To nearshore or not to nearshore: A not-so-simple question

The COVID-19 pandemic brought home to many the fact that regardless of careful planning a catastrophe can result in overwhelming disruptions to supply chains. The pandemic led to shortages caused by firms lacking easy access to supply when their primary source was shut down, resulting in months-long backlogs.

“For instance, consider someone building washing machines in the U.S. with components coming from overseas,” says Kevin Sweeney, associate professor and director of the Saunders College of Business graduate program in global supply chain management. “After those distant manufacturers shut down due to COVID-19, it took time for the factories to get back up to speed, weeks for components to be sent to the U.S., and more time for transportation.  As a result, a three-week shutdown could mean months or even a year for a component to reach its destination.”

This has led many U.S. firms to move, or consider moving, outsourced production from overseas, China in particular, to the U.S. or nearby. According to Forbes (March 2023), Why Nearshoring Is Closer Than Ever: How Mexico Is Becoming The Next Big Thing In Global Markets, “The world is beginning to move out of China in the same way that they flocked to the Asian giant during the 1990s.”

Bringing production to locations close to the U.S.—Mexico, northern South America, Canada, the Caribbean—is known as nearshoring. Also in the mix are reshoring (or onshoring), moving production back to the U.S., and friend-shoring, relocating in allied countries such as Taiwan, Malaysia, Turkey, and Vietnam.

The impact of this trend is evident in domestic job growth, as reported by Control Engineering (August 2024), Reshoring, nearshoring trends making North American manufacturing competitive: “Reshoring and foreign direct investment have grown, from generating 11,000 new U.S.-based jobs per year in 2010 to more than 300,000 in 2022, and another 180,000 jobs recorded in just the first half of 2023.”

Nearshoring can increase expenses, at least initially, due to higher labor costs.  However, the greater proximity to the U.S. “can lead to better collaboration, a faster time to market, easier management of the supply chain, and cultural integration,” as reported by DF Alliance: Nearshoring and Reshoring Trends: How These Shifts are Affecting Logistics Demand.

Still, the assumption that bringing production back to the local market will lower the risk of supply chain disruptions is commonly made but is not justifiable in every situation, according to Laharish Guntuka, assistant professor of management in Saunders College of Business, who studies global supply chains.

“While localization—nearshoring or reshoring—is often assumed to reduce risks like geopolitical disruptions or long lead times, it doesn’t always lower risk and might introduce new complexities,” says Guntuka. He points to several potential drawbacks:

• Local markets may lack specialized resources or infrastructure, leading to inefficiencies or increased costs.

• A company might become overly reliant on a smaller pool of suppliers, increasing vulnerability if one fails.

• There may be added operational complexity due to differing regulations, labor laws, and supply chain structures, potentially creating bottlenecks.

• Localized operations may still be exposed to economic downturns or local disasters.

• Environmental risks, such as natural disasters, can be amplified when production is concentrated in a specific area.

Of course, the unpredictable threat of tariffs on U.S. neighbors by the Trump administration has complicated matters even more. As reported recently in The New York Times, “Why These Companies in Louisville, Ky., Fear Trump’s Tariffs” (February 4, 2025), “Some [companies] have shifted production to Mexico from China to avoid American tariffs and volatile shipping costs. But Mr. Trump’s threats to impose tariffs on Mexico have heightened risk, while adding momentum to the movement to bring work back to the United States.”

“Ultimately,” concludes Guntuka, rather than eliminating risks altogether, “localization shifts them to different areas, such as labor availability, infrastructure constraints, and potential cost fluctuations in the new region.”

He favors a hybrid approach—balancing global and local strategies to leverage the strengths of both.

“For example, companies can nearshore critical components to enhance responsiveness while still sourcing lower-cost, non-critical inputs globally. They can also maintain a diversified supplier base to avoid over-reliance in any single region. Additionally, digital tools and real-time data analytics can help companies integrate both global and local operations more effectively, enhancing overall resilience,” the ability to bounce back to a previous state or create a new operating state.

While currently there is no consensus regarding the appropriate balance between risk and resiliency, the best approach depends on industry-specific factors, risk tolerance, and strategic priorities. Key is understanding the tradeoffs between the need to minimize complexity while reducing exposure to risk.

“Anyone considering nearshoring or reshoring should think about these types of decisions with medium- and long-term strategies in mind,” concludes Sweeney. “While a changing political environment and regulations may require quick action, trends in demand, costs, and environmental risk require long-term planning and intuition to handle effectively.”

Jacqueline Mozrall is dean of Rochester Institute of Technology’s Saunders College of Business

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