Maquiladoras

Maquiladoras is the term used for foreign assembly plants, particularly in Mexico, but also in Central America and the Dominican Republic. These plants play an important role in the process of globalization and are usually located in countries with relatively low labor costs. Typically, components and other manufacturing inputs produced by capitalintensive processes in industrialized countries are assembled in labor-intensive processes in developing countries, then reexported to markets throughout the world. These assembly plants are often located in free trade zones (FTZs), export-processing zones (EPZs), or bonded facilities in industrial parks.

ORIGINS AND TERMS

Assembly plants in Mexico that rely on imported components operate under the Maquiladora Decree, which governs both the Maquiladora Program and the Programa de Importación Temporal para la Exportación program (PITEX; Temporary Import Program for Exportation). Under the Maquiladora Decree, machinery, components, and supplies are imported duty free as long as the assembled articles are exported. Until November 2006, maquiladoras were exempt from certain taxes that were applicable to companies that manufactured goods strictly for the domestic market in Mexico. Prior to the entry into force of the North American Free Trade Agreement (NAFTA) in 1994, no duty was applied to the value of U.S.-made components contained in articles imported from assembly plants in Mexico. However, under NAFTA all goods from Mexico are imported free of duty, provided the articles meet NAFTA's rules of origin requirements.

The Maquiladora Program was established in Mexico in 1965 to encourage investment in manufacturing operations along its northern border. A key objective was to create jobs for agricultural workers displaced by termination of the Bracero Program in the United States at the end of 1964. The government of Mexico was concerned that the lack of job opportunities for the newly unemployed bracero workers, many of whom had families that had resettled in Mexico's northern border cities, would lead to political instability in the region.

EXPANSION

Confined to Mexico's northern border until 1972, the maquiladora industry grew slowly until the Mexican economic crisis of the early 1980s, when the devaluation of the Mexican peso made the cost of Mexican labor inexpensive in dollar terms and competitive with labor costs in other parts of the developing world. Initially, all assembled goods had to be exported, but by 1994 maquiladoras were permitted to sell up to 50 percent of their production in the Mexican market, and in 2001 all maquiladora products could be sold throughout Mexico. By 1993 the maquiladora industry included more than 2,000 plants and nearly one-half million employees; by the end of 2000, the industry employed 1.3 million workers in 3,700 plants, and 60 percent of these facilities were in the border area. Maquiladora plants produce electronic articles, motors and generators, engines and other auto parts, appliances, apparel, and furniture.

The PITEX Program was established in 1985 to give assembly plants producing motor vehicles, auto parts, and computers for both the Mexican and U.S. markets tax incentives comparable to those for the maquiladora plants. Unlike the Maquiladora Program prior to 1994, there were no restrictions on where PITEX operations could be located or the portion of a company's production that could be sold in the domestic market. Differences between the programs became so subtle that the November 2006 Maquildora Decree merged PITEX with the Maquiladora Program. In 2004 companies operating under the Maquiladora Decree accounted for 82 percent of Mexico's total exports to the United States, with maquiladoras accounting for two-thirds of that total and PITEX companies the remaining one-third.

CONTROVERSY

The maquiladora industry has attracted controversy. Critics claim that maquiladoras export large numbers of jobs from the United States, that they cause severe pollution problems in Mexican and U.S. border cities, that they exploit the largely female workforce, and that they are not integrated with the Mexican economy. Furthermore, critics say that maquiladoras have caused infrastructure shortages in border cities, that they close operations and leave the country at the first sign of labor difficulties, and that they have not produced significant transfers of technology. Proponents of the Maquiladora Program point to the stability of most firms in the industry, the job creation in the stagnant Mexican economy, improved environmental management systems, the growing capitalintensive nature of maquiladoras, increased training and transfers of technology (including managerial skills), high levels of worker satisfaction, and the generation of foreign exchange as benefits of the industry. Opponents of NAFTA, including U.S. labor unions and their supporters, focused on the maquiladora industry in their attacks on the treaty and on globalization.

NAFTA AND A U.S. RECESSION

Implementation of NAFTA began January 1, 1994, and gradually many of the special privileges enjoyed by maquiladoras were extended through programs such as PITEX to all firms manufacturing in Mexico. The transition from the special protections provided by the Mexican maquiladora regulations to the more open NAFTA regime was not handled smoothly by the Mexican government. This created uncertainty and the perception of risk during the time that the U.S. economy was in a recession, from 2001 to 2002. During that period, U.S. producers lost U.S. market share to imports from Asia or shifted production from North America to suppliers in China and elsewhere in Asia. The U.S. recession and global restructuring had a significant effect on the maquiladora industry. Employment in the maquiladora industry fell by 250,000 workers during the U.S. recession, with plants assembling computer equipment, telecommunications equipment, and apparel taking the hardest hits. Only by early 2007 had employment in the maquiladora industry recovered to near the employment figures of the year 2000.

EVOLUTION

Since 1965 the maquiladora industry has evolved away from primarily low-technology, labor-intensive assembly operations to more sophisticated, capitalintensive undertakings requiring a more skilled workforce and employing more technical personnel and engineers. By 2007, electrical equipment for industrial customers, aircraft and automotive parts, and large-screen televisions dominated the product mix, with apparel, consumer electronics (except televisions), and furniture on the decline. Assembly in Mexico continues to be an important component of the strategies for many North American industries to remain competitive with imports from Asia, particularly for products with high transportation costs, whose customers demand just-in-time deliveries, that are subject to frequent style changes or short production runs, and for which protection of intellectual property is important.

See alsoEconomic Development; North American Free Trade Agreement.

BIBLIOGRAPHY

Cañas, Jesús, and Roberto Coronado. "Maquiladora Industry: Past, Present, and Future." Business Frontier no. 2 (2002). Available from http://www.dallasfed.org/research/busfront/bus0202.pdf

Christman, John H. "Mexico's Maquiladora Industry Outlook, 2007–2012." Presentation at LVIII Maquiladora Industry Outlook Meeting, Tijuana, Baja California, January 26, 2007. Boston and Mexico City: Global Insight, 2007.

Clement, Norris C., Stephen R. Jenner, Paul Ganster, and Andrea Setran. Exploring the Mexican In-Bond/Maquiladora Option in Baja California. San Diego, CA: Institute for Regional Studies of the Californias, San Diego State University, 1986.

Dussel Peters, Enrique. Economic Opportunities and Challenges Posed by China for Mexico and Central America. Bonn: German Development Institute, 2005.

Grunwald, Joseph, and Kenneth Flamm, eds. The Global Factory: Foreign Assembly in International Trade. Washington, DC: Brookings Institution,1985.

Sklair, Leslie. Assembling for Development: The Maquiladora Industry in Mexico and the United States, expanded edition. San Diego: Center for U.S.-Mexican Studies, University of California, 1993.

Vargas, Lucinda. "The Maquiladora Industry in Historical Perspective, Part I and II." Business Frontier nos. 3 and 4 (1998). Available from http://www.dallasfed.org/research/busfront/bus9803.html (Part 1) and http://www.dallasfed.org/research/busfront/bus9804.html (Part 2).

Watkins, Ralph. "Mexico versus China: Factors Affecting Export and Investment Competition." Industry Trade and Technology Review (July 2002): 11-26.

                                        Paul Ganster

                                      Ralph Watkins