Commercial and political tensions between the US and China and supply chain bottlenecks derived from the Covid-19 pandemic have fueled interest in nearshoring by US companies. Latin America is perfectly positioned as a strategic destination for US nearshoring but the promised economic boom has yet to materialise.
According to a regional trade analyst, “Latin America’s geographic proximity to the US, Canada and even Europe combined with a growing pool of skilled labour makes it the ideal candidate for nearshoring.”
“Latin America’s geographic proximity to the US, Canada and even Europe combined with a growing pool of skilled labour makes it the ideal candidate for nearshoring.”
Regional trade analyst, Latin America
Leading US multinationals like Boeing, Nike and Hasbro have already moved parts of their manufacturing supply chains out of China opting for countries like Mexico. These corporations are counting on the implicit support of the Biden administration, which is actively supporting this reorientation. In February 2021, President Joe Biden passed an executive order which called on government agencies to identify geopolitical risks to supply chains and find alternative strategies.
The current economic and political environment in the US suggests that the nearshoring trend is here to stay. Nevertheless, companies in Latin America still face high labour, material and tax expenses, a limited talent pool, lower process monitoring, security threats, poor governance and political instability. A Mexican economist told us, “If Latin America’s political, policy and economic problems can be resolved, nearshoring has the potential to add USD 78 billion to Latin American exports.”
Notably, the IDB’s Vision 2025 plan for economic growth and recovery for Latin America and the Caribbean supports the reconfiguration of regional value chains which include nearshoring services. According to the organisation’s estimates, Mexico and Brazil would be the main beneficiaries from US nearshoring due to their large established industrial bases and skilled labour.
Before it can anticipate any nearshoring boom, Mexico needs to resolve a long-standing dispute under the US-Mexico-Canada (“USMCA”) where the US and Canada have filed a complaint about Mexico’s nationalist energy policies. Mexico’s President López Obrador has stated that he does not want to rupture the USMCA agreement but that he will protect Mexico’s sovereignty.
Other governments across Latin America are coming up with imaginative policies to lure US business and investments. Honduras has awarded its special economic zones a high level of autonomy which allows administrators to provide independent arbitration of legal proceedings. Panama, Costa Rica and the Dominican Republic launched the Caribbean Triangle Alliance in September 2021 to promote trade through the special development zones for nearshoring services. Similarly, Guatemala launched a public-private initiative known as “Guatemala no se detiene” (Guatemala does not stop) to attract new nearshoring investors.
“Latin America as a whole is trying to position itself to benefit from US nearshoring. There is competition between the countries in the region but there is also collaboration.”
Director, Chamber of Commerce, Costa Rica
A director of the Costa Rican chamber of commerce affirmed, “Latin America as a whole is trying to position itself to benefit from US nearshoring. There is competition between the countries in the region but there is also collaboration. To be successful we must all improve political stability, education, trade facilitation, value-add and ancillary services.”