Know thy broker

By choosing the right customs broker and taking advantage of new Mexican laws, shippers may be able to save time and money on shipments south of the border.

By James R. Giermanski -- Logistics Management, 2/1/2000

Most people would agree that the North American Free Trade Agreement (NAFTA) has increased trade tremendously between the United States and Mexico. Most people would also agree that NAFTA has done nothing to reduce the cost and time it takes for freight to cross the border into Mexico.

By contrast, the treaty has facilitated crossings into and out of Canada. Chapter 16 of NAFTA says that a U.S. customs broker may enter Canada and forward freight back into the United States, and a Canadian customs broker may enter the United States and forward freight back into Canada--the kind of reciprocity NAFTA is supposed to promote. But Mexico is different. Not only is there no mention of reciprocity between Mexico and the United States in this regard, but Volume Two of NAFTA, which contains "reservations" to the agreement, makes it clear that the southern border will remain under the control of Mexican customs brokers.

The essence of the brokers' chokehold on the southern border is their practice of preventing the direct entry of cargo into Mexico. All cargo moving overland to Mexico must stop on the U.S. side of the border and be placed into the custody of a freight forwarder, which is either a Mexican customs broker operating in the United States as a freight forwarder or the broker's representative. The cargo is then counted, classified with the appropriate tariff number, checked for discrepancies, and when necessary, unloaded, stored, and reloaded. The Mexican broker or its representative prepares the required entry documents, and once the broker receives its fee for this service, it allows the cargo to enter Mexico. The forwarder then hires a U.S. drayage or transfer motor carrier (often owned by the Mexican customs broker or its forwarder affiliate) to pick up the cargo and move it across the border into Mexico.

This system is likely to be with us for a long time, but there are four ways shippers and consignees can minimize the extra time and cost incurred by Mexican brokers, their forwarders, and their drayage companies. Three are contained in the Mexican customs law--one is so new, in fact, that many Mexican customs brokers do not yet know of its existence. These are Article 98, "Inspected at Origin"; Article 37, "Consolidated Pedimentos"; and a new hybrid of Article 135, "Recinto Fiscalizado" (Foreign Trade Zone). The fourth method involves limiting the rights of Mexican subsidiaries of U.S. shippers to select Mexican customs brokers.

Article 98

Article 98 of the Mexican customs law offers great advantages, especially for shippers that have their own operations in Mexico. The article allows shippers that export their own products to their Mexican subsidiaries to remove the Mexican broker from the import transaction.

There are several important elements shippers must understand about Article 98. First, the Mexican importer must be granted permission to use Article 98 by the Mexican customs authorities. Second, Article 98 requires the U.S shipper to supply its Mexican subsidiary with all of the information that would normally be needed by the Mexican customs broker or by an in-house agent (apoderado aduanal) employed by the importer to handle customs matters. That information is contained in the primary import document, the pedimento de importación. In this scenario, the Mexican broker or agent simply passes on the information supplied by the shipper to the Mexican customs authorities. The Mexican importer, rather than the Mexican broker or the apoderado, assumes responsibility for the accuracy and consistency of the import information relative to the cargo that is actually shipped.

One of Article 98's most important benefits is that the importer may pay duties within 30 days from the time of importation. Every January, the importer must calculate and pay any duties that were omitted in the preceding year. If Mexican customs authorities find a discrepancy, the importer is obligated to pay any penalty directly to the appropriate Mexican taxing authority.

The impact of Article 98 can be significant. If the U.S. supplier provides the correct information and the Mexican importer deals with the government directly, then the standard border- crossing process can be eliminated. There is no need to incur the typical Mexican broker charges at the border. Nor is there any need for a detailed classification, unloading, loading, or forwarding charge. Because there is no need for the freight forwarder's services, there also is no need for drayage. In fact, the few companies that are using Article 98 today typically arrange for the Mexican longhaul motor carrier to pick up the cargo on the U.S. side. There, the U.S. motor carrier hands the cargo off to the Mexican longhauler. It's not surprising that U.S. shippers are not informed of this option by their Mexican brokers or by their companies' Mexican managers, who may benefit from maintaining a continuing relationship with the Mexican broker.

Article 37

Yet as beneficial as Article 98 can be to certain shippers, there is a downside to its application, says Carlos Zamudio, a well-respected Mexican customs broker in Laredo, Texas. That is, if Mexican customs authorities find a discrepancy in the shipment, they will automatically assume that the same error exists in all of the shipments.

Zamudio says there is a way to avoid that problem, but it requires assistance from a knowledgeable Mexican broker. He recommends using Article 37, "Consolidated Pedimentos." A pioneer in the use of consolidated pedimentos, Zamudio says that this provision allows importers to fix errors made by the U.S. shipper before penalties are assessed by Mexican customs.

Here's how Article 37 works. If the product entering Mexico is essentially the same every time or is easily classified in accordance with the Harmonized Tariff schedule, then each shipment does not require a separate pedimento de importación. Instead, the Mexican broker consolidates shipments each week into a single pedimento. This gives the broker sufficient time to verify that the shipment was correct when it arrived at its destination and, if not correct, make official adjustments to the import documentation before submitting it to the Mexican customs authorities.

Under Article 37, shippers can avoid cross-border drayage. Again, the U.S. carrier can deliver Mexico-bound cargo to its own terminal on the U.S. side, instead of to a freight forwarder. The Mexican longhauler then picks up the cargo on the U.S. side and moves it across the border into Mexico during off-peak hours, avoiding the long lines associated with the practice of drayage.

Using Article 37, as a result, reduces paperwork and related costs. It also reduces the risks attached to errors in shipments, making the use of Article 98 almost risk-free.

A New Foreign Trade Zone

Another new program that will help U.S. shippers is the creation of Mexico's first true customs-bonded inland multimodal port. The development, authorized last fall under Article 35, Recinto Fiscalizado (Foreign Trade Zone), is called ADNPlus. The project, now under construction, is located in Monterrey, Mexico, a three-hour drive from Laredo, Texas.

The benefits of using a facility like this are many. For example, shipments destined for ADNPlus will not require inspections or clearance at the border. Commingling of Mexican domestic and international goods will be permitted within the foreign trade zone. In addition, there will be no need to bond U.S. motor carriers' equipment that remains in the zone until its return to the United States.

Air, motor carrier, and rail services all would be located in the zone. Goods could be manipulated, allowing maquiladora-type manufacturing and warehousing of maquila components without having to pay Mexico's IVA value-added tax. Additionally, while the customs paperwork must be completed within 60 days after importation, the goods may remain in the zone indefinitely, incurring taxes only when they enter domestic commerce. Finally, all pricing and charges in the zone will be denominated in pesos at the official exchange rate prevailing at the time of payment.

The potential savings on a per-crossing basis are astounding. For instance, on a single shipment originating in Chicago and carried by truck to the zone, the shipper could save in the neighborhood of 44 hours and between $400 and $800. (For more details on this project, see the accompanying sidebar.)

Control Broker Selection

The final way to reduce the cost of crossing the border is to control the selection of the Mexican customs broker. Because the broker is the key to border-crossing costs, it is essential that the U.S. parent company be involved in the selection process.

The selection of the Mexican broker, which appropriately takes place in Mexico, can be full of risks. It is common knowledge that there can be a relationship between the Mexican affiliate and the Mexican broker. This relationship may be linked to family ties, friendship, or money. If there are benefits accruing from the Mexican broker to the affiliate's Mexican manager, the affiliate may insist that the U.S. parent accept its choice of brokers. If such is the case, then the Mexican manager is unlikely to inform the parent company about ways to avoid the unnecessary costs of the Mexican broker's services.

If a U.S. exporter has an arm's-length relationship with a Mexican importer, there is little it can do about this. But multinational companies with affiliates in Mexico could demand to participate in the selection of Mexican customs brokers. To gain further control over costs, they could ask a reputable U.S. customs broker on the southern border for advice on choosing a Mexican broker, or they could retain a U.S. customs broker to review the business practices of the Mexican broker and its forwarder. The U.S. shipper also could require audits of the Mexican broker's practices.

As we've seen in the four examples above, the key to reducing costs and minimizing the amount of time it takes to cross the border is to understand the southbound customs process and the role of the Mexican customs broker and its affiliated U.S. freight forwarder. By doing so, the U.S. shipper can influence the selection and use of brokers, which are the indispensable link to efficient crossings and reasonable charges. On the southern border, having the right broker is the bottom line.

Dr. James R. Giermanski is Regents professor at Texas A&M International University in Laredo, Texas. He has frequently written, commented, and testified on issues affecting cross-border trade with Mexico.