Global Issues

Nearshoring is not a silver bullet for tariffs

When nearshoring is driven by tariff avoidance rather than genuine economic strategy, it creates more problems than it solves.

A worker makes textile export orders at a production workshop of a textile enterprise in Binzhou, China, on July 8, 2024. [NurPhoto via AFP]
A worker makes textile export orders at a production workshop of a textile enterprise in Binzhou, China, on July 8, 2024. [NurPhoto via AFP]

Global Watch |

Nearshoring is the buzzword of the moment. Companies are moving production closer to home, and on the surface, it seems like a win-win.

Shorter supply chains, lower transportation costs and fewer headaches from tariffs, what’s not to love? But dig a little deeper, and you’ll see that nearshoring, especially when it's all about dodging tariffs, is less of a smart business move and more of a short-sighted gamble. It's a strategy that might feel good in the short term but comes with a hefty price tag for regional and global economies—and, ironically, for the very countries embracing it.

Basically, nearshoring involves shifting production to countries closer to your main market. It's a quick fix with long-term consequences. For companies in Asia, this might mean moving operations to Southeast Asia or India. In South America, it could involve relocating production to neighboring countries like Colombia or Brazil.

The idea is to save money, avoid tariffs and keep things running smoothly. Sounds great, right? But when nearshoring is driven by tariff avoidance rather than genuine economic strategy, it creates more problems than it solves.

For example, take Africa. Countries like Ethiopia and Kenya have become attractive nearshoring destinations for companies looking to avoid the rising costs of production in China. While this has spurred some economic activity, it has also created a dependency on foreign investments that are often volatile.

Moreover, the lack of robust local supply chains forces these nations to import raw materials from distant markets, negating the supposed cost savings of nearshoring.

In Africa, nearshoring has brought a mix of opportunities and challenges. Ethiopia, for instance, has become a hub for textile manufacturing, attracting companies that previously relied on China. However, this shift has not been without its downsides.

Economic inequalities

The country's infrastructure struggles to keep up with the demands of large-scale production, and its reliance on imported raw materials undermines the cost advantages of nearshoring.

Additionally, the political instability in the Horn of Africa region poses significant risks to supply chain reliability. Kenya, another nearshoring hotspot, has seen growth in its technology and service sectors. Companies from India and China have set up operations in Nairobi to serve African and Middle Eastern markets.

While this has created jobs, it has also deepened economic inequalities, as the benefits are often concentrated in urban areas, leaving rural communities behind.

In South America, Brazil has long been seen as a potential nearshoring destination due to its large workforce and natural resources. However, the country's high taxes, complex regulations and inadequate infrastructure have made it a challenging environment for businesses.

Many companies that nearshored to Brazil have found themselves grappling with higher-than-expected costs and logistical headaches. Colombia, on the other hand, has emerged as a more viable option for nearshoring, particularly in the technology and customer service sectors.

Companies from India and Russia have invested in Colombian operations to serve North and South American markets. While this has boosted Colombia's economy, it has also created a dependency on foreign capital, making the country vulnerable to global economic fluctuations.

Asia presents a complex picture when it comes to nearshoring. India has positioned itself as a nearshoring alternative to China, particularly in the technology and pharmaceutical sectors. Companies from Russia have increasingly turned to India for manufacturing and IT services, leveraging the two countries' strong political and economic ties.

However, this shift has challenges. India's regulatory environment is difficult to navigate, and its infrastructure remains majorly inferior to that of China and other developed nations. Meanwhile, Southeast Asian countries like Vietnam and Indonesia have become popular nearshoring destinations for companies looking to diversify away from China.

Disruption vulnerabilities

These countries offer lower labor costs and proximity to major markets. However, their reliance on Chinese raw materials and components means that they are still deeply tied to China's economy, making them vulnerable to disruptions in Chinese supply chains.

At its core, nearshoring driven by tariff avoidance is a form of economic nationalism. It's about putting your country or region first, even if it means disrupting global trade. But here's the irony: this kind of nationalism often backfires. By focusing on short-term wins, countries undermine the very principles of free trade that have fueled global economic growth for decades.

Take Africa again. While nearshoring has brought some economic benefits, it has also created a dependency on foreign investments and markets. This lack of diversification makes African economies more vulnerable to global economic shocks.

Similarly, in South America, the focus on nearshoring has often come at the expense of long-term economic stability, as countries become overly reliant on a single market or industry. The solution isn't to abandon nearshoring entirely but to rethink its purpose and approach. Instead of using nearshoring to sidestep tariffs, companies and governments should embrace compliance with trade regulations as an opportunity to strengthen global partnerships and foster sustainable growth.

Building long-term resilience

Tariffs, while often seen as a burden, can incentivize companies to invest in local economies, diversify supply chains and innovate in ways that benefit both producers and consumers. For instance, complying with tariffs can encourage companies to source raw materials locally, reducing dependency on distant suppliers and mitigating risks associated with geopolitical instability.

In Africa, rather than relocating operations solely to avoid tariffs, companies could invest in infrastructure and workforce development to create a self-sustaining manufacturing ecosystem. This approach not only aligns with trade regulations but also builds long-term resilience and economic independence.

Similarly, in South America, compliance with tariffs can drive innovation in industries like technology and agriculture. By adhering to trade rules, companies can unlock access to government incentives, such as tax breaks and subsidies, which are often tied to compliance.

For example, Brazil's government has introduced reforms aimed at revitalizing its manufacturing sector, offering opportunities for companies willing to invest in local production rather than relying on nearshoring as a quick fix.

In Asia, countries like India and Vietnam can benefit from tariff-compliant partnerships that prioritize sustainable development over short-term cost savings. By working within the framework of trade agreements, companies can foster stronger ties with local suppliers, improve quality control and enhance their reputation as responsible global players.

This approach not only reduces the risk of supply chain disruptions but also positions companies as leaders in ethical and sustainable business practices.

Nearshoring driven by tariff avoidance may seem like a clever workaround, but it often leads to unintended consequences that harm both regional and global economies. Complying with tariffs, on the other hand, offers a pathway to long-term stability and growth.

It encourages companies to invest in local economies, build resilient supply chains, and foster innovation that benefits everyone involved. By embracing trade regulations as an opportunity rather than a hurdle, companies can contribute to a more balanced and equitable global economy.

This approach prioritizes cooperation over competition, sustainability over expediency and long-term resilience over short-term gains. In the end, compliance with tariffs isn't just about following the rules, it's about creating a system that works for everyone, ensuring that global trade remains a force for shared prosperity rather than division.

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