Mexico: Nearshoring, Responsible Sourcing, and its Role as a Pivot Market in Global Supply Chains

As LRQA’s 2023 Supply Chain ESG Risk Ratings Report highlights, supply chain managers are seeking to decouple – or de-risk – from China.

The COVID-19 pandemic, geopolitical challenges such as the war in Ukraine and tensions between the US and China, as well as growing environmental and social concerns around sourcing, have prompted companies to relocate their operations and move closer to their consumers and buyers. This trend presents a huge opportunity for Mexico as a popular nearshoring destination for companies selling to the North American market. Geographic proximity, lower labor costs, and the United States-Mexico-Canada trade agreement (USMCA) are facilitating this trend.

According to the Interamerican Development Bank, “nearshoring could add an annual $78 billion in additional exports of goods and services in Latin America and the Caribbean in the near and medium term”. The biggest opportunity is for Mexico accounting for $35.3 billion annually corresponding to exports of goods alone.

However, the data from LRQA’s supply chain risk intelligence platform EiQ, where countries are given risk scores based on LRQA’s proprietary audit data and civil society data, shows that Mexico is a high-risk country overall with more than half of all supply chain indices dropping in score from 2022 to 2023.

Critical challenges for Mexico

The aforementioned 2023 Supply Chain ESG Risk Ratings Report identifies the critical challenges associated with responsible sourcing in Mexico as:

• Working Conditions: Issues to consider include low wages, long working hours, inadequate health and safety conditions, and lack of union representation. Companies nearshoring to Mexico need to ensure that they are not complicit in perpetuating these conditions, by verifying that their suppliers comply with local labor laws, including minimum wage standards, and allowing for union representation. Responsible purchasing standards also help avoid any negative incentive for suppliers to continue these practices. In recent years, new labor laws have been approved relating to employment contracts and labor outsourcing, annual paid leave, and freedom of association.
• Environmental Compliance: Mexico faces a range of environmental issues, including pollution, deforestation, waste management, and water scarcity. Nearshoring companies need to ensure that their suppliers comply with local environmental laws and regulations and take steps to mitigate environmental risks, such as reducing waste and emissions and increasing water use efficiency.
• Corruption and Transparency: There is a high risk of lack of transparency in business practices that can make it challenging for companies to ensure responsible sourcing. Nearshoring companies need to be attentive in assessing their suppliers’ compliance with anti-corruption measures and ensuring transparency in their supply chains.
• Human Rights: Human rights issues include child and forced labor, humane treatment, use of the undocumented foreign migrant workforce, harassment, and discrimination against women. Companies that nearshore to Mexico need to ensure that they are not contributing to these abuses, by working with suppliers who respect human rights and by implementing due diligence policies to prevent or remediate human rights violations in their supply chains.

Mexico’s key role

On the other hand, nearshoring strengthens the role of Mexico as a pivot country for global supply chains and this adds an additional layer to the analysis. According to the data from our supply chain intelligence platform EiQ, some of the main countries of origin of Mexico’s imports include high-risk exposure countries such as the US, China, Brazil, Vietnam, Malaysia, and Central America countries.

LRQA’s 2023 Supply Chain ESG Risk Ratings Report highlights several sustainability supply chain risks that companies based in Mexico may face when importing raw materials and inputs from these geographies. Some of the key risks are:

• Forced labor, child labor, excessive working hours, wage violations, exposure to risks associated with migrant workers, and inhumane treatment in the workplace: forced labor remains a persistent problem in these regions, where poor practices and weak enforcement of laws enable exploitative working conditions, and vulnerable populations and migrant workers are often subjected to inhumane practices. Also, child labor remains in the magnifying glass of these countries, being more prevalent in developing economies.
• Lack of adequate environmental management and non-compliance with legal environmental permits, often leading to pollution and inefficient use of resources.
• Unauthorized sub-contracting, which often fails to guarantee the protection of human rights along the value chain.

Here it is important to highlight that May 2023 represented a milestone for supply chain due diligence for companies operating in Mexico, especially companies relying on global supply chains, as the new Mexican ban law came into effect. This is a new regulation to avoid the entry into Mexico of products made with forced labor content. This is an important driver for companies operating in Mexico to adopt supply chain due diligence practices following the US forced labor ban regulation. The ban is the result of the obligations that Mexico acquired through the United States-Mexico-Canada Agreement (USMCA). It is foreseeable that this law and the trade agreement open the door to additional supply due diligence regulations applicable to businesses in Mexico following a global trend of mandatory due diligence regulations such as the Corporate Sustainability Due Diligence Directive (CSDDD)

Despite these challenges, the responsible sourcing topic is relatively new, both for sustainability and supply chain companies’ teams in Mexico. It brings complex challenges to Mexican businesses and US and European importing companies to ensure that responsible sourcing practices are effectively implemented throughout their global supply chains.

Navigating ESG supply chain risks

Overall, sourcing responsibly for companies nearshoring to Mexico requires carefully evaluating their suppliers, establishing clear ethical and social responsibility standards, engaging with suppliers to build capacity to comply with standards and develop management systems, and implementing effective monitoring and grievance mechanisms to ensure responsible sourcing.

A key issue for companies nearshoring or operating in Mexico is to promote supplier ownership, encouraging their suppliers to adopt responsible sourcing management systems that enable social and environmental risk mitigation beyond Tier 1 and traceability.

Whether your company is relocating its operations to Mexico, increasing sourcing spending in the country, leveraging nearshoring opportunities, or looking into becoming a key partner for US and European companies, LRQA has the knowledge and experience to support you in navigating ESG supply chain risks. We can also help you meet the due diligence and responsible sourcing requirements and expectations from your stakeholders.

If you would like to learn how we can develop and implement strategies to help you stay ahead of supply chain sustainability risks and opportunities, please contact us.