What changes will “nearshoring” bring to U.S.-China trade?

In light of the aftermath of the global pandemic and rising tensions between the US and China, ‘nearshoring’ has emerged as a major issue in global production and distribution.

Americans have struggled with shortages of personal protective equipment and other critical supplies throughout the pandemic. These shortages were due not only to production limitations such as lack of materials and insufficient factory capacity, but also to location, as much of the supply came from distant coasts, primarily China. Yet another factor contributing to the shortage is the disruption to production caused by China’s strict, hastily imposed lockdown and the closure of Chinese manufacturing facilities with little notice.

Also, from a national security perspective, sourcing parts and finished products from China has significant consequences for the United States, given that the Chinese government could turn chokepoints in the global supply network into political weapons. there is a possibility.

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

Nearshoring is the act of relocating business operations to a nearby country, with particular preference given to distant countries. An example would be a chip maker like ASML moving part of its operations from the Netherlands to Costa Rica to be closer to the US end-user market. Nearshoring is not a new phenomenon. Production-sharing arrangements, such as Mexico’s maquiladoras, have existed since the early 1960s.

Nearshoring enables closer production and distribution, increased vigilance and control of intellectual property, faster transportation to customers, speed to market, similar time zones in most cases, and improved supply chain efficiency. will improve. Downsides include a lack of a skilled and productive workforce, a lack of high-quality, locally sourced supplies, increased training/retraining costs, increased taxes in many cases, and infrastructure limitations such as power outages. Masu.

Perhaps there is no better example of nearshoring than relocating all or part of a multinational company’s business operations from China to the Western Hemisphere. For example, Apple, General Motors, and Dell have moved some of their Chinese operations to Latin America. China itself has experienced nearshoring, with many domestic companies as well as European and Asian multinationals based in China, such as Adidas and Samsung, moving manufacturing to countries such as Vietnam, India, Malaysia, and Thailand. are doing.

Given the Chinese Communist Party’s geopolitical objectives, it is not surprising that China’s nearshoring strategy is linked to its larger plans for the Americas. China has recently strengthened ties with Ecuador, El Salvador, Brazil, Argentina, and Nicaragua. China’s most prominent relationship with Latin America is through the Belt and Road Initiative, embodied in projects such as Cosco Shipping’s $3 billion mega-port development in Peru, which will link South America and Asia. Transport time will be reduced by 10 days.

Chinese multinationals Huawei and Lenovo have announced that they will move most of their production to Mexico. The fact that Mexico has concluded 13 free trade agreements with 50 countries, the most important of which is the USMCA (successor to NAFTA), which provides a duty-free export platform to Chinese companies, has a considerable impact. is affecting.

A survey of businesses conducted by the American Chamber of Commerce in Shanghai found that nearly 20% of respondents plan to move some of their company’s current operations outside China in the next one to three years, primarily due to the uncertainty of the U.S. situation. reported that they are considering moving to. China relations. Some may interpret this as the beginning of a trend by foreign companies to reduce their exposure to China, but as more multinationals operate in China, there is a growing number of “China+” companies that reduce their supply chains. Some may see this as unimportant since it employs a “one” strategy. Avoid the risks of relocating certain sourcing and production operations that are sourced exclusively in China to other countries.

Whether the goal is to reduce the public health impact of a future global pandemic or the impact of a further deterioration in U.S.-China trade relations, nearshoring provides multinational companies in both countries with sourcing opportunities. and provide investment options. Buffer against negative economic performance.

For global companies around the world, nearshoring is not a panacea, but it is certainly a smart and viable option to consider.

Jerry Haar is a professor of business administration at Florida International University and a fellow of both the Woodrow Wilson Center and the Council on Competitiveness. He is a board member of the Miami World Trade Center and co-author with Ricardo Ernst of Globalization, Competitiveness, and Governance.