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Chile could be one of the countries to gain the most from Mexico’s recent decision to ban outsourcing. With it’s business-friendly environment, strong trade ties, competitive labor costs, and well-developed infrastructure, Chile is well-placed to step in. The question is, Will it?
Mexico’s outsourcing ban was signed into law by its populist President Andrés Manuel López Obrador on Apr. 23, just days after passing through the Mexican Senate uncontested, and little more than a week after being passed by the lower house with a strong majority.
The legislation is intended to close a loophole that for years has seen companies avoid tax and employee benefits via outsourcing arrangements, and which has contributed to the number of outsourced employees in Mexico increasing more than four-fold in a 15-year period.
But the law, which President López, or “Amlo,” had been promoting since the latter half of 2020, could cost the country millions of jobs according to one analysis.
In an attempt to close the loophole, the legislation forces outsourcing companies to begin paying the same benefits to employees that they would get as in-house workers, including profit shares. It also includes a provision that workers engaged in “core business activities” cannot be outsourced and must be brought in-house within three months of the law going into effect.
This appears likely to take a big chunk out of the “professional employer organization” (PEO) services sector, an outsourcing option that allows foreign investors to hire staff in a given country without going through company formation. Another name for PEO is “employer of record” (EOR) services.
It is quite common for staff performing what could be considered “core business activities” to be employed via PEO arrangements, meaning that current users of the service in Mexico will have to make a choice. While one of those is to register a business in Mexico, another is to look elsewhere for PEO services.
This seems to be an ideal opportunity for some of Mexico’s biggest competitors, including Chile and Colombia, as well as for nearby Central America.
Four Reasons Chile Could Capitalize on Mexico’s Outsourcing Ban
Chile is well-placed to capitalize on Mexico’s outsourcing ban thanks to a combination of its business-friendly environment, strong trade ties, competitive labor costs, and well-developed infrastructure.
- Business-friendly environment
Chile is known for its pro-business outlook and encouragement of investment, and PEO in Chile is already a popular option among foreign investors. While it is unclear what Chile’s new constitution could mean for business, the country has reached its current levels of development and education in part through the encouragement of free trade and enterprise, and this should be expected to continue.
- Strong trade ties
That leads to the second point in Chile’s favor, because its status as a major promoter of free trade on a global scale, with dozens of free trade agreements (FTAs) in place, makes the country a regional hub for trade that is particularly attractive to foreign investors. For those using EOR services as a precursor to a deeper investment in the region, Chile is an attractive option for that reason.
- Competitive labor costs
Despite being one of the most prosperous countries in the region, as well as one of the most secure, Chile is able to offer competitive labor costs thanks to a business-friendly tax regime. As the BLH payroll calculator highlights, the total cost to an employer for an individual employee can often be less in Chile than it is in Mexico, making it a good alternative option for affected businesses.
- Well-developed infrastructure
Chile’s status as a trade and investment hub is bolstered by the country’s well-developed infrastructure, with the 2019/20 edition of the Global Entrepreneurship Monitor highlighting the fact that the country has significantly stronger infrastructure in support of business and investment than the global average. That report also highlighted the strong government support and education provision in favor of business and investment.
All of these factors add up to put Chile in position to benefit from Mexico’s outsourcing ban. In short, many of the pull factors that take so much business to Mexico can be found in Chile – albeit in slightly different form.
For example, while cross-border access to the United States cannot be replicated, Chile is able to provide free trade and easier access to other major economies, both within the region and elsewhere in the world. As Chile further extends its free trade connections – with a number of FTAs currently under discussion – that network can only be expected to grow and offer more benefits to locally-based businesses.
With outsourcing often the precursor to a deeper commitment, investors looking towards a future beyond outsourcing but unable to induce such a shift right now, will see significant promise in Chile.
That promise is reinforced by conditions on the ground – with competitive staffing costs and good infrastructure highly favorable to doing business in Chile and factors that will remain relevant for the foreseeable future.
As such, investors forced to look elsewhere by Mexico’s recent outsourcing ban will find a strong alternative Chile.