Nearshoring Opportunities in Mexico Appeal to U.S., Chinese and Other Asian Companies

Nearshoring is now clearly on the agenda of North American leaders, due in part because of supply chain disruptions derived from COVID-19, the United States' trade tensions with China¹ and Russia's invasion of Ukraine. Whether for those reasons alone together or combined with other trends, investments mostly from the U.S. and Asian countries are pouring into Latin America.²

Nearshoring is not for everybody. Transferring a business operation to a nearby country is not necessarily an easy task, but it is indeed an opportunity that should not be overlooked.

Mexico, in particular, has attracted the attention of different companies around the world because of certain conditions inherent to it, mainly its proximity to the United States (the Mexico-U.S. border at approximately 3,150 kilometers  – nearly 2,000 miles – is one of the top 10 longest in the world, as well as one of the busiest and most active economically³); the benefits of free trade agreements signed by Mexico,⁴ particularly the modernized United States-Mexico-Canada Agreement (USMCA); and low labor costs,⁵ among others.

The New York Times recently made the argument that Mexico is the next globalization stop after China, pointing to the trend that U.S.-based companies that used to obtain goods from suppliers located in Asia, mostly China, have started to look elsewhere for new locations and suppliers given the fact that obtaining such goods from regular suppliers has become increasingly more expensive and time-consuming.

Several inquiries have been raised on whether Mexico will replace China as the preferred destination for investments of countries such as the U.S. There are reasons to believe that this may happen, such as the tariffs imposed to Chinese products in the U.S. or the increment in salaries of Chinese workers. However, there are companies that may choose to stay in China since they are comfortable with doing business there, particularly those that fit in with the local Chinese high-tech capabilities and supply chain infrastructure.⁶

During the North American Leaders' Summit held in Mexico City on Jan. 9-10, 2023, leaders of the region stressed the importance to strengthen bonds for obtaining goods from providers located in the North American region rather than from different regions as is occurring today.

In order to achieve this goal, the leaders agreed to create a joint committee comprised of four representatives from each country that will focus on promoting the integration of the region's economies and, in the words of Mexico's President Andrés Manuel López Obrador, "substitute the importations to North America in order to achieve self-sufficiency of the area."⁷

Developments in the U.S. Congress

As the leaders continue to discuss regional economic integration, there are proposals developing in the U.S. Congress to strengthen ties with trading partners in the Americas amid growing tensions with China. Sen. Bill Cassidy (R-La.) and Rep. Maria Elvira Salazar (R-Fla.) recently introduced a discussion draft of a bill that would establish a sweeping foreign and economic policy that points toward the Western Hemisphere. It contains provisions that would encourage companies to nearshore supply chains from China to the Western Hemisphere through tax incentives and trade preferences. It also includes instructions to the U.S. Trade Representative to negotiate expansion of the USMCA with select countries in the region; creation of an "Americas Partnership" with countries in the Western Hemisphere focused on hemispheric integration; and, creation of an "Americas Investment Corporation" within the U.S. government that would provide for private sector economic development in partner countries through support to large-scale infrastructure investment and nearshoring and reshoring opportunities.

Although merely a discussion draft at this time, the 202-page bill demonstrates the significant amount of consideration being paid in Congress to nearshoring and shifting supply chains away from China.

Risks and Opportunities

Among the bundle of nearshoring opportunities for the North America region, the semiconductor industry is probably the most promising,⁸ not only for U.S. companies but for existing Asian companies that would be interested in assuring their participation in this new promising value chain, which based on current trends is most likely to occur. Of the 5.09 million square feet of space in Mexican industrial parks that have been leased by foreign companies, approximately 80 percent are Chinese-based companies. About 15 percent were rented by U.S.-based companies, along with 3 percent by Japanese companies and 2 percent by Korean companies. Chinese companies also have leased 4.23 million square feet of Mexican industrial park space to install production lines in the Mexican cities of Monterrey, Saltillo, Juarez, Tijuana, Queretaro and Mexico City.⁹

As an example of how nearshoring is already impacting on the Mexican economy, the Mexican state of Baja California has informed that during the first semester of 2022 it had received investments from 55 different companies based in the U.S., China, South Korea, Germany and France, which correspond to a total amount of $1.22 billion. These investments are primarily from the medical, electronic, automotive, metal and food industries.¹⁰

Moreover, this investment by Chinese companies in Mexican industrial parks continues to increase.¹¹ There are published plans of expansion from Chinese companies into the Mexican states of Jalisco, Nuevo Leon and Guanajuato. All demonstrating the realization that company managers have regarding the advantages of nearshoring in Mexico, as well as the states' push to obtain more investments from Chinese companies.¹² It is undeniable that no opportunity is free of risks. Mexico's energy production capabilities are being questioned. Although the USMCA leaders have shown interest in working together to develop new opportunities in the development of renewable energies, there are other problems that need to be addressed such as the limited capacity of industrial parks in Mexico, which requires seeking or developing facilities outside of the industrial parks.¹³

How We Can Help

Holland & Knight is well equipped to assist clients navigating complex cross-border transactions such as those experienced by companies that are seeking to take advantage of the nearshoring opportunities.

Our U.S. and Mexico trade practices makes us a one-stop firm with deep knowledge of U.S. and Mexican regulations and programs such as the Maquila Program (IMMEX), tariff classifications, rules of origin or USMCA knowledge. Holland & Knight attorneys also have plenty of experience in regulatory compliance, labor law, real estate complexities, transfer pricing agreements, infrastructure and general business practices (e.g., tax and environmental issues), as well as other areas of the law required to succeed in such endeavors.

Holland & Knight will continue to keep our clients informed of major legislative and regulatory modifications that could affect how business is being conducted to allow for improved decision-making in favor of our clients' interests.

For more details regarding nearshoring, contact the authors or another member of Holland & Knight's International Trade Group.

Notes: 

¹ Remarks by U.S. Secretary of Commerce Gina Raimondo on the U.S. Competitiveness and the China Challenge, U.S. Department of Commerce, Nov. 30, 2022.

² Nearshoring will be an enormous boon to Latin American industry in 2023, Fortune, Dec. 23, 2022.

³ With more than 170,000 kilometers (approximately 105,600 miles) of paved roadways, more than 100 commercial ports and 70 airports, Mexico has a vast network infrastructure for performing supply chain operations.

⁴ Mexico has signed 12 different free trade agreements with countries around the world.

⁵ Mexico has one of the lowest minimum salaries in the Organization for Economic Cooperation and Development (OECD).

⁶ Reshoring from China to Mexico - How Prevalent is it Really?, china-briefing.com, May 27, 2022.

⁷ AMLO anuncia creación de grupo para sustituir importaciones en América del Norte, El Financiero, Jan. 10, 2023; and López Obrador's remarks about 'import substitution' raise eyebrows, InsideTrade.com, Jan. 13, 2023.

⁸ North American semiconductor industry will prevent 'over-reliance' on Asia: Trudeau, Globalnews.ca, Jan. 11, 2023; and North American leaders set aside tensions to focus on chips and migration, Financial Times, Jan. 10, 2023.

⁹ Mexico Attracts Most Nearshoring Opportunities in the Region, mexicobusiness.news, Dec. 5, 2022.

¹⁰ Nearshoring, una larga fila en México, forbes.com.mx, Nov. 16, 2022.

¹¹ China lidera la inversión en espacios industriales para nearshoring en México, eleconomista.com.mx, Nov. 25, 2022.

¹² Chinese investment in manufacturing on the rise in Mexico, mexiconewsdaily.com, Sept. 16, 2022.

¹³ Mexico's industrial parks benefit from nearshoring, Opportimes, Sept. 8, 2022.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.