Mexico: Relocation Strategies in Times of Tariffs and Trade Uncertainty

In today’s international trade environment, tariffs on imports have led companies to rethink their production strategies to reduce costs. Among these strategies, nearshoring stands out, which involves relocating manufacturing to countries close to the destination market. Mexico has become a key destination thanks to its location, free trade agreements, and programs such as IMMEX. This trend seeks operational efficiency and tariff advantages. Below we analyze the benefits and challenges of these strategies, especially in the Mexican context.

What is it and how does it affect international trade in times of tariffs?

Currently, one of the main topics in international trade is the imposition of “tariffs” or “customs duties,” which are taxes paid by purchasers in certain countries for the importation of foreign products into their territories. As a result, the cost of importing products—whether finished goods, parts, components, or spare parts—compromises the feasibility of selling or using such products in the destination country.

This situation is leading many companies to consider restructuring their productive activities to minimize, as much as possible, the costs and financial impacts associated with the importation of their products into the jurisdictions to which they are destined.

In this context, one of the strategies being considered is precisely to modify the place of processing or manufacturing of certain goods, in order to have a lower tariff burden in the jurisdictions to which they are sent.

The strategy adopted by the company—be it nearshoring, offshoring, reshoring, inshoring or backshoring—will depend on where the processing or manufacturing activities take place, as well as largely on the destination country or territory.

Nearshoring involves relocating production activities to locations closer to the final consumer market. A common example is that of Asian companies relocating their manufacturing plants to Latin American countries with the aim of distributing their products in the United States of America.

While nearshoring is the best-known strategy, it can be considered an intermediate strategy among other alternatives, such as reshoring and offshoring, which seek to reduce import costs of goods into certain jurisdictions.

Reshoring involves bringing back the production and manufacturing of goods to the country of origin or the final destination country for consumption. This strategy is also known as onshoring, inshoring or backshoring.

The main advantage of this type of structure is avoiding the payment of tariffs on imported goods, but it also involves changes in logistics, supply chains, and various issues that affect production in a specific jurisdiction.

Reshoring is essentially the opposite of offshoring, which involves relocating production and manufacturing processes outside the consumer country to reduce costs.

Offshoring processes were very common during the 1980s and subsequent years, resulting in a significant increase in manufacturing plants in various Asian countries and, in some cases, in Latin America.

Among the main reasons behind offshoring was the need to reduce production costs and diversify the locations for manufacturing final or intermediate goods for production and commercialization.

Another relevant factor was the lack or shortage of skilled personnel and talent in the final destination countries, as well as the excessive costs in local markets.

Also important was the presence of highly skilled personnel in low-labor-cost countries, capable of handling these tasks more efficiently and at lower cost.

This also relates to the implementation of training programs by governments of less-developed countries with lower costs for carrying out production processes.

Other important factors behind these phenomena include the existence of restrictive local regulations that prevent companies from reaching their long-term goals in the shortest possible time. They often represent excessive costs and reduced competitiveness, such as technical regulations in production processes or import/export permits for parts, components, raw materials, etc.

Moreover, globalization and the interconnection of world trade compel companies not to have just one production site, but to diversify them in order to better control costs and logistics.

These processes had a very relevant impact in Mexico, since they opened the door within the Mexican customs framework to government-issued programs whose main goal was to attract manufacturing plants to Mexico, taking advantage of its proximity to the North American market and allowing for optimization of operating and tax costs related to the import of inputs and the export of manufactured goods.

Among these, the current IMMEX Program (Manufacturing, Maquiladora and Export Services Industry)—formerly known as the Maquiladora Industry Program—the PITEX Program, which allows for temporary imports of goods without paying foreign trade taxes, provided they are intended for export, and the Sectoral Promotion Program (PROSEC), which grants tariff preferences even if the product remains in Mexico, as long as it is used in strategic sectors.

The existence and development of these programs in Mexico has led to a significant increase in the nearshoring phenomenon, which essentially involves an intermediate process that, although it does not relocate all production to the country of origin, does move it partially to nearby or stable jurisdictions, such as Mexico.

Along these lines, there is currently a trend among companies—not only from the United States but also from other jurisdictions—to relocate their production processes from Asian countries to Mexico for several reasons.

Among them stands out a certain degree of political and financial stability and, in particular, the existence of a vast network of free trade agreements that allows our country to export various products subject to preferential tariffs to destination countries.

It is important to understand some of the main reasons for this nearshoring effect in Mexico, even during times when it seems that major countries and consumer markets are doing everything possible to promote reshoring of production processes for goods intended for domestic consumption.

Although Mexico has experienced significant development in recent years, it remains a jurisdiction where labor costs are highly competitive, and with a large pool of well-qualified labor. Thus, Mexico's experience in production processes helps mitigate negative effects related to potential quality control issues, infrastructure limitations, or supply chain disruptions, as well as low political and economic risk, among others.

Another highly relevant point is the current geopolitical situation and the existence of various free trade agreements and accords entered into by Mexico with more than fifty countries. These instruments allow for the establishment of production processes in a jurisdiction with extensive experience in these matters, thereby facilitating subsequent exports to other countries with access to preferential tariffs.

It is true that the current administration of the United States has generated a certain level of uncertainty and lack of clarity regarding the tariffs and costs applicable to products manufactured in Mexico and exported to that country. However, Mexico also has free trade agreements with countries such as Canada, Colombia, Chile, Peru, and various other countries in Central and South America, as well as Japan, Australia, Brunei, New Zealand, Singapore, Vietnam, the United Kingdom, and the European Union, among others. These agreements allow for tariff and other types of preferences for investments in productive processes in Mexico aimed at exporting goods to those jurisdictions.

This network of international trade agreements makes Mexico a strong option for nearshoring companies engaged in manufacturing operations for commercialization or use in one of the various jurisdictions with which Mexico has free trade agreements.

It is important to consider that each of these agreements may have specific characteristics that should be reviewed before using them to determine whether it is viable or commercially convenient to use Mexico as a platform for such operations. It is also important to determine the rules of origin and applicable requirements in order to carry out such operations efficiently and with commercial viability.

In conclusion, Mexico continues to be a solid option for companies seeking to engage in productive processes to manufacture goods intended for consumption in other markets, with not only internal incentives and programs that make it attractive, but also a significant impact on tariff costs in the destination countries.