Tesla Is the Proof that Nearshoring Reaches Mexico and Latin America

In the economic press, the term nearshoring has gained significant relevance due to economic agreements and the increase in investment in Mexico. But what is this investment model about? And even more relevant, is it the solution to improve economic development in Latin America?

Nearshoring literally means near the coast. It is a variant of the well-known term offshoring, which is the relocation and delegation of processes to companies abroad, where economic conditions are favorable for productivity growth, cost reduction and the legal framework. Asia had been the clear example of offshoring, where valuable companies invested and delegated assembly processes to countries in China, India, or Southeast Asia.

However, the crisis in freight forwarding, the container crisis, the COVID-19 pandemic, and the shortage of microchips have shown that offshoring has weak points that compromise the efficiency of companies in the centers of operation and major markets such as the United States or Europe. Additionally, the economic and political panorama in China, especially, generates an increase in the suspicions and distrust between the Western governments and the Asian giant.

Likewise, the environmental problems and the constant criticism of the carbon footprint represented by the long journeys generated by offshoring causes that other alternatives are beginning to be considered. This led to talk of nearshoring, which sought to find environments equally or similarly favorable as in Asia, but closer to the destination countries. Production or assembly centers or where various processes can be delegated and that guarantee the same or better efficiency and competitive prices.

For this, Mexico represents the most valuable ally for the United States. It is a country where labor is cheaper and has all the conditions that both US companies and the government welcome. On the one hand, the legal framework of Mexico, which has a free trade agreement, a historical ally and an extensive border that facilitates agile, efficient, economic and much more environmentally friendly trade that is so relevant for the current context.

The Undersecretary for Multilateral Affairs and Human Rights of Mexico, Martha Delgado, said in an interview with Carmen Aristegui for CNN that her country has a series of favorable conditions for this new nearshoring trend. “Being able to make optimal use of strategic conditions that Mexico has. The first is the entire framework of free trade agreements. Because here you can import, with our 14 free trade agreements, from almost the whole world with very low or zero tariffs, the materials to make almost anything and second, because you can export to Latin America in almost the same way, to Europe, to the United States, the products already manufactured with very competitive conditions. If we add to this that Mexico is strategically below, to the south of the United States (which is one of the largest markets in the world); two, that Mexico does not have tariffs for Chinese raw materials that are having difficulties to be able to be placed in the United States due to the high taxes they pay; and third, that we have a skilled workforce of excellent quality ”

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Delgado also assured that Mexico does not intend to just stay in a small aspect of production, but to create favorable conditions to be an export center for the finished product. This is why they not only seek to keep the Tesla plant, but "to be able to create the conditions for these automobile plants to exist, but also for batteries, semiconductors, and to be able to make optimal use of them," said the official in her interview with CNN.

Nearshoring Challenges

Nearshoring not only generates joy for the countries that host this investment. For many, this model generates the same number of doubts in governments. One of the main challenges is working conditions. So that these companies that arrive and comply with the conditions of decent work, without any type of exploitation against vulnerable populations such as mothers who are heads of households, minors, or migrants.

For this, AMLO or the government in power must find a way to continue attracting foreign investment, but without giving up or giving up the rights of workers. Likewise, for Mexico or any other Latin American country to be a reliable nearshoring place, it is important to have a sufficient energy supply and the training of the workforce, not only for technical jobs, but also for managers. On the other hand, a reliable infrastructure that guarantees efficient and state-of-the-art transportation and customs handling is also essential.

It Is Not Only Mexico, but Also Latin America

Despite the fact that nearshoting finds the main partner for US companies in Mexico, the truth is that the entire region can find benefits to be recipients of foreign investment. In order to be not only centers of production, but of services, it is crucial to invest in infrastructure and education. Having bilingual and trained personnel, with efficient ports and means of transport that expedite shipments, is key. All this, with care for the environment, which will be one of the main attractions for Western companies, when finding allies in Latin America and that serves as added value for their customers.