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A rotation in global trade is remapping supply chains

In a new era of “re-globalization”, economic integration is expanding to new markets and reshaping supply chains through nearshoring and multi-shoring.
In a new era of “re-globalization”, economic integration is expanding to new markets and reshaping supply chains through nearshoring and multi-shoring.
12 June 2024 •

In February 2024, a watershed moment took place in international trade as Mexico replaced China as the biggest exporter of goods to the United States (U.S.) for the first time in 20 years.

The news reflected how dramatically global trade patterns have shifted in recent years. Before the Covid-19 pandemic, China was the dominant offshoring market for many multinational corporations.

Fast forward four years, and trends like nearshoring and multi-shoring have rotated trade flows from China to other countries closer to the home markets of multinational corporations. Underlying this shift is companies’ push for more resilient supply chains amid geopolitical tensions, which continue to overshadow today's global economy.

Thankfully, fears that escalating cross-border conflicts during the pandemic would trigger a broad-based retreat from globalization have not materialized, the World Trade Report noted. However, there are early signs of economic fragmentation as trade restrictions tripled in 2022 compared with 2019, the report warned in September 2023.

The world is now shifting towards what the World Trade Organization calls “re-globalization”, where the expansion of economic integration to more economies, markets, and people is reshaping global supply chains.

What are the key factors driving the ongoing global rotation of trade, and how are they propelling the rise of popular nearshoring destinations across Latin America, Asia, and Eastern Europe?

De-risking amid geopolitical tensions

Global trade patterns are increasingly influenced by geopolitics, as the United Nations Conference on Trade and Development (UNCTAD) report in December 2023 pointed out.

In particular, the trend of “friend-shoring” – where countries and companies prefer politically aligned trade partners – has become more pronounced since 2022, said UNCTAD.

Friend-shoring is becoming a trend alongside near-shoring, as supply chain resilience becomes a priority.
Friend-shoring is becoming a trend alongside near-shoring, as supply chain resilience becomes a priority.

This trend has made nearshoring destinations with relatively friendly ties with the U.S, like Mexico, India, and Vietnam, even more attractive. This is because companies are looking to reduce the risks of business disruptions due to simmering tensions between the world’s two largest economies. Amidst the trade feud between the U.S. and China, the upside to this is a boost in trade for friend-shoring countries in Asia Pacific.

De-risking is also a key consideration for European companies: the Ukraine-Russia war has prompted some companies to shift production from those two countries to nearby markets.

Against this backdrop of geopolitical instability, companies are prioritizing resilience in their value chains. Many are moving away from “just in time” logistics in China to a “just in case” model, where production and inventory warehousing sites are spread across markets nearer to home. This ensures reliable supply in case of unexpected events, from natural disasters to geopolitical conflict.

Tariffs tilt trade flows

Geopolitical tensions have also triggered more protectionist measures. International sanctions on Russia and the U.S.-China trade war, which raised tariffs on roughly US$450 billion (€411 billion) in bilateral trade, have accelerated the re-globalization trend.

Countries have imposed roughly 3,000 trade restrictions in 2022, the World Trade Report found. This in turn has prompted more companies to shift operations to markets within regional free trade blocs such as the United States-Mexico-Canada Agreement (USMCA) and the European Union-Vietnam free trade agreement.

China Plus One policy

China’s policies in recent years, from its zero-Covid lockdowns that disrupted production, to “state secret” raids on foreign companies, as well as its crackdown on technology companies, have diminished its appeal as a stable offshoring destination for some western investors.

Its post-pandemic economic recovery has been relatively less uplifting, with soft domestic consumption now hurting the sales of key investors like Apple and Tesla that have major operations there.

Besides these push factors, many companies are incentivized to accelerate their China Plus One approach because of recent U.S. and European Union (E.U.) policies to encourage or even compel companies to reshore or nearshore production in certain strategic sectors.

Many countries are leveraging the China Plus One approach, which encourages diversifying investment into other countries besides China.
Many countries are leveraging the China Plus One approach, which encourages diversifying investment into other countries besides China.

Tax policies to boost domestic or nearshore production of electric vehicles (EV), EV batteries and semiconductors in the U.S. and Europe are prompting companies to change production sites as well as suppliers for raw materials and components, thus redirecting trade flows.

Spotlight on some popular nearshoring markets

Some countries stand out as early beneficiaries of nearshoring, which has become a mainstream trend.

These markets do not just offer geographical proximity to the U.S. or E.U. markets. Their attractiveness as nearshoring destinations largely stem from the same advantages that China once relied on to become the premier offshoring destination: young, well-educated populations; relatively low labor and production costs; government incentives; and strong state investment in infrastructure.

Latin America: Mexico is the nearshoring poster boy

Mexico is enjoying a nearshoring boom, as U.S. corporate giants like Mattel, Tesla, General Motors and Honeywell open new plants here to take advantage of the USMCA.

According to online database fDi Markets, U.S. companies switching production closer to home accounted for just over 40 percent of Mexico’s US$40 billion (€37 billion) foreign direct investment (FDI) in 2022. This trend continued in 2023, with 42 new companies setting up nearshoring operations, helping Mexico to rake in foreign direct investment of US$29 billion (€27 billion) – and counting.

Asia: Multi-sourcing spotlight on India and Vietnam

MNCs like Apple and Tesla are diversifying their operations out of China to markets like lndia, which counts the U.S. as its number one trading partner. Consumer goods manufacturing hubs like Bangladesh have benefited from the nearshoring or multi-shoring push of global apparel and fashion companies, some 70 percent of which plan to diversify their production, according to McKinsey research.

As for Vietnam, its digital transformation and strong infrastructure have made it a magnet for nearshoring and offshoring FDI, which surged 32 percent in 2023 to US$36.61 billion (€34 billion) in 2023.

Europe: Nearshoring driven by Russian-Ukraine war

More than US$82 billion (€77 billion) was pledged to manufacturing projects by foreign companies in 15 nearshoring destinations across Central and Eastern Europe (CEE) and North Africa between 2022 and 2023, according to fDi Markets. This was the highest two-year figure ever and marks a 62 percent increase compared with the pre-pandemic years of 2018–2019, it noted.

In the aftermath of European companies’ closures of operations in Russia or Ukraine, Turkey has become a key nearshoring hub for companies like French carmaker Renault, which is investing US$430 million (€403 million) with local partners to expand its factory in Bursa.

In Poland, nearshoring investments include U.S. chipmaker Intel’s new plant, as well as a joint venture between Germany’s Volkswagen and Belgium’s Umicore to set up a production facility for cathode active material used in EV batteries.

Not all nearshoring or multi-shoring investments are from Western investors. Chinese companies have become increasingly active due to E.U. and U.S. measures to block Chinese EV imports. In Hungary, Chinese firm BYD is developing its first European EV factory in Szeged.

Re-globalization and nearshoring will continue to evolve

The trend towards diversifying production globally is likely to continue as companies seek to de-risk further amid re-globalization.

As more companies continue evolving their nearshoring strategy, navigating the complex supply chain is key to its success. Logistics firms with a strong network and good understanding of trade and customs regulations will be crucial to the nearshoring trend.

Logistics companies with a strong global network will play a vital role in the shift in global trade and the rise of nearshoring.
Logistics companies with a strong global network will play a vital role in the shift in global trade and the rise of nearshoring.

DHL is on hand to support companies with their complex supply chain management needs. With our global reach, we can leverage our expertise as a Lead Logistics Partner to provide end-to-end inbound-to-manufacturing solutions for companies diversifying their operations globally.

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