Feature Article

Nearshoring – Can Wisconsin’s Forest Industry Benefit?

By Scott Bowe

You have probably heard the term nearshoring. Nearshoring is the outsourcing of business processes to companies in a nearby country, often sharing a common border. Nearshoring is sometimes called friendshoring or allyshoring where the two countries are allies allowing mutual international markets and supply chains while reducing certain geopolitical risks. The idea of nearshoring has become a topic of interest in recent years as our relationship with China has become strained and Covid-19 disruptions showed the benefits of shorter supply chains.

If we look at what happened to the hardwood lumber industry in the last three decades, we saw a shift in value-added manufacturing in the late 1990’s and early 2000’s. Furniture manufacturers that had operated in the United States for decades shifted their manufacturing to China, chasing cheaper manufacturing and labor costs. Companies that did not move manufacturing to China found that they could not compete with imported furniture products produced in China and eventually went out of business. What happened to the hardwood lumber that used to supply our domestic furniture industry? Markets quickly adapted and much of that lumber was exported to manufacturers in China. China had the inexpensive labor, but did not have the wood raw material, so hardwood lumber had to be imported.

I should state that keeping manufacturing in the United States keeps jobs and economic activity local. This is the best scenario if the manufacturer can compete and be profitable. With that said, this is not always the case in a global marketplace. We are unable to compete with cheaper foreign manufacturing costs in certain markets. Of interest is that certain furniture manufacturing has returned to the United States. Innovative domestic manufactures have been able to use technology, just-in-time manufacturing, and product customization to recapture some furniture market share.

Figure 1 shows the import trends for furniture and cabinets since the year 2000. The red line shows imports from China, which is clearly the largest importer during the last two decades. That trend has changed dramatically in the last five years with a clear drop from China and a substantial increase from Vietnam.  We can’t describe Vietnam as nearshoring since it is still a long way from the United States; we might better describe it as friendshoring. Probably the most realistic explanation is that manufacturing has moved from China to Vietnam because manufacturing costs are much cheaper in Vietnam. In the past 20 years, manufacturing costs in China have increased by about 8 times. In today’s marketplace labor costs in countries like Vietnam, Thailand, Malaysia, Philippines, and India are about ¼ the cost of China.

Figure 1: Furniture and Cabinet Imports to the United States.

Another trend shown in Figure 1 is the increase in furniture and cabinet imports from Mexico. This trend is more subtle than the increase shown in Vietnamese exports, but value-added wood manufacturing is growing in Mexico. The increase in Mexican wood manufacturing is a true example of nearshoring.

Figure 2 shows exports of US produced hardwood lumber to countries other than China and Canada. It is clear that Vietnam and Mexico are key consumers of our domestic hardwood lumber resource. All the countries shown in Figure 2 show a downturn in imports in the last two years, which coincides with weaker markets globally, but these markets are expected to grow as the world economy improves.

Figure 2: United States Hardwood Lumber Exports to Markets
other than China and Canada.

Not all these gains in Mexico are from Mexican or US owned companies. Mexico has made the top ten list of countries for Chinese foreign direct investment and Chinese investment in Mexico reached an all-time high in 2023 and is growing. In these cases, US exporters may enjoy the benefits of nearshoring with closer markets and simplified logistics, but they may still be conducting business with a Chinese owned company.

If Mexico wants to maximize nearshoring benefits, it will need to invest in three key areas. First, Mexico needs to improve ease of logistical operations. This would include port improvements, rail improvements, and road improvements. These logistical improvements would help US firms export lumber to Mexico and aid in importing value-added products back to the United States. Second, Mexico must integrate its energy market with the rest of North America. Despite a push for the State to run the energy industry in Mexico, state run energy markets would ultimately make energy more expensive and increase manufacturing costs. Finally, Mexico must operate with democratic values and the rule of law. The unchecked drug cartels in certain parts of Mexico will hamper legitimate manufacturing businesses. When we compare Mexico to its competitors in Asia and North America, Mexico is in the middle of the pack in most business indices but falls to the bottom third when it comes to corruption, rule of law, business climate, and safety.

Just like we have differences between states in the USA, there are many different parts of Mexico. The northern parts of Mexico generally have more manufacturing, more infrastructure, and higher levels of education among its citizenry. Can the US develop border and trade policy to benefit both countries? This remains to be seen as domestic politics are focused on our own national election in November. In many ways, Mexico must copy what China did 25 years ago - investments in infrastructure and safety. This will pave the way for more investment in Mexican manufacturing from the United States and other countries.

The Wisconsin Department of Ag, Trade, and Consumer Protection (DATCP) has an ongoing project examining wood products export opportunities in Mexico (Figure 3). We had the opportunity to speak to the IMEXFOR trade association companies at the TechnoMueble wood products trade show in Guadalajara, Mexico. IMEXFOR is an association of Mexican forest products import companies bringing wood raw materials into Mexico. A number of Wisconsin hardwood lumber species, including white oak, red oak, and black walnut, were showcased in furniture displayed at the TechnoMueble trade show. A second part of this study is looking at a reverse trade mission to bring Mexican import companies to Wisconsin to see our forest industry and develop trade relationships with Wisconsin sawmills.

Figure 3: Representatives from Wisconsin Explain Wisconsin's Forest Industry and Market Opportunities at the IMEXFOR Trade Association’s Annual Meeting in Guadalajara, Mexico.

Nearshoring in Mexico is a growing opportunity for wood producers in the United States. Working with Mexican importers to create demand for Wisconsin’s forest products is one more strategy for diversifying market opportunities. Clearly, healthy forests depend upon healthy forest industries and markets to buy and utilize Wisconsin’s sustainable forest resources.

Scott Bowe is a Professor of Wood Products at the University of Wisconsin’s Kemp Natural Resources Station in Woodruff, WI.