Autumn Hufault
Associate Vice President, Business Insurance
U.S. manufacturing nearshoring is on the rise. This practice of adopting partnerships with production in nearby countries has increased in light of supply chain disruptions, rising labor costs in mainstay manufacturing hubs like China, greater transportation costs, geopolitical tensions and delayed delivery.
With more nearshoring comes new risk management and insurance considerations for manufacturers—especially concerning cargo insurance. Understanding these dynamics helps businesses make informed decisions and effectively navigate the evolving landscape of global manufacturing.
A closer look at growth of nearshoring
The U.S. manufacturing industry has turned its attention to Mexico as a favorable location for businesses to transition their supply chains. For the first time in two decades, the total value of U.S. imports from Mexico exceeded U.S. imports from China. Additionally, Mexico surpassed Canada and China as the largest U.S. trading partner in 2023, increasing by 2.5% year over year to $798 billion in exports, other fuels and imports of passenger vehicles.
There are multiple reasons for domestic manufacturers making the shift to nearshoring, but chief among them are:
- Physical proximity: During COVID-19, U.S. manufacturers learned that compared to shipping goods across the ocean from China, Japan and Korea, transporting goods from Mexico is simpler and faster, enabling products to reach the U.S. in three to five days versus 15-50 days from overseas.
- Lower labor costs and better talent availability: Skilled labor is easier to acquire and more cost-effective in Mexico in contrast to the U.S. According to Forbes, skilled machinists and welders earn between $7 and $8 per hour in Mexico, versus a median $20 rate for U.S. laborers.
- Favorable trade agreements: The United States-Mexico-Canada Agreement (USMCA) superseded the North American Free Trade Agreement (NAFTA) in 2020. The USMCA creates a more level playing field for American workers while simultaneously easing the flow of goods across the partner countries. The key benefit of the USMCA to manufacturers involves duties and tax incentives.
Increased demand for cargo insurance
Nearshoring has a range of benefits for U.S. manufacturers in Mexico and Canada—but those benefits come with a need for efficient coverage—typically via cargo insurance—that adapts to transportation route conditions and potential risks.
There are several ways cargo insurance helps account for new challenges and benefits:
- Reducing supply chain disruptions: While long-route supply chain issues typically involve port congestion and customs delays, shorter routes can decrease the likelihood of interruptions. Even so, short routes are still impacted by factors like transportation strikes, infrastructure problems and natural disasters, making cargo insurance essential to preventing and improving supply change issues and enabling quicker recovery from losses.
- Streamlining regulatory compliance: Switching manufacturing operations to Mexico or Canada means adjusting to new regulations. Cargo insurance makes navigating these regulations easier for manufacturers by demonstrating due diligence in compliance audits, fostering trust in nearshoring processes with suppliers and logistics partners and preventing regulatory breaches. Having the correct cargo insurance coverage also ensures compliance with USMCA trade agreements, encouraging more seamless cross-border transactions.
- Environmental and infrastructure risks: Nearshoring operations can be subject to natural disasters, extreme weather conditions, poor road quality, transportation and storage issues, all of which are covered under cargo insurance, protecting against costly supply chain issues, mitigating warehouse storage damage, as well as covering damage incurred from transportation infrastructure failures (for example, a bridge collapse).
Supplemental insurance considerations
Even though cargo insurance covers many manufacturing-associated risks, additional coverage protections may be needed. Manufacturers may also think about adding:
- General liability: This coverage accounts for any legal costs and damages should a manufacturer be sued for causing bodily injury or property damage to a third party. For example, if a smart device manufacturing company produces a faulty product batch from their Mexico-based facility resulting in U.S. consumers receiving defective equipment, general liability insurance can help cover the resulting claims and legal costs.
- Fleet insurance: Manufacturing companies involved in nearshoring with transportation and logistics should consider fleet insurance for comprehensive coverage for all vehicles under a single policy, potentially lowering overall costs.
- Business interruption insurance: Unforeseen events, such as natural disasters, political instability, or supply chain issues can be mitigated along with the financial risks associated with their operations, ultimately supporting business continuity and stability.
To help navigate the complexities of nearshoring and how it impacts coverage needs, manufacturers should work strategically with their insurance partners to create an effective plan. Nearshoring also comes with additional costs and complexities that manufacturers need to manage effectively and pair with appropriate insurance protections.
Marsh McLennan Agency helps manufacturers dial in on coverage
Manufacturers can find the coverage they need to prevent risk and optimize nearshoring operations. Our expert team will help tailor cargo insurance, business insurance, employee health and benefits, retirement and private client insurance solutions for best outcomes.
Connect with a Marsh McLennan Agency representative to explore how we can help your business.
