03 / 11 / 22

Nearshoring in Mexico: how Tesla and the North American Leaders Summit create opportunities.
(Lexlatin collaboration)

MEXICO CITY, MEXICO, March 3rd, 2023 –  In addition to the Federal Labor Law and environmental regulations, it will be important to review the Manufacturing, Maquiladora and Export Services Industry Program.

Nearshoring, that phenomenon that refers to the relocation of investments in markets close to their final destination -as explained by Fernanda Garza, a specialist in economic competition who now leads the area in antitrust law and international trade practice at SMPS Legal-, is having an important boom in Latin America and especially in Mexico, as evidenced by the recent agreement between the Mexican government and Elon Musk to build the ‘world’s largest electric vehicle plant’ in Monterrey. 

A sustained increase in nearshoring agreements in Mexico is expected, for example Grupo Santander estimates this increase at 14% to 20% – driven by the paradigm shift brought about the global supply chain crisis, the slowdown in the Chinese manufacturing industry, the global shortage of semiconductors, and mainly according to Garza, by the trade conflict between the United States and China.   

“The Mexican manufacturing industry has a great possibility of benefiting from nearshoring, to the extent that companies interested in the United States as a final destination, could move their production to the country. Mexico offers competitive labor costs, skilled labor and a well-developed supply chain infrastructure,” says the lawyer.

According to the specialist, in 2022, the Inter-American Development Bank (IDB) estimated that the increase in the country’s total exports as a result of the industrial relocation process could be up to USD 35.28 billion. Of these, USD 30 billion corresponds to manufactures sent to the United States. 

Fernanda Garza, who has also been an official of the Mexican competition authority, details in an interview the key points in the country’s participation in this global phenomenon.

What opportunities is the construction of Tesla´s plant in Nuevo León generating for nearshoring?

Fernanda Garza – Among the opportunities that this investment will generate for Mexico, it is possible to anticipate the following:

  • Economic grow due to expected investment

The opening of the new Tesla plant will translate into a significant economic spillover to our country in terms of foreign direct investment (FDI). 

Martha Delgado, Undersecretary for Multilateral Affairs of the Foreign Ministry, said that the initial investment foreseen for the opening of the Tesla plant will be around US$5 billion. 

The investment will also contribute to economic growth, increase the flow of foreign trade, and integrate the regional and global automotive supply chains. 

  • Investment spiral along the electric vehicle manufacturing supply chain.

On a secondary level, Tesla’s investment will create a spiral of investment attraction along the supply chain. Such a project drives an economic multiplier effect on the local economy through all the activity around the operation of a car plant, such as the auto parts industry and other suppliers of goods and services that bring the factory to life.

With the establishment of the Tesla plant in Nuevo Leon there will be a significant increase in demand for local suppliers of raw materials, components and services. Local suppliers will be in a privileged position to supply these types of goods and benefit from Tesla’s investment, as the company will require a significant amount of local content to comply with the rule of origin foreseen in the T-MEC. 

The automotive industry is one of the most important in the Mexican manufacturing sector. According to figures published by Morgan Stanley in January 2023, the U.S. automotive industry market currently accounts for one-third of Mexican exports to the United States. 

  • Opportunity to move towards green energy

The announced investment will also have a very interesting effect in the environmental and energy spheres, as Tesla’s manufacturing will focus on developing electric vehicles that represent clean energy and move away from traditional automotive manufacturing, based on the combustion engine. This effort contributes to the goal of transforming the world economy towards clean energy, electrification and the transition to zero CO2 emissions. 

Tesla’s investment project comes on top of BMW’s plan to invest US$860 million in electric vehicle manufacturing at its San Luis Potosi plant and announcements by other industry giants of new operations to expand or start electric production.

  • Creation of sources of employment

Tesla’s investment will also represent an important direct and indirect source of jobs, while strengthening local manufacturing capabilities. 

Martha Delgado, Undersecretary for Multilateral Affairs of the Foreign Ministry, said that the project could represent the creation of up to 6,000 sources of employment and Tesla’s investment in Mexico is also expected to create indirect employment opportunities that will come from the network of suppliers that will develop around Tesla’s operations, as well as from the multiplier effects of increased economic activity in the region. Mexico has a skilled workforce that for years has acquired the knowledge necessary to manufacture all the parts of an automobile.

Are there any regulatory projects under discussion or recently enacted that add to the positioning of this activity?

Some relevant regional initiatives aimed at strengthening investment relocation and offshoring China from Western value chains include the following:

  • At the North American Leaders’ Summit, held in Mexico City in January of this year, it was agreed to strengthen ties to promote the manufacturing of goods from suppliers located in the North American region (and not from different regions). To achieve this, a joint committee composed of four representatives from each country will be created. This will focus on promoting the integration of the region’s economies and, in the words of Andrés Manuel López Obrador, President of Mexico, “replacing imports to North America to achieve self-sufficiency in the area”.
  • At the same time, proposals are being developed in the U.S. Congress to strengthen ties with trading partners in the Americas, amid growing tension with China. Senator Bill Cassidy and Representative Maria Elvira Salazar, both Republicans, introduced a bill to promote a broad, Western-focused foreign and economic policy aimed at offshoring China’s supply chains to the West through tax incentives and trade preferences. This initiative also instructs to negotiate the extension of the T-MEC with certain countries in the region and the creation of an “Alliance of the Americas” with Western countries.

From this trend, have you noticed an increase in litigation or disputes? 

One of the most relevant recent disputes that have been settled under the T-MEC dispute settlement mechanism is closely related to the central topic of this interview, which is nearshoring and the automotive industry.

Mexico and Canada requested the establishment of a panel to determine whether the U.S. application and interpretation for calculating the Regional Value Content (RVC) of passenger cars, light trucks and their parts was correct. 

The panel determined that the T-MEC allows vehicle manufacturers to consider the essential parts of a finished vehicle (engine, transmission, body, etc.) as originating, as long as, independently, those parts have met the minimum regional content percentage (of 75%). The panel concluded that the methodology applied by the United States to determine the RCV was incorrect. 

As a consequence of the resolution, Mexico, the United States and Canada must resume dialogue and find a mutually favorable solution within 75 days. In the event that the three countries do not reach an agreement within this period, Mexico and Canada may temporarily impose tariffs on products originating in the United States as a trade countermeasure (retaliatory measure). 

Another sensitive sector where international controversy is potentially looming is energy. Mexico has great potential to generate renewable energy, due to its privileged geographic location and abundant natural resources. In addition, Mexico has made international commitments to gradually move towards the use of cleaner energy sources, as well as to create a more competitive market in the energy sector. 

However, there is still a strong dependence on coal and oil-based energy sources and national legislation continues to favor state-owned companies based on these energy sources. Mexican regulatory instability has affected domestic and foreign investment in the sector. This could give rise to international disputes between States, individuals or even under investor-State dispute settlement mechanisms under FTAs signed by Mexico or agreements for the reciprocal promotion of investments.

Sectors with potential for nearshoring 

According to Fernanda Garza, the industries with the greatest room for growth in nearshoring are agriculture and agribusiness, chemicals and plastics, clothing and accessories, basic metals, machinery and equipment, information technology, electronics, pharmaceuticals and medical devices, automotive, aerospace, furniture and toys. 

Applicable regulations

Mexico’s network of free trade agreements, including the T-MEC, will be very important in this scenario. 

“Mexico has a network of 14 Free Trade Agreements with 50 countries (FTAs), 30 Agreements for the Promotion and Reciprocal Protection of Investments (APPRI) with 33 countries or administrative regions and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI),” said Garza.

In addition to the Federal Labor Law and environmental regulations, it will be important to review the Manufacturing, Maquiladora and Export Services Industry Program.

On the U.S. side, the review of the Chips and Science Act will be crucial. 

“In relation to electric vehicles, Joe Biden’s administration has offered monetary incentives to U.S. consumers to buy electric cars, as part of its plans to encourage the use of clean energy,” said the expert.

The full article was made in collaboration with Lexlatin, and you can find the original article in Spanish herein: https://lexlatin.com/entrevistas/nearshoring-mexico-tesla-cumbre-norteamerica-oportunidades 

All the information placed in this article and the rights of distribution belongs to @Lexlatin. 

All the information placed in this article and the rights of distribution belongs to Lexlatin. 

More News

Related Practice

International Trade

Related Lawyers

Fernanda Garza