Supply Chain Nearshoring in Response to Regional Value Content Requirements

Abstract

Problem definition: Global supply chains are currently experiencing unprecedented challenges arising from a shift toward deglobalization in international trade policies. This trend has resulted in the tightening of rules of origin (ROOs) within regional trade agreements, placing pressure on firms to localize or nearshore their production activities. In this paper, we explore how firms’ global sourcing decisions respond to these changes in trade policies by utilizing the tightening of automotive ROOs due to the renegotiation of North American Free Trade Agreement into the U.S.-Mexico-Canada Agreement (USMCA), resulting in increases to both the stringency and scope of regional value content (RVC) requirements for several classes of automotive products. Methodology/results: We empirically show that firms in the U.S. automotive industry significantly increase the share of their imported automotive products originating from Mexico and Canada, with no corresponding change for other products that do not face an increase in RVC requirements. Our results indicate that in response to the stricter RVC requirements, U.S. automotive firms increasingly source from the USMCA region instead of from outside the regional trade agreement bloc. This nearshoring response is most significant for complementary components, a class of products affected by RVC changes and requiring simpler manufacturing processes, suggesting that automotive firms adopt a gradual nearshoring strategy by initially focusing on less costly supply chain changes. This strategy, although effective in meeting compliance requirements, may lead to unintended consequences of the policy, because it does not fully align with the goal of promoting more regional trade of core parts. We observe that firms with higher property, plant, and equipment and leverage ratios exhibit intensified nearshoring activity. Furthermore, nearshoring is associated with a decrease in inventory level, an increase in inventory turnover and average cost, and a decline in gross margin. Managerial implications: Our findings provide some of the first empirical evidence on how international trade policies influence firms’ global sourcing decisions. In particular, RVC requirements are proven effective in bringing supply chains near home. Funding: This work was supported by the National Natural Science Foundation of China [Grant 72201230] and the General Research Fund by Hong Kong Research Grants Council [Grant 14505325]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2024.1555 .