When it comes to “Nearshoring” China’s loss is Mexico’s gain

BMW Plant San Luis Potosi (Photo: OEM)

One of the many buzzwords to have come out of the supply chain crisis of the past few years has been “nearshoring”: companies investing in production closer to home so that they don’t have to deal with global sourcing challenges.

In the U.S., the supply chain crisis has added fuel to the country’s inflation fire, and a growing number of industries have chosen to bring production closer to home as a result. U.S.-based companies that have already restored their operations to nearby countries in Latin America and the Caribbean include carmaker Ford and aerospace manufacturer Boeing.

The nearshoring momentum could represent a major rethink of global supply chains, and some countries could be in line for a windfall because of it. But Bank of America analysts believe that based on early signs, Mexico is poised to be the main beneficiary of the new nearshoring wave sweeping the U.S.

Nearshoring to Mexico could be a “lifetime opportunity” for those interested in investing in the country and in the companies doing business there, researchers by the bank’s head of Canada and Mexico economics Carlos Capistrán, wrote in a note last week, and believe the country is headed for massive growth in the coming years.

They added that the supply chain crisis, a breakdown in U.S.-China relations, and a free trade agreement already in place between the U.S. and Mexico have created the conditions behind the country’s “best growth opportunity for the next 10 years.”

The China conundrum

The nearshoring move to Mexico comes as more and more U.S. companies decide doing business in China is simply no longer worth the cost.

U.S. trade relations with China have been tense for years since a series of U.S. tariffs on imported Chinese goods paved the way for a trade war between the two countries in 2018 under former President Trump. That war has survived mostly intact into the current administration.

The trade war heightened tensions between the two countries and made cooperation more difficult, but the real spark behind the supply chain crisis and the move towards nearshoring happened more recently when the COVID-19 pandemic hit.

China responded with periodic lockdowns, which threw supply chains into disarray, and are still happening now with factories in China shutting down for weeks at a time. The supply chain crisis has led to a full-blown shortage of items the U.S. once imported heavily from China, including semiconductor chips and iPhones.

In addition to China’s strict COVID-19 policies—which have widely eroded U.S. business confidence in the country—labor costs in China have been on a steady rise in recent years, pushing many international companies to look elsewhere.

In response to the shortages, the Biden administration has approved large investments in domestic production of goods including chips and solar panels, products that the U.S. has previously imported from China and other East Asian countries in large amounts.

But with companies on the hunt for more affordable workforces that are also in relative proximity to the U.S., Latin American countries have been put in the spotlight, and Mexico is poised to benefit the most from American companies relocating their operations, according to BofA.

Source: El Financiero

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