From Global-isation to Local-isation

Nearshoring in Mexico and Central America.

The concept of nearshoring has gained significant attention in recent times as companies seek to diversify their production lines and reduce supply chain vulnerabilities. This phenomenon involves companies from the US or the West moving their operations to neighbouring countries like Mexico and Central America. Chinese companies are also partaking in ‘nearshoring’ in Mexico, not only to maintain proximity to the US market, but also limit their exposure to shipping and supply chain problems as well as growing geopolitical tensions.  

Chinese companies, in particular, have been establishing operations on the US-Mexico border, effectively rolling nearshoring into their business strategies. “The Mexican Secretariat of Finance gave a report on the performance of tax revenues in Mexico,” informed a renowned economist at the Salvadoran Foundation for Economic and Social Development, “and talked about nearshoring and the issue was that they had made a growth forecast for 2023 and they were adjusting it upwards, estimating it will grow at approximately 3.5% because of the impact of nearshoring investments.” The economist also acknowledged that the trend has garnered “strong investments from Chinese companies expanding operations in Mexico,” contributing to economic growth. 

The Mexican Secretariat of Finance […] talked about nearshoring and the issue was that they had made a growth forecast for 2023 and they were adjusting it upwards.”

Economist at the Salvadoran Foundation for Economic and Social Development 

Mexico, divided into four regions by the central bank, is witnessing significant investments in nearshoring. “Reading between the lines, the central bank said that Mexico had to take advantage of this to attract higher value-added investments,” confirmed an independent business consultant from El Salvador. While sectors like automotive suppliers, electric vehicles, batteries and health-related products are benefiting, challenges such as energy supply and a shortage of specialised human capital for these new production chains are evident. The central bank suggested to make “an ad hoc plan for the whole wave that is coming, to relieve bottlenecks which could limit the speed of the arrival of these new companies.” 

Central America is also experiencing its share of nearshoring activities, with Costa Rica, Panama and the Dominican Republic forming an alliance, know as the Alliance of Democracy, to attract such investments. “In the case of El Salvador, Honduras and Nicaragua most of our industrial plants in Central America are for textiles and have low wages,” informed the El Salvadorian business consultant. While Central America has seen an increase in manufacturing contracts moving from Asia, the El Salvador region faces challenges in retaining workers due to the “low wages”, especially compared with the US. 

However, higher-wages are possible in the expanding market of call centres and Business Process Outsourcing (BPO) services showing potential for keeping workers within the region, but the language barrier poses a challenge. For example “in El Salvador there is a gap of 12,000 bilingual people in call centres who have not been hired,” reported the Salvadoran Foundation for Economic and Social Development economist, “there is full employment with open contracts to fill and with that salary they would stay in the country, but there is a language barrier.” The market is suggesting that in remote services there is an opportunity for workers not to leave the country, “but you have to train them” warned the economist. 

“in El Salvador there is a gap of 12,000 bilingual people in call centres who have not been hired… there is full employment with open contracts to fill and with that salary they would stay in the country, but there is a language barrier.”

Economist at the Salvadoran Foundation for Economic and Social Development 

Industrial park development for free trade zones varies across Central American countries. Honduras and Costa Rica have seen investments, driven by Kamala Harris’ initiatives “who promoted strong investment in industrial parks, not under the nearshoring logic, but under the US policy of reducing migration,” explained the business consultant. However, the growth of industrial infrastructure in El Salvador depends on demand and available resources. 

The Progress in the Americas Initiative agreements (jointly published by the IDB and the US Senate Foreign Relations Committee) highlighted last year that there exists a potential market of USD 72 billion worth of imports from the United States that could be tapped into by Latin American countries. The economist elaborated that “El Salvador exports USD 2.7 billion to the United States, of that USD 72 billion,” continuing that, “if our country doubled exports in 5 years, it would be a success.” For example, “Costa Rica’s health industry, since CAFTA [Central America Free Trade Agreement] was signed in 2006 to 2022, the value of their exports increased by USD 3 billion, just from that industrial chain.” This underscores the notion that El Salvador’s current production falls short of the expansive industrial chain exported by Costa Rica, revealing the potential for diversification and the need for “a deliberate policy to attract sectors.” However, realising this potential necessitates meticulous and strategic efforts.

Guatemala finds itself “in the same position as El Salvador,” the independent business consultant expanded, “it has a much more direct relationship with Mexico, which would be a linkage but what affects Guatemala is legal uncertainty, which is why investment is very low.” To harness the full potential of these opportunities will require active public policies, alignment with private sector needs and improvements in training and human resources. 

The shift towards nearshoring presents a promising avenue for economic growth and diversification in Mexico and Central America. While challenges such as energy supply, labour market skills and language barriers need to be addressed, these regions have the potential to become essential players in various industries through strategic investments, strong policies and alignment with market demands. By capitalising on nearshoring opportunities, these countries can further enhance their economic prospects and global competitiveness, by keeping it all a little closer to home. 

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