Nearshoring, an opportunity for companies in Mexico

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Nearshoring, an opportunity for companies in Mexico

10 February 2023

As a result of the United States-Mexico-Canada Agreement (“UMSCA”) over the next years, incentives for nearshoring to Mexico will remain high for companies doing business in the U.S. and Canadian market, among others. Thus, companies in Mexico must have a labor, social security, and ESG (Environmental, Social and Governance) environment that does not generate risks.

As a result of the “UMSCA” and the provisions issued by the International Labor Organization (ILO); the Federal Labor Law (“FLL”) has needed to adapt to these changes. In addition, following the COVID-19 pandemic, the phenomenon of Nearshoring has increased. Nearshoring is the strategy whereby a company transfers part of its production to third parties that, despite being located in other countries, are located in nearby destinations with a similar time zone.

Nearshoring in Mexico has impacted the FLL and compliance on ESG matters in a number of ways. Some of the most significant impacts include:

Changes to labor regulations: Mexico has made significant changes to its labor regulations in recent years in an effort to attract nearshoring investments from foreign companies. These changes have included simplifying the hiring process and increasing flexibility for employers. In ESG issues, specifically in social factors, we can observe issues related to fair labor practices, respecting human rights, promoting diversity, non-discrimination, among many others.
Increased competition for jobs: The growth of nearshoring in Mexico has led to increased competition for jobs, especially in the tech and manufacturing industries. This has put pressure on companies to offer competitive wages and benefits to attract and retain employees.
Improvement in working conditions: With the growth of nearshoring, employees in Mexico have benefited from improved working conditions, such as better salaries, benefits, and working hours. This has helped to raise the standard of living for many employees.
Protections for employees: FLL provides protections for employees, such as minimum wage requirements, job security, and the right to form unions. These protections help to ensure that employees are treated fairly and that their rights are respected. Moreover, the UMSCA contains several protections that have an impact not only locally but have an international aspect as well.
Matters related to ESG: This new hiring strategy and the significant changes it involves, has a direct relationship with ESG, as it seeks better conditions for employees, greater protection and better job opportunities, achieving a positive impact on this sector.

Overall, nearshoring in Mexico has had both positive and negative impacts on FLL and on ESG matters. While it has led to increased competition for jobs and improved working conditions for some employees, it has also put pressure on companies to adhere to strict labor regulations.

Hogan Lovells is ready to assist you with this matter.

Authored by Hugo Hernández-Ojeda, Mariana Ávila, and Juan Pablo Vázquez.