Geographic proximity to industrial centers is crucial in this strategy. Thus, several Latin American countries are emerging as prime destinations for nearshoring. The Inter-American Development Bank (IDB) estimates that nearshoring could boost annual exports of goods and services in Latin America and the Caribbean by close to $78 billion in the medium term. The automotive, textiles, pharmaceutical, and renewable energy industries, among others, have strong potential.
According to the IDB, Mexico emerges as the leading destination due to its proximity to North America—with $35 billion of that expected boost potentially set for Mexico. But while the projected volume for Mexico is substantial, countries like Brazil, Argentina, Chile, and Colombia also show potential as nearshoring destinations. As indicated by IDB data, they are projected to reap one-quarter of the total wins, equivalent to almost $20 billion.
While proximity to a major consumer market like the U.S. is a significant advantage, it is not the sole factor that determines a country’s appeal for nearshoring. Critical elements such as rule of law, investment protections, robust infrastructure, and a skilled workforce are critical in relocation decisions.
We gathered a variety of data to try to quantify which countries in Latin America offer the best opportunities for nearshoring. The inputs came from publicly available indices and other sources, including the World Bank and the World Justice Project. We standardized the scores for each indicator, and then divided by the sample’s standard deviation to come up with an average score for 20 countries in the Western Hemisphere.
The results, visible above, highlight how countries relatively distant from the United States are still attractive nearshoring destinations. For example, Chile ranks among the top five nearshoring prospects. Its strengths include better adherence to the rule of law, greater property rights protection, and a more developed financial system compared to Mexico and the regional average, making it a competitive nearshoring option. Other countries that also perform better than Mexico in these key factors include Brazil, Argentina and Colombia.
The countries mentioned also boast strong competitive advantages in high-potential industries. Brazil’s automotive sector, bolstered by a large domestic market and Mercosur membership, is a prime nearshoring hub for automakers seeking proximity to North America. Its leadership in biofuels and expanding renewable energy sectors further aligns with global shifts toward greener technologies, enhancing Brazil’s position as a major energy exporter. Argentina’s vast “Vaca Muerta” shale reserves make it a top choice for nearshoring natural gas production, strengthened by its trade agreements with North America. Similarly, Colombia’s rising natural gas output and strategic location provide direct access to North American markets, reducing reliance on distant suppliers.
Potential benefits from nearshoring
Nearshoring reduces reliance on international suppliers, shortens delivery times, cuts transportation costs and risks, and enables more efficient oversight of production processes. However, what are the benefits for the host country?
The foremost advantage is the attraction of foreign direct investment (FDI), which can significantly boost infrastructure, technology and human capital. Indeed, the current nearshoring trend has already driven a substantial increase in FDI across Latin America. Many industrial companies expect demand to rise between 2024 and 2025, with benefits fully realized after 2026. This is a reasonable timeline, as relocating industrial production lines is a complex and time-intensive process, involving infrastructure development, plant construction, securing permits, workforce acquisition, company registration, and other preparatory steps.
Nearshoring’s impact extends beyond a single country, promoting regional trade and economic growth.
Nearshoring also creates new employment opportunities across sectors like manufacturing, technology and specialized services. It also integrates host countries into global supply chains, enhancing their significance in international trade. Additionally, nearshoring introduces advanced technologies and management practices, enabling host countries to build their own production capabilities. This often leads to investment in critical infrastructure such as ports, airports, roads and telecommunications.
Nearshoring’s impact extends beyond a single country, promoting regional trade and economic growth. For example, Mexico’s increased manufacturing could boost demand for raw materials and inputs from countries like Brazil, Chile or Argentina. Additionally, success in one country could inspire others in the region to improve their business environments, infrastructure, and regulatory frameworks to attract investment. This would foster competition, driving up standards across the region.
How to take advantage of nearshoring?
Proximity to the U.S. and North America alone will not guarantee that Latin American countries fully capitalize on future relocation opportunities. To attract FDI and strengthen their global position, the region must foster a more favorable business environment and improved commercial infrastructure.
To take advantage of this trend, countries should enhance their business climate, as each dollar spent on investment promotion yields nearly $42 in FDI, according to the IDB. Also, modernizing regional integration to reduce trade frictions and enhance competitiveness is essential. Despite numerous trade agreements among LAC countries, the region’s integration into international trade and global value chains remains limited. Harmonizing the more than 33 preferential trade agreements within the Americas could increase intraregional trade by more than 10%.
In addition, elements like the rule of law, investment protections, and tax considerations are crucial in determining relocation decisions, providing the certainty investors seek (and need). To enhance long-term attractiveness, the region must also ensure a qualified labor force through appropriate education and training policies. This is key to maximizing the benefits of incoming investments.
Host countries must also assure foreign investors that their intellectual property, business interests, and operational investments will be protected and effectively managed. Nearshoring, as part of the deglobalization process, is likely to reduce overall economic efficiency and growth. Nonetheless, some regions can significantly win from this. If appropriately complemented by domestic and regional policies, Latin America is likely to be one of them.
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Larraín is an economics professor at Universidad Católica de Chile and director of its Centro Latinoamericano de Políticas Económicas y Sociales (CLAPES UC). He is a former finance minister of Chile.
Cifuentes is an economist from Universidad Católica de Chile and a researcher at CLAPES UC.
