FREE TRADE IN NORTH
THE MAQUILADORA FACTOR
THE MAQUILADORA INDUSTRY
OF MAQUILADORA INVESTMENTS
TYPES OF MAQUILADORA
FREE TRADE IN
THE MAQUILADORA FACTOR
On 24 September 1990, Trade
Minister John Crosbie announced that Canada would enter into talks with
the United States and Mexico in the hope of creating a North American
free-trade zone, a market of over 350 million people. Trade between
Canada and Mexico is currently about $3 billion and has been growing at
an annual rate of approximately 10%. While an enlarged North American
trade area offers opportunities for Canadian manufacturers, there is concern
that the wage differentials between the two countries will have a significantly
adverse effect on Canadian employment. Liberalized trade between Mexico
and the United States and lower Mexican wage rates have already resulted
in substantial investments on the border between those two countries.
The creation of enterprise zones in Mexico has attracted considerable
investments not only from American and Canadian firms, but also from other
nations that seek to remain cost competitive in the global economy. This
paper examines the phenomenon of the "maquiladoras" or Mexican
enterprise zones that were created to encourage foreign investments in
The maquiladora (or maquila)
industry is composed of a wide variety of industrial activities whose
common characteristic is that they operate under the maquiladora regulations,
rather than what they produce. They are part of a larger phenomenon, known
as enterprise or free trade zones, which are areas composed of export-oriented
assembly industries. The economic objective is to achieve export-led industrialization
of less-developed countries by attracting foreign investment and technology.
The spectacular success of such enterprise zones in South East Asia has
led other developing nations to adopt this strategy.
Enterprise zones are often
industrial parks specifically built to service the offshore sourcing needs
of foreign firms. Equipment, materials and components are shipped into
the zone and held in bonded warehouses until needed. These imports enter
duty free on condition that the products assembled or manufactured from
them are exported out the host country. For the multi-national firm there
is an advantage in relocating production from an advanced industrial economy
to a third world economy, where labour costs are generally much reduced.
For the host country, the advantage lies in the jobs created and foreign
currency for local currency at official rates to pay wages and other costs.
Low cost labour and the
opportunity to import duty free equipment, machinery and materials are
not sufficient to ensure the success of an enterprise zone development
program since many industrialized countries maintain tariff and non-tariff
barriers to discourage imports created through industrial assistance measures
in foreign countries. However through the continuing United Nations Conference
on Trade and Development (UNCTAD), industrialized nations began to realize
that the poorer nations required some form of trade assistance if they
were to improve their economic conditions. In 1968, UNCTAD created the
General System of Preferences (GSP) to facilitate the export of developing
nations manufactures to the industrial nations. Though this created
market opportunities for some third world nations, it is not nearly as
significant as the 1962 provisions of the U.S. Tariff Act.
Tariff laws in the United
States, the worlds largest consumer market, are a significant impediment
to the third world exports. Items 806.30 and 807.00 (806/807) of the U.S.
Tariff Schedule, however, provided an opportunity for multinational firms
to establish production-sharing practices. Item 806.30 permits the export,
processing and re-entry into the U.S. of any non-precious metal article
of U.S. origin for further processing, with duty levied only on the value
of the processing carried out abroad. Item 80 refers to:
Articles assembled abroad
in whole or in part of fabricated components, the product of the United
States, which (a) were exported in condition ready for assembly without
further fabrication, (b) have not lost their physical identity
in such articles by change in form, shape, or otherwise, and (c) have
not been advanced in value or improved in condition abroad except by
being assembled and except by operations incidental to the assembly
process such as cleaning, lubricating, and painting
duty upon the full value of the imported article, less the
cost or value of such products of the United States.(1)
Together these tariff items
permit goods assembled abroad from U.S. components to be brought back
into the U.S. with duty only on the value added, mainly the (relatively
cheap) labour and overhead costs. Though items 806/807 were never intended
to promote either offshore sourcing or production sharing they have nonetheless
facilitated these trends along the U.S.-Mexican border. In the 1970s,
multinational firms began a systematic division of their production processes,
not just in the traditional manner of the division of labour on the shop
floor, but in a geographical sense. Offshore sourcing, where the materials
and components of a final product are assembled or processed in several
plants in different countries is largely based on labour costs. For products
that require straightforward assembly of standard parts and for which
air transport is economical, there is no geographical obstacle to offshore
sourcing. Export processing zones that combine cheap labour, unrestricted
access for foreign capital, and a modicum of political stability have
made offshore sourcing a reality.
THE MAQUILADORA INDUSTRY
Mexico instituted the maquiladora
program in 1965 to encourage foreign firms to build factories along the
U.S.-Mexico border. It was hoped that the strategy would serve as a catalyst
for industrial development and employment creation in the designated area.
Although the program attracted foreign investments, it did not achieve
significant growth until 1982 when, as a result of a major devaluation
of the peso from 24.51 to 57.44 per U.S. dollar, Mexicos wage rates
could compete with those of other countries that offered enterprise zone
operations. In 1965, Mexican exports to the U.S. amounted to about U.S.
$3 million under the provisions of U.S. tariff items 806/807. By 1986,
Mexicos 806/807 trade with the U.S. was worth U.S. $6.45 billion.(2)
The program has undoubtedly achieved a notable degree of growth and success.
Today the maquiladora industry numbers some 1,600 plants that annually
generate in excess of U.S. $12.7 billion in products and over U.S. $2 billion
of value added in income for Mexico while employing some 450,000 workers.(3)
The maquiladora industry has supplanted the tourism industry as Mexicos
second largest generator of foreign exchange, behind petroleum exports.
As can be seen in Table
1, Mexicos share of 1965 U.S. imports under 806/807 amounted to
0.52%. By 1986 it accounted for 17.67% of the total. In the period 1970-1987,
U.S. imports grew ten-fold, from about $40 billion to $400 billion.
In the same period, 806/807 imports grew three times as fast, from about
$2 billion to over $68 billion.
MEXICOS SHARE OF U.S. IMPORTS UNDER TARIFF ITEMS 806 AND 807
of U.S. dollars)
SHARE OF 806/807 IMPORTS
Source: Leslie Sklair, Assembling
For Development: The Maquila Industry in Mexico and the United States,
Unwin Hyman Inc., Winchester, Massachusetts, 1989.
Maquiladora plants combine
Mexican labour with foreign technology, components and capital to assemble
a variety of products. Most of the plants are owned by foreign nationals,
primarily from the United States, but also from Japan, Sweden, France,
West Germany, Canada, Taiwan, Hong Kong, and Korea. Apart from the American-owned
firms, maquiladora plants operated by companies based in Japan, West Germany
and Canada generate the largest volumes of products destined for U.S.
markets. As a major world industrial area, the original maquiladora region
of Mexico appears to be moving away from simple manual assembly operations
towards more sophisticated processes requiring larger, capital-intensive
plants and higher levels of skill and technological proficiency.
The variety of products
assembled in the maquiladora sector has expanded considerably over the
years. The fastest growing industrial sectors in 1988 include: chemical
products 92%, metal and wood furniture 65%, transport equipment
57%, electric and electronic goods 52%.(4) The employment and value added
shares of the major industrial sector in the maquiladora operations are
shown in Table 2. The electric and electronic goods sector accounts for
the largest portion of the value added created in the maquiladora plants
and is the major employer. While most of this activity is located in areas
adjacent to the American border, rising costs in the original maquiladora
region is causing some firms to locate their plants in other regions of
Mexico. In 1988, non-border regions accounted for 25% of the maquiladora
activities as compared to only 12% in 1985.(5)
VALUE ADDED AND EMPLOYMENT SHARES BY INDUSTRY
and electronic goods
Textiles and apparel
Wood and metal furniture
Equipment and tools
Source: Government of Mexico,
Committee for the Promotion of Investment in Mexico, An Overview of
the Maquiladora Industry in Mexico, 1990.
Table 3 provides an overview
of the major economic indicators of the maquiladora industry in the 1980s
and a forecast to 1993. The obvious low level of hourly wages in this
period is the main incentive that has spurred the rapid increases in both
the number of establishments and employment. Also evident is the substantial
decline in hourly wage rates that was brought about by the devaluation
of the peso in 1982.
MAQUILA INDUSTRY ECONOMIC INDICATORS
(in billions of U.S. $)
(in billions of U.S. $)
Source: Elsie Echeverri
Carroll, Maquilas: Economic Impacts and Foreign Investment
Opportunities (1988); and Government of Mexico, An Overview of
the Maquiladora Industry in Mexico (1990).
OF MAQUILADORA INVESTMENTS
There are several factors
that stimulate foreign investments in the maquiladora industry. First
of all, both the American and Mexican governments support the concept
through a host of commercial and tariff measures. There are also direct
economic benefits through savings in labour and transportation costs (as
compared to East Asian locations), improved accessibility to American,
Mexican and even Latin American markets, and increases in labour productivity.(6) Wage differences between Mexico
and the U.S. have traditionally induced American manufacturers to locate
facilities in Mexico. By 1987, Mexican wages were also competitive with
Hong Kong, Malaysia, and Korea, thereby attracting the interests of foreign
multinationals with subsidiaries in the U.S. These subsidiaries began
to locate facilities in Mexico. For example, Japanese multinationals established
31 maquiladora plants between 1982 and 1988, 15 of which were set
up after 1987. It is estimated that maquiladora sites, as compared to
American sites, offer savings in the range of U.S. $15,000 to U.S. $20,000
annually per worker.
A decision to invest in
a maquiladora operation must take into account certain constraints in
the region where most of the activity currently takes place. These consist
of shortcomings in infrastructure, housing, and social amenities, and
a lack of professional or skilled labour, which will increase as more
sophisticated assembly processes are introduced into the maquiladora plants.
The rapid growth of the maquila industry is also beginning to create pressures
that can be expected to increase the cost of labour. Already, competition
for labour in some locations is creating turnover rates of 100%.(7)
Indeed the combination of poor infrastructure and the scarcity of skilled
labour may ultimately restrain the growth potential of the maquiladora
TYPES OF MAQUILADORA
Foreign firms wishing to
take advantage of the benefits available from operating under the maquiladora
program enter into one of three types of arrangement. The first, and most
prevalent, arrangement is to establish a wholly-owned Mexican subsidiary
that is then subject to Mexican law in all respects. For tax purposes,
the Mexican government treats these subsidiaries as cost centres rather
than profit centres. The second type of arrangement is to subcontract
the manufacturing process to an existing Mexican company located in Mexico.
In this approach the foreign firm remains responsible for supplying the
Mexican firm with the necessary raw materials and other inputs, while
the Mexican firm looks after the manufacturing process. The third approach,
the "shelter approach," is similar to the second approach in
that the manufacturing plant and equipment are Mexican-owned; however,
in this instance the foreign company retains full control over the operation.
The subcontracting and shelter approaches have become increasingly important
in the maquiladora regions in recent years as being the most suitable
arrangement for small and medium-sized firms without either the financial
resources to invest in plant and equipment or experience with offshore
Without formally joining
any free trade arrangement with this country, Mexico is already capturing
investments and jobs that might previously have come to Canada. There
is concern that Canada, in joining the Mexico-U.S. free trade discussion,
will lose even more employment opportunities to the maquiladora zones.
However, it must be understood that it is as much the ability of maquiladora
producers to export into the U.S. at reduced tariff rates as their low-cost
wage structure that is attracting investments into their region of North
America. A decision on Canada s part not to enter a North American
free trade arrangement would not alter the economic forces that are already
attracting Canadian jobs to Mexico. For the most part, these jobs involve
low-skill assembly work in a host of manufacturing companies that seek
to remain competitive in the global marketplace. The type of jobs that
could be transferred to Mexico are most likely to remain low-skilled assembly
type work. More sophisticated production technology requires higher level
skills and higher levels of infrastructure services than are currently
available in Mexicos economy, a fact that is expected to constrain
the future growth of the maquiladora industries. In time, wage rates and
infrastructure costs in Mexico should rise, thus reducing the economic
attractiveness of operating there rather than in Canada. In the interim
it is difficult to predict which industrial sectors are most likely to
invest in maquiladora plants. However, recent Canadian relocations include
a seatbelt manufacturer, an auto-parts manufacturer and a producer of
1990 marks the 25th
anniversary of the establishment of the maquiladora program in Mexico.
There is no doubt that the program has been successful in creating jobs
and in providing value added exports for the Mexican economy. The economic
benefits created by the program are extremely strong inducements for foreign
firms of all sizes to relocate some portion of their manufacturing process
in the maquiladora regions. Even in the absence of a North American free
trade arrangement, the labour cost savings available in Mexico will continue
to attract investments into that country; the creation of a North American
Free Trade Zone will probably accelerate the process. The continued attractiveness
of the maquiladora system may, however, be moderated by the lack of local
infrastructure and the inadequate supply of professional and skilled labour.
(1) United States International Trade Commission
Leslie Sklair, Assembling for Development: The Maquila Industry in
Mexico and the United States, Unwin Hyman Inc., Winchester, Massachusetts,
Government of Mexico, Committee for the Promotion of Investment in Mexico,
An Overview of the Maquiladora Industry in Mexico, Mexico City,
(6) Elsie Echeverri-Carroll, Maquilas: Economic
Impacts and Foreign Investment Opportunities, Graduate School of
Business, University of Texas, Austin, 1988, p. 3.
(7) Ibid., p. 39.
Montreal Gazette, "Far-fetched Notion May Be Getting Closer,"
27 June 1989.