U.S. Treasury Secretary Janet Yellen
By THE STAR STAFF
Puerto Rico must increase its competitiveness to take advantage of new U.S. policies on “reshoring” and “nearshoring,” which involve producing items closer to home, a report from economic think tank Estudios Técnicos says.
The idea is to transfer commercial and manufacturing operations of critical goods and services from China to the United States or nearby countries, according to “Impact of ‘Nearshoring’ in Puerto Rico,” a report in the most recent edition of ETI Trends by economists from Estudios Técnicos.
The report notes that when the reshoring program was announced, the reaction was positive in Puerto Rico because the U.S. territory has competitive advantages over other places to attract U.S. companies wishing to relocate their manufacturing operations closer to home.
The outlook has changed under “nearshoring” or “friendshoring” policies because Puerto Rico now competes with jurisdictions close to the United States in which production costs are lower than those in Puerto Rico but have a comparable industrial base and infrastructure.
“This should force us to take measures to face important challenges regarding our competitiveness compared to the countries mentioned above. Puerto Rico is not adequately preparing for ‘reshoring’ and much less for what ‘nearshoring’ implies,” the report said.
ETI Trends noted that the global economy has undergone significant transformations since the COVID epidemic, the conflict between China and the United States, and Russia’s invasion of Ukraine. One is that the economy is more responsive to geopolitical considerations than before. The geopolitical conflict between the United States and China has given rise to a trade war with global consequences since China is an essential supplier of Western economies.
China’s zero COVID-19 policy has contributed to the idea of “reshoring” “nearshoring” and more recently to “friendshoring,” a concept Treasury Secretary Janet Yellen introduced during a speech before the Atlantic Council. The pandemic caused huge disruption to supply chains worldwide, and other economic shocks have closely followed it. Uncertainty still hangs over supply chains, driven by rising fuel prices, soaring shipping costs and rolling COVID-19 lockdowns globally.
What impact is this process having in the Caribbean and mid-Americas region? The countries with the most significant potential for reshoring are Mexico, Colombia, Costa Rica, Guatemala and El Salvador. The sectors or industries that benefit the most are transportation, pharmaceuticals, computers, and scientific and professional equipment. Three factors explain this: geographic proximity to the United States, lower labor costs, and lower shipping costs compared to shipping from China to the United States.
“Let’s look at Mexico, for example. Its most important market and partner of the USMCA (US-Mexico-Canada Free Trade Agreement) tripartite trade agreement is the United States,” the report reads.
According to recent data, as of September 2022, exports from the 10 Mexican states with the most significant number of exports to the United States grew at an average annual rate of 20.6%. Most are border states with the United States. The state of Chihuahua occupied the first place.
Nearshoring has acquired vital importance for Latin America and the Caribbean. According to estimates by the Inter-American Development Bank (2022), it could bring an additional $78 billion to its exports in the coming years, both for goods ($64.1 billion) and services ($14 billion), particularly for Mexico, Colombia, Brazil, Argentina and the Dominican Republic.
Several countries are part of free trade agreements with the United States (USMCA and CAFTA-DR), which adds an advantage. In addition, several are in the Caribbean (Costa Rica, Jamaica, Dominican Republic).
“Changes in the global environment are not limited to this aspect (“reshoring” and “nearshoring”). Two examples that reflect what has been said: by 2027 Apple will have moved a good part of its production in China to India, and, closer to us, Costa Rica has become a producer and exporter of ‘chips’ and medical equipment, something completely unexpected a few years ago,” the ETI Trends report said. “As we have indicated many times, Puerto Rico has to be inserted into the global economy and must have the mechanisms for our companies to understand it, and the risks that this changing and volatile environment entails.”