Since the global financial crisis of 2008-2009, proponents of trade and investment liberalization have found themselves in the sights, metaphorically speaking, from both left and right. Globalization has been their piñata. Republicans and Democrats have adopted a populist and inward-looking orientation with corresponding policies, posing a real threat to free trade.
The global pandemic itself has posed serious challenges to trade, investment, and the operation of businesses engaged in cross-border commerce. One of those looming challenges is knowing where to source.
Many large US companies choose to internalize (source within the company), while others outsource to companies specializing in specific business needs (e.g. information technology) and still others choose to relocate, particularly to China, Taiwan and South Korea.
But what do companies do when internalization, nationwide outsourcing and offshoring is not feasible for reasons such as cost, speed of delivery, reliability and control? Enter “nearshoring”, the compromise of growing choice.
Nearshoring, in layman’s terms, is the process by which a business locates all or part of its business activities closer to home or where its products are sold. It has always been available as a supply option, but has gained greater prominence in global trade since the start of the pandemic. According to Nobel Laureate in Economics A. Michael Spence, the confluence of accommodative monetary policy, high savings balances, pent-up demand, and massive budget spending (leading to higher inflation rates) ) caused shortages, delays and imbalances between supply and demand. Fold growing political tensions between the United States and China, and it is easy to see why importers and exporters seek to lower their trade risk by shortening the supply chain.
What are the advantages of nearshoring? To start, it allows more frequent visits to the manufacturing site, better control of intellectual property, operation in a more convenient time zone, faster transit from manufacturer to customer, faster time to market, better quality control and improved supply chain efficiency.
Some examples of successful nearshoring are Inditex, the Spanish clothing company and parent company of Zara, which has moved production from Asia to Morocco and Turkey, as well as Whirlpool, Samsung, LG and Boeing, which now produce the majority of their products in Mexico. Nike and Hasbro are reducing their presence in China in favor of Mexico is another example.
But make no mistake: Nearshoring has its limits. The downsides include high expenses (labor, supplies, taxes), a tight talent pool, training workers for production changes, less process oversight, and increased security threats. With higher trucking rates in the United States and a shortage of transportation workers, it’s no wonder that so many companies prefer to relocate to China and India, for example, where costs can be as high as $ 70. % lower and significantly shorter deadlines.
As nearshoring proliferates across the world, two regions are well placed to benefit significantly. One is Eastern Europe with a rich market of Western European customers. For example, Ukraine has one of the largest pools of IT specialists, and companies such as N-IX, Eleks, and Intellectsoft serve customers such as Siemens, Ernst & Young, Jaguar, and T-Mobile Deutsche Telekom.
The other region is Latin America and the Caribbean, where real-time collaboration, cultural affinities, cost effectiveness and a growing talent pool make it the crown jewel for nearshoring operations, especially Mexico, Colombia, the Dominican Republic, Panama and Costa Rica. . Last year, the Association of Free Zones of Latin America (AFZA) spear Relocate Latam, a specialized platform for rehoring, nearshoring and offshoring.
The President of the Inter-American Development Bank, Mauricio Claver-Carone, has made nearshoring a priority for his organization, noting: “While Latin America has captured only 10% of the top ten source destinations outside the Western Hemisphere, [it] would increase exports by about $ 72 billion per year.
The Bank helps to position Colombia as a hub for business services and help Chile develop its services export sector. In addition, congressional legislation such as Rep. Brand GreenMark GreenCities become pawns in redistribution game GOP senators seek to block dishonorable dismissals for unvaccinated troops Rapid reaction force in India could prevent Taliban regime’s worst in Afghanistan MOREThe Latin American Nearshoring Act (R-Tenn.) Encourages companies to relocate production facilities or invest in manufacturing and services in the Western Hemisphere. In light of a 2020 Gartner survey revealing that a third of the world’s top 260 companies plan to move some of their chains out of China by 2023, the the time has come for Latin America and the Caribbean to aggressively tackle nearshoring activities.
Moving workers and production facilities closer to home and relocating factories is a trend that is sure to continue. The difficulties of sourcing raw materials, hiring labor and reserving space on ships will not ease anytime soon. Therefore, the outlook for nearshoring is extremely favorable. This is particularly true for IT nearshoring (Ukraine, Poland, Romania), call centers (Jamaica, Costa Rica), pharmaceuticals and medical devices as well as automobiles (Mexico).
But the most attractive nearshore industry is clothes. As an example, Benetton shifted much of its production from Asia to Croatia, Serbia, Turkey, Egypt and Tunisia, and German Hugo Boss to Poland and Turkey.
The factors that push companies to relocate to low-cost sites are still valid; but other forces have taken on more weight in a company’s sourcing decisions, as we’ve seen recently with supply chain bottlenecks. Considering these developments, as well as the growing capacities of nearshore suppliers to meet the operational needs of potential customers, it must be concluded that the future of nearshoring is promising.
Jerry Haar is Professor of International Business at Florida International University, Global Fellow of the Woodrow Wilson International Center for Scholars, and Board Member of the World Trade Center Miami and the Commonwealth Institute.