From China to Mexico: What Nearshoring Entails

For decades, offshoring to China had been considered among the most cost-effective options for US companies. However, trade relations between the two have been tense for years, culminating with a trade war in 2018 triggered by the implementation of US tariffs on imported Chinese goods. New restrictions for the electronics industry and the delisting of Chinese companies from US stock markets were announced just this year, signaling a continuation of the conflict. The COVID-19 pandemic lockdowns, coupled with China’s zero-COVID policy, exacerbated already rising manufacturing prices and global logistical bottlenecks. Subsequent factory lockdowns reduced production capacity and resulted in material shortages and halted trade, aggravating an already fragile geopolitical context and further raising costs. Tariffs and the pandemic pushed businesses operating in China to seek alternative and more sustainable solutions, through reshoring production lines back onto US soil or through nearshoring operations and sourcing to nearby countries. This has left Mexico as the strongest contender to fill China’s shoes. 

Nearshoring, or the process of moving production and supply chains closer to home and their main destination markets, is a growth strategy that can benefit companies from all sectors. While China continues to be a world leader in the manufacturing of semiconductors, Mexico is also notable in many other industries, including manufacturing for the automotive, aerospace, medical device, apparel, and textile industries. Historically, labor costs in China had been way below those in Mexico, but in the past few years, costs have been rising significantly.Mexico now offers around 20 percent lower labor costs with more stable wages and exchange rates. This, along with Mexico's highly educated and specialized labor force and lower operating costs, has incentivized more companies to move operations to its shores, not only in manufacturing but also outsourcing IT, marketing, and logistics operations, among many more. Mexico also holds the advantage of having ISO certifications and IATF certifications for their manufacturing companies, standardizing production and management processes to ensure the quality, safety, and efficiency of its products, services, and systems. These certifications comply with US and international regulations and facilitate business operations and the subsequent export of products to their destinations.

The possibility of having quicker and more efficient feedback and deliveries is also more attractive for US customers. Given that almost 88 percent of US-Mexico trade happens through their shared land border, exports have managed to remain more cost-effective, avoiding the recent supply chain blocks facing seaborne trade. The country's proximity also makes it easier to communicate, erasing most time zone differences and, in some cases, even severe language and culture barriers. The pre-existing free trade framework established by the USMCA has also helped increase imports and exports between countries as well as investments in Mexico, by reducing tariffs and taxation on cross-border business with North American countries. Finally, numerous infrastructure projects, such as the T-MEC Corridor, showcase efforts to modernize and expand the country’s logistical infrastructure, creating multiple new hubs that will increase connectivity and facilitate access to the North American market.

Even with the geographical proximity, relocating to Mexico is not without its challenges. Relocating companies will still need to adapt to new and evolving government policies, tax laws, and different providers. The country's business taxes are complex for foreigners and can vary according to resident and nonresident companies. Understanding manufacturing compliance regulations that are unique to Mexico, such as the Official Mexican Standards (NOMs) and the tax incentives for US manufacturing companies (IMMEX), is imperative and challenging. It is also important to be aware of the limitations and disruptions to the supply chain, which have been prone to geopolitical squabbles in recent months. Furthermore, recent energy policy developments have placed the sustainable and green energy industry at a disadvantage, antagonizing foreign companies already conducting business in the field. Although scant, such policies run the risk of scaring off potential investors and companies. Also worth mentioning is that Mexico is competing against other Asian countries, particularly Vietnam and Indonesia, for nearshoring relocation. While labor costs are significantly lower in both, companies must also factor in other elements of the production process, including shipping costs and possible maritime or air freight delays.

Despite its obstacles, nearshoring in Mexico continues to be an attractive alternative for US companies. As political, cultural and economic relations between China and the US become more tense and incompatible, Mexico offers unique benefits to its northern neighbor through more amicable bilateral relations, a decades-long history of collaboration and trade, a more convenient geographical location, and overall greater logistical and operational ease. Nearshoring to Mexico represents a strategic business decision for companies seeking to access open pro-business markets ripe for expansion, lower operating costs, quality assurance and stability, and avoiding the geopolitical hassles associated with tariffs and trade wars.