Mexico, the best candidate for Nearshoring? | Nearshoring

Mexico the best candidate for Nearshoring

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What is Nearshoring?

He "nearshoring” involves outsourcing or subcontracting services, operations or processes to suppliers located in geographically close countries, unlike “offshoring”, which involves subcontracting in distant countries, nearshoring seeks to collaborate with companies or suppliers in geographically close regions or with greater cultural proximity and time, the main idea is to keep certain services close to the main location of the company to improve communication, reduce operating costs and maintain greater cohesion in cultural and linguistic terms, this practice is common in the technology and information services industry , where efficient collaboration and strategic cultural proximity are considered beneficial.

Mexico and Nearshoring

Mexico has emerged as a strategic destination for nearshoring, a business practice that involves the outsourcing of services, operations or processes to suppliers located in geographically close countries, because thanks to its proximity to the United States and a business infrastructure in constant development, Mexico has become a focal point for companies seeking benefits in efficient collaboration and cultural synergy. 

According to him Inter-American Development Bank, Mexico has the potential to attract considerable investments, estimated at around 35 billion dollars annually due to relocation alone (last year's data), Ministry of Economy has registered notable interest, with more than 400 companies expressing their willingness to establish themselves in the country, which underlines the growing importance of Mexico as a key player in the nearshoring strategy at a global level. 


The combination of its strategic location, skilled workforce and an expanding economy has established Mexico as an attractive destination for companies seeking to maximize operational efficiency and take advantage of the advantages of close collaboration.

The nation's economic outlook presents a unique opportunity: nearshoring, this phenomenon, influenced by different elements such as trade tensions between the United States and China, the COVID-19 crisis and the search for efficiency in supply chains, They place Mexico in a central position in the global economic scenario.

Does the conflict between the US and China benefit Mexico?

The trade dispute is positioned as one of the main sources of tension for the world economy, since the increase in tariffs by the United States and the retaliation implemented by China have resulted in a stagnation in international trade and a decrease in demand to At a global level, in addition, the perception persists that this conflict between the two most powerful economies is not mainly related to the trade deficit, but rather to the technological aspirations of both nations.


It is important to note that, from a recent historical perspective, the United States trade deficit with the rest of the world had already begun in 1970, three decades before the deficit with China arose, in fact, the negative imbalance in the trade balance American is not something new and has been multilateral in nature, not limited only to bilateral agreements. 


Despite this, after a year and a half of development of the trade war and despite the repeated tariffs applied, it is clear that the results obtained have not met the expectations of the US government.


In 2018, the United States implemented tariffs in three consecutive stages on products from China. This action initially affected annual imports valued at USD 34 billion, then others for USD 16 billion and, finally, an additional USD 200 billion. As a result, a significant decrease in US imports from China was observed on all three sets of products subject to tariffs.


Another aspect to highlight is related to the years 2008-2009, during the time of the global financial crisis, in this period, the Chinese economy consolidated itself as a fundamental component for the world economy, explained by its growing participation in international trade, In fact, its involvement in global trade increased significantly, going from 13.5% in 2008 to approximately 20% in 2018, according to ITC data in 2019, and it contributed to the growth of the world economy in proportions ranging between 20% and 30%. .

Mexico, the best candidate for Nearshoring?

The willingness of companies to simplify their supply chains has positioned Mexico prominently, No country has a more favorable opportunity to capitalize or benefit from this new phenomenon, Mexico is presented as the natural candidate to generate the greatest economic benefits in this context.


Thanks to its strategic position and a long history of cooperation with the United States, Mexico is presented as the optimal option to take advantage of the opportunities of nearshoring, the implementation of NAFTA in 1994 has been instrumental in the development of solid production and logistics chains, providing a robust foundation for this initiative.


The geographical proximity to the United States ensures more compact supply chains, reducing both transportation times and associated costs. This advantage becomes especially important in situations of global disruptions, such as those generated by the pandemic and trade disputes, and also, the coordination of the time zone facilitates communication between production centers, suppliers and markets, strengthening commercial operations.

The attractive competitive cost of national labor constitutes another significant advantage, since with a labor cost of $4.8 USD per hour, Mexico surpasses China, positioning itself as an attractive option for those companies that seek efficiency without compromising quality, as well as, Mexico has developed infrastructures and has an extensive network of treaties and trade agreements, which allows it to acquire inputs and market products without incurring tariffs.

How to make Nearshoring work in Mexico?

Although Mexico presents advantages for the implementation of nearshoring, it also faces challenges that must be overcome for this practice to become a reality in the country, among these challenges are the need to provide certainty and legal security for foreign investments, address social problems related to security, organized crime, corruption and impunity, and carry out the development and modernization of infrastructures such as transportation, ports, airports, customs capacity and clean energy sources, as well as the training of a greater quantity of labor qualified.


The vulnerability of nearshoring in Mexico lies in the fact that, unlike NAFTA, it is not a state policy supported by Mexico nor a formal agreement with the United States; instead, it is the result of unplanned circumstances, such as the economic impacts derived from the Covid-19 pandemic, trade tensions between the United States and China, and the war between Russia and Ukraine.

What is NAFTA?

The North American Free Trade Agreement (NAFTA) was a trade agreement between Mexico, the United States and Canada that entered into force on January 1, 1994, also known as NAFTA (North American Free Trade). Agreement) and the main objective of NAFTA was to eliminate trade barriers between the three countries, facilitate the exchange of goods and services, promote investment and establish a framework for economic cooperation in North America.


The agreement covered various aspects, including trade in goods, services, investments, intellectual property, and established mechanisms to resolve trade disputes between member countries. In 2020, NAFTA was replaced by the Agreement between Mexico, the United States and Canada (T-MEC), which introduced some modifications and updates to the original agreement.


NAFTA (North American Free Trade Agreement) benefited Mexico in several ways:


  • Economic growth: By eliminating tariffs and facilitating trade, NAFTA contributed to Mexico's economic growth by increasing exports and encouraging foreign investment.


  • Employment generation: The opening of trade facilitated the expansion of industries and companies, leading to the creation of jobs in sectors such as manufacturing and services.


  • Diversification of the economy: By promoting the diversification of the Mexican economy, NAFTA helped reduce dependence on specific sectors and encourage the development of more diverse industries.


  • Attraction of foreign investment: The removal of trade barriers and the creation of a more business-friendly environment attracted foreign direct investment to Mexico.


  • Infrastructure modernization: The competition generated by the agreement encouraged the modernization of Mexican infrastructure, improving efficiency in transportation and logistics.


  • Access to technology and knowledge: Participation in a trade agreement with the United States and Canada allowed Mexico to access new technologies, advanced business practices and specialized knowledge.

What can be the favorable effects of Nearshoring in Mexico?

John Soldevilla stated that the positive effects of nearshoring could begin to manifest in a period approximately seven years, a period similar to the time it took for NAFTA to show its main impacts, in this way, the economist suggested that between 2023 and 2030, these results could be anticipated if all the benefits of nearshoring in Mexico are fully taken advantage of.


The Mexican economy could experience a growth 3.7% per year, in contrast to the 2.6% recorded in the last two decades, manufacturing would represent 96% of total exports, while investment would increase by 7.4% annually, reaching 28.6% of GDP, its highest figure. historically high, the manufacturing sector would emerge as the main beneficiary of this phenomenon, contributing 22.4% to GDP in 2030.


At its highest point to date, the generation of around one million new formal jobs annually would be estimated, exports would go from 578,000 million dollars in 2022 to 1.1 trillion dollars in 2030, representing an increase from 39% to 49% of GDP and Foreign investment would also experience an increase, going from 36,000 million dollars in 2022 to 87,000 million in 2030, equivalent to an increase from 2.5% to 3.8% of GDP.


And it also emphasizes that unless an extraordinary internal or external event occurs, commonly called a black swan in economic terms, the end of the presidential term should develop in an organized manner, without facing an economic or financial crisis, the possibility of a crisis is perceived as low, with a moderate slope, due to the presence of few risk factors that are in the amber traffic light category.

Which states would benefit in Mexico from Nearshoring?

ECOBI noted that among state economies, five northern Mexican states could see the greatest benefits from nearshoring, led by Nuevo León. 


New Lion tops the list as the most prominent entity in terms of manufacturing, leading in GDP, foreign direct investment (FDI), employment, and is about to do so also in salaries registered in the Mexican Social Security Institute (IMSS), with the exception of Mexico City is considerably ahead of other entities in terms of financing.

Nearshoring in Nuevo León, Mexico

According to the president of the International Investment Council (IDEI), Alberto de la Garza Evia, the capital city of the state is in an exceptional situation due to the relocation of companies, since, in the last 8 years, approximately half a million people, both national and foreign, have arrived in the city in search of what is known as the “Regiomontano dream”.


Nuevo León stands as the main exponent of nearshoring in Mexico, the state has unlimited potential derived from its strategic geographical position and its economic development, however, the benefits of this strategy should not be limited only to being a magnet for investments; Relocation must also be synonymous with improvement in well-being and social progress for residents of the areas where foreign companies will be established.


It stands out as the state with the most prominent manufacturing activity in Mexico, which makes it attractive for large-scale investments, such as the case of the electric vehicle manufacturer. Tesla Motors.


The fundamental pillars of the state economy are mainly focused on manufacturing (25%), commerce (18%) and real estate services (10 %), according to information provided by the local government itself.


Due to these characteristics, the entity is positioned as the second largest economy in the country, contributing 7.6 percent to the national Gross Domestic Product (GDP).

In conclusion, the phenomenon of nearshoring presents a series of significant benefits for Mexico, the geographical proximity to the United States, the advantage in labor costs, the synchronization of time zones and the boost to job creation are part of the positive aspects that this business approach brings to the country, in addition, nearshoring not only stands out as a catalyst for economic growth and attraction of investments, but also acts as a driver for the modernization of infrastructure and the transfer of knowledge and technology. 


However, it is essential to address the challenges related to legal certainty, security, and ensure that benefits are distributed equitably to guarantee sustainable and equitable development in the affected areas. In this context, Mexico is in a strategic position to capitalize fully take advantage of nearshoring opportunities and consolidate itself as a key destination for business relocation.

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