Finding cheaper labor has been the holy grail of companies. This quest has taken them to lands so distant as South America and Asia, but the ever-changing economies are making US companies turn their heads back to nearsourcing with long-time partners.
It’s no news that for years, American companies have been outsourcing jobs to Asia and South America, seeking for cheaper labor in order to improve benefits. Wages used to be so attractive in some countries, that American companies were willing to incur into higher transportation and freight costs, increased tariffs, lower education levels of the employees, jet-lag syndrome and other inconveniences in order to reduce labor costs.
As years go on, some of these offshore countries have increased their economies, thus starting to experience inflations that go as far as 19% (China, 2003-2008). The wage gap has started to shorten and each day the additional costs of having an offshore partner are making American companies to start re-evaluating their strategies. One of these options is to move their operations to nearshore locations in Mexico.
In January of 1994, Mexico, US and Canada signed the North American Free Trade Agreement (NAFTA), whose final goal was to ensure an easy trilateral trade amongst those countries. So far, NAFTA has created the world’s largest free trade area, linking 444 million people and producing $17 trillion worth of goods and services.
Minimal or zero tariffs for several goods and nearly all services is one of NAFTA’s most evident advantages companies are taking benefit of. Nevertheless, perhaps the most interesting characteristic of NAFTA is that it reduces investors’ risk by guaranteeing they will have the same legal rights as local investors. Through NAFTA, investors can make legal claims against the government if it nationalizes their industry or takes their property by eminent domain. Essentially, moving operations to Mexico is no different than moving to Canada or another State. Furthermore, opening a large facility in Mexico may surely make the investor a good candidate for additional benefits offered by local governments.
Making business with trade partners encourages a multi-lateral cooperation vacuum in which Mexico can make use of advanced technology to boost its industrial and economic development while US and Canada can avail of comparatively cheaper labor. Mexico’s modernization would then require the purchase of US components and technology, which in turn will encourage better economic integration.
To learn more about NAFTA and how your business can benefit from it, please visit naftanow.org
