Business Expansion from Us to Mexico

MEMORANDUM

To: Supervisor

Date: December 5, 2018

Re: Expansion of U.S. Corporation to Mexico

1. Aspects of U.S. Law

1. Background

All businesses must follow the laws of the countries in which they are physically present and operating. When U.S. businesses operate abroad, they are required to follow the laws of the host country (McAdams, 2015). The source of law applicable to an international dispute depends partially on the issue involved. Private parties are free to form agreements in whatever manner they see fit. For example, the parties to the agreement can determine which nation’s law will govern the contract, where disagreements in connection with the contract will be settled, and in which language the transactions will be made. This is referred to as the “private law” of contracts (McAdams, 2015).

When parties from different jurisdictions are involved in a lawsuit, the court will start by looking at the agreement of the parties themselves to resolve these issues. Where the contract is silent as to the choice of law, jurisdiction, and other questions, the court must decide. Generally, the law of the jurisdiction in which the transaction occurred is applied (McAdams, 2015).

Public law includes those rules of each notion that regulate the contractual agreement between the parties. For example, import and export taxes, packaging requirements, and safety standards. Public law derives from a number of sources and regulates the relationships among nations. The most familiar source of international public law is a treaty or convention (a contract between nations). For example, the U.S., Canada, and Mexico are all parties entered into the North American Free Trade Agreement (NAFTA), a convention regarding trade among these countries (McAdams, 2015).

1. Treasury Department’s Office of Foreign Assets Control (OFAC)

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries. Per Federal law and the Treasury Department’s OFAC, U.S. companies cannot operate with certain countries; this list changes every so often (Department of Treasury, 2018). Currently, these countries are as follows: Burma, Cuba, Iran, North Korea, Sudan, Syria, Liberia, The Western Balkans, and Zimbabwe. Penalties for violating this law can include a fine of up to $1,000,000 and/or up to 20 years in prison. The U.S. also yields the right to seize and forfeit goods of the company in violation of the law. The OFAC has national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze a company’s assets if any provisions are violated (OFAC, 2016).

1. Labor and Employment Law

American employment laws, such as those set forth by the Fair Labor Standards Act, still apply to American employers and employees in foreign countries, such as Mexico. Exceptions to this are non-U.S. residents working outside the United States. The FLSA prescribes standards for wages and overtime pay (Department of Labor, 2018). The company must also adhere to local jurisdiction in regards to labor and employment regulations.

1. Human Rights

U.S. and international laws protecting human rights must be adhered to while establishing businesses in Mexico. The Alien Torts Claim Act (ATCA) states that any human rights that are affected by a company’s business operations makes them directly liable. These rights can include “slavery, certain war crimes, genocide, torture, forced labor, apartheid, crimes against humanity, and forced disappearances.” (Latham & Miller, 2006).

1. Import/Export Laws and Regulations

The U.S. Export Administration Act of 1979 yields restrictions on goods and technology where the exportation in question would harm national security (McAdams, 2015). The federal government regulates imports into the United States according to customs laws and regulations.

1. Committee on Foreign Investment in the United States

Any merger, acquisition or takeover that could result in foreign control of a U.S. business may be reviewed by the Committee on Foreign Investment in the United States (CFIUS) prior to consummation (Department of Treasury, 2018). CFIUS is an inter-agency committee in the U.S. whom is authorized to review transactions that could result in control of a U.S. business by a foreign person, in order to determine the effect of such transactions on the national security of the United States. This operates via section 721 of the Defense Production Act of 1950 and has been amended by the Foreign Investment and National Security Act of 2007 (FINSA) (Department of Treasury, 2018).

1. Legal Implications

1. Advantages

1. Low labor costs.

The average factory worker in Mexico is paid $2.60 an hour with tax and benefits included, as compared to the U.S. 2002 average of $21.11 an hour (Abogados, 2015).

1. Proximity to the United States.

Mexico and the United States share a common border; therefore, the costs of shipping and business travel between the two neighbors is significantly less than between the U.S. and Japan. Not only will it cost less to transport goods over a shorter distance, but business travel for company executives will also be substantially less than it would be if executives needed to fly somewhere such as Japan (Abogados, 2015). Therefore, shipment of goods and business travel will cost less between Mexico and the U.S. than it would between Japan and the U.S., and it will take much less time.

1. Time Zone

Unlike Japan, Mexico shares the same time zones with the U.S., making communication between offices and production lines in the U.S. and those in Mexico much simpler and more time and cost-efficient (Abodagos, 2015). If a problem arises that requires immediate attention, Mexico being in the time zone as the U.S. allows for quick and easy communication and resolutions between companies.

1. Higher Education

Mexican institutions of higher education graduate around 30,000 engineers a year. The U.S., a nation with three times the population and many more students from abroad studying technical fields, only graduates around 50,000 engineers a year. Furthermore, the average salary of an experienced well-trained engineer in Mexico is nearly half that of an engineer in the U.S. This means inexpensive skilled labor for U.S. companies operating in Mexico, with other industries offering similar disparate salary comparisons (Abodagos, 2015).

1. Raw Materials

Mexico has an abundance of raw materials and various sources for them throughout the country, so most forms of raw materials don’t need to be imported from other countries. This helps cut costs and lead times by a significant margin, not to mention the increase reliability in supply and thus production.

1. Shorter Lead Times

Although production times may be similar among Mexico and Japan, shipping times would vary significantly. Products coming from Mexico can reach the United States in a week, while products imported to the U.S. from Japan could take 4-6 weeks (Abodagos, 2015).

1. Mexican Government

To encourage more foreign investment, business rules in Mexico are more or less the same as those in the U.S. In fact, U.S. companies in Mexico may be wholly owned in all but a few specific industries (Abodagos, 2015). As a result of the 1994 North American Free Trade Agreement (NAFTA), the U.S.  began trading with Mexico's businessmen, investing in business opportunities in Mexico, and establishing business facilities in Mexico in unprecedented numbers and ways. As a result, as of 1998, Mexico and the United States achieved a level of trade that makes Mexico the United States' s second-largest trade partner, second only to Canada (Encyclopedia of Business, 2018).

1. Disadvantages

1. Legal System

Mexico’s legal system is significantly different from that of the United States, so failure to understand at least the basic elements of Mexico's legal system can pose a significant barrier to U.S. businesspeople trading with or investing in Mexico. Mexico’s legal system is a civil law system, while the U.S. employs a “common law” system (Encyclopedia of Business, 2018).

1. Legal Education and Licensing

To do business in Mexico, U.S. businesspeople nearly always need to hire a Mexican attorney. Reciprocity that would allow U.S. licensed attorneys to practice law in Mexico and vice versa is not a part of NAFTA. U.S. businesses usually use their own U.S. attorneys for matters related to U.S. law and hire Mexican attorneys to work with their U.S. attorneys and to handle legal practice in Mexico (Encyclopedia of Business, 2018).

1. Political Landscape

Corruption and violence stemming from the drug trade in Mexico have served as a deterrent for foreign investors. The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. ("FCPA"), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business (Department of Justice, 2018).

1. Ethical Implications

1. Employee Rights

1. Actual application and operation of Mexico's guarantees does not always live up to the words of the Mexican Constitution and its statutes. A description of Mexico's labor laws does not necessarily provide an accurate picture of working conditions for most Mexican workers. Most of Mexico's workers receive insufficient incomes to support their families comfortably, and many work under conditions that threaten their health or safety on a daily or long-term basis. 
2. Article 123 of the Constitution of 1917, entitled "Labor and Social Security,” states that every person "is entitled to suitable work that is socially useful. Toward this end, the creation of jobs and social organizations for labor shall be promoted in conformance with the law." Article 123 provides various protections and guarantees to workers, including an eight-hour work day, a maximum workweek of six days, equal pay for equal work, and mandatory childbirth and maternity leave (Encyclopedia of Business, 2018).

Under Article 123, employers are required to provide employees with a safe workplace and disability pay for work-related injuries. Workers are also guaranteed the right to form unions and bargain collectively. Workers' rights to organize strikes are recognized, and the rights of employers to impose a lockout, under certain conditions, are recognized (Encyclopedia of Business, 2018).