J.P. Morgan, the largest issuer of letters of credit in the United States, has seen resurgence in the use of letters of credit to facilitate the financing of international trade. In these uncertain times, letters of credit are a traditional, secure way of doing business and of financing the underlying trade between buyers and suppliers. The increase in letters of credit usage became noticeable toward the end of 2007 as surpluses of working capital for open account financing began to dry up.
Recently, fewer banks have been willing to extend and guarantee credit, so the supply has been declining, and in some cases, the cost has risen dramatically. For the right borrower and the right transaction there are still deals to be done, but the market will remain tight for the near future.
Shortening the Supply Chain
J.P. Morgan continues to see U.S. manufacturers reconfiguring their supply chains by moving plant operations and sourcing vendors closer to home and away from Asia. Limited free trade agreements, high energy costs, and rising labor and production costs in Asia all contribute to companies reevaluating extended supply chains.
While opportunities still exist in Asia, Mexico has become an increasingly popular source for manufactured goods as companies compete on time-to-market strategies, seek financial advantages found in Mexico's multiple free trade agreements, and capitalize on Mexico's investment incentives, streamlined customs processes and abundant English-speaking workforce. The U.S. Department of Commerce reports a 7.2 percent increase from year-to-date imports through Mexico compared to the year before.
Mexican customs officials have been piloting a new customs regime that seeks to attract more foreign investment by improving importers' supply chain speed and mitigating the delays frequently associated with time-intensive processes and procedures at the port of entry. A customs regime is a country's specific set of trade regulations, processes and practices that regulate the actions of importers and exporters. The government believes that this new customs regime, known as Regimen de Recinto Fiscalizado Estratégico (RFE), will decrease logistics cost in terms of dollars per container and numbers of days in transit which, in turn, will help attract additional production to Mexico.
The program is expected to open for additional manufacturers in early 2009. Mexico Customs estimates that the new clearance process will save an importer between US$200 and US$600 per shipment.
Other highlights: goods can remain in a Mexican warehouse for up to two years on a tax-free and duty-free basis; the elimination of customs inspection at the port of entry, resulting in cost reductions and reduced time-to-market; no secondary customs inspections required; a simplified customs clearance process resulting in reduced Customs Brokers fees; and a three-day grace period for importers within which to correct import declarations.
More Free Trade Agreements and More Scrutiny
More than 200 bilateral and multilateral Free Trade Agreements (FTAs) exist around the world today. In 2009, more growth and duty savings opportunities will arise for manufacturers, but with a new administration soon in power in the United States, will FTAs continue to prosper?
The United States is expected to finalize three new FTAs in 2009 with Colombia, Panama and South Korea. Whether or not the existing FTAs on the table will be a priority for the new U.S. administration, many companies still risk leaving millions of dollars worth of duty savings unclaimed with the FTAs already in force.
In addition, U.S. Customs and Border Protection is expected to increase scrutiny of FTA claims and the ability of importers to substantiate their claims. The complexity associated with understanding and leveraging FTAs is beyond the scope of many companies because they either lack the expertise, resources, technology, or all of the above to do it efficiently and cost-effectively. Many companies eventually come to a decision point: either invest internally or outsource to a global trade expert.
China Clamps Down on Oversight
The embarrassing toy and milk product recalls that triggered unexpected supply chain costs and negative public attention for multinational manufacturers has also attracted the attention of Chinese officials who fear the mass pull-out of foreign businesses. Chinese officials have vowed to clamp down on product safety failures by launching national investigations and ordering local officials to report all possible product safety issues. The regulatory environment is expected to become stricter in China with the introduction of a control list or catalogue of commercial encryption products developed and made overseas.