Mexico curtails duty-free fulfillment option for apparel, textile importers

Originally published December 26, 2024 in the Journal of Commerce: https://www.joc.com/article/mexico-curtails-duty-free-fulfillment-option-for-apparel-textile-importers-5911557

Eric Johnson, Senior Technology Editor | Dec 26, 2024 at 2:38 PM EST

Mexico has ended a program that enabled US apparel and textile importers to avoid paying duties while using Mexican warehouses as fulfillment hubs for low-cost finished products sourced outside Mexico that are sent directly to US consumers.

The action, announced last week, is likely to result in US e-commerce brands shifting their fulfillment back to the US or switching to fulfillment providers in Asia, sources have told the Journal of Commerce. Neither option comes without cost, or risk.

“How impactful would this be to US-based e-commerce as whole?” said Matthew Hertz, founder and CEO of Third Person, a platform that helps e-commerce brands find and connect with fulfillment partners. “There will be companies that suffer.”

Using US-based third-party logistics providers (3PLs) that fulfill from US locations translates to higher labor costs, which would be somewhat offset by shorter delivery times to customers, Hertz said.

Switching to fulfill directly from Asia, while cost-effective for US brands sourcing in Asia, would subject importers to the risk of further regulatory upheaval if a US program that allows single shipments of $800 or less per day to be imported to the US duty-free is changed in 2025.

The Mexican decree, unveiled Dec. 19 by President Claudia Sheinbaum, essentially stops the use, for whole categories of apparel and textiles, of Mexico’s so-called IMMEX program, which allows companies to defer duties on the import of raw materials and components used in the production of goods destined for export.

Mexico-focused fulfillment 3PLs will also be affected, as their business has effectively been wiped away by the changes.

Sheinbaum’s action also increased tariffs to 35% — up from 20% to 25% — on 121 apparel products and textiles. Another category of textiles will see tariff levels increase to 15% from the current 10%.

“These increases aim to level the playing field for Mexican industries facing competition from lower-priced imports, particularly from countries without free trade agreements with Mexico, and they will remain in effect until April 23, 2026,” trade law firm Sandler, Travis, & Rosenberg said in a note to clients Tuesday.

The e-commerce import volumes affected by the decree will now be up for grabs among more diversified fulfillment-focused 3PLs that aren’t overly exposed to Mexico, as well as global 3PLs that have fulfillment services for e-commerce in the US.

”We’ve been talking about this forever,” Hertz said of the ability of US e-commerce apparel and textiles brands to import to the US via Mexico to avoid duties. “It’s a loophole. Loopholes are good until they’re not available anymore.”

He said he’s already hearing of 3PLs offering relief on transition costs for e-commerce brands that will need to move inventory out of Mexico. His conservative estimate of the value of 3PL services now in play to move back to the US is $10 billion.

“That’s a lot of absorb and it’s going to happen quickly,” Hertz said.

Duty-free uncertainty

Sheinbaum’s decree comes amid a changing landscape for so-called US Section 321 shipments, also known as “de minimis.” The Biden administration in September announced it would be ending duty-free treatment on all shipments that would ordinarily be subject to 25% Section 301 tariffs on Chinese imports, tariffs originally implemented during the first Trump administration.

While that rule would wipe away the $800 duty-free threshold on most shipments from China, there has yet to be a timeline for implementation of that rule.

“As of right now the timeline and exact implementation remain uncertain, but most close to the situation have understood that brands probably had [until] April to make the transition,” Flexport CEO Ryan Petersen wrote in a comment on X Monday. “Most brands were already planning an exit from Mexican fulfillment centers and reshoring that work as soon as the details become more clear.”

Contact Eric Johnson at eric.johnson@spglobal.com.

Journal of Commerce Research Analyst Cathy Morrow Roberson contributed to this report.