Why is nearshoring to Mexico relevant?
At this time, a combination of factors has created the “perfect storm” that has driven companies to produce closer to their target market, nearshoring. Companies are interested in manufacturing its products in a country where it is cheap to produce them and is close to their final market.
The U.S.-China trade war, Russia’s invasion of Ukraine, and the COVID-19 pandemic play a major role in this storm. In particular, port closures, export restrictions, and high freight costs have also forced companies to reconsider their supply chains.
Adrián González
Global Alliance Solutions LLC's President
Trade Consultant and US Customs Broker
Numerous associations and think tanks have promoted the concept of nearshoring. But, undoubtedly, the most impactful promoter has been the U.S. government with its declarations and actions. The U.S. Inflation Reduction Act and the Chips Act are a great example of this kind of actions.
Importance of Nearshoring from the U.S. to Mexico
The U.S. government has made it clear that the paradigm in supply chains has to change. The United States Trade Representative (USTR), the U.S. Treasury Secretary, and the U.S. Secretary of State stated that multinationals must look beyond lowering costs when it comes to locating factories and sourcing suppliers.
These officials also consider that companies must take into account resilience in their supply chains. That is, companies must be able to withstand disruptions and continue to operate in the face of adverse events. The core point that emerges as the basis for resilience is diversification. In other words, strategically varying the location of suppliers, factories, and raw materials. Moreover, it is also necessary to reduce or even eliminate dependence on countries that are trade antagonists.
Tesla: An example of nearshoring from the U.S. to Mexico
Tesla recently announced that its 5 billion USD investment in Mexico follows the previously mentioned patterns of nearshoring, but not only that. Elon Musk’s company has argued that Mexico’s IMMEX program offers more benefits than the Foreign-Trade Zone (FTZ) program from the United States. Tesla argues that, under identical scenarios, manufacturing costs in the United States in a FTZ are higher than those of in Mexico under an IMMEX program. This is specifically important in terms of tariffs on components incorporated in its vehicles.
Tesla also comments that all tariffs related to inputs must be paid in the FTZ. However, that does not happen in Mexico under its IMMEX program. Moreover, it is not possible to claim USMCA tariff preferences when importing into an FTZ. But, those preferences can actually be claimed under the IMMEX program. Tesla’s statement is one of the few times that a multinational company openly presents the IMMEX program as superior to the FTZ.
Challenges of Nearshoring to Mexico
It is also important to recognize that “Nearshoring” brings challenges and conflicts, when it comes to big investments that could have a significant impact in the country. A clear example is the process of agreeing the location of the Tesla factory in Mexico. Tesla announcement got the attention of top officials in Mexico. The Mexican President decided to personally follow Tesla’s nearshoring project. Specifically, the Mexican President actively tried to persuade Tesla into building its facilities in Hidalgo instead of Nuevo León. The main reason was that Nuevo León is facing a water supply problem.
Water supply is a legitimate issue that must be addressed by the government. However, other projects with lower investments in Nuevo León did not get as much attention as Tesla did. Accordingly, big nearshoring projects could have political or environmental implications that attract the attention of the government.
Conclusions about Nearshoring to Mexico
Nearshoring is currently a trend in international trade that represent a great opportunity for both foreign and Mexican companies. In this regard, nearshoring can translate into several benefits for companies and their supply chains, but it and also necessary to be aware of their challenges. Moreover, Tesla’s investment in Nuevo León is a great example of the importance and implications of nearshoring.