Regionalization and Nearshoring of Manufacturing: Environmental Concerns Hitting Close to Home

Regionalization and Nearshoring of Manufacturing: Environmental Concerns Hitting Close to Home

Over the past decades, China – recently known as the world’s factory – has grown to become the largest global manufacturer. For many companies the decision to move production to China was essentially synonymous with producing goods at the cheapest possible price. Combined with inexpensive exporting costs, goods could easily be manufactured in China and transported across the globe.

While China is still the global leader in manufacturing, the United States remains the top market and the largest national economy.

Supply chain disruptions during the COVID-19 pandemic brought to light some of the challenges associated with foreign-made goods. From exorbitantly long delays and overwhelmed ports to skyrocketing shipping costs, buying goods from overseas suddenly became a much more challenging expense.

Politically Favorable Endeavor

The inherent advantages of nearshoring manufacturing include shorter transit times and more efficient cash flows from time of production to time of sale. From an Environmental, Social, and Governance (ESG) perspective, shorter transit distances dramatically lower the carbon footprint associated with the entire process.

That said, the Trump Administration’s tariffs and reworked trade agreements were established with the goals of bringing manufacturing back to the United States. In addition, the Biden Administration has made major efforts to boost production of micro-chips and green technologies. In July 2022, Congress passed the CHIPS Act to strengthen domestic semiconductor manufacturing, design and research, fortify the economy and national security, and reinforce the United States chip supply chains.

Bridging Borders

Recalibrating the supply chain and bringing manufacturing closer to the end target market of our nation does not necessarily require bringing manufacturing directly into the United States. In fact, a large manufacturing increase in Mexico has been reported due to its favorable proximity to the United States market and relatively inexpensive labor.

Chinese companies are even relocating operations to Mexico as the advantages of being a stone’s throw away from its target market is evident.

For many years, the busiest ports located in the United States were the Port of Los Angeles and Long Beach, as the west coast was the primary location for goods being imported from the Asia-Pacific region. However, recent data shows that the dollar value of freight crossing the border at places like Laredo and El Paso Texas are increasing drastically, while trade at prime California ports are declining.²

However, unlike in China where goods can be manufactured essentially turn-key within its own borders, Mexican-made goods involve a great deal of United States-made components, raw materials, or end assembly. Therefore, a growth in Mexican and Latin American manufacturing yields a higher demand of United States-made goods. All of this interconnection is further enhanced by the USMCA agreement, which creates more balanced reciprocal trade supporting high-paying jobs for Americans and grows the North American economy, further eliminating barriers to trade between Mexico, U.S., and Canada.

Chart source: https://www.dallasfed.org/research/indicators/ep/2023

Hidden Environmental Risks with Manufacturing

With an increase in manufacturing comes a heightened risk of environmental exposures. Nearly every manufacturing operation has a component in its process or on/near the premise that could potentially cause bodily injury, property damage or environmental destruction.

Since it takes time to properly implement production and supply chains alterations, there is a rapid drive to make moves on nearshoring manufacturing initiatives. In order to meet tight timelines, there are likely to be opportunities to utilize contaminated areas and redevelop abandoned sites, such as brownfields, into modern manufacturing and distribution facilities.

While many are aware of the environmental pollution exposures associated with redevelopment projects in general, especially with brownfield developments, minimal recognition is often given to the ongoing operational exposures – particularly pertaining to warehouses and distribution centers – once development is completed. Interested in learning more? Read our Mega-Warehousing Leading to Mega Environmental Concerns publication.

In addition, to support the expected increase in land-based trade across Mexico and the United States borders, new infrastructure (i.e. roads) will need to be constructed. The recently passed Bipartisan Infrastructure Bill will reauthorize surface transportation programs by investing $110 billion in additional funding to repair our roads and bridges and support major, transformational projects.

Discover the silent tragedies of traffic and the long-term impact diesel-fueled transportation may have on the environment and human health.

How can Great American Environmental Help?

Great American Environmental is proud to offer comprehensive insurance solutions, keeping your client’s businesses strong, and in turn, our world clean for generations to come. We provide control services through our in-house risk engineering team alongside a network of specialty vendors, representing diverse capabilities and experience in a variety of environmental areas.

We offer a complete portfolio of environmental insurance products, including contractor’s and fixed premises pollution liability insurance products. Our core products and services enable businesses to effectively and efficiently manage risks that can threaten their financial security.

Looking for more information on how environmental insurance can help combat the complexities of redevelopment coverage? Check out the following resources or contact our team today!

Olivia Sarkisian , Production Underwriting Manager
Great American Environmental Division

Olivia Sarkisian currently serves as a Production Underwriting Manager with Great American’s Environmental Division. In her role, she analyzes environmental risk and provides coverage determinations for our products while managing an experienced team of underwriters. With an extensive environmental background, Olivia brings nearly a decade of engineering and underwriting experience to Great American. Olivia earned her Master of Science in environmental engineering and her Bachelor of Science in chemical engineering from Manhattan College. She is based out of our New York office.

References:

1. https://www.semiconductors.org/chips/

2. https://ustradenumbers.com/port/port-of-los-angeles

3. https://www.dallasfed.org/research/indicators/ep/2023

4. https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement