Current supply chain disruptions, rising transportation costs, and myriad other issues are causing many US companies to reconsider their production lines. However, moving production to another region or country comes with a host of legal and practical challenges, too. Here are some of the significant legal considerations that come with nearshoring or relocating your production lines:
US Regulations and Trade Agreements
The current trend for companies nearshoring production to Mexico has, in large part, been fueled by the US-Mexico-Canada Agreement (USMCA), coupled with increasing import duties, sanctions, export bans and due diligence requirements placed on production from China.
The relationship between the US and the country to which you may relocate production is going to play a role in the success and resiliency of your supply chain. While it’s not always simple to predict future geopolitics, you should consider the current and historic relationship between the US and the country that may inherit your business prior to making the change.
Worker Conditions and Standards in the Country
Environmental, social and governance (ESG) considerations have emerged in recent years as an increasingly prominent factor among investors, as well as an important issue for companies, as the reputational costs of getting it wrong can be significant. Horrific factory conditions in Bangladesh, for instance, were exposed in 2012 following two separate incidents (a factory fire and a factory collapse) that killed more than 1,300 workers.
Companies can mitigate against the risk of ESG issues by looking to the existing regulatory environment in the country. By looking into the country’s minimum wage standards, carbon emissions commitments, humanitarian crises and building codes, you can glean greater insights into the ESG risk you’ll face by moving production to a country that leaves all such burden of oversight to the businesses themselves. From there, you can determine whether the risk is too great or if you could overcome the risk by requiring certain ESG standards to be met in your supply chain contracts.
Intellectual Property Protections
Any change in jurisdiction necessitates new intellectual property protections. To reduce the impact of counterfeits, you’ll need to consider whether you can register your trademarks and IP in any country you’re considering for production. You’ll also need to consider whether that country has a reputation for actually enforcing those IP protections.
If not, you’ll need to consider whether those obstacles can be overcome through segmenting production and protecting the information through trade secrets. KFC, for instance, famously distributes the production of its secret herbs and spices mix so that no individual company has access to the blend. Your company may be able to implement similar protections.
Cyber Resiliency and Privacy
The costs of cybercrime are now in the trillions annually, and they’re still rising. The cyber resiliency of the infrastructure in any country you’re considering moving production to, as well as any local government initiatives to improve cyber resiliency, should be weighed up.
Again, you can require your suppliers to meet minimum cybersecurity standards and to implement specific protections to guard any personal information you share (particularly if you engage in direct-to-consumer shipping) as well as your company’s IP.
Interested in learning more? Listen to our recent Conversations with CGL episode about building better supply chains with better contracts. We discuss how companies can use their contracts to embed crucial protections within their supply chains.
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