The Covid-19 pandemic drastically changed the dynamics of international trade. It did not only cause the temporary closing of borders around the world and the lockdown of a considerable proportion of its population. It also unveiled the weaknesses of global supply chains and made companies rethink their operation models when facing a crisis that may repeat itself in the short term. Further, tensions between so-called eastern and western countries have created high levels of uncertainty among companies that have offshore operations. On the one hand, the well-known trade war between two of the biggest economies of the world – United States and China – created an incentive for U.S-based companies to relocate their Chinese operations. On the other hand, the conflict between Russia and Ukraine has led to political and economic measures of global impact that may have negative effects on the companies’ operations overseas. In this context, Latin America seems to have a great opportunity to become a nearshoring platform, as the benefits of this model start to become more attractive for international companies.
During the 1990s and early 2000s China became the “factory of the world” and multiplied its economy in such an exponential manner that other regions of the world were overlooked. However, today the context is not as favorable for Asia as it used to be. With U.S economic measures against China and the Covid-19 consequences, companies around the world have started to see the value of diversifying their suppliers and building a stronger operation that takes into account the possible risks that the world now faces. Companies are in the process of finding ways to shield their operation, while knowing that the crisis that they have faced in the past years could just as well happen again. Supply chain and production control is now of utmost importance, since Covid-19 demonstrated how vulnerable the traditional international supply chain settings were, both from the demand and the supply side .
Nearshoring has therefore risen as a possible future for the already damaged global supply chains. Under this model, the operation consists of “sourcing work to a foreign, lower-wage country that is relatively close in distance and/or in time zone. The customer expects to benefit from one or for of the following constructs of proximity: geographic, temporal, cultural, linguistic, economic, political and historical linkages” . In the current global context, this translates into having more direct and practical control over the companies’ operation overseas, which brings companies to reducing uncertainty and risk.
The benefits of Nearshoring
- Stronger regional value chains and reduced risk
One of the determinant factors in nearshoring is geographical proximity. Nearshoring motivates the strengthening of regional value chains, since the operation focuses on a particular portion of territory. It therefore helps consolidating cohesive development paths within the different countries of a same region.
At the same time, nearshoring reduces the risks associated to distance and transport in the context of crisis. The fact that the operation is established in a country that is relatively close to the company’s headquarters ensures to a larger extent the possibility of always being able to access the merchandise and make it arrive safely and timely to its destination.
- Reduction of cultural and linguistic differences
Geographic proximity is more often than not associated to cultural and linguistic similarities, as well as time zone coordination. Even though we live now in a globalized world, these elements are not of little importance. Particularly, linguistic and time zone similarities may help creating synergies between teams that must work together for a common goal. Moreover, communication is key to success, especially in times where decisions must be taken quickly and assertively. As for cultural similarities, while it could be argued that they are not necessary, they may have a strong impact in the efficiency of communication and the desired results.
The choice for nearshoring in Latin America
With companies wishing to relocate their Chinese operations, Latin America is now turning into a hub for hosting larger companies’ operations. Latin America is in close proximity to the U.S and has a highly skilled labor force accessible at affordable prices. Moreover, several Latin American countries are aware of the importance of insertion in the digital era, which allows them to adapt better to the e-commerce revolution in international trade.
As members of several international organizations, Latin American countries such as Colombia, Costa Rica, Dominican Republic and Mexico have a tendency towards sustainability and improvement of security in relation to corruption issues. In this sense, companies in Latin America will soon have to adjust their legal relations with suppliers to meet international standards on transparency and sustainability. These are factors that remain distant in countries like China and make Latin America even more competitive as a region for nearshoring operations.
- Colombia
Colombia is a geographically strategic country with exits in both the Pacific and the Atlantic oceans. Thanks to this it has a highly competitive logistics industry with skills and knowledge that make the country suitable for international trade operations.
Colombia has a highly developed and competitive Free Trade Zone regime, thanks to which operations taking place in those areas have access to tariff and tax benefits. This regime was recently reinforced by Decrees 278 of 2021 and 505 of 2022, which brought interesting changes to the legal framework. These Decrees allowed the hosting of all agro-industrial activities inside the Free Trade Zones, which opened the door for industries such as medical and industrial cannabis to have access to the Free Trade Zone benefits. They also opened the possibility for e-commerce operations to take place via express shipments and for companies to engage in activities even outside the Free Trade Zone. These changes allowed the Colombian Free Trade Zone regime to be aligned with the world’s status regarding Covid-19 and made of the Free Trade Zones a pillar for the economy’s reactivation.
- e) Dominican Republic
The Dominican Republic is already an industrial hub for large U.S companies such as GE Energy, Johnson & Johnson and Cardinal Health. Dominican Republic also counts with a high-caliber talent pool and, more importantly, has a government with an industrialization objective. In fact, the current Government is held upon five pillars for industrialization that reinforce the Dominican Republic’s future as a platform for nearshoring:
- Efficiency in permits and authorizations
- International promotion and improvement of tax regulation
- Optimization of the supply chains
- Education and technical training
- Strengthening infrastructure
- f) Costa Rica
Costa Rica is a strong exporter of high value added services in the region of Latin America. It has a strong and already recognized IT industry that hosts companies such as Microsoft and IBM. At the same time, Costa Rica educates its labor force in the IT industry locally and has developed an advanced Free Trade Zone infrastructure that has made it take an advantage of its geographic location and the free trade agreements that it has signed with other countries. Mainly, Costa Rica has benefited from the CAFTA Agreements between the U.S and some of the developing economies of Central America.
Conclusions
Recent phenomena have shown a need for companies to restructure their overseas operations, which proved to be more vulnerable than imagined. In a world subject to global pandemics that can press a stop button on international trade unexpectedly, companies must look for alternatives to diversify their pool of suppliers around the world and to guarantee the continuity of their operation. Moreover, the recent conflict between Russia and Ukraine is likely to cause global consequences in the political and economic arena, which still remain to develop in the future. As was discussed, nearshoring is becoming an attractive alternative for companies looking to reduce risks associated to offshoring and Latin America seems to be an ideal platform for this in many aspects.
Still, the region must face challenges such as addressing social discomfort, which has caused protests and affected international trade operations. Also, political factors such as high corruption levels keep on creating distrust towards Latin American countries.
Geographic proximity, cultural and linguistic similarities have now become valuable assets in times of uncertainty. In that sense, Latin American countries such as Colombia, Dominican Republic and Costa Rica, among others, are ideal destinations for foreign direct investment from nearshoring activities.