Nearshoring, from crisis to opportunity
The nearshoring trend emerged from one crisis, or several. Every crisis represents an opportunity for those who know how to identify it amid chaos. Nearshoring and other commercial trends are the result of several critical events that have reconfigured the political, economic and commercial worldwide scenario.
Trade war between the United States and China
Who doesn’t remember Donald Trump’s 2016 campaign slogan: “Make America great again.” Donald Trump transformed this slogan into a protectionist policy when he assumed the presidency – and which continued with President Joe Biden -, which involves the imposition of tariffs on Chinese imports to the United States, as well as restricting US investments in that country. As a result of this policy, three trends emerged: a) the return of investments to the United States (reshoring); b) the relocation of investments in “friendly” countries (friendshoring); and c) the relocation of investments to countries geographically close to the United States, such as Mexico (nearshoring).
“Make America great again” also impacted Mexico, where issues on the bilateral agenda with the United States, such as migration and drug trafficking, were bargaining chips to “negotiate” the signing of the new trade agreement, the USMCA under the conditions of Donald Trump.
Covid-19, the supply chain crisis
In 2020, the global borders closure due to the Covid-19 pandemic led to the interruption of supply chains. In April of that year, the Mexican government did not close borders, but established criteria to determine essential and non-essential economic activities, which implied the temporary closure of many companies that were part of the integrated productive chains in North America. Companies and business organizations, and even US officials, undertook several actions through negotiations and the media to convince the Mexican government of the need to harmonize production chains (an intrinsic condition of nearshoring) to gradually reopen all economic activities. Finally, this was achieved, opening the opportunity for companies to relocate to Mexico.
As the supply chain crisis became normalized, nearshoring strengthened as a trend, production centers from Asia began to relocate to countries closer to the United States, such as Mexico, despite the several critical issues that the country has to resolve.
Is Mexico taking advantage of the nearshoring opportunity?
Economic analysts and international organizations, such as the Inter-American Development Bank (IDB), project nearshoring investments for Mexico of over 35 billion dollars for the coming years.
But, nearshoring seems more like a narrative than a reality. It is true that despite the critical issues that Mexico faces (water, energy, legal certainty, etc.), nearshoring investments continue to arrive. However, they are not yet reflected in Foreign Direct Investment (FDI) figures.
According to the Economy Secretariat, during 2023, 4.8 billion dollars were registered for new investments (that is, those that could be derived from nearshoring), which represented 13% of the total FDI captured in the year. In contrast, reinvestments by foreign companies already established in Mexico represented 74% (equivalent to $26.63 billion) of FDI in the same period.
In this context, there is a risk that nearshoring will not be used properly. It all depends on the public policies that the next president will carry out.
What’s going on? Are investors waiting for Mexico’s political and economic future to make decisions? It is an important factor, although it is not the only one. As an example, for some reason that is unknown until now, Tesla has not yet started work on its installation in Nuevo León. Meanwhile, the gigafactory of the same company has already been installed in Austin, Texas. This sends bad signals to its potential supply chain, or worse, to other potential mega investments in Mexico.
The presidential candidates
The presidential candidates have the diagnosis, they know what must be done to attract nearshoring investments, this is what they have expressed in meetings with business organizations or in the three debates they had. What they do not have is a comprehensive strategy, or at least they have not made it public.
The problem with presidential candidates is that they have limitations. A president who will continue the legacy of her predecessor, that is, the “nationalist” energy policy or one aimed at prioritizing fossil energy over renewable energy, is not a good sign for investors; Neither is a president without sufficient political and diplomatic skills to confront an aggressive trade (protectionist) policy by the United States.
Tax reform, the first great challenge of nearshoring
More needs to be raised to allocate resources to the necessary infrastructure (roads, ports, telecommunications, etc.) to attract nearshoring investments.
In this context, the first great challenge of the new Mexican Congress (Senate and Chamber of Deputies) that will take office as of September 1, 2024 (before the inauguration of the next president of Mexico) is the discussion and approval of the Income Law and Expenditure Budget.
An insufficient tax reform that does not aim to increase revenue, that does not offer tax incentives to attract nearshoring investments, or that does not consider the adhesion of new taxpayers (from the informal economy), will be more detrimental than beneficial in attracting investments.
The other constitutional reforms
If Morena, the leading candidate’s party, obtains a qualified majority in Congress (two-thirds), pending constitutional reforms could be approved that would affect the business climate. Although this is unlikely (the conditions under which it won the relative majority in Congress in 2018 are not the same in 2024), Morena has the task of promoting constitutional reforms, in energy matters, water for industrial use, railways and even eliminate autonomous regulatory bodies such as the Federal Telecommunications Institute and the Federal Economic Competition Commission, to continue the legacy of President Andrés Manuel López Obrador.
A party with a qualified majority in Congress would leave little room for negotiation, for the business sector to actively participate in the construction of public policies aimed at optimally taking advantage of nearshoring.
New crises?
How can companies face new crises such as interruptions in their supply chain derived from the political-trade decisions of one country or another? What challenges would the policies of the next president of Mexico represent for companies seeking to establish in Mexico?
Companies must be aware that disruption of their supply chains can happen again under any circumstances outside of their operations, so they must be prepared.
Many crises warn. Avoiding them is not only about facing the problems inherent to the company’s operations, but also about being alert and addressing public issues that represent a change in government, new regulations, decrees or law reforms that impact a certain economic sector.
Are the companies and their business organizations that represent them prepared to receive the new government and a new Congress?