Nearshoring refers to the relocation of companies to a neighboring country where they desire to export. The recipient economies of nearshoring benefit in the short term through foreign direct investment and job creation. In the long term, the benefits of nearshoring are evident in increased fixed investment, productivity, wage growth, higher educational attainment, export growth, increased consumption, and currency appreciation.
Moreover, with appropriate economic policies, economies transition from being assembly plants to producing high-value-added goods, which increases the creation of skilled jobs, reduces informality, and provides an opportunity to narrow income inequality.
Key Moments of Momentum
There have been four key moments that have propelled nearshoring in Mexico: Strictly speaking, the opportunity for nearshoring opened up for Mexico with the implementation of the North American Free Trade Agreement (NAFTA) on January 1, 1994. From that date until 2022, Mexico's exports have grown at an average annual rate of 8.98% and currently represent 40% of Mexico's GDP. As a direct result of NAFTA and nearshoring, manufacturing exports have grown at an average annual rate of 9.17% since 1994, and foreign direct investment reached a historic high of $48.3 billion in 2013.
1. The implementation of NAFTA (North American Free Trade Agreement).
2. The onset of the trade war between China and the United States under the
3.The tariff ratification and continuation of the trade war between the United
States and China under the Joe Biden administration.
4. The pandemic, which led to increased logistics costs and delivery times.
Trade not only grew for Mexico. China joined the World Trade Organization (WTO)
in 2001, and its exports increased significantly due to low labor costs,
transportation-friendly infrastructure, and continuous depreciation of the yuan as a
In theory, the trade war between the United States and China would give
nearshoring in Mexico a renewed boost. However, there was no significant effect
on Mexico in 2018 and 2019, as companies make their fixed investment decisions
with a long-term horizon (15 years or more), and it was believed that the trade war
would end with the end of Trump's presidency. Additionally, in 2018, there was
uncertainty in Mexico due to the cancellation of the construction of the new
Mexico City airport. At the beginning of 2020, the uncertainty surrounding Mexico
had diminished, but tensions between China and the United States had also eased
with the signing of the phase 1 trade agreement. Companies that could have left
China decided to stay due to what seemed to be a promising new trade scenario.
Two months later, the pandemic hit.
In November 2020, Joe Biden won the presidency of the United States, raising expectations of the removal of tariffs imposed on Chinese products. Under a different style without as much fanfare but with the same tariffs, the trade war between the United States and China continued in 2021, alongside a significant increase in the costs of maritime freight from China to the United States.
Nearshoring has proven to be a strategic approach for companies seeking to optimize their export capabilities by relocating to neighboring countries. The shortterm benefits for recipient economies include increased foreign direct investment and job creation. In the long run, nearshoring brings about positive outcomes such as enhanced fixed investment, improved productivity, wage growth, higher education levels, expanded exports, increased consumption, and currency appreciation. By implementing appropriate economic policies, economies can shift from being low-value maquiladoras to high-value producers, resulting in the creation of skilled jobs and a reduction in income inequality.
At Lumextrade Financing Solutions, we understand the importance of nearshoring as a strategic business decision for companies seeking to optimize their export capabilities. As a trusted partner, we offer tailored financing solutions designed to support companies embarking on the nearshoring journey. Our expertise in commercial flow financing and working capital solutions, coupled with our deep knowledge of the Latin American business sector, positions us as the ideal financial partner for businesses looking to expand their operations through nearshoring.
Whether you require funding for relocation costs, working capital to support your new operations, or trade finance solutions to navigate cross-border transactions, our dedicated team is ready to provide customized financial support that meets your specific needs. Contact us today to explore how LUMEX Financing Solutions can empower your nearshoring endeavors and drive your business growth in the Latin American market.