Reasons for Nearshoring Increase in Mexico
Nearshoring represents an opportunity for Mexico that could positively impact the country’s economy. In fact, according to Deloitte, this model could increase Mexico’s GDP by up to 3% in the next five years. The need to bring production and operations closer to the final consumer has increased considerably since the pandemic, and Mexico has become a preferred destination in this subject. It is important to understand the reasons why the demand for nearshoring has significantly increased in Mexico in order to make assumptions about its future in this country.
The COVID-19 Pandemic
The spread of the virus led to significant border closures in most parts of the world, which impacted product availability and delivery times, especially for articles that were in high demand at the time. The problems and the supply chain disruptions generated by the health emergency drove an increase in demand for nearshoring in Mexico.
Several global companies redirected their investments in China after its severe measures to deal with COVID intermittently shut down parts of the country for nearly three years, significantly disrupting production and trade. Reliability, resilience, and security of production sites and supply chains has become more important due to the above and the current geopolitical conflicts.
And although in December 2022 China finally relaxed its restrictions, the issues have not stopped, as cases have increased yet again. Reports from that time indicated that 20 to 30 percent of employees from the biggest car assembly plant in China were sick at home, leading to a decline in production of up to 2,000 units per day.
These interruptions have increased the interest in nearshoring in Mexico, which also benefits from free trade agreements with the U.S.
Tariffs Imposed by the U.S. on Chinese Goods
Since 2018, the U.S. government has imposed tariffs on Chinese goods, urging companies to search for alternative markets to reduce costs. A clear example is the import of computers to the U.S. Chinese computer imports were reduced by $3.4 billion USD, while those from Mexico have increased by $9.2 billion USD. It is also important to remember that in 2019, Dell announced that it would open new facilities in Mexico to counteract the impact of tariffs imposed on Chinese parts.
Currently, Chinese goods account for 18% of U.S. imports, down from 22 percent at the start of the trade war. By contrast, imports from Mexico have increased 38 percent compared to the levels before the trade war, which have also rebounded well after the pandemic.
Free Trade Agreements
One of the most significant changes that nearshoring has brought to the relationship between the U.S. and Mexico is an increase in trade. As more and more companies move their commercial processes to Mexico, the trade demand between the two countries is increasing. According to the U.S. Census Bureau, trade between the U.S. and Mexico reached $614.65 billion USD in 2020, making Mexico the second most important trade partner for the U.S.
The Mexico-U.S.-Canada Agreement (T-MEC) is also expected to further strengthen trade relations between Mexico and the United States. This treaty includes provisions which will modernize and strengthen the commercial relationships between North American countries.
This advantage is being viewed favorably by the rest of the world. And it is important to note that Mexico has other eleven free trade agreements with 50 countries. Agreements with the United Kingdom and South Korea are currently under negotiation.
Read also: Which are the main industrial cities in Mexico?
Disruptions in Logistics
The availability of containers and the increase in transportation costs, especially maritime freight, have resulted in an increase of more than 500 percent of costs.
More than two years after the supply chain crisis, ocean freight rates have dropped considerably; however, some routes continue to maintain higher costs than pre-pandemic.
On the other hand, air freight from China to North America has experienced weekly increases of 14 percent, resulting in a cost of $4.59 USD per kg.
Mexico’s proximity to the U.S. is, thus, one of the reasons for the increase in nearshoring demand in the country.
The War between Russia and Ukraine
The onset of this conflict limited the supply of raw materials, forcing several global businesses to look for new suppliers.
This war, although unfortunate, precipitated investments and a demand for nearshoring in Mexico, since different companies are looking to minimize risk —mainly in the supply chain—, to reduce transportation costs, and to take advantage of the proximity to the biggest consumer markets in the U.S.
This conflict has led U.S. companies to bring productions closer to their home country in order to reduce their dependence on China or the European Union.
At Advance Real Estate, we are aware of Mexico’s potential with the rising demand for nearshoring. This is why we offer industrial properties in strategic locations for multinational manufacturing companies that are looking to transfer their production to Mexico.
Information sources:
- https://www.morganstanley.com/ideas/mexico-nearshoring-gdp-growth
- https://www.sdcexec.com/sourcing-procurement/manufacturing/article/22605186/the-nearshore-company-2022-shows-unabated-growth-in-nearshoring-to-mexico
- https://www.dallasfed.org/research/swe/2023/swe2303
- https://7news.com.au/news/world/china-smashed-by-covid-infections-sparking-radical-changes-to-pandemic-plans-c-9281467
- https://www.freightos.com/freight-blog/shipping-delays-and-cost-increases/
- https://www.wilsoncenter.org/article/mexico-face-russias-invasion-ukraine-economic-political-and-commercial-consequences
- https://mexicobusiness.news/health/news/nearshoring-mexico-healthcare-and-pharma-opportunity
- https://oec.world/en/blog/post/when-china-and-the-us-have-a-trade-war-mexico-wins
- https://gbmenlinea.gbm.com.mx/Documentosanalisis/Nearshoring_Mexico2022.pdf
