Investment in nearshoring, an industrial strategy involving the relocation of factories and production to neighboring countries, is booming in Latin America, and Mexico is leading the pack as the region’s top destination.
The North American country has become the top-pick for US companies seeking to bring down operating costs. Its geographical proximity and shared border make it an attractive destination by reducing production and logistics costs. Moreover, free trade agreements between Mexico, the United States, and Canada ease tariffs and simplify export growth.
With Mexico consolidating itself as a crucial hub for nearshoring in recent years, around 80% of the country’s industrial production currently has the US as its final destination. Indeed, foreign direct investment has soared to record levels, according to Barclays, not only shoring up the Mexican economy against potential headwinds north of the border, but also fueling sustained growth.
A telling example is that Mexico and Canada have overtaken China as the primary suppliers of goods to the United States, thanks in no small part to a diversification that has been driven by nearshoring.
According to Bloomberg News, the US imported nearly $203 billion worth of goods from China in the first six months of 2023, a 25% drop compared to the same period in 2022, based on the latest unadjusted data from the Department of Commerce. China now ranks third among suppliers of goods to the US, trailing Mexico and Canada.
Where are these investments heading?
According to a study by Deloitte, the nearshoring market is poised to grow at a compound annual growth rate (CAGR) of 10.3% from 2021 to 2025. Furthermore, estimates from the Inter-American Development Bank (IDB) suggest that nearshoring could boost global exports from Latin America and the Caribbean by $78 billion annually, with $35.3 billion attributed to Mexico alone.
A recent study by IDC concluded that Latin America offers the North American market a distinctive blend of geographical proximity and capable partners with the maturity required to provide quality services. Among the countries with potential, Mexico shines, alongside Guatemala and El Salvador. Simultaneously, the industries benefiting from the demand for these services are diverse, encompassing the automotive, textile, pharmaceutical, renewable energy, and IT sectors.
Even though Central America enjoys a privileged location, other countries could also see export growth through nearshoring. Projections from the IDB suggest that Argentina could export an additional $3.91 billion; Brazil, $7.84 billion; Colombia, $2.57 billion; and Chile, Costa Rica, and the Dominican Republic, collectively, over $1.5 billion per year.
The consolidation of nearshoring is expected to yield significant benefits across the region, including economic recovery and a slowdown in inflation, by reallocatinvestments worth between $30 billion and $50 billion that had previously flowed to Asia.
A noteworthy example of a US company that embraced production in Argentina is Whirlpool, which established a washing machine factory in the Buenos Aires province district of Pilar. Ruben Belluomo, Commercial Manager at Infor South Cone, highlighted that “the American company saw an opportunity in Argentina due to the challenges associated with producing in faraway countries during the Covid-19 pandemic. Initially, they had set up their plants in China, as part of the offshoring trend, only to discover that competitiveness is not solely dependent on costs but also relies on a stable supply chain committed to value creation.”
To bolster its global position and promote foreign direct investment, the region must take substantial steps to enhance its business environment and modernize its commercial infrastructure. These measures are pivotal in attracting investments and boosting the region’s competitiveness on the international stage.
According to data from the IDB, it’s estimated that each dollar invested in investment promotion yields a return of up to $41.7 in additional foreign direct investment. This correlation between investment and return underscores the effectiveness of strategies implemented to attract capital and improve export prospects.
Investment in infrastructure is another critical pillar in enhancing the business environment. This includes constructing secure roads, expanding high-capacity ports, streamlining customs processes, and enhancing connectivity and digitalized transportation. Such progress would not only reduce operating costs for foreign companies but also streamline commercial and logistical flows.
Furthermore, Latin America should tackle a seamless regional integration to foster economic growth and competitiveness through preferential trade agreements. This frictionless integration would provide companies with a broader operational base and access to a larger pool of potential customers, further boosting foreign investment and regional economic development.