Mexico and eastern Europe benefit from ‘nearshoring’ trend

Nearshoring comes to Mexico and eastern Europe

Lesson summary

Hi there everyone, I’m Jeff and this is Plain English. Here at Plain English, we help you upgrade your skills with stories about current events and trending topics. Each episode also helps you express a new idea in English. That’s because we show you exactly how to use one English expression.

Today’s story is about “nearshoring.” That’s the word used to describe companies bringing manufacturing and services closer to home. If the 1990s and 2000s were about globalization, then this decade is about regionalization. Today, we’ll talk about how nearshoring is affecting two regions: Mexico and eastern Europe.

In the second half of the episode, I’ll show you how to use the English phrasal verb “carve out.” This is lesson number 654, so that means JR, our producer, has uploaded the full lesson to PlainEnglish.com/654.

Let’s get started.

‘Nearshoring’ comes to Mexico and eastern Europe

For decades, it seemed that trade between countries was going in only one direction: up. Many big companies became international, opening offices, call centers, and factories around the world. Asia became known as the world’s workshop. “Offshoring” is the word used to describe big companies moving manufacturing to countries, mostly in Asia, where labor was cheaper.

Supply chains grew ever more complex. Foxconn can assemble up to half a million iPhones a day in its massive facility in China. Some car parts cross international borders eight times before they’re finally put into a vehicle.

As the 2010s came to a close, though, there were signs that trade among the world’s countries and regions was slowing. And then the pandemic changed everything: shipping costs increased, factories closed, and governments acted unpredictably.

Companies realized there were hidden risks in having complex, far-flung supply chains. China’s zero-COVID policies exposed political risk, too. And the geopolitical rivalry between the U.S. and China has added to the risk of running a big, international company.

Now, there’s a new buzzword in international business: not “offshoring” but “nearshoring.” Companies in big economies like the U.S. and western Europe want to simplify their supply chains and bring some manufacturing and support functions closer to home. They still want access to lower-cost markets, but they don’t want the risk of a complex supply chain in too many countries.

Look at a map of the world and you’ll see that this should benefit two regions the most: eastern Europe and Mexico.

Let’s start in Europe, where nearshoring is more advanced. Large, international companies in the relatively higher-cost west are bringing manufacturing and services to the relatively lower-cost east. Eastern Europe connects Asia and the Middle East to western Europe. The time zone is right, English is commonly spoken, and there are cultural similarities between the east and the west.

Many eastern and central European countries are already part of the European Union, meaning the legal framework for trade is already in place. And the countries of eastern Europe generally have stable governments and well-established property rights and rule of law.

The region has good multi-modal transportation infrastructure. That means ports, railways, and roads, which all connect with one another. Trucks and trains cross borders with little disruption. So eastern Europe is poised to take advantage of the nearshoring trend. How are they doing?

Poland is positioning itself as the gateway between west and east. Romania is carving out a niche in semiconductor manufacturing. Croatia and Slovenia have major ports for importing products.

Eastern Europe is also becoming a hub for services. The Czech Republic, Bulgaria and Turkey have a lot of talent in IT services and software development. Many investment banks and consulting firms are hiring in Poland.

Western Europe, then, already has a well-developed region with lower costs right on its doorstep. There are some challenges. The threat from the east looms large: Russia’s thirst for conquering territory by force appears only to be growing stronger. It has already called Poland a “dangerous enemy.”

Things are different in North America. The U.S., the biggest economy in the Americas, shares a 3,000-kilometer border with a lower-cost, friendly country: Mexico. Last year, Mexico became America’s largest trading partner, ahead of both China and Canada. The biggest American port is in Laredo, Texas, which has four large bridges across the Rio Grande.

Mexico has a well-developed manufacturing sector, especially in the automotive industry. Japanese, American, and European car companies have all increased their investment in assembly plants in Mexico. Tesla plans to open a huge factory near Monterrey, in the north.

Mexico also has the advanced facilities needed for pharmaceutical and medical device manufacturing. The country has a relatively well-developed infrastructure of roads and warehouses. Compared with other countries in Latin America, it has stable electricity and a deep labor market.

But there are some challenges. First, shipping is not as well-integrated as it is in Europe. Trucks from Mexico have to cross bridges to get to the U.S., and they face long lines for inspections. Trucks from each side have to unload their goods in a narrow border zone, transferring the load to local trucks. That adds costs and delays.

Mexico’s government is not as committed to nearshoring as are those of eastern Europe. The rule of law is not as strong: companies have to worry about safety of their employees and they have to contend with corruption at all levels of government.

Only about a quarter of young people in Mexico pursue higher education. There isn’t a culture of apprenticeships (like in Europe) or of vocational or technical schools (like in the U.S.). The result is that companies often struggle to find enough skilled labor. And then there are the toxic politics of drug smuggling and migration.

Still, the advantages outweigh the challenges. Both Mexico and eastern Europe are enjoying the fruits of nearshoring. Construction of warehouses and data centers is strong in both regions. Rents are up. Unemployment is low. The Mexican peso is strong. If politics don’t get in the way, this trend could be a real benefit for both regions for a long time to come.

Jeff’s take

For a while, from what I could tell, the attitude in Mexico was skepticism. People were just not sure if this was real or not. The word “nearshoring” is extremely popular in business, but, some people worry, only in the type of business that’s already present, like auto manufacturing. Tesla announced its huge factory, but then dragged its feet for the better part of a year—they still haven’t broken ground, now a year since the announcement.

Plus, there’s a drought in Mexico now—that makes it hard to build and run factories.

But the benefits, I think, are starting to show up in the statistics—trade with the U.S. is up, rents are up, more industrial parks are being built. We’ll see how real it turns out to be. But for now, it seems like a great opportunity.