Nearshoring

Nearshoring has been one of the hot-button topics in global trade over the past five years. But what, exactly, is nearshoring? Put simply, it is the process of moving business processes to a neighboring country, ideally one that shares a border. For American companies, this typically applies to Mexico or Canada.

The desire of American companies to cut operating costs without losing quality of service is nothing new in business. Historically, this has led to the offshoring of many operations and processes. China was the biggest benefactor, but plenty of other countries around the world have reaped the benefits of companies’ desire to offshore.

However, much of that started to change in 2018. In early 2018, the office of the United States Trade Representative (USTR) released a list of its findings of an exhaustive investigation into China in relation to Section 301 tariffs. These findings resulted in then-President Trump announcing additional tariffs, upwards of 25%, on a slew of imported goods from China.

These tariffs in part made American companies start considering the possibility of decoupling their processes from China. The rising costs associated with the increased tariffs began to render the cost savings from offshoring a moot point.

Fast forward to today and companies have seen even more evidence to point them toward nearshoring. If the Section 301 tariffs weren’t enough motivation, the COVID-19 pandemic crippled supply chains across the globe and proved to companies that an alternative option might be necessary. Not only was the flow of goods disrupted, but container costs skyrocketed as well. While the pandemic was likely a once-in-a-lifetime occurrence it highlighted the importance of having alternate options when it comes to importing goods.

On top of that, President Biden further increased Section 301 tariffs earlier this year. Following a four-year review of the tariffs, the USTR determined China was still engaging in unfair business practices. The newest tariffs targeted specific sectors of the industry, including steel and aluminum, semiconductors, electric vehicles, batteries, and more.

Combine all these factors and you have a clear picture of why companies are looking to Mexico for their nearshoring. Since 2018, the cost of doing business with China have steadily risen leading to the decoupling process. Granted, America will never stop doing business or offshoring operations to China entirely. There will always be benefits to operating in China, but diversifying operations and mitigating risk through nearshoring make Mexico an appealing alternative option.

This nearshoring could provide a major boon to the Mexican economy, as well. Deloitte reports that if Mexico were to receive even 15% of the money previously invested in China, it would double Mexico’s current level of foreign investment.

On top of the cost savings for American companies that come from avoiding shipping costs and tariffs, the USMCA provides further incentive to trade with Mexico. Under the USMCA, there are many goods produced in Mexico that can be imported duty-free into the United States. Saving money on duties helps to offset some of the cost difference in production, helping Mexico remain a viable alternative to China.

Improved supply chain efficiency is another key factor to consider when looking at nearshoring. Moving operations closer to home provides a number of benefits when it comes to controlling factors inside one’s own supply chain. Geographic proximity theoretically provides easier access to those parts of the business if any issues were to arise. Working in the same or a similar time zone can simplify communication between offices if problems need to be solved.

Shorter lead times are an obvious, but nonetheless crucial advantage of nearshoring as well. The pandemic, and to a lesser extent, the recent ILA strike highlighted the importance of having other avenues to import. When congestion occurs with shipping vessels, having the option to use railways or trucks becomes that much more important. All of a sudden, a trans-Atlantic trip that previously took months via ocean travel now could take less than a week from Mexico to somewhere within the United States.

Nearshoring can’t answer all questions or potential issues within a supply chain, but it does offer certain benefits that are difficult to overlook for companies looking to cut costs without sending all operations across the globe.