BUSI 360 Week 8 Research Paper Example

Nearshoring to Mexico: Tariffs, Supply Chain Risk and the New Map of North American Manufacturing

Abstract

Since 2018, tariffs on Chinese goods, the disruptions of the pandemic and the United States-Mexico-Canada Agreement have pushed many U.S. manufacturers to move production closer to home, and Mexico has become the leading destination. The paper examines the evidence on what drove the shift, including concentrated job losses from Chinese import competition, the incidence of the 2018 tariffs and the risks of concentrated supply chains. It examines evidence that some of Mexico's gains reflect rerouted Chinese inputs, identifies the policy and infrastructure risks of nearshoring, projects likely outcomes and recommends a diversified strategy for a mid-sized manufacturer. Its conclusion is that Mexico works best as one leg of a diversified, resilient supplier network, not as a one-for-one swap for China.

Introduction

A mid-sized Ohio manufacturer of heating and cooling controls, used here as a composite example, builds most of its products through a contract manufacturer in Shenzhen. For two decades the arrangement worked: Chinese labor and supplier networks kept costs low, and five weeks of ocean shipping was an acceptable price. Since 2018, however, tariffs have added to the cost of every shipment, the pandemic stretched lead times to months, and customers have begun asking whether the company's supply chain is secure. The company's leaders, like many others, are now asking whether to move production to Mexico.

The question reflects a broader change in the global business environment. The course reader describes globalization as a process that can shift direction quickly when political and economic conditions change (Maidment, 2013). The current shift is not a retreat from trade but a rearrangement of it. This paper examines why the rearrangement is happening, why Mexico has benefited, what risks nearshoring carries, and how a company should respond. The paper's thesis holds that the 2018 tariffs, pandemic-era supply shocks and the USMCA together made Mexico the first choice among American producers looking beyond China, but that nearshoring brings risks of its own, so firms should add Mexico to a spread of suppliers instead of swapping one country for another.

The Roots of the Shift: Concentrated Costs of Chinese Imports

The movement away from China began with politics, and the politics began with jobs. Once China entered the World Trade Organization in 2001, its sales to the United States grew dramatically. Consumers benefited from lower prices, but the costs were concentrated. Autor et al. (2013) studied American commuting zones that faced more or less competition from Chinese imports; where exposure was highest, factory employment and wages dropped further and more residents came to depend on disability payments and other public aid. These losses persisted for years rather than being quickly absorbed by other industries.

That pattern matters for understanding today's trade policy. Gains from trade were spread widely and thinly, while losses fell heavily on particular communities. Over time, the political response to those losses made tariffs on Chinese goods a bipartisan feature of U.S. policy rather than a temporary measure, and that durability is what convinced many firms that the change was worth planning around.

Tariffs and Who Paid for Them

In 2018 the United States imposed tariffs on a wide range of imports, most heavily on goods from China, and trading partners retaliated. Supporters argued that foreign exporters would bear the cost. The evidence shows otherwise. Amiti et al. (2019) examined import prices and found that U.S. importers paid almost the entire tariff, so American firms and consumers, not Chinese exporters, absorbed the cost. Fajgelbaum et al. (2020) arrived at a similar verdict in their broad study of the trade war: even with tariff collections and the benefits to shielded industries added back, American real income declined slightly, while retaliation landed hardest on U.S. farm exporters.

For a company like the Ohio manufacturer, these findings translate into a simple fact: tariffs on Chinese components are a cost the company pays directly. As long as tariffs remain, and as long as their level can change with each new policy announcement, sourcing from China carries a cost and an uncertainty that sourcing from elsewhere may avoid.

Supply Chain Risk and the Pandemic

Tariffs explain part of the shift; supply chain risk explains the rest. During the pandemic, factory closures in China, shortages of shipping containers and congestion at U.S. ports added weeks or months to lead times. Firms that had concentrated production in a single country found themselves with no alternative. Baldwin and Freeman (2022) review research on risk in global supply chains and argue that such shocks prompted firms to reconsider the concentration of production in one location, while noting that diversification is costly and that firms are still learning how much resilience is worth paying for.

The lesson is not that global supply chains failed. Many recovered relatively quickly, and international trade rebounded. The lesson is that concentration in a single supplier country exposes a firm to shocks it cannot control, whether those shocks are pandemics, natural disasters or political decisions.

Mexico's Rise

Mexico offers advantages that address both tariffs and risk. It shares a long land border with the United States, so goods can travel from industrial centers such as Monterrey to the Midwest by truck in a few days rather than weeks by sea. It shares time zones with U.S. customers and engineers. And under the USMCA, which took effect in 2020, goods that meet the agreement's rules of origin enter the United States without tariffs.

The trade data reflect these advantages. Freund et al. (2024) examined U.S. imports after the 2018 tariffs and found that imports of products subject to tariffs on China declined while imports of the same products from other countries, including Mexico and Vietnam, increased. In 2023, for the first time in two decades, more U.S. goods imports came from Mexico than from China.

The same research, however, adds an important qualification. Freund et al. (2024) found that the economies winning a larger share of American imports tended to be the ones most tied into Chinese supply chains, and that they bought more from China as they did. In other words, some of the shift represented final assembly moving out of China while key components continued to come from China. The map of final assembly has changed faster than the map of the parts inside the products. For U.S. firms, this means nearshoring may reduce tariff exposure on finished goods without reducing dependence on China as much as it appears.

Comparing Total Landed Cost

Decisions about where to produce are often made on the wrong number. A comparison of factory prices alone will usually favor China, where wages and supplier networks remain highly competitive. The relevant figure is total landed cost, the full cost of getting a finished product to the customer. For the Ohio manufacturer, that includes the factory price, ocean or truck freight, tariffs and customs fees, the inventory the company must hold to cover long lead times, the cost of expediting when shipments are late, and the travel and quality-control costs of managing a distant supplier.

When those elements are added, the comparison changes. A Mexican partner's factory price may be several percent higher than a Chinese supplier's, but freight is cheaper and faster, tariffs disappear for goods meeting USMCA rules, and a lead time of days rather than weeks lets the company hold far less safety stock. Each week of inventory the company no longer needs frees cash that can be used elsewhere. The research on tariff incidence reviewed above implies that tariffs belong in this calculation in full, since importers, not foreign suppliers, pay them.

Total landed cost has limits of its own. It captures expected costs but not the cost of rare disruptions, such as a factory closure or a sudden tariff increase, which can halt sales entirely. A firm deciding where to produce should therefore look at both the expected landed cost and the range of outcomes under stress, a view that strengthens the case for having more than one source.

The Risks of Nearshoring

Nearshoring to Mexico carries at least four risks. The first is hidden Chinese content. If a product assembled in Mexico relies on Chinese circuit boards or components, it may fail to meet USMCA rules of origin, losing its duty-free status, and it remains vulnerable to disruptions in China.

The second is policy risk. Mexico's trade relationship with the United States is governed by an agreement, but agreements can be reviewed and pressured. Tariffs announced in 2025 on goods from Mexico and Canada exempted products that qualified under USMCA, and the three countries must jointly review the agreement in 2026. A firm that moves to Mexico exchanges some China-related policy risk for a different form of policy risk.

The third is capacity. Rapid investment in northern Mexico has strained industrial space, power, water and the supply of skilled technicians in some areas. A firm that arrives late may face higher costs and longer timelines than early movers.

The fourth is security and governance. Firms operating in parts of Mexico must plan for security risks to people and cargo and for uneven enforcement of rules, which adds costs that do not appear in wage comparisons.

Projected Outcomes

Several outcomes appear likely over the coming decade. First, Mexico's manufacturing for the U.S. market will probably continue to grow, because the advantages of proximity and USMCA access are structural, while tariffs on Chinese goods appear durable. Second, growth will be constrained by infrastructure, and regions that invest in power, water and logistics will capture more of it. Third, U.S. enforcement of rules of origin is likely to tighten, aimed at reducing the rerouting of Chinese content, which will reward firms that build genuinely regional supply chains and penalize those that only move final assembly. Fourth, policy volatility is likely to continue, so firms will need flexibility rather than a single permanent bet. Finally, competition for Mexican capacity is likely to raise costs there over time, narrowing the gap with other locations and making early, well-planned moves more valuable than late, hurried ones. Firms that wait for complete certainty about trade policy may find the best partners and industrial sites already committed to competitors.

A Strategic Response

What should the Ohio manufacturer do? Moving all production to Mexico would reduce tariff costs and shorten lead times, but it would concentrate risk in a new location and depend on a single new partner. Research on resilience suggests a better approach. Grossman et al. (2023) modeled firms' choices between diversifying across countries and reshoring and showed that resilience often comes more from spreading production across several locations than from concentrating it in one, even a nearby one; and policies that compel reshoring are not inherently better than diversification.

On that basis, the company should adopt a phased, diversified strategy. Phase one would certify a Monterrey contract manufacturer and shift assembly of the two product families that sell most in the United States. Phase two would follow only after the partner hits its quality and on-time delivery targets, transferring every other product sold in the U.S. market. Its Chinese supplier would continue to serve customers outside North America and act as a backup. Throughout, the company should map its component suppliers to the second tier to identify Chinese content and plan substitutions that allow its products to meet USMCA rules. Finally, it should build tariff scenarios into its pricing and customer contracts, so sudden policy changes do not erase its margins.

This strategy accepts higher labor costs in Mexico than in China in exchange for lower tariff exposure, shorter lead times, lower inventory needs and reduced concentration risk. For a company whose customers increasingly value reliability, the trade is likely worth making.

The strategy also has a human and relational side. Customers who have asked about supply chain security should hear about the plan early, with honest timelines, because a credible plan can strengthen those relationships before the move is complete. The Chinese supplier, which has served the company well, deserves candid notice of the change in volume rather than a sudden loss of orders. And the company's own engineers and quality staff in Ohio will carry much of the work of qualifying the new partner, so their time and travel should be budgeted from the start. A nearshoring plan that treats these relationships carelessly may save on tariffs and lose on trust.

A Biblical Perspective

Scripture commends prudence in the face of uncertainty. Ecclesiastes counsels spreading what one has across seven or eight ventures, since calamity on the earth cannot be foreseen (English Standard Version Bible, 2001/2016, Ecclesiastes 11:2). A supply chain concentrated in one country, whether China or Mexico, sets that counsel aside. Spreading production is a way of admitting that no forecast is certain, and it also protects the employees and customers who depend on the company's continued operation.

Conclusion

Nearshoring to Mexico is one of the most significant contemporary developments in international business. It has been driven by the concentrated costs of Chinese import competition, by tariffs whose costs fell on American buyers and by supply chain shocks that exposed the dangers of concentration. Mexico's proximity and USMCA access have made it the leading beneficiary. Yet the research shows that the shift is shallower than trade statistics suggest, because Chinese inputs often remain inside products assembled elsewhere, and nearshoring carries policy, capacity and security risks of its own. The right response for most firms is not to replace China with Mexico but to build a diversified supply base in which Mexico plays a central role. Firms that treat nearshoring as a step toward resilience, rather than a final destination, will be best prepared for the next change in the global business environment.

References

Amiti, M., Redding, S. J., & Weinstein, D. E. (2019). The impact of the 2018 tariffs on prices and welfare. Journal of Economic Perspectives, 33(4), 187-210. https://doi.org/10.1257/jep.33.4.187

Autor, D. H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States. American Economic Review, 103(6), 2121-2168. https://doi.org/10.1257/aer.103.6.2121

Baldwin, R., & Freeman, R. (2022). Risks and global supply chains: What we know and what we need to know. Annual Review of Economics, 14, 153-180. https://doi.org/10.1146/annurev-economics-051420-113737

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Fajgelbaum, P. D., Goldberg, P. K., Kennedy, P. J., & Khandelwal, A. K. (2020). The return to protectionism. The Quarterly Journal of Economics, 135(1), 1-55. https://doi.org/10.1093/qje/qjz036

Freund, C., Mattoo, A., Mulabdic, A., & Ruta, M. (2024). Is US trade policy reshaping global supply chains? Journal of International Economics, 152, Article 104011. https://doi.org/10.1016/j.jinteco.2024.104011

Grossman, G. M., Helpman, E., & Lhuillier, H. (2023). Supply chain resilience: Should policy promote international diversification or reshoring? Journal of Political Economy, 131(12), 3462-3496. https://doi.org/10.1086/725173

Maidment, F. H. (Ed.). (2013). Annual editions: International business. McGraw-Hill.