Nearshoring in Mexico: Regulation, Advantages in the Global Era

The last quarter of the year marked a significant milestone in Mexico's foreign trade advancements, as in the first half of October, the country's government issued a decree to promote investments through the growing nearshoring model.

This legislation establishes the granting of various fiscal incentives for companies seeking to relocate anywhere in Mexico, with a focus on accelerated investment deduction, ranging from 56% to 89% in 2023 and 2024.

Furthermore, an additional deduction of 25% is guaranteed for three years for worker training expenses, with a focus on human capital development.

This government implementation will be applicable to 10 fundamental sectors in the Mexican economy: electronic components, semiconductors, batteries, motors, electronic equipment, fertilizers, pharmaceuticals, agribusiness, medical instruments, and cinematography.

What does the issuance of this decree tell us? Firstly, it speaks to the confidence that both the public administration and the private sector have in the nearshoring model, projecting it as one of the fundamental pillars of foreign trade and aiming to capitalize on certain macroeconomic characteristics of the industry, such as the fact that 90% of total product transportation occurs by sea.

It is also a good way to leverage the financial advantages of nearshoring in the region. Calculations by the Inter-American Development Bank (IDB) estimate that the potential gain for Latin America and the Caribbean in the short and medium term from this sector could represent an increase of up to USD$78 billion from new exports of goods and services, where Mexico and Brazil would have the greatest opportunities.

What Role Does Nearshoring Regulation Play?

Regulation plays a crucial role in achieving effectiveness and sustainability in nearshoring, and the implementation last October is a clear example that Mexico is promoting proactive policies to strengthen foreign investment and facilitate the establishment of companies from other countries.

The economic and political context of the country (which is about to go through a new stage due to the 2024 electoral process), along with solid trade agreements, creates a conducive environment for the relocation and development of foreign companies.

Illusion or Reality? 

Implementing nearshoring in the country continues to be a hot topic for discussion. In fact, the conversation pulse indicates that, in the last decade, this model has continued to grow for several reasons: trade disputes, the USMCA, low labor costs, the post-pandemic world, a more regional approach to strategies. However, some do not see tangible benefits from this model, doubting its application in Mexico.

The truth is quite different, as many industrial sectors have been moving their production and distribution plants to Mexican territory for years. Some examples of such ecosystems are:

• In 2013, one of the world's largest financial firms, headquartered in New York, opened a nearshoring center in Mexico City and, to date, it is used to provide customer service and technical support in English and Spanish to clients in the United States.
• The aerospace industry, through one of its major American brands, began nearshoring operations in Mexico less than five years ago, transferring its plant to a new facility located in Chihuahua, which functions as an aircraft wiring manufacturing center.
• The appliance business is another example of companies that implemented nearshoring for their manufacturing operations in Mexico. Today, about 80% of a leading US company's machines are manufactured and exported from Mexico to the United States and Canada.
• Aerospace component production has also ventured into nearshoring, moving part of its operations from the United States to Mexico through a factory located in Mexicali, where it produces many of its products.

Nearshoring is a solid and tangible reality in Mexico, especially in its relationship with many North American companies (the United States and Canada). This has become a popular topic for many companies due to the benefits they can obtain:

• Geographical proximity. Mexico shares an extensive border with the United States, one of the world's largest consumer markets. This geographical proximity significantly reduces transportation costs and delivery times, resulting in greater operational efficiency for companies that opt for nearshoring in Mexico.
• Competitive labor costs. Although labor costs in Mexico are higher than in some Asian countries, they are still considerably lower than those in the United States and other developed countries. This allows companies to reduce their production costs without sacrificing quality.
• Shorter supply chains. Reducing the distance between production and the final consumer shortens supply chains. This not only contributes to efficiency but also makes companies more agile and capable of quickly adapting to changes in market demand.
• Cultural and linguistic affinity. The cultural similarity between Mexico and the United States facilitates communication and collaboration between teams from both nations, minimizing barriers and misunderstandings that sometimes arise in international business environments.
• Regulatory and environmental compliance. Mexico has strengthened its regulatory and environmental framework, providing companies with a clear and stable regulatory environment. This measure, besides reducing legal risk, also satisfies consumer expectations regarding sustainable business practices.

Nearshoring in Mexico has become an attractive business strategy thanks to a combination of favorable regulations and competitive advantages. Geographical proximity, competitive labor costs, and effective regulation make the country an attractive destination for companies looking to optimize their operations and remain competitive in an increasingly challenging business world.

However, it is essential for companies adopting this strategy to also consider factors such as supply chain management, workforce training, and risk management to ensure long-term success.