The recent shifts in trade policies, particularly changes to tariffs, have significantly influenced business decisions regarding nearshoring operations to Mexico. The imposition of tariffs, especially in the context of the United States-Mexico trade relations, has led companies to reassess their strategies for outsourcing and relocating manufacturing and other business functions. Tariffs And Nearshoring: Uncertainty, Strategy And A Path Forward Here, we’ll explore the impact of these tariff changes on nearshoring to Mexico.
What are Tariffs?
The tariffs being imposed by the Trump administration are just taxes on imported goods. Governments can impose tariffs to regulate trade policies, protect domestic companies, and find a way to influence international relations. In the past, U.S.-Mexico trade has benefited from agreements like NAFTA and its successor, the USMCA. However, the recent escalations in tariff policies by the U.S. has affected many countries and created new complexities.
Right now, the U.S. has implemented tariffs of up to 25% on certain Mexican imports. They are primarily targeting automotive components, electronics, and select consumer goods. In response to the US tariffs, Mexico has enacted their own tariffs ranging from 5% to 20% on American agricultural products, metals, and various consumer items. These tariffs, similar to tariffs enacted on other countries could disrupt the cross-border trade. We will need to stay tuned as to what the outcomes of the tariffs will be on businesses across the US. Impact of Tariffs on U.S.- Mexico Trade and Manufacturing
The Shift Toward Mexico
While tariffs with Mexico are high, they pale in comparison to those imposed on China. This will play a significant role in driving US businesses to reevaluate their dependence on China manufacturing and, perhaps, re-consider other countries as possible alternatives. Mexico has emerged as an attractive alternative for the following reasons:
- Proximity to the U.S.: Mexico’s proximity to the U.S. means that manufactured goods can be shipped at lower transportation costs and more quickly when compared to products shipped from China. The ability to shorten deliveries and reduce shipping times and costs provides a competitive advantage, particularly in industries where speed-to-market is critical.
- Cost Competitiveness: While Mexico’s labor costs are generally higher than in China, they remain lower than in the U.S., making Mexico an attractive option for companies looking to reduce costs while avoiding the tariffs on Chinese imports.
Challenges Due to Tariffs, even for Nearshoring
While certain trade agreements like NAFTA and USMCA have generally made Mexico more attractive, there are some challenges:
- Uncertainty around Tariff Policies: Despite the stable tariff framework of the past, in our current economic environment, the tariffs can change almost hourly. These fluctuations can create a huge amount of uncertainty for businesses considering nearshoring options in the future.
- Tariffs on Services: While tariffs have currently been enacted only on goods at this point , it is possible that in the future tariffs could be enacted on services as well. Companies must consider whether it makes financial sense to consider Mexico as a country to provide, for example, AR and AP services and whether those could be likely to have tariffs imposed as well.
Short-Term vs. Long-Term Considerations
The higher tariffs imposed on some countries in Asia far exceed those imposed on Mexico. This has encouraged many companies to look at the short-term solution of relocating their offshoring manufacturing to a near shore location. Navigating 2025: Trends And Risks Impacting Nearshoring In Mexico In the long term, however, the impact of these tariffs could be less than expected as companies find ways to mitigate costs through technology improvements, automation and AI.
In Conclusion
While tariffs are shaping nearshoring decisions, they should be only one part of a larger and more strategic decision that includes factors like long term labor costs, skill availability, and infrastructure investment.