Key Cross-Border Trends: The Rise of Nearshoring to Mexico
- Nearshoring is causing an increase in trade between the U.S. and Mexico, as more companies nearshore their business processes to Mexico.
- Nearshoring is creating job opportunities and boosting both the Mexican and American economies, particularly in the manufacturing, finance, and IT sectors.
- One of the biggest winners from nearshoring to Mexico, is the supply chain, as this trend is helping to shorten and streamline processes.
What is Nearshoring in Mexico?
Nearshoring is a business trend that involves outsourcing business processes to companies in nearby countries. Over the years, Nearshoring to Mexico has become increasingly popular among companies in the United States due to its numerous benefits, such as lower costs, decreased lead times, and increased efficiency. However, the impact of nearshoring doesn’t stop there, as it has been the catalyst for different trends in U.S.-Mexico cross-border trade.
Impact of Nearshoring to Mexico
Nearshoring is becoming more popular, though it involves more than just cost reductions. This trend isn't really a brand-new concept; companies have been outsourcing parts of their operations for decades, allowing shippers and businesses to enjoy some of the following advantages:
Cost savings: Companies can reduce costs by moving production closer to the end-user and reducing transportation expenses when shipping goods back into North America, especially to Mexico.
Speed to market: When shippers are closer to their customers and suppliers, it takes less time for products and materials to get where they need to go, and this makes them more attractive in today's fast-paced world economy.
Quality control: When shippers are closer to their suppliers and customers, they can ensure that the production process is going smoothly, and that products meet quality standards. It also means that companies may be able to respond faster to issues that come up along the way.
The Rise of Cross-Border Logistics in US-MX
Cross-border logistics is on the rise among U.S. companies seeking to cut costs and improve efficiency by utilizing Mexico's proximity to the U.S. For example, Walmart announced plans to open a new cross-border fulfillment center in Mexicali that will serve online customers in southern U.S. states. The move will allow Walmart to deliver packages faster while reducing its shipping costs significantly.
The concept of nearshoring is not new. As early as 2003, the trend was identified by experts in the field of supply chain management as the next step in outsourcing production to countries like China and India, where labor costs were low but rising quickly at a time when it was still cheaper for companies to manufacture products overseas than domestically. Now the need of bringing the operation back closer to home is growing steadily. Mexico's proximity to the US makes it a more convenient location for companies that want to keep their supply chains more regional. This reduces shipping times, transportation costs, and the risks associated with long-distance shipping.
Increased Trade between the U.S. and Mexico
One of the most significant changes that nearshoring is bringing to the U.S.-Mexico relationship is an increase in trade. As more and more companies nearshore their business processes to Mexico, the demand for trade between the two countries is increasing. According to the U.S. Census Bureau, the U.S.-Mexico trade reached $614.5 billion in 2020, with Mexico being the United States' second-largest trading partner. As nearshoring continues to grow, this trend is expected to continue to rise.
In fact, the United States-Mexico-Canada Agreement (USMCA), which came into effect on July 1, 2020, is expected to further boost trade between the two countries. The USMCA is a free trade agreement that replaces the North American Free Trade Agreement (NAFTA). It includes provisions expected to modernize and strengthen trade relationships between the United States, Mexico, and Canada, including rules regarding intellectual property, digital trade, and labor standards. This agreement is expected to continue having a positive impact on nearshoring in Mexico.
Streamlined Supply Chain Processes
The nearshoring trend has shortened supply chains, reducing the distance and time required to move goods from production facilities to consumers. This has led to faster delivery times, reduced inventory costs, and improved responsiveness to customer demand.
Another major advantage of nearshoring to Mexico in the supply chain operation is opportunities for greater integrations. Cross-border trade requires greater coordination and collaboration between different stakeholders in the supply chain, such as manufacturers, distributors, and logistics providers. This can lead to increased information sharing, joint planning, and improved coordination of logistics operations, resulting in greater supply chain integration. This has resulted in cost savings and better overall performance by allowing for more efficient use of resources and increased coordination between different levels of the supply chain.
Having this level of specificity brings both positive and challenging aspects at the same time. Now the supply chain and logistics processes are more specific than before, with the need to navigate multiple regulatory frameworks, cultural differences, and language barriers. Managers must be able to effectively manage these challenges to ensure smooth operations. To successfully navigate these challenges, you need to have a reputable logistics partner who can handle all these processes for you, and vertically integrate all the products needed to manage supply chains, combining freight forwarding, customs, and insurance, with software designed for the movement of cargo between the U.S. and Mexico. If this resonates as a solution for your supply chain operation, contact our experts.
Benefits to the U.S. & Mexico Economies
The rise of nearshoring to Mexico is fostering the creation of more jobs, which is beneficial for both countries. When companies nearshore their business processes to Mexico, they are creating job opportunities. This is a win-win situation for both countries: The United States benefits from cheaper costs and increased efficiency, while Mexico benefits from job creation and economic growth. Based on the publication of the government's most recent budget forecasts, the Mexican GDP might expand by up to 3.0% in both 2023 and 2024, propelled by manufacturing and nearshoring operations. On top of that, recent research found that a good made in China has roughly 4% of it positively impacting the US economy, but a good made in Mexico has about 40% - (10x more) - so for US brands considering Mexico, it’s not only closer, faster, maybe cheaper labor; it’s better for the American economy.
The Future of Nearshoring to Mexico
Going forward, experts predict that nearshoring to Mexico will continue to grow in popularity, becoming a golden opportunity for companies looking to streamline their supply chain processes. A Deloitte report cites nearshoring to Mexico as an opportunity due to several reasons, including the need for companies to have more control over their supply chains, as well as the increasing importance of agility and flexibility in the current business environment. The impact of nearshoring on U.S.-Mexico trade is significant.
As the trend grows, more companies keep considering nearshoring as a way to keep their businesses competitive. According to A.T. Kearney's Global Services Location Index, Mexico is one of the most popular destinations for nearshoring for U.S.-based multinationals. Companies are looking for other factors beyond cost savings when choosing where to locate their operations and what services to outsource in order to remain competitive in today’s marketplace. Nearshoring is a trend that is here to stay, and Mexico keeps emerging as a viable option.
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