Nearshoring’s Tariff Benefits Might Not Be Worth Other Costs

There are many unknowns for the future of trade policies between the US and Latin American countries. Recent developments include likely 25% tariffs on goods originating from Mexico and other looming tariff threats on Colombia and Brazil.

But other locations within Latin America have retained more friendly trade policies, leading many US manufacturers to consider the potential benefits of nearshoring. While relocation can bring cost savings, it also can bring additional headaches. Companies must consider trade agreements, compliance challenges, and broader supply chain implications—which could end up being more costly than higher tariffs.

Businesses can identify and navigate these regulatory obstacles and compliance risks with proper preparation, including a detailed customs and trade impact analysis.

Given the impending tariff changes in Latin America, US manufacturers considering nearshoring should first evaluate the following concerns.

Country of origin compliance and free trade agreements. It’s a common misconception that relocating production automatically qualifies a product for preferential tariff treatment. Relocation can pose a major compliance risk due to the expanse of regulations enforced by US Customs and Border Protection.

For example, to change a product’s country of origin, the manufacturer must satisfy the CBP’s substantial transformation requirements. And although some Latin American countries—including Mexico, the Dominican Republic, and Honduras—provide tariff reductions or exemptions under free trade agreements, the ability to benefit hinges on whether the product meets the agreement’s applicable rules of origin and regional content requirements. Failure to correctly determine the country of origin or improperly claiming free trade agreement benefits can lead to severe penalties.

These compliance considerations can make a significant difference in a manufacturer’s ability to realize savings from nearshoring. For instance, under the US-Mexico-Canada Agreement, a product may qualify as Mexican origin, but for Section 301 China tariff purposes, the 25% duty may still apply if most of the raw materials originate from China and no meaningful manufacturing transformation occurs in Mexico. This example underscores the importance of in-depth analyses of customs compliance.

Customs valuation. Relocating production also can complicate the customs valuation of imported goods. The CBP has strict customs valuation rules, particularly for related-party transactions and proper appraisal of goods. Before planning production, making sales, and importing into the US, companies must review the CBP’s valuation requirements to ensure compliance.

Failure to properly assess and document customs valuation can result in unexpected duty payments, penalties, and increased CBP scrutiny. Manufacturers should carefully consider the potential impacts of relocation on customs valuation factors.

For example, manufacturers should evaluate whether the relocation will involve any new intercompany transactions or multi-tiered sales requirement transfer pricing adjustments. Manufacturers also must understand how toll manufacturing structures could affect customs valuation. Finally, companies need to assess whether the previous transaction value method is still valid or whether an alternative valuation method will be required.

International tax and duty benefits. Many businesses focus solely on the duty implications of US imports without considering that materials imported into the new production location also may be subject to duties.

Some countries offer special trade programs that may help offset these additional costs, but they often require strict compliance and reporting. For example, Mexico offers the IMMEX maquiladora program, which provides duty and value-added tax exemptions on imported raw materials used in manufacturing for export. But manufacturers must register with the Mexican government; maintain detailed documentation on operations, imports, and exports; and implement inventory control systems—all of which are subject to review during periodic audits and inspections.

Before relocating, manufacturers should note any duty deferral or exemption programs in the target country, research potential local tax incentives that could reduce operating costs, and weigh associated administrative and compliance burdens.

US and local tax implications and compliance risks. Unexpected tax liabilities can erode the potential cost savings from relocation, so manufacturers will benefit from conducting a full tax impact study before making a relocation decision.

Corporate tax compliance requirements should be top of mind. Businesses must prioritize understanding corporate tax rates, VAT policies, and industry-specific taxes, as well as evaluating transfer pricing regulations that might affect intercompany transactions. It’s also important to know whether the target country has any bilateral tax treaties with the US that could offer tax advantages, as well as how the US international tax framework could affect the company’s global position.

US companies also must consider the implications of nearshoring from an income tax perspective. Bilateral tax treaties with countries such as Mexico and Chile can help resolve double taxation issues and provide tax advantages. For instance, these treaties can reduce withholding taxes on dividends, interest, and royalties.

Supply chain considerations. Another misconception is that nearshoring automatically translates to lower freight costs. In some cases, a well-optimized global supply chain may still be more cost effective than nearshoring, especially considering port congestion, labor strikes, or infrastructure challenges that can be prevalent in Latin America. Conducting a broader supply chain analysis by assessing overall shipping costs and delivery times, the efficiency of the target country’s ports, transportation networks, and customs clearance processes can help uncover hidden logistics costs.

The manufacturing ecosystem also may vary across different countries, particularly regarding industry specialization and the workforce. When considering nearshoring, manufacturers should determine whether the target location is compatible with their needs and expectations. Local wages, labor laws, workforce skills, infrastructure investments, and regulatory stability are all factors that could offset potential savings from nearshoring.

Nearshoring can provide tariff relief, cost advantages, and supply chain efficiencies, but it isn’t a one-size-fits-all solution. Companies must conduct a thorough analysis of customs compliance, free trade agreements, logistics, and tax considerations before making a move.

US manufacturers shouldn’t assume relocation will guarantee tariff benefits—it can carry many pitfalls of compliance issues, lost savings, and operational inefficiencies if not navigated carefully.

By conducting a comprehensive feasibility study, engaging trade and customs experts, and implementing a risk-mitigated relocation strategy, businesses can maximize duty savings while ensuring long-term compliance and supply chain resilience.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Vanessa Piedrahita is tax partner and Latin America practice leader at Aprio.

Jay Cho is tax director of Aprio’s tariffs and customs practice.

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