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Nearshoring in Mexico: Opportunities & challenges for law firms

Regina Lopez  Industry Data Analyst / Thomson Reuters Institute and Financial Insights

· 6 minute read

Regina Lopez  Industry Data Analyst / Thomson Reuters Institute and Financial Insights

· 6 minute read

The Mexican legal community is leveraging the economic phenomenon of nearshoring and contributing to the creation of successful and sustainable supply chains thru collaboration among practice areas and jurisdictions

Nearshoring — a transformative economic phenomenon in which a company delegates a portion of its production to third-party entities situated in foreign countries, yet within close proximity — has significantly influenced Mexico’s economy, creating a ripple effect across diverse industries.

The challenges posed by considerable distances and time zone disparities in cross-continental operations are undeniable. Before the COVID-19 pandemic, cost reduction efforts led many companies to seek suppliers in distant destinations, with Asia being one of the most attractive hubs. However, global supply chain disruptions originating from the pandemic were proof that these challenges can end up negatively impacting the efficiency of production processes. With nearshoring, businesses aim to mitigate these issues by bringing outsourced production centers closer together, thereby enhancing collaboration and addressing logistical obstacles much easier.

There has been a clear and growing trend of companies nearshoring their manufacturing operations to Mexico. A recent study from the Mexican Institute of Competitiveness found that foreign direct investment linked to the relocation of supply chains in Mexico grew 47% during the first three quarters of 2023. For Asian companies, Mexico has become a very interesting alternative and a way to avoid the geopolitical conflict between the United States and China. More than 3,000 companies from Asia have already established themselves in Mexico, with those of Chinese origin having the greatest presence. Further, experts anticipate these numbers will increase in the coming years, predicting that Mexico has the potential to attract more than $50 billion annually due to this phenomenon.

The impact of nearshoring

Not surprisingly, nearshoring has introduced both challenges and opportunities for law firms in Mexico. Most of the businesses that come to Mexico to embrace nearshoring are foreign companies that in some cases are not completely aware of the country’s legislation, culture, and business dynamics, explains Fernanda Garza, a legal expert in competition, antitrust, and international trade. This provides a great opportunity for lawyers to help clients navigate their nearshoring projects successfully within the legal landscape.

According to Garza, clients are coming in different shapes and sizes. Clients and their projects are unique, each with a different scope, industry, project stage, and market objectives. Therefore, lawyers advising these types of companies need to understand that there isn’t a one-size-fits-all template or framework that can be applied universally, and instead they must approach each project on an individualized basis with custom-made solutions.

The need to collaborate

In the context of nearshoring, legal guidance requires strong teamwork between legal practitioners with experience in different fields and practice areas. Garza describes how several legal practice areas have been the busiest, due mostly to legal work around the relocation of supply chains. Additionally, she considers the coordination among these practice area lawyers to be fundamental in order to serve companies in the best possible way:

Corporate — It is common that one of the first steps in these types of projects is to establish a legal entity. Lawyers need to inform their clients about the various types of companies that may be incorporated in Mexico, along with the rights and regulations that are involved. Selecting the correct corporate structure is a key factor for creating a successful business in Mexico.

International trade — Mexico is party to many free trade agreements (FTA), and it also offers diverse manufacturing and export promotion programs with interesting and attractive benefits for investors. In addition, if companies wish to export their final goods into the US or Canada, it is crucial that their businesses operate within the regulatory framework of USMCA — the trade agreement between the US, Mexico, and Canada — which has stronger terms compared to the NAFTA. Understanding how these treaties and programs apply to a client can make their operational processes more efficient and reduce significant costs.

Labor — Most of the projects that embrace nearshoring involve manufacturing, which of course, is known for being labor intensive. Given this, foreign businesses need to be aware of every aspect of Mexican labor law, including Social Security rules, profit-sharing, employee benefits, working hours, minimum wage payments, issues with unions, a ban on outsourcing, workers housing fund, and others.

Real estate — With 32 states in Mexico, each having distinct legislation and tax incentives to attract investment, the selection process for the project’s location becomes pivotal. Also, consideration of geographical factors, infrastructure, and availability of resources, such as water and energy, holds significance as well. Following the decision on a project’s location, conducting proper due diligence becomes imperative to ensure that the intended land acquisition adheres to the necessary legal permits for purchase or lease. Otherwise, an evaluation may be necessary to determine the steps required to meet these conditions.

Tax — This aspect becomes fundamental in order to determine the level of profitability for a project. Lawyers can play a significant role in designing optimal fiscal schemes that comply with Mexican tax laws and benefit from certain double-taxation agreements.

Compliance — Due to the nature of nearshoring, compliance extends beyond adherence to the company’s governance guidelines and rulings, and domestic laws; it involves aligning with the regulations of the countries encompassed within the entire supply chain and the FTAs involved. This entails monitoring the journey of raw materials and final products manufactured in the project, from their origin to their eventual destination.

Environmental, social & governance (ESG) — Comprehensive legal advice on nearshoring projects also must include guiding companies through the best international practices in ESG matters.

Foreign firms have come to Mexico to establish factories for decades; however, the projects coming in this new wave demand more complex and sophisticated solutions. These projects need to be integrated into global or regional value chains, and it is typical for the manufactured products in Mexico to be exported and commercialized elsewhere. Therefore, lawyers need to supervise every stage in the product supply chain and verify that the complete operational process aligns with the laws of the all the countries involved, including those of the final market.

Garza said that, in order for these projects to be successful, joint efforts from different practice areas and jurisdictions are indispensable. Lawyers have to transcend the mere comprehension of the Mexican legal framework and work with lawyers in other parts of the world. Additionally, they should take into consideration fast-changing global trends, technological advancements, and of course, the rise of artificial intelligence.

Looking ahead

The coming months are critical for law firms to leverage this nearshoring phenomenon by specializing further, coordinating efforts, and adopting an international perspective. The role of lawyers is not only to provide legal advice but to fortify incoming companies in all aspects, fostering a welcoming and well-advised environment for their ambitious business goals.

The recent development of nearshoring, accelerated by the COVID-19 pandemic and disruptions in global supply chains, demands a proactive approach from law practitioners. The legal community in Mexico stands at the forefront of this transformative trend, sensing legal needs and preparing to navigate the complexities of nearshoring while contributing to the creation of successful and sustainable supply chains.

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