The world is getting closer together again

There is a lot of construction going on in Mexico: excavators and cranes are in constant use to construct new industrial parks. From the large US electric car manufacturer Tesla to the Chinese alloy wheel manufacturer Lizhong: companies from all over the world are “nearshoring” and settling in the Latin American country. The trend can also be observed in other parts of the world.

“Nearshoring means moving production closer to the end customer. That’s almost always the case in Mexico USA“, says the director of the foreign trade company Germany Trade & Invest (GTAI) for Mexico and the Caribbean, Edwin Schuh. “This means, for example, that companies from China, Germany or even the United States are relocating their production from other places to Mexico in order to produce for the US market.”

Companies in Europe and Asia are in a similar situation, not least for strategic reasons: Apple has relocated production capacities from China to Indonesia, Sony now manufactures smartphones in Thailand and sporting goods manufacturers such as Nike and Puma are increasingly having their products manufactured in Vietnam. German companies often relocate their locations to Eastern Europe.

“The reasons for nearshoring are the erosion of the world trade order, the aggressive foreign trade policies of individual countries such as China and the USA, greater geopolitical tensions and supply chain problems, for example in the corona pandemic“, says Dirk Dohse, Director of the Research Center “Innovations and International Competition” at the Kiel Institute for the World Economy (IfW). “For companies, nearshoring is primarily about security.”

Long supply chains are vulnerable

During the corona pandemic, the assembly lines in many car factories stood still because there was a lack of cable harnesses and microchips. Due to the war in Ukraine, delivery bottlenecks are currently looming for gas neon, which is required for the manufacture of semiconductors. “One experience from the corona pandemic is that long supply chains are vulnerable,” says Sebastian Dullien, head of the Institute for Macroeconomics and Business Cycle Research at the trade union-affiliated Hans Böckler Foundation. “In the long term, nearshoring can also help protect the environment and fight climate change because transport routes are shortened.”

Mexico could be one of the major beneficiaries of “nearshoring”: The North America Free Trade Agreement allows duty-free exports and imports between the trading partners USA, Mexico and Canada. More than 2000 companies with German capital are also registered in the Latin American country, in particular to export duty-free to the USA from there.

Mexico is now becoming even more attractive for companies: With the reform of the free trade agreement, the so-called rules of origin have been changed. The added value shares within the free trade zone must now be higher so that the end products can be imported tax-free into the USA. In addition, labor costs in Mexico are now significantly lower than in China.

turning away from China

The People’s Republic as the “workbench of the world” is not only under pressure because of rising wages and an aging population. The increasing tensions with the USA have also led to international companies realigning their supply chains. This is especially true for the technology sector. The smartphone giant Apple is currently in the process of reducing its significant dependence on China. The Taiwanese Apple supplier Foxconn wants to open a new large production facility in India.

Things are getting tight in Mexico: The industrial parks recently reported an occupancy rate of 97.5 percent. According to Foreign Minister Marcelo Ebrard, around 400 companies have shown an interest in settling in Mexico in the near future. Tesla recently announced the construction of a new giga factory near the northern industrial metropolis of Monterrey. BMW wants to build fully electric cars at its plant in San Luis Potosí from 2027 and is investing 800 million euros in the project. Foreign direct investment in Mexico rose 12 percent to $35.3 billion in 2022, according to the Commerce Department.

Does the trend towards “nearshoring” mean an end to globalization? “Nearshoring is a correction of the excessive expansion of supply chains,” says economist Dullien from the Hans Böckler Foundation. “It makes sense because the relationship between security and cost efficiency has not been properly balanced so far.” Economist Dohse from the IfW also sees it no fundamental trend reversal: “It’s not the end of globalization, it’s more of an adjustment.”

(From Andrea Sosa, Denis Duettmann and Jorn Petringdpa)