How ‘nearshoring’ can revolutionize U.S.-China commerce

In the aftermath of the global pandemic and in light of increasing tensions in between the U.S. and China, “nearshoring” has emerged as a major issue in global production and distribution.

Americans suffered from shortages of personal protection equipment and other critical supplies throughout the pandemic. These shortages came about not only due to production limitations — a scarcity of materials and insufficient plant capacity — but location, as much of the supply originated from distant shores, mainly China. Still another factor leading to shortages was production disruptions due to China’s strict lockdowns, which were hastily implemented, and the shutdown of Chinese manufacturing facilities with little notice.

And from a national security standpoint, sourcing components and finished products from China could pose grave consequences for the U.S., given that the Chinese government could turn choke-points in the global supply networks into political weapons.

Is nearshoring the answer to the dual challenges of a future global pandemic and national security?

Nearshoring is the practice of transferring a business operation to a nearby country, especially in preference to a more distant one. An example would be a chip manufacturer like ASML moving part of its operations from the Netherlands to Costa Rica to be closer to the end-user market of the U.S. Nearshoring is not a new phenomenon. Production sharing arrangements, such as Mexico’s maquiladoras, have been around since the early 1960s.

Nearshoring allows for closer proximity for production and distribution, greater vigilance and control of intellectual property, faster transit to customers, speed to market, a similar time zone in most cases and an improvement in supply chain efficiency. Downsides include the unavailability of skilled and productive labor, scarcity of high quality and locally sourced supplies, an increase in training/retraining costs, higher taxes in many instances and infrastructure limitations such as power interruptions.

Perhaps there is no better example of nearshoring than the relocation of all or part of the business operations of multinational firms from China to the Western Hemisphere. For example, Apple, General Motors and Dell have moved some of their China operations to Latin America. China itself is experiencing nearshoring as many of its companies, as well as European and Asian multinationals in China such as Adidas and Samsung, have been moving manufacturing to countries such as Vietnam, India, Malaysia and Thailand.

Given the geopolitical objectives of the Chinese Communist Party, it is not surprising that China’s nearshoring strategy is linked to larger plans vis-à-vis the Americas. China has recently bolstered its relations with Ecuador, El Salvador, Brazil, Argentina and Nicaragua. China’s most prominent relationship with Latin America is via the Belt-and-Road Initiative, embodied in projects such as Cosco Shipping’s development of a $3 billion mega-port in Peru, which will reduce transit times between South America and Asia by ten days.

Chinese multinationals Huawei and Lenovo have announced that they will move a large share of their production to Mexico. It is of no small consequence that Mexico has 13 free trade agreements with 50 countries — the USMCA (the successor to NAFTA) being the most important —providing China with a duty-free export platform for its companies.

In a survey of businesses conducted by the American Chamber of Commerce in Shanghai, nearly 20 percent of respondents reported that their firms are considering moving some of their current operations out of China over the next one to three years, largely due to uncertainty about U.S.-China relations. While some may interpret this as the beginning of a trend by foreign companies to reduce their exposure in China, others may see this as inconsequential, since more multinational firms with operations in China are embracing a “China Plus One” strategy — reducing supply-chain risk by moving certain sole-sourced China procurement and production operations to other countries.

Whether the aim is to lessen the effect of a future global pandemic on public health or to mitigate the fallout from a further deterioration in U.S.-China commercial relations, nearshoring provides multinational companies in both nations with a sourcing and investment option that can serve as a buffer against negative economic performance.

For global firms the world over, nearshoring is not a panacea — but it is indeed a viable option they would be wise to consider.

Jerry Haar is a business professor at Florida International University and a fellow of both the Woodrow Wilson Center and Council on Competitiveness. He is a board member of the World Trade Center Miami and coauthor with Ricardo Ernst of “Globalization, Competitiveness and Governability.”