The Limits to Nearshoring

Chinese state agency Xinhua reported yesterday that Tesla will build a battery factory in Shanghai and that production is expected to begin in the middle of next year. The new plant will complement an existing one in the same city dedicated to the assembly of electric vehicles. An initial volume of 10,000 units of Megapack lithium-ion battery packs per year is estimated — equivalent to a storage capacity of about 40 gigawatts.

To put this figure in perspective, it is equivalent to one-eighth of Mexico’s annual production of electricity. Thus, the planned facility will have an output similar to Tesla’s megafactory in Lathrop, California. In the Asian nation, Elon Musk’s corporation has the capacity to assemble 22,000 units of its Model 3 per week.

This data shows that, despite the growing political rifts between Washington and Beijing, the U.S. lacks the capacity to dispense with China’s immense productive strength; it also sheds light on the impossibility of U.S. efforts to reduce its industrial dependence on the Asian giant through sanctions.

The most drastic example of sanctions was the total embargo that the Trump administration imposed on Chinese telecommunications corporation Huawei. Despite the verbal hostilities between the two governments, there is no indication of an economic rupture; moreover, it seems inevitable that in industrial, commercial and technological arenas, China will continue to accumulate power to the United States’ detriment.

This context also makes it necessary to review the prospects of policies aimed at promoting nearshoring, i.e., the relocation of factories to countries close to the Western superpower, which continues to be the world’s largest market.

This strategy is particularly favorable for Mexico, whose membership in the U.S.-Mexico-Canada Agreement adds advantage to the geographical proximity. It should be remembered that at the summit meeting with President Andrés Manuel López Obrador last January, Presidents Joe Biden and Justin Trudeau agreed to transfer a quarter of their industrial facilities currently located in China to the common zone.

In addition to U.S. and Canadian industries, those from other countries are also seeking to relocate to Mexico. Proximity to the superpower market is part of the appeal, plus 50 nations we have trade agreements with represent 65% of the world’s gross domestic product.

This is assuredly an auspicious situation; however, limits remain as to what we can expect. Many U.S. companies have and will continue to have major elements of their production in China. Thus, it is better to be moderately optimistic and recognize that, although nearshoring is attracting substantial investment in Mexico, it will not necessarily translate into an economic “miracle” or into overflowing growth rates.