Part 2: The Emerging Role of Latin America in Nearshoring

Central America remains at the forefront of the nearshoring investment trend, the practice of transferring business operations to a nearby country, with Mexico traditionally recognized as the premier destination. With the manufacturing shift phenomenon, many Central American countries have seen opportunities and challenges as they continue to address the growing needs associated with nearshoring.

With declining industrial supply, lack of site readiness, energy demand pressures, recently reelected political party and substantial majorities in Congress, potential risks are being introduced to the market in Central America.

It is crucial for investors to evaluate the political climate across alternative locations when considering nearshoring, especially in a year marked by elections. Each Central American nation discussed in this article shares a free trade agreement with the United States, denoting significant investment prospects and a deep level of collaboration with US-based entities.

Primary Central America Countries Positioned for Nearshoring Investments:

Guatemala

Guatemala, home to Central America's largest economy, has witnessed considerable progress in recent years, with steady economic growth and a stable currency exchange rate, alongside a flourishing domestic private sector. Known for producing sugar, coffee and cardamom, Guatemala is also advancing into more value-added agricultural operations.

Local firms with diverse economic interests have begun transforming extensive parcels of land in Guatemala near the Mexican border, around Guatemala City and in the Department of Escuintla. These projects aim to develop industrial infrastructures within free trade zones to meet increasing company demands. Industries such as logistics, textiles and apparel, and food and beverage are growing at an accelerated rate. In addition, the recent groundbreaking on a manufacturing site for auto parts industry giant Yazaki has shifted focus toward a nascent sector.

Panama

Bolstered by the Panama Canal, Panama offers unmatched nearshoring opportunities, especially within the industrial sector. This pivotal shipping lane facilitates global trade, significantly reducing transportation times and costs for manufactured goods. Combined with Panama's Special Economic Zones, this infrastructure presents a major competitive advantage.

Panama's economy also benefits from dollarization, ensuring fiscal stability and negating currency exchange risks for businesses. The workforce is increasingly bilingual, highly skilled, and versatile, further enhancing its attractiveness.

Costa Rica

Renowned for its high-tech manufacturing and services industries, Costa Rica's recent alignment with the United States to rejuvenate its semiconductor industry is noteworthy. Significant growth in medical devices, electronics, pharmaceuticals, and precision equipment manufacturing sectors has positioned the country as a leading choice for nearshoring.

Costa Rica's commitment to sustainability and renewable energy, with over 99% of its electricity sourced from renewable means, matches global demand for environmentally responsible business practices. Companies can leverage this clean energy to meet their sustainable corporate objectives.

Secondary Central America Countries Positioned for Nearshoring Investments:

Honduras

Honduras is distinguished for its vibrant textile and apparel manufacturing industry, showcasing its capacity to serve foreign markets with speed and competitive pricing. The country is expanding its presence in automotive component manufacturing, attracting international corporations, such as Lear Corporation and COFICAB, which are drawn to its skilled yet affordable labor force. Furthermore, agro-industrial food processing and packaging investments are capitalizing on Honduras's rich agricultural resources. This transition from primarily agricultural exports to value-added products carries substantial growth potential.

Investments in industrial parks and free trade zones prioritizing green technology and eco-friendly manufacturing practices are also on the rise, aligning with the global trend toward environmental sustainability. These developments highlight Honduras's evolving identity as an attractive and dynamic investment locale in the industrial sector.

El Salvador

El Salvador has achieved considerable success in the textiles and apparel industry, employing more than 70,000 direct workers. Innovative technologies introduced to minimize water usage and enhance eco-friendliness signal the sector's integration with regional economies. The country’s annual exports have grown approximately 12% from 2012 to 2022.

The government of El Salvador has worked to brand the country as a welcoming environment for foreign investments in the services sector. Noteworthy steps have included adopting Bitcoin as legal tender and the Google development office establishment, which aids in streamlining import-export processes and maintaining health registries.

Dominican Republic

The Dominican Republic is developing as an appealing nearshoring option in the Caribbean, aided by preferential access to significant Western Hemisphere markets. This access is ideal for manufacturing and industrial companies on the lookout for efficient, cost-effective export routes to the United States and other countries.

The Dominican Republic is also recognized for its stable politics, a growing, skilled, and bilingual labor force, and a substantial diaspora in the United States, with a focus on expanding its digital and back-office operations sectors.

Amidst evolving political and economic landscapes, Central America offers a diversified spectrum of nearshoring opportunities. With nations from Guatemala to Costa Rica exhibiting growth in industries and logistic advantages, the region presents a fertile ground for investments. Despite political considerations, the drive towards robust, diverse economies has created an environment for nearshoring, with each country proposing a distinct and attractive proposition.