipment became duty-free immediately. Mexican duties on remaining goods will be eliminating over a 10 year period.

U.S. exports of construction machinery, farm and food product's machinery, and refrigeration equipment are anticipated to accelerate under Nafta. According the U.S. International Trade Commission, U.S. exports of industrial machinery to Mexico are expected to increase by 6% in the short term and 10% in the long term.

U.S. exports of oil and gas machinery and other goods are expected to increase through Nafta-secured access to contracts awarded by Pemex, Mexico's state-owned oil company. Based on a U.S. industry source, an estimated $1 billion to $2 billion of potential contracts exists.

For machine tools, Nafta's implementation will immediately allow 76% of Mexican imports to enter duty-free. Tariffs on the remaining 24%, which is currently assessed duties up to 20%, will be phased out over a five-year period. This category is comprised mostly of the metal-cutting and metal-forming machines mentioned earlier. For the U.S. and Canada, all qualifying imports from Mexico were immediately eligible on January 1, 1994, to enter duty-free.

The U.S. International Trade Commission has forecasted that under Nafta, U.S. exports to Mexico of machine tools will rise 9% in the short term and 11% in the longer term. These estimates are considered very conservative, and likely to be higher. As a result of increased exports, U.S. employment in these sectors will rise.

This article appeared in The Exporter, September 1994.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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