Nearshoring: an ESG opportunity?

Can Latin American nearshoring deliver economic benefits and address ESG challenges?

Estimates by the Inter-American Development Bank (“IADB”) have revealed that nearshoring could generate an additional USD 78 billion of goods and services exports from Latin America and the Caribbean, this would be one of the region’s largest growth opportunities in decades. But can the benefits transcend economic profit?

Some companies are predicting that nearshoring will meaningfully boost their ESG credentials. Lower transportation emissions, diversification of manufacturers, and a more efficient use of infrastructure are some of the main ESG opportunities of nearshoring. In Latin America, the IADB revealed that internal greenhouse-gas emissions to produce goods for external consumption amounts to 20% of total emissions – which may seem high but is apparently below average.

Pilar Madrigal, head of investment advisory at CINDE, the investment promotion agency of Costa Rica said, “Along with its strategic location, places like Costa Rica are also known for promoting more sustainable practices, a growing topic of interest to multinational companies. The country has aimed to become a carbon-neutral nation by 2050, and as of today, 99% of its electricity generation comes from renewables: water, wind, geothermal, biomass, and solar energies.”

“Along with its strategic location, places like Costa Rica are also known for promoting more sustainable practices, a growing topic of interest to multinational companies.”

Pilar Madrigal, Head of investment advisory, CINDE

Nevertheless, environmental, logistics, and economic advantages need to be accompanied by a favourable regulatory framework to attract businesses into Latin America. For example, companies looking to locate their production in Mexico need to find suitable locations which involve the development of business parks and logistics hubs. Urban development plans also require secure and quality supply of electric energy, with specific regulations for ad-hoc contracts to cater to private suppliers and traders.

Dyalá Jiménez, Director of the Costa Rican Chamber of Commerce, explained how the country was prepared for the nearshoring opportunity, “Costa Rica’s advantage stems from the investment made, over decades, in education, trade policy and regulation. Today, we offer a wide range of imports and exports with few tariffs but with high international standards of regulation and a Free Trade Zone regime that has been modernised, offers tax incentives and legal certainty.”

The nearshoring opportunity expands well beyond Costa Rica, however, for the region to take advantage of the opportunities that come with increased participation in global value chains, the IADB recommends countries to focus on a “3i” strategy: investment, infrastructure and integration. Investment in improving the business, Infrastructure development focused on trade, connectivity, transportation and logistics, and better regional Integration to lower trade friction and boost competitiveness.

“Economic integration without ideological restraints can synchronise efforts in a regional and global productive chain for the benefit of all.”

CEO, Guatemalan business association

Better regional integration has been highlighted as an economic opportunity in Latin America for some time but could the nearshoring opportunity finally be large enough to unite potential competitors? The CEO of a Guatemalan business association was a keen supporter of regional integration, “Companies and countries across Central America need to realise that if we go our way alone, we will be romantic quixotes travelling against the wind. We do nothing alone. Economic integration without ideological restraints can synchronise efforts in a regional and global productive chain for the benefit of all.”

Finally, to encourage nearshoring, regional governments need to work hand-in-hand with the private sector to set up investment plans, engaging with local stakeholders, and identifying business opportunities while ensuring compliance with regulatory obligations.

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