Have you heard of nearshoring before? Dive into this article to discover why it plays a crucial role in Mexico's economy.
Nearshoring involves the relocation of factories from the country of origin to a nearby one with a similar time zone. The main goal is to reduce costs, including workers' salaries, electricity, fuel, inputs, and taxes.
Nearshoring emerged as a response to the cost-saving strategies of offshoring, where companies sought to manufacture goods in destinations such as Asia.
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 important to consider other significant factors, such as the increasing 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 skill 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 stands out as a prime nearshoring destination, with advantageous free trade agreements between Mexico, the United States, and Canada helping to alleviate tariffs. Approximately 80% of Mexico's industrial production is directed towards the United States.
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.
Projections from the Inter-American Development Bank (IDB) suggest that nearshoring could potentially boost exports by $78 billion annually. Mexico is expected to account for $35.3 billion (45%) of this total, presenting a significant growth opportunity for the national economy.
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.
In conclusion, numerous industry sectors stand to gain advantages from nearshoring in the region, particularly in Mexico. It is also crucial to consider the positive impact on the global industry and the environmental benefits that this model offers.
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