Nearshoring vs. Offshoring: The Future of Supply Chains in the U.S.-Mexico Corridor

Here’s the key factors driving the nearshoring trend and the robust U.S.-Mexico trade relationship, and why this corridor is set to be a critical piece of global supply chains.

Mikhail Adobe Stock 480915892 Editorial Use Only
Mikhail AdobeStock_480915892_Editorial_Use_Only

The dynamic landscape of global supply chains has prompted companies to reevaluate their sourcing strategies, with the decision to nearshore or offshore becoming increasingly pivotal. Among the various regions considered for nearshoring, Mexico stands out as a top destination, offering numerous advantages that align with the strategic goals of American businesses.

The industry has experienced a massive influx in corporate investment in Mexico specifically related to logistics, with companies pledging $100 million-plus investments for manufacturing in the country. Here’s the key factors driving the nearshoring trend and the robust U.S.-Mexico trade relationship, and why this corridor is set to be a critical piece of global supply chains.

Why are U.S companies choosing nearshoring (to Mexico) vs. offshoring?

Proximity to the U.S. market. One of the primary motivations for nearshoring is proximity to the U.S. consumer base. Production facilities closer to the United States significantly reduce transportation time and costs. This proximity not only enhances the speed of delivery but also enables companies to be more responsive to market demands, fluctuations and adverse events. 

Cost and efficiency advantages. Nearshoring to Mexico offers significant cost benefits due to its considerably lower labor costs compared to the United States, and competitive wages that are 60-100% lower than in China. Although Mexican labor costs may be higher than in other Asian countries, the savings in transportation and tariffs often offset this difference. Shipping a container from Mexico to the United States can result in average savings of $5,000-9,000 per container compared to its Chinese counterparts. This cost efficiency, plus shorter supply chains, enhanced control and coordination, and favorable trade terms under the U.S.-Mexico-Canada Agreement (USMCA), makes nearshoring to Mexico a compelling choice.

Geopolitical stability and risk reduction. The COVID-19 pandemic highlighted the fragility of global supply chains, with disruptions causing significant delays and shortages. Rising geopolitical tensions with traditional manufacturing hubs like China have further prompted companies to reconsider their offshoring strategies. Trade wars, tariffs, and political uncertainties increase the risk and cost associated with offshoring. Nearshoring to Mexico offers a more stable and predictable environment, minimizing these geopolitical risks by shortening supply chains and enhancing control and coordination. Mexico sharing a 1,954-mile border with the United States gives it a distinct geopolitical advantage that other countries simply cannot compete with. 

The U.S.-Mexico trade relationship: A growth story

The U.S.-Mexico trade relationship has evolved significantly, particularly in the context of shifting dynamics with China. For the first time in nearly 20 years, the United States imports more from Mexico than China, with Mexico comprising 16% of total U.S. trade in October 2023 compared to China’s 12.7%​​. This shift underscores the growing importance of Mexico as a key trade partner and nearshoring destination for American companies.

In 2023, around 7.5 million loaded trucks and rail containers crossed from Mexico to the United States, a 34% increase from 2022​​. This surge is reflective of the increasing trend toward nearshoring, which is also supported by  Foreign Direct Investment in the country, most notably in the manufacturing sector. In 2023, 50% of Mexico's foreign direct investment (FDI) was directed toward manufacturing, with significant portions concentrated in strategic locations such as Nuevo León, Coahuila, and Chihuahua​​​​.

Strategic infrastructure developments are supporting this growth. The land Port of Laredo, the busiest port in the United States in 2023, handled goods worth over $300 billion, an 8% increase despite a global trade decline of 4%​​. Enhancements such as additional lanes at the World Trade Bridge and expansions at the Colombia Bridge are underway to accommodate the increasing trade volume- which is expected to continue trending up as more of these investments materialize in the coming years.

The future of global supply chains

Technological advancements. Technological advancements are playing a crucial role in the nearshoring trend. Although 70-90% of carrier relations in Mexico are currently managed through WhatsApp groups, the country is beginning to adopt new technologies in manufacturing and logistics, narrowing the gap with traditional offshoring destinations like China. The integration of automation, advanced manufacturing techniques, and digital supply chain solutions will enhance Mexico's competitiveness as a nearshoring destination.

To address the growing need for innovative solutions to tackle visibility, safety, and vendor management challenges, among others, logistics companies are increasingly investing in proprietary technology to optimize shipment management, particularly at the complex U.S.-Mexico border. These systems aim to provide accurate, timely, and actionable data, enhancing efficiencies such as faster border crossing times and reliable door-to-door transit times. These technologies are expected to significantly improve supply chain control and coordination in the region by integrating real-time load instructions, dynamic estimates, and live data usage.

Impact of nearshoring on global trade

The Inter-American Development Bank projects an additional $30 billion by 2025 in trade between the United States and Mexico due to nearshoring, with an estimated 40% of that passing through Laredo. This growth underscores the strategic importance of the U.S.-Mexico trade corridor and highlights its potential to shape the future of global supply chains. Every day, companies are making billion-dollar investments in new plants, which will take a few years to be built, come online, and start shipping. Therefore, expect the real tipping point of this nearshoring trend to be in 1-3 years, when these developments require new carriers, transportation providers, and execution capabilities, raising the bar for facilities and service quality across the board.

The decision to nearshore or offshore is multifaceted, involving considerations of cost, efficiency, risk, and strategic alignment. As companies increasingly prioritize supply chain resilience and risk management over pure cost savings, nearshoring to Mexico offers a compelling blend of advantages, especially for U.S. companies. The robust U.S.-Mexico trade relationship, supported by strategic investments and infrastructure developments, positions this corridor as a key driver of global supply chain transformation.

Latest