Snapshot: Biden’s US tax incentive and Latin America nearshoring prospects

A global trend of multinationals reducing their exposure to China was underway prior to the health crisis, with chief drivers being trade tensions, sustainability concerns and a policy push in Washington.

The pandemic has accelerated this, fueling optimism in Latin America about the possibility of companies transferring some links in their supply chains to the region.

Regarding US multinationals, however, president-elect Joe Biden has said he wants to reshore jobs and investment, not nearshore – which could potentially dampen prospects for the region.

On the campaign trail, Biden indicated he would take a carrot and stick approach, offering a 10% tax credit for US companies that reshore and applying a 10% surtax to those that do not.

The policy – part of his Made in America initiative – would apply to a US company’s foreign affiliate that sells its products or services to US consumers. Biden has also proposed raising the corporate tax rate to 28% from 21% currently.

Nevertheless, Latin America could still stand to benefit from US investment, particularly if US companies target the region to manufacture for non-US markets, a tax seminar hosted by the Chilean office of professional services firm EY was told.

Tax is just one factor that companies consider when making decisions in areas such as investment, manufacturing and research and development, Carmen Encarnacion, a partner at EY US, said in reply to a question from BNamericas.

“This is very important because the reality is that the US is an extremely expensive country. Labor is very expensive, and not necessarily skilled regarding some sectors,” Encarnacion (pictured) said.

“There could be a situation where a US multinational says, ‘independent of the surtax, it is better for us to manufacture or assemble in a Latin American jurisdiction.”

While multinationals already established in Asia are unlikely to fully uproot from the region – on account of investment made and the sophistication of supply chains – analysts forecast some niche supply chain links could move to Latin America.

Meanwhile, in terms of Latin America potentially gaining from any possible relocation in production, the region may need to up its game on the competitiveness front. Key areas are business environment, infrastructure, productivity levels and workforce skills. 

During an event held by IDB and private sector initiative Americas Business Dialogue, IDB chief Mauricio Claver-Carone outlined the opportunities that nearshoring could present for the region.

Claver-Carone said: “Nearshoring brings more than new investments; it brings the potential for new financing to the small and mid-sized enterprises of Latin America and the Caribbean who can become part of the new supply chains,” 

“Tied to this is the potential for quality jobs paying high wages, to the transfer of capital and technology, to the development of skilled human capital and to productivity and export-led economic growth.”

Chile is the most competitive country in Latin America, according to the 2019 IMD World Competitiveness Ranking, Chile slid to 42nd place from 35th, but was still ahead of Mexico (50), Colombia (52), Peru (55), Brazil (59), Argentina (61) and Venezuela at (63). 

The ranking is compiled by IMD World Competitiveness Center, a research group at the IMD business school in Switzerland.