Texas Border Business
By Roberto Hugo González
Nearshoring has become a prevalent term in the global business landscape. Jorge Torres, President and owner of Interlink Trade Services, explains that nearshoring involves relocating manufacturing and assembly operations closer to the customer market. For instance, if a company’s primary market is the United States, moving operations from China to México would be considered nearshoring. This trend also includes reshoring, which refers to bringing manufacturing back to the US from overseas, and friendshoring, which involves doing business with countries that are friendly to one’s home country, like the US and México.
Impact of the COVID-19 Pandemic Torres explains that the nearshoring trend gained significant attention during the COVID-19 pandemic, highlighting global supply chain vulnerabilities. The pandemic caused disruptions due to port closures and restrictions on the movement of people and goods. “This reliance on China for critical commodities, such as medical devices, drugs, and semiconductors, led to significant delays and shortages in the US and México,” he said.
According to Torres, the US government’s financial response to the pandemic, which increased consumption of electronics, exercise equipment, and vehicles, further strained the supply chain. Products couldn’t be manufactured quickly enough due to missing components, especially semiconductors. “The surge in demand for items like face masks and Personal protective equipment (PPE), primarily sourced from China, exacerbated the situation. Consequently, shipping costs skyrocketed, increasing container prices from $3,000-$4,000 to $28,000-$30,000,” Torres said.
Trade Wars and Tariffs Torres also points out that the US-China trade war, initiated by President Trump with the implementation of Section 301 tariffs on Chinese goods, has further fueled the nearshoring movement. These tariffs, ranging from 7.5% to 25%, responded to China’s perceived abuses of copyrights and trademarks. The continuation and potential increase of these tariffs under President Biden’s administration are pushing companies to relocate their operations closer to the US.
Torres highlighted that the rapid growth in nearshoring presents challenges, particularly regarding infrastructure. South Texas and México are facing significant hurdles regarding adequate power and water supply to support the influx of new businesses. The AMLO administration in México has not favored private investment in the energy sector, focusing instead on the state-owned PEMEX and CFE (Mexico’s Electric Power Company). This has led to setbacks in renewable energy development and a general decline in energy infrastructure.
Similar issues persist in the US, with the need for greater investment in the power grid and water resources. These challenges must be addressed to support the anticipated growth in nearshoring activities.
Despite these challenges, nearshoring is expected to accelerate, particularly in México. Torres notes that México received $36.1 billion in foreign investment in 2023, with half directed toward manufacturing. Projections for 2024 indicate that foreign investment could surpass $40 billion. Significant investments are anticipated from the US, China, and other countries, though the growth rate will depend on the responses of the Mexican and US governments to these challenges.
As the global trade landscape evolves, Torres said that nearshoring remains a critical strategy for companies aiming to mitigate supply chain disruptions and optimize production costs. However, the practical implementation of nearshoring presents several challenges, particularly in regions like South Texas and México.
Infrastructure Challenges Torres underlines the crucial issues of water and electricity. The sudden influx of manufacturing operations requires a robust and reliable infrastructure, which needs improvement. This gap has slowed down the anticipated influx of companies relocating from Asia to North America.
He said the efforts to bolster infrastructure had been mixed, particularly under President Andrés Manuel López Obrador’s (AMLO) administration in México. AMLO focuses primarily on the state-owned petroleum sector, PEMEX, while cutting back on renewable energy investments and partnerships with foreign companies. This shift has resulted in setbacks in energy infrastructure, impeding the growth potential of nearshoring.
Torres notes that the Comisión Federal de Electricidad (CFE), México’s state-owned utility, has also limited foreign investment, further exacerbating the issue. The lack of adequate power remains a significant barrier to attracting new businesses. Additionally, water resources, dependent on rainfall and climate patterns, present another layer of complexity. Political factors, such as México’s obligations to share water resources with the United States, further complicate the situation.
Hope for the Future Despite these challenges, Torres said, there are glimmers of hope. “Claudia Sheinbaum, the newly elected president of México, has expressed a commitment to renewable energy investments. This shift in policy could potentially attract foreign investments and enhance the country’s infrastructure to support nearshoring.”
In the United States, increased investment in the power grid is critical. Addressing these infrastructural deficiencies will require coordinated efforts and substantial financial commitments from both the government and private sectors.
Economic Impact Nearshoring has already made a significant economic impact. In 2023, México attracted $36.1 billion in foreign investment, with the United States being the primary contributor. Projections for 2024 suggest that this figure could exceed $40 billion, with a substantial portion directed toward manufacturing and production facilities. Notably, while currently a smaller player, China is expected to become the second-largest investor in México within the next few years, potentially contributing $11.28 billion.
Countries like Spain, Canada, Japan, Germany, and Denmark are also key investors in México, highlighting the global interest in leveraging nearshoring opportunities.
According to Torres, the future of nearshoring in South Texas and México hinges on how effectively these regions can overcome their infrastructure challenges. The México government’s response to foreign investment in renewable energies and the US government’s handling of the ongoing trade war with China will play crucial roles in shaping the nearshoring landscape.
The growth potential is evident, but realizing it will require strategic planning and investments in critical infrastructure. As Torres aptly concludes, the extent and speed of growth will depend on these dynamic factors and the ability of both governments and private industry to adapt and support the industry’s evolving needs.
“While nearshoring presents a promising solution to the supply chain disruptions experienced during the COVID-19 pandemic, the path forward is filled with challenges. Addressing these will be essential to harnessing the full potential of nearshoring for economic growth in South Texas and beyond,” Torres finalized.
Jorge Torres is the President and owner of Interlink Trade Services, which provides international trade services in Customs Brokerage, Consulting, and Logistics.
