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Iván Arias

Economic Research Department, Citibanamex, Mexico


 


Little evidence of nearshoring trend in Latam, so far.


In recent years relocation/nearshoring trends have led to a meaningful change in the geographical distribution of US imports. The Latam region has some attractive features for relocation trends, especially Central American countries such as Costa Rica, El Salvador, and Mexico, however, most of the main gainers from the drops in the market share of China and Japan in US manufacturing imports have been Asian countries. If Latam countries attend their weaknesses the benefits could be higher.


Efficiencies considerations make Latam attractive for nearshoring for the US. Geographical proximity gives advantage to Central American and Caribbean countries from a transportation/logistics cost point of view. But the Latam region is also competitive in terms of labor costs, with most Latam countries showing lower manufacturing wages than China (see Figure 1), albeit higher than some Asian countries like Bangladesh, India, and Vietnam. Several Latam countries (Mexico, Chile, El Salvador, Dominican Republic, Costa Rica, Peru, Colombia, and Panama) have free trade agreements with the US, another competitive consideration when compared to China.


However, trade linkages of Latam countries with the US are strongly correlated with distance. Mexico is the extreme case, with 82.7% of its exports directed to the US, while the rest of Latam countries are more diversified. The US is also a relevant destination of exports (more of 25% of total) for countries like Dominican Republic, El Salvador, and Colombia. In contrast, the US is the destination of 15% or less of total exports for Chile, Brazil, Argentina, and Uruguay.


Manufacturing exports are also more relevant for countries closer to the US. Exports accounts for more than 15% of GDP in most Latam countries, with Argentina and Dominican Republic as some of the few exemptions. Nevertheless, for several countries of the region, especially from South America, the main exporting products are commodities not manufacturing. In contrast, for Mexico, El Salvador, Costa Rica and Panama, manufacturing exports are equivalent to more than 10% of GDP.


FDI trends give mixed evidence for a nearshoring story in the region. The relocation of manufacturing firms into a country should lead to an expansion of FDI flows, and to a gradual increase of the market share of exports in their destinations. FDI inflows have risen sharply in countries such as Uruguay, Chile, Peru and Brazil, but it is not the case in the rest of Latam for saying that a massive relocation would be underway. 


Only Mexico shows signs of early benefits. In the 2018-2023 period, the participation of exports from China in total US manufacturing imports dropped by 8.7pp. The EU, Vietnam, Taiwan and South Korea have been relevant winners from relocation trends in recent years. These developments could be related with the composition of manufacturing production, as the mentioned Asian countries show a greater export similarity to China of their net exports. In the same period, Mexico increased its market share in US imports by 1.8pp, while other Latam countries ranged from -0.1pp (Peru) to 0.1pp (Costa Rica). These results suggest that, at least at this aggregated level, so far there is no significant evidence of a widespread relocation of plants into Latam countries which would be leading to an accelerated expansion of their exports to the US. Mexico’s gains are concentrated in few industries (automotive products, and professional and medical equipment), and 1.4pp of its gain was recorded in 2023. Thus, while even in Mexico we see no evidence of an extensive relocation (in terms of industries) from other countries, there are signs of things starting to move faster. We estimate that under current conditions, Mexico is increasing its GDP growth by around 0.4pp per year from effects of relocation trends, not negligible but neither high enough for implying a boost to its GDP per capita.


Improving governance and the macro framework could increase the attractiveness. Challenges in governance topics persist in Latam. According to data from the World Bank, just Uruguay, Chile, Costa Rica, and Dominican Republic rank above the median world country in the Worldwide Governance Indicators. A related topic that has been increasing relevance is the protection and enforcement of Intellectual Property rights. According to the US Chamber International Index 2023, Mexico is the only Latam country with a better ranking than China (23 vs. 24, out of 55 countries), while all the region ranks below Taiwan (21st place). Macro stability is another relevant factor considered by investors in their decision-making, thus, policies aimed to promote investment and boost productivity, could also increase the attractiveness for relocation into Latam. Relocation trends will persist in the coming years, but for Latam to take full advantage from the related opportunities, policy changes are needed to increase their attractiveness.

 

This column was written with the collaboration of Fernando Monreal.


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