Nearshoring: learn what it is and its importance to the US

Nearshoring in Mexico is an industrial relocation strategy that involves moving manufacturing processes from distant countries to nearby territories with compatible time zones. For foreign companies, Mexico represents an attractive destination due to its low production costs, logistical proximity to the United States, and the benefits derived from the USMCA. In 2024, foreign direct investment in Mexico exceeded $36 billion, much of it driven by nearshoring-related projects.

The attractiveness and necessity of nearshoring can be attributed to two key factors. Firstly, China's economic growth raised concerns in the United States, leading to restrictions on Chinese products and sparking a trade war between the two global powers.

Furthermore, it is essential to consider other significant factors, such as growing concerns about climate change and the ongoing conflict between Russia and Ukraine. In this current landscape, the region has the potential to make a valuable contribution to the global economy by integrating into global supply chains.

Therefore, in today's international trade environment, we observe a growing trend in certain practices that companies are adopting to enhance the efficiency of their supply chains, with nearshoring being a notable example.

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Nearshoring and offshoring: China's role

Nearshoring involves relocating production to a neighboring country, while offshoring entails moving it to any country, regardless of proximity.

China has been a prominent player in offshoring, boasting a vast workforce with a mix of skills and affordability, accommodating subsidiary companies that cater to parent companies overseas.

However, dealing with long distances and time zone differences between continents can throw a wrench in the supply chain. The chaos of the pandemic highlighted just how vulnerable offshoring can be, especially when dealing with exclusive business partners.

Nearshoring, on the other hand, is seen as the solution to these challenges by bringing production centers closer together. By relocating their manufacturing processes instead of outsourcing them, like with offshoring, companies can have better control over their production.

As a result, more and more companies are jumping on the nearshoring bandwagon in all American countries. This trend is particularly evident in Mexico, where the model offers a promising opportunity for growth.

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Nearshoring in México: opportunity for growth

North America has established itself as the leading region in global nearshoring, and Mexico is the country benefiting most from this trend. Currently, more than 80% of Mexican exports are destined for the United States, reinforcing the country's strategic value within the USMCA.

A recent survey conducted among suppliers of Mexican companies reveals that over 45% of imported products originate from the United States, followed by China, Japan, Germany, and South Korea at 30%.

Mexico's strategic geographical location positions it favorably for this nearshoring model, particularly due to its proximity to the United States. This proximity proves valuable for addressing logistical and transportation challenges that have been significantly impacted and require prompt solutions.

Mexico's advantageous 3,152-kilometer land border with the United States makes it an excellent candidate for foreign nearshoring investments. Additionally, the shared time zones between the two countries allow for coordinated operations, further enhancing the appeal of Mexico for nearshoring opportunities.

According to the Inter-American Development Bank (IDB), nearshoring could generate an additional $78 billion in annual exports in Latin America, of which more than $35 billion would come from Mexico. Furthermore, figures from the Mexican Ministry of Economy (2024) indicate that sectors such as automotive, electronics, aerospace, textiles, and semiconductors are the ones that are benefiting most from the influx of investment.

Key factors that support nearshoring between Mexico and the United States include:

•  The strained relations between China and the United States.
•  The T-MEC agreement facilitates trade with key partners like the United States and Canada.
•  The proximity of the two nations.
• Mexico's competitive labor costs.
• Efficient and reliable supply chains.
• Strong performance of the national industry, particularly in the automotive sector.

The most attractive states in Mexico for nearshoring

By 2025, Nuevo León, Coahuila, Chihuahua, Querétaro, Jalisco, and Baja California will have positioned themselves as the most attractive states for nearshoring-related investment in Mexico. These territories offer solid logistics infrastructure, industrial parks, a skilled workforce, and proximity to the United States border.

For example, Tesla's arrival in Nuevo León set a precedent in the relocation of production chains, while Querétaro and Jalisco excel in the high-tech and semiconductor sectors.

How can we assist you

At H&CO, our tax experts boast over 25 years of experience in offering expert advice to foreign investors on various tax-related matters. When expanding your business or investing in the US, meticulous planning is essential, especially when navigating through the complexities of US tax laws and regulations.