Preface

In recent years, nearshoring has gained substantial momentum in the USMCA (United States-Mexico-Canada Agreement) economic region. This trend, driven by the need for resilient and diversified supply chains, has positioned Mexico as a critical player in North American manufacturing. However, the true potential of nearshoring can only be unlocked by maintaining strategic logistics hubs in the southern states of the U.S., such as Arizona, New Mexico, and Texas. These hubs play a vital role in ensuring the seamless movement of goods between Mexico and the U.S., a key factor in the success of nearshoring initiatives.

This blog is an extract from a sub-project that we carried out in the third quarter of 2024 for a European supplier to the mobility industry as part of strategic scenario generation for the USMCA market. The project work took place in the Mexican plants, as well as with business partners of the value chain in the South Belt of the USA, especially in the states of Arizona, New Mexico and Texas.

If you want to recall the entire context of the project mission, you can find all the information under the following link:

Why Nearshoring is Gaining Traction

Nearshoring, the practice of relocating production processes closer to end markets, is becoming increasingly attractive for companies. For U.S. firms, this often means shifting operations from distant locations in Asia to Mexico, which offers several compelling advantages:

• Reduced shipping times and costs: Products reach markets faster and at lower costs due to shorter transit distances.

• Improved supply chain reliability: Proximity means fewer risks of disruptions caused by natural disasters or global crises, such as the COVID-19 pandemic.

• Access to duty-free trade: The USMCA agreement provides a framework for smooth and cost-effective trade within the region, further incentivizing nearshoring.

However, along with its benefits, nearshoring presents its own set of challenges, such as infrastructure development, regulatory compliance, and labor availability. To mitigate these challenges, southern U.S. states provide critical support through their strategic logistical advantages.

The Southern States as Critical Nearshoring Gateways

Southern states like Arizona, New Mexico, and Texas are not only geographically close to Mexico, but they also offer robust infrastructure, economic incentives, and a skilled workforce that make them ideal hubs for nearshoring logistics. Here’s why they matter:

1. Geographic Proximity: Sharing borders with Mexico, these states are natural entry points for goods moving between North and South America. This geographic advantage cuts down on transportation times and costs, allowing faster delivery of goods to U.S. markets.

2. Well-Developed Infrastructure: The southern states feature some of the most developed transportation networks in the country. Texas, in particular, boasts major ports like the Port of Houston, along with highways and railroads that streamline the flow of goods. This connectivity ensures that products manufactured in Mexico reach U.S. customers quickly and efficiently.

3. Economic Incentives: States such as Texas offer tax breaks, grants, and other incentives to attract businesses. These incentives reduce operational costs and make it easier for companies to set up logistics hubs, creating a win-win scenario for businesses and local economies.

4. Skilled Workforce: The region’s growing pool of skilled workers, particularly in logistics and supply chain management, is another significant asset. Efficient supply chain operations depend on skilled personnel who can manage complex logistics and handle the demands of modern nearshoring strategies.

Resilience in an Uncertain World

One of the key drivers behind the nearshoring trend has been the need to build more resilient supply chains. The COVID-19 pandemic revealed significant weaknesses in global supply networks, with factory shutdowns and transportation delays causing major disruptions. By relocating production closer to home and setting up strategic logistics hubs in the southern U.S., companies can create supply chains that are not only faster but also more adaptable to crises.

Boosting Regional Economic Growth

Investments in logistics hubs don’t just benefit companies—they also provide a significant economic boost to the southern U.S. states. Arizona, New Mexico, and Texas are experiencing job growth, increased investment, and stronger local economies as a result of these developments. These states play a pivotal role in strengthening the U.S.’s competitive edge by ensuring that goods flow smoothly across borders, fostering international trade, and positioning the U.S. as a leader in global supply chain management.

Challenges in Nearshoring Logistics

Despite the numerous advantages of nearshoring, there are challenges that businesses must navigate. Key hurdles include:

• Infrastructure costs: Setting up new or upgrading existing infrastructure can be a costly and time-consuming process.

• Skilled labor shortages: Finding workers with the necessary skills remains a challenge, though workforce training programs can help address this.

• Supply chain coordination: Managing international supply chains requires close coordination to avoid disruptions.

However, with careful planning and leveraging the strengths of southern U.S. hubs, companies can overcome these challenges and optimize their nearshoring strategies.

Nov. 5, 2024, late evening: Now it's clear, new USMCA trade agreement under scrutiny

Mexico's role in the US-China trade conflict: risks and opportunities for North American supply chains

In recent years, the flow of Chinese goods into the US via Mexico has increased significantly. This trend is the result of a mix of geopolitical tensions, global supply chain restructuring, economic strategies and market opportunities that have become particularly apparent during the pandemic. Both foreign and American companies are increasingly using Mexico to reduce costs and secure market access. However, this development also harbors risks: The incoming US administration could call into question the previous regulation under the USMCA agreement, which facilitates the movement of goods through Mexico.

When the Trump administration transformed NAFTA into the updated USMCA trade agreement in 2020, it was stipulated that the agreement must be reviewed after six years - from 2026. If one of the three parties (USA, Canada or Mexico) decides against an extension, the agreement will not end immediately, but there would be years of uncertainty about the future of the North American Free Trade Area. Since the US election night of November 5, 2024, this scenario now seems more real than ever.

The Importance of Mexico as a Production Location and Export Platform

Mexico has established itself as an attractive production location for numerous companies, including those from the USA. One of the reasons for this is that production costs are often lower in Mexico, allowing companies to avoid up to 300 customs duties. Mexico is also of great interest to China: It sees the country as an ideal platform to export goods and materials to North America. It is foreseeable that this issue will play a central role in the planned USMCA review in 2026. However, a more intensive trade flow between Mexico and the USA will only continue if the contracting parties agree to a continuation of the agreement.

Political Uncertainties and their Impact on the Future of Free Trade

The upcoming elections in Canada and the tense situation in the USA increase the risk of a potential change to the agreement. Should pressure on the US government increase, it could take measures to restrict trade relations with Mexico, particularly with regard to Asian products that enter the USA via Mexico. In the long term, Mexico could act as a favorable export hub for Chinese companies in an increasingly complex geopolitical environment.

Strategic Implications for Companies

For companies that benefit from trade relations between Mexico and the USA, there is therefore an urgent need for action. Some are already developing strategies to transport their products via Mexico and US ports to hedge against the potential consequences of Trump's renewed presidency, which could impose higher tariffs of up to 100% on Chinese imports.

Donald Trump, who has once again won the White House, can be expected to use the economic influence of the US to renegotiate trade agreements and prioritize the interests of American workers and companies, similar to his first term in office.

Conclusion

As nearshoring continues to reshape the manufacturing landscape in North America, the strategic importance of logistics hubs in the southern U.S. cannot be overstated. Arizona, New Mexico, and Texas are ideally positioned to serve as crucial nodes in a more efficient, resilient, and flexible supply chain. By tapping into their geographic advantages, robust infrastructure, skilled workforce, and favorable economic incentives, businesses can enhance their competitiveness in the global market, ensuring long-term success in the face of ever-evolving challenges.