Industry Knowlegde

Nearshoring: How It’s Reshaping International Trade?

Carlos Ortiz
6 Minutes

Globalization has made nearly every product on earth available to anyone with an internet connection. You can get almost anything that is made anywhere in the world, shipped to your front door at little to no cost and with very little hassle. Purchasing has become easier than ever, but now that globalization has reached its peak, we are beginning to see many companies change their supply strategies and relocate them due to higher costs, friction, and other factors.

From Offshoring To Nearshoring: The Changing Landscape of Globalization Over The Decades.

Offshoring is the practice of moving a company's operations or services to a foreign country, often to take advantage of lower labor costs, tax incentives, or other benefits. This trend began in the 1960s and 1970s when large corporation started moving their manufacturing operations to low-cost labor countries like China, India, Taiwan and South Korea.

Factory workers | Republic Of China

However, Offshoring has also had negative consequences, such as forced labor in developing countries. As a result, in recent years, there has been a growing trend towards Nearshoring, which now primarily involves moving business operations or services to nearby countries, often those with similar cultures and languages.

One example of this trend was the growing number of companies in Europe that moved their manufacturing and service operations to countries in Eastern Europe, such as Poland, Romania, and Ukraine. These countries had lower labor costs than Western Europe, but also offered a skilled workforce, proximity to their clients, and a stable political and economic environment.

Another example were the establishment of IT services to Latin America, particularly to countries like Mexico, Costa Rica, and Colombia. These countries offered a highly skilled workforce, a similar time zone to the United States, and competitive labor costs compared to outsourcing from Asian countries.

Overall, the trend towards Nearshoring  have had reflected a desire to balance the benefits of globalization developed over the last decades.

The Key Decision Factors For Companies To Adapt A Nearshoring Strategy

As a result of the economic disruptions and crisis that have recently impacted today’s modern world, many companies have moved their manufacturing facilities from China back to Europe or the United States. Nearshoring it’s already changing the way we do business. Nearshoring is driven primarily by companies looking for lower costs, better quality control and greater flexibility in their supply chain management. It has also been driven by the huge concerns of the increase of labor costs in China and its impact on profit margins.

Supply chain challenges are prompting new concerns among teams in organizations.

Nearshoring is not just about moving manufacturing from China to Mexico or other Asian countries such as Vietnam for example, but also involves moving production lines and facilities closer to home — within North America itself, for example.  We are seeing more companies trying to take advantage of low-cost labor elsewhere while maintaining control over their supply chains by using modern technology such as cloud computing, mobile devices and communication apps to allow teams located across different regions to work together seamlessly.

Now, how nearshoring will change global trade and what will be the new economical behaviors we will see from now on?, lets began by talking about the key decision factors shaping the current and future international trade behaviors:

A Better Response To Crisis And Disruptions

As opposed to the Offshoring effects the world started experiencing decades ago, where lowering cost was the main concern for companies and countries to become competitive in a globalized world, with Nearshoring we're now seeing a focus towards building more responsive and resilient supply chains by reducing transit times. Having more control over the supply reaching the final consumer on time and in optimal conditions has become the primary concern of teams and boards across organizations of many sizes.

Products Always Available For Customers & Consumers

After making sure products reach the final destination the second most important components that follow are; consistency and availability. Offshoring gave birth to the “just in time” methodology, now nearshoring is showing the world the development of a new trend the “just in case” methodology. Teams across organizations are leveraging on strategies that add an additional buffer of inventory to ensure products are not just arriving on time but also that they are always available at the retail shelves for final consumers, specially for essential industries and key commodities.

The Advantages Of Regional Partnerships For Strategic Products & Sectors

With disruptions also came eye-opening opportunities for companies and nations that revolve around trade blocks, foreign trade zones, and free trade agreements. With all of this, companies, as well as nations, are now trying to take full advantage of regional partnerships as well as local products and the benefits communities in nearby countries provide, something that wasn’t happening in the past, especially for strategic production, products, or semi-products. Nations are also becoming more collaborative with the private sector in many ways with a protectionist objectives in order to safeguard key industry sectors of national interest.

Expected International Trade Behaviors In The Modern World

Based on the key drivers making organizations rethink their supply chains, we will continue to see major emphasis in behaviors such as:

Regionalization Of Trade

Nearshoring can result in the creation or strengthening of regional trade blocs as countries seek to establish closer economic ties with their neighboring nations. This trend can be observed in regions such as North America, Europe, and Asia, where countries within proximity collaborate more closely to optimize supply chains and reduce transportation costs.

Shifts In Global Shipping Patterns

Nearshoring can lead to the creation of new trade lanes or the strengthening of existing ones. As production shifts to new locations, trade flows, and shipping routes may adjust accordingly. This may result in shorter shipping distances, leading to a potential decrease in long-haul shipping also nearshoring can lead to changes in port activity as production shifts to new locations. Ports near the production hubs may experience increased import and export volumes, while those previously serving as major transshipment hubs for long-distance shipping may see a decline in traffic.

Transport carriers are adapting to market shifts by exploring new commercial routes.

Reshaping Of Trade Agreements

Nearshoring can influence the negotiation and restructuring of trade agreements. As supply chains become more regionally focused, countries within a specific geographic area may seek to establish preferential trade agreements to enhance market access, facilitate trade, and promote the movement of goods across borders something we are already seeing with the USMCA and the RCEP agreements. In addition, trade agreements may also incorporate provisions related to intellectual property protection, labor standards, and environmental regulations, reflecting the changing dynamics of nearshoring.ç

Key Stats:

88% of U.S.-based small and medium-sized businesses plan to use suppliers in the U.S. or Mexico in 2023, according to Gartner.

In conclusion, nearshoring is reshaping international trade by bringing manufacturing and production activities closer to the target market or home country. This strategy is influencing various aspects of global trade, including regionalization, shifts in production hubs, changes in trade agreements, enhanced resilience and flexibility, technological advancements, labor market effects, and environmental considerations. By shortening supply chains and optimizing efficiency, nearshoring is transforming the way goods are produced, shipped, and consumed. As companies adapt to evolving market dynamics, nearshoring emerges as a significant force in shaping the future of international trade, fostering regional collaborations, and redefining global shipping patterns.

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