A Brief Summary of the Nearshoring Model in Mexico

What is Nearshoring?

Nearshoring is a commercial strategy that reconfigures company ́s value chains by bringing production centers closer to final markets. Nearshoring contrasts with the offshore model, which consists of relocating the production of goods and services to a third country regardless of its location.

What are some of the principal benefits of the Nearshoring model?

Shorter geographical distance between production and consumption centers, has the advantage of reducing transportation, logistics, and environmental costs.

Proximity between plants and markets decreases shipping costs and transit times. Efficiency in delivery and storage is improved and there is better coordination between management and operating areas at the company level.

What has triggered Nearshoring?

1. The rise in labor costs in China have quadrupled between 2001 and 2019, significantly undermining the comparative advantage of the Asian country as a center of production.

2. The COVID-19 pandemic has come to question the sustainability of offshore production models and intercontinental value chains. COVID-19 brought upon mobility restrictions, border closures, and widespread disruptions in international trade reminding us that borders are real.

3. Changes in geopolitical views and relations between the western countries, China and Russia.

4. Russia’s invasion of Ukraine which has contributed to fueling the perception that the existing integration model is extremely vulnerable.

5. The possibility of an armed conflict between China and Taiwan that ends up involving the United States, which would completely disrupt global value chains.

6. Global inflation and the current economic crisis.

   
   

What benefits offer the Nearshoring model in Mexico?

Mexico is identified as the best alternative for the relocation of value chains under the nearshoring model. Mexico is known for its skilled workforce, relatively developed infrastructure, cultural affinity with the United States, and a shared land border of 1,958 miles.

Mexico has a track record of more than 30 years of integration into the value chains of the United States and Canada through its original free trade agreement (NAFTA), and the current treaty (USMCA) provides legal support to the business relationship with a transparent dispute resolution mechanism, strict intellectual property protection, as well as a stable working and economic environment.

Additionally, Mexico is known for its active participation in international trade and has pursued an extensive network of free trade agreements (FTAs) with countries and regions

around the world to promote trade and investment, including:

1. Latin America: Colombia, Chile, Peru, and Uruguay, among others, through bilateral FTAs and regional agreements such as the Pacific Alliance and the Association of Latin American and Caribbean States (CELAC).

2. Central America and the Caribbean: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama, among others, through bilateral FTAs and regional agreements such as the Central American Integration System (SICA) and the Caribbean Community (CARICOM).

3. Europe: European Union (EU) member countries through the EU-Mexico Economic Partnership, Political Coordination, and Cooperation Agreement.

4. Asia-Pacific: Japan, Singapore, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) countries, which includes countries such as Australia, Canada, New Zealand, and Vietnam, among others.

5. Middle East: Israel and the United Arab Emirates, among others.

6. Africa: South Africa, among others.

   
   

What are the main USMCA benefits for U.S. and Canadian companies thinking about Nearshoring?

1. Tariff Elimination: USMCA eliminates most tariffs on goods traded between the United States, Canada and Mexico, reducing costs for U.S. and Canadian companies that are sourcing inputs or finished products from Mexico.

2. Market Access: USMCA provides U.S. and Canadian companies with increased market access to Mexico's growing middle class, increasing sales for U.S. and Canadian companies that are exporting goods or services to Mexico.

3. Investment Protection: USMCA includes provisions that protect U.S. and Canadian companies that are investing in Mexico, including intellectual property (IP) protection over patents, trademarks, trade secrets and data protection, as well as protection against expropriation, unfair treatment, and discriminatory measures.

4. Regulatory Coherence: USMCA includes provisions that promote regulatory coherence between the United States, Canada and Mexico, reducing barriers to trade and investment and promoting regulatory compatibility and transparency.

What are some challenges to think about Nearshoring in Mexico?

Mexico faces many challenges in the economic, social and security arena, which have negatively impacted investment and made it less attractive for investors, mainly:

1. Security Concerns: Mexico has a reputation for high levels of crime and violence, particularly in certain regions. Taking steps to ensure the safety and security employees and operations would be advised.

2. Infrastructure Availability: While Mexico has made significant progress in recent years, some areas still lack modern infrastructure, particularly in the rural areas. Considerations over the availability of reliable transportation, housing, communication, and utilities is recommended when selecting a location for nearshoring.

3. Corruption: Mexico has a history of corruption practices and companies investing in Mexico should ensure compliance standards, anti-corruption guidelines and practices in line with US standards and anti-corruption regulations (FCPA).

   
   

What is Mexico ́s principal legal framework consideration for Nearshoring?

1. Mexican Corporate and Commercial Laws: Mexican Company ́s Law and Commercial Laws govern business activities in Mexico, including corporate activities, contracts, commercial transactions, and corporate governance.

2. Mexican Tax Laws: Mexico's tax system is governed by the Federal Tax Code, which outlines the rules and regulations for paying taxes in the country. Companies that are nearshoring in Mexico must register for Mexican tax purposes and comply with tax obligations, including income tax, value-added tax (VAT), and payroll taxes.

3. Mexican Labor and Social Security Laws: The Mexican Labor Laws govern the rights and obligations of workers and employers in Mexico. These laws cover a wide range of topics, including wages, hours of work, benefits, health and safety, and termination of employment.

4. Intellectual Property Laws: Mexico's intellectual property laws protect patents, trademarks, copyrights, data and trade secrets. These laws establish registration standards, use and terms of use of intellectual property, including effective and non- discriminatory protection for patents, proper examination and opportunity for judicial review, as well as protection periods during registration from unfair commercial use, unauthorized disclosure, and reliance by competitors.

5. Foreign Investment Law. Mexico establishes the conditions under which foreign investors may operate in Mexico, including the types of investments that are permitted, the sectors that are open to foreign investment, and the requirements for obtaining authorization to invest in certain sectors, and regulates the entry, operation, and exit of foreign investment in Mexico.

6. Foreign Trade laws and Regulations: Mexico has a diverse laws and regulations governing foreign trade, including import and export requirements, customs procedures, and trade agreements.

7. Environmental Laws and Regulations: Mexico has a comprehensive set of environmental regulations that govern activities that may have an impact on the environment. These regulations cover a wide range of topics, including air and water pollution, waste management, and biodiversity conservation.

What can we conclude on Nearshoring into Mexico?

We can conclude that Mexico has several potential industries for nearshoring. The automotive industry stands out, since the USMCA incorporates ambitious goals of regional content, which force the incorporation of a minimum of inputs produced in North America in its value chain. In addition to activities related to the automotive and transportation equipment industries, we also find that the manufacturing of electrical equipment and home appliances could gain market share in the United States. There are also opportunities in the chemical, pharma, biotech industries, as well as in the value chain of semiconductors, medical equipment, computers, cell phones and telecommunications equipment. The list is endless as most industries are either already existing in a high level of performance and professionalization in Mexico, or are available to scale and build up to optimization levels in a short period of time.

Germán Brito is a partner at Brito Associates, S.C., he is a licensed attorney in Mexico and California as Foreign Legal Consultant, you can reach him at germanbrito@britolaw.com.mx