[News Terms] Building a Multi in My Front Yard... 'Nearshoring'

Relocating Production Facilities from Distant Countries to Neighboring Nations
Mexico: Major Beneficiary of USMCA Amid US-China Rivalry
US Concerns Over China’s Circumvention Exports Exploiting USMCA Loopholes

As the U.S. government promotes a ‘Nearshoring’ strategy alongside the Inflation Reduction Act (IRA) and the Chips Act to counter China, concerns are emerging that Mexico could effectively function as China’s export base to the U.S.

A Mexican worker working in a factory
Photo by AFP Yonhap News

‘Nearshoring’ refers to a strategy where companies relocate production facilities or service operations from countries geographically distant from their home country to countries closer to home. In short, it is outsourcing to a nearshore country.

The reason advanced countries’ companies, including those in the U.S., have utilized developing countries such as China and India as production bases is that they offer advantages in reducing production costs through cheap labor. However, as China has risen as an economic powerhouse, the U.S. has begun strengthening nearshoring policies to counter China and stabilize supply chains.

Claudia Sheinbaum (62), who began her new term as Mexico’s president on the 1st of this month (local time), recently announced plans to reduce import dependence on China and strengthen domestic supply chains based on recent economic achievements. The Wall Street Journal (WSJ) reported on the 8th (local time) that this will have broad impacts beyond simple domestic policy changes, affecting the global economic structure and geopolitical dynamics involving the U.S., China, and others.

Mexico, Canada, and the United States, parties to the USMCA
[Photo by Yonhap News]

Mexico is considered the biggest beneficiary of the United States-Mexico-Canada Agreement (USMCA), which came into effect in 2022 after renegotiating the North American Free Trade Agreement (NAFTA). Mexico shares a 3,200 km border with the U.S., the world’s largest market. Geographically, it serves as a production base and foothold for entering the North American and Latin American markets, offering significant advantages in transportation.

Additionally, with the USMCA in effect, products manufactured in Mexico are recognized as North American production, allowing them to enjoy tariff reduction benefits. Last year, Mexico accounted for 15.4% of total U.S. imports, surpassing China (13.9%) and Canada (13.7%) to rank first. From 2007 to 2022, China was the U.S.’s largest import source for 17 years. Notably, even as total U.S. imports have been declining, imports of Mexican products have shown an upward trend.

Domestic companies such as Samsung and LG have also started building factories in Mexico one after another. South Korea’s investment in Mexico surged from $11 million (about 1.48 billion KRW) in 2020 to $396 million (about 534.5 billion KRW) in 2022.

However, China has recently been rapidly increasing its investment in Mexico. According to Mexico’s Ministry of Economy, based on investment plans announced in 2023, China accounts for 12% of total investment in Mexico, making it the second-largest investor after the U.S. (38%). This raises concerns that Chinese products could be imported into the U.S. via Mexico.

Major Items Subject to U.S. Public Tariff Increases
Photo by Akyung DB

Representative items include steel and aluminum. The U.S. has pointed out a lack of transparency regarding Mexico’s imports of steel and aluminum from third countries. Another item is electric vehicles. It is argued that China exploits loopholes in the USMCA’s rules of origin, allowing electric vehicles made in Mexico using Chinese parts to receive tariff benefits when exported to the U.S.

At a recent U.S. hearing, concerns about unfair competition from Chinese products were raised, with calls to revise the USMCA. At the USMCA rules of origin revision hearing held in Washington D.C. on the 8th (local time), Jim Warren, president of the Forging Industry Association (FIA), said, “Chinese companies bring Chinese workers and Chinese tools to produce goods in Mexico. If these loopholes are not closed, U.S. companies will face unfair competition.” The USMCA is scheduled for revision in 2026.