Nearshoring: The phenomenon attracting firms, investment to the Americas

Mexico City, May 24 (EFE).- Investment and companies are flocking as never before to the Americas, with Mexico and Brazil the prime destinations, thanks to the phenomenon of “nearshoring,” or relocating supply chains, whereby manufacturers relocate to be closer to their markets, especially from Asia.

The problems created by the Covid-19 pandemic, the disruption of supply chains, inflation and the US-China trade war pushed many firms to the Americas so they could get physically closer to the US market.

But there’s an unequal situation in the region, where not all the countries are prepared to attract investment due to internal crises or lack of an appropriate labor pool.

Mexico, where the peso last week hit its best exchange rate in seven years due to nearshoring, is the country that has benefited most from the relocation of supply chains, as the $5 billion investment by Tesla to set up the world’s largest electric vehicle plant in Monterrey demonstrates.

The Mexican assembly plant sector anticipates investment of up to $18 billion this year – compared to $11 billion in 2022 – thanks to nearshoring, Luis Manuel Hernandez, the president of the National Council of the Maquiladora and Export Manufacturing Industry (Index), told EFE in an interview.

“It’s bringing assets to Mexico, having greater capacity, greater production capacity so that orders come to Mexico instead of to Asia,” said the representative of the 1,000 most important export manufacturing firms in Mexico.

Since Joe Biden took office in the United States in January 2021, reducing the dependence on China has been one of his main economic objectives, as shown by the CHIPS law, approved to foster construction and expansion of US semiconductor factories.

The US leader has also undertaken protectionist measures such as the “Build America, Buy America” law, which requires that all the iron, steel, manufactured products and construction materials for infrastructure projects be produced in the US.

Despite that, the relocalization of companies back into the US is still not a significant trend, although it is in Mexico.

According to figures from the Inter-American Development Bank (IADB or IDB), Mexico’s export totals resulting from the industrial relocation process could reach $35.28 billion, compared to $30 billion in the US.

Brazil is the No. 2 Latin American country in terms of benefiting from nearshoring, with the potential to increase its exports to more than $7.8 billion each year, according to a 2022 IADB study.

But at present the establishment of foreign companies to produce in Brazil is still only “timid,” Constanza Negri, the manager of Trade and International Integration for the National Confederation of Industry (CNI) told EFE.

Negri said that Brazil has “a chance to integrate itself into the (global) value chains,” but “to participate in that process, there are pending structural challenges.”

Fostering competitiveness, greater technological development, strengthening modern industrial policy and creating an integration strategy are the “structural challenges” that Brazil needs to deal with to improve its standing as a nearshoring destination, she said.

Uruguay, meanwhile, has a “very open policy” for attracting foreign companies, although no figures exist on this so far, Ines Bonicelli, the executive deputy director for the Uruguay XXI investment, exports and country image promotion agency, told EFE.

She emphasized Uruguay’s “attractiveness” for drawing in new investment due to its economic, political and social stability, institutionality, respect for business rules and quality of life, all elements that she said are a “letter of introduction” that creates interest in a region where there is plenty of instability.

Meanwhile, Argentina is hampered in becoming a nearshoring destination due to its restricted debt markets, high inflation and fiscal pressure, along with the scarcity of foreign currency.

In fact, between 600 and 800 Argentines have become tax residents in Uruguay since the start of the pandemic, and they are joined by the Argentine companies that have expanded their businesses onto the other side of the Rio de la Plata, according to what EFE was told by Uruguay’s embassy in Argentina.

The Dominican government is currently promoting the country as a site where foreign companies can relocate, emphasizing its geographic location, the trade agreements it has with countries like the US and the legal security that guarantees that foreign firms can operate with a minimum of difficulty.

The number of foreign firms operating in the Dominican Republic increased from 695 in 2019 to 783 in 2022, with most of them being cigarette and tobacco products manufacturers, medical and pharmaceutical firms, clothing workshops and others.