Many U.S. Companies Moving Manufacturing to Mexico – Known as “Nearshoring” – Amid Rising Risks of China Reliance
PALM BEACH, FL – While China has been the dominant force in global manufacturing for decades now, in recent years a phenomenon known as “nearshoring” – the practice of transferring a business operation to a nearby country, especially in preference to a more distant one – has taken hold of companies in the United States, with many weighing the risks of relying solely on the Asian juggernaut amid numerous concerns, including cost, reliability, and rising U.S./Chinese economic tensions.
As a result of these factors, many American companies are turning their attention to their immediate neighbor to the south – Mexico – for their manufacturing needs, leading to the country as of 2023 surpassing China as the U.S.’s leading trade partner.
In Q3 2023, audits and inspections in Mexico on the part of U.S. buyers showed over a 17 percent degree of growth year-over-year. This has been cultivated by U.S. companies desiring increased supply chain reliability and flexibility resulting in shorter lead times and more affordable transportation costs, in addition to establishing a cooperative economic relationship with one of America’s closest neighbors.
This greater reliance on Mexico came at the tail end of the COVID-19 pandemic; the United States outsourcing manufacturing to Mexico was slow as recently as 2019, but as of July 2023 Mexico made up 15 percent of all U.S. imports – granting it new status as this country’s largest trading partner – with China coming in second at 14.6 percent.
Bear in mind that American companies are not abandoning Chinese manufacturing, far from it; it’s just that many are recognizing the need to add additional options to their existing supply chain as more and more businesses and organizations develop international influence or start operating on an international scale.
For an example of the genesis of this sudden and rapid growth, in February of 2022 Walmart chose a family-run apparel business in Mexico called Preslow over their usual Chinese source to purchase a $1 million order of company uniforms. The reasons made sense- the pandemic had caused the costs of international shipping to skyrocket, and supply chain issues had resulted in ports being jam-packed with incoming transport vessels, resulting in months-long fulfillment delays.
The logic of relying on one country halfway around the world for important goods was beginning to be questioned.
Mexico has been gearing up for the rise of nearshoring; since 2019, the country has grown its industrial space by 30 percent, but is still in the process of assessing and addressing some of their manufacturing weaknesses as well, such as security, power availability, and infrastructure.
U.S. businesses have been taking note of the numerous advantages to dealing with their neighbor to the south for their needs, including the country’s exceedingly close proximity, low labor costs translating to reduced pricing, a proven and reliable industrial base, and – perhaps the biggest reason of all – the fact that all products manufactured in Mexico and imported to the U.S. that are compliant with the United States-Mexico-Canada Agreement (USMCA) are assessed zero tariffs.
Other reasons for the growing popularity of nearshoring have been due to deteriorating economic relations between the U.S. and China; in 2018, the Trump Administration – claiming that Beijing’s aggressive trade practices were a violation of global trade rules – began imposing harsh tariffs on Chinese imports, a move that President Joe Biden continued to support after taking office in 2021.
Since then, the Biden Administration has encouraged American companies to engage in manufacturing with allied countries – called friendshoring – to bring back their manufacturing to the United States – known as reshoring – or, finally, to seek suppliers closer to the country via nearshoring.
In the near future, American companies are expected to continue to diversify their sourcing options, while nonetheless still keeping China as a major partner in a large number of their manufacturing ventures. It will be interesting to see how the industry will reshape itself in the years to come as globalization continues to grow and evolve.