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As a result of the COVID-19 pandemic, and diverse political and economic problems in recent years, such as destocking of raw materials for production in a number of industries around the world, e.g. disposal of microchips in the automotive industry, it is validly concluded that the problems in international trade goes beyond the imposition and compliance of customs duties and non-tariff regulations and restrictions, such as supply chains, international logistics and the proximity of the production of goods to their final destinations.
This is causing important and transcendental changes in the world, such as the relocation of important companies in the industries that generate the highest number of jobs globally from China and other Asian countries to more attractive locations such as Mexico, creating this phenomenon known as "Nearshoring".
Now we find ourselves with a new term "Nearshoring", but what is it? how does it work? where does it come from? and how does it benefit the Companies?
Nearshoring?
Prior to 2016, the supply chain was focused on Asian countries, mainly China, due to its low production costs. This phenomenon is known as "offshoring", which consists of hiring already established manufacturers as suppliers so that the manufacturing of the final product is more cost-effective, even with the costs of moving the goods.
On the other hand, nearshoring is a concept originated by the trade war between the United States and China initiated in 2016 when former President Donald Trump won the presidential elections in the United States, being that part of his presidential campaign "Make America great again" encouraged the departure of American investors and entrepreneurs from Asian territory to promote their production process to be carried out in the United States, via tax incentives.
In addition to the previously mentioned, from January 2020 to May 2023, as a consequence of the global pandemic caused by the COVID-19 virus, supply chains and logistics services were affected, creating chaos in the production of various goods around the world due to a lack of supplies and a shortage of personnel.
Likewise, in February 2022, Russia began its territorial invasion to Ukraine, causing many supply agreements with these two countries to be cancelled and several inputs and production processes to be interrupted.
For the these reasons, companies were forced to look for closer territories to the country whose market is their destination to install their factories and conduct their production processes of parts or final products.
Nearshoring in Mexico
Nearshoring in Mexico dates back to 1980 when the country opened its doors to foreign investment, especially in the manufacturing sector. Subsequently, with the signing of the North American Free Trade Agreement ("NAFTA") in 1994, this investment increased because Mexico, due to its proximity to the United States and the tariff benefits derived from NAFTA, was a determining factor for several foreign companies to invest in Mexican production.
Even with the offshoring boom in China and other Asian countries. Mexico has always been an attractive destination for North American and Canadian companies due to its geographic location, labor force, competitive labor costs, export promotion programs, among others, which contributed to the increase in investments and growth of the Mexican manufacturing industry and the gradual development of nearshoring in Mexico.
Nearshoring advantages in Mexico
As mentioned above, investors from all over the world began to look to Mexico when the COVID-19 pandemic complicated production in China, in addition to the various problems generated in other countries that have caused businessmen to want to have greater control and proximity of their manufacturing, bringing it closer to its destination market, which in most cases is the United States of America.
In this regard, the key factors that benefit nearshoring in Mexico, to mention a few, are the following:
Territorial proximity to the United States of America, creating logistical advantages as this is the main nearshoring destination worldwide.
Same time zone as the United States and Canada.
Complicated commercial and diplomatic relations between China and the United States which makes the relationship with Chinese suppliers more complicated.
The United States, Mexico and Canada Free Trade Agreement “USMCA”
Low labor costs in our country.
Access to diverse global markets.
Air and port facilities
Bonded warehouses
Border region and free zones.
Tax deduction derived from employee qualification.
Immediate deduction on assets
Export promotion programs such as the Maquiladora, Manufacturing and Export Services Industry ("IMMEX") and the Sector Promotion Program "PROSEC".
Tariff and non-tariff benefits of Mexico's free trade agreements with several countries.
Faster and safer supply chains.
2024 Announced Investment.
According to the investment announcements issued by the Ministry of Economy, from January 1 to February 29, 2024, 52 investment announcements were identified, equivalent to approximately 25 billion 844 million USD that will enter Mexico in the next two to three years, which could generate 28 thousand new direct jobs for Mexicans.
In the following table, we can see which are the 10 countries that issued direct investment announcements in Mexico.
From the above, we can see that the country with the highest investment expectations in Mexico is the United States, precisely because of its territorial proximity and low production costs that are attractive to U.S. investors.
Then we can observe European countries such as Germany, Netherlands, France, Switzerland, Asian countries such as China, India and Korea and also American countries such as Argentina and Canada.
It is very interesting that leading offshoring countries such as China and India are in the investment race in Mexico, taking advantage of nearshoring to be able to compete commercially with European and American products in the North American market.
On the other hand, in the following table we can observe the economic sectors to which the aforementioned advertisements belong:
From the above, the industry with the highest expectation of foreign investment is manufacturing, since we will now compete with China for the title of "the world's factory" and other sectors such as mass media, transportation, energy, construction, commerce, services and temporary housing.
According to the report, the main manufacturing industries are the beverage industry, automobiles, iron and steel and auto parts, industries that today are known for their leadership in Mexican manufacturing.
Conclusion.
From the previously mentioned we can conclude that thanks to nearshoring, Mexico is in the eye of the foreign investor to take advantage of its vast territory, its labor force, and its fiscal and administrative facilities to start bringing foreign companies that produce their products whose purpose is to export to other countries taking advantage of the free trade agreements ratified by the Mexican State, benefiting Mexicans in the massive creation of jobs in various entities of the country.
It is important to keep in mind that the purpose of nearshoring is not entirely to export to the United States, but to take advantage of all the trade tariff benefits that Mexico offers, and that other Latin American countries join in investing in Mexico to be able to offer their products on a global scale never seen before in Latin America.
By:- Brianda Ramirez Cordero, Senior Associate at Ramos, Ripoll & Schuster
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