Supply chain disruptions due to COVID 19, the invasion of Ukraine, and geopolitical tensions between China and the United States (US) due to Taiwan have negatively affected companies’ profitability. In addition, tariffs imposed by the Trump administration on certain Chinese imports have affected profit margins. After a long period of relative calm, senior executives at US companies have to reassess their supply chain strategy.
Reallocating purchases to other Asian countries has been the preferred route of some US manufacturers to reduce their supply chain risk. However, supply chain disruptions can still be an issue due to distance and the influence of China in the region.
A good solution is considering nearshoring to avoid trade tariffs and certain supply chain risks. It is estimated that 10 out of the 20 Free Trade Agreements (FTA) the US has in place are with Latin American countries. FTAs with Latin American countries could provide US companies with alternative suppliers that can reduce supply chain risks while maintaining competitive costs. The question is how to leverage free trade agreements between the US and Latin America?
Avoid Import Tariffs
The US has imposed tariffs on imports from certain countries, such as China. These tariffs have increased the cost of importing products for companies that rely on manufactured products from China. However, many products manufactured in Latin America are duty-free because of Free Trade Agreements. Leveraging free trade agreements between the US and Latin America should keep companies from paying duties, thus reducing overall product costs. In addition to Mexico, the US has a free trade agreement with countries like Colombia. Both countries share a proximity to the US as well as high quality manufacturing companies with competitive pricing.
Leverage Distance From the Us
FTAs with countries like Mexico and Colombia have lower customs and duty fees. This means savings for certain US companies. Geographical proximity to the US helps decrease transportation costs and lead times compared to buying from enterprises in Asia.
Reduced travel time decreases costs significantly, and shorter lead times minimize the need to maintain costly safety stocks to provide just in time deliveries. Risks associated with supply chain disruptions are also mitigated by geographical proximity and, therefore, can help companies increase profits.
Established Manufacturing Culture
Countries like Brazil, Mexico, Colombia, and Argentina have a long history of manufacturing. All countries have large original equipment manufacturers (OEMs) ecosystems that meet US quality standards.
According to the International Trade Administration, the automotive sector in Mexico is one of its largest industries, comprising 20% of the nation’s GDP and employing over one million people nationwide. Some of the top players in the Mexican auto industry include Ford, General Motors, Honda, Kia, Mazda, Nissan, Toyota, and Volkswagen, among others.
In Colombia, the motorcycle fleet amounts to approximately 9.4 million units in 2020 and has been growing since the COVID 19 pandemic. Colombia is the second largest manufacturer of motorcycles in South America, with a production of approximately 550,000 units per year. Motorcycle assembly plants in Colombia include Honda, Yamaha, Suzuki, and Hero, among other global brands.
Mexico and Colombia have state of the art manufacturing companies that work with well know global OEMs. As a result, these countries have the technical expertise, the technology, and world class quality standards.
International trade is dynamic and everchanging and therefore risky. Critical products and components are at imminent risk from geopolitical conflict, trade disputes, severe weather due to climate change, and now a disease. Much has changed in recent years prompting corporate executives to reevaluate their supply chain strategies. The overdependence on China as a source of manufactured products needs to be reevaluated. Leveraging free trade agreements between the US and Latin America might be a good option.
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