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Maquiladoras: an industry in transition.

The number of maquiladora or in-bond plants in Mexico grew from 454 in 1975 to more than 2,000 by October 1992. Accordingly, the number of maquiladora jobs increased from 67,214 to over 502,000 in the same period. In 1991, these plants earned over $4.1 billion in foreign exchange, supplanting tourism as Mexico's second largest earner of foreign exchange after its oil export sector. However, this manufacturing growth is not confined to Mexico. Manufacturing jobs are being added on the Texas side, too. It has been estimated that maquiladoras contribute one in five new jobs created in El Paso. In 1987, when most of the state experienced a 1.2 percent decline in jobs, the mix of industries along the border allowed this area a 1.1 percent increase in employment.

The maquiladora industry is heavily concentrated along the U.S.-Mexico border, with the largest number of plants in Ciudad Juarez, across the border from El Paso. When Juarez launched into the maquiladora business in 1969, eleven plants and 255 maquiladora workers were located in the city. By October 1992, Juarez registered a total of 266 plants with over 128,000 workers, 12.8 and 25.5 percent, respectively, of the totals of all in-bond plants. A major factor in this success is that Juarez and El Paso are the largest metropolitan areas on the Texas-Mexico border and contiguous to one another. Rapid growth of the industry is occurring in other such cities on the Texas border, including Reynosa (McAllen), Matamoros (Brownsville), and Nuevo Laredo (Laredo), and some maquiladora activity is developing in such nonmetropolitan city pairs as Ciudad Acuna (Del Rio) and Piedras Negras (Eagle Pass).

For more than a decade, the growth of the U.S. economy and low Mexican wages have been the major factors contributing to the success of the maquiladora industry. Estimates indicate, for instance, that an increase of one unit in U.S. industrial production will increase maquiladora employment 2.8 times. Therefore, the near-term transition of the U.S. economy to substantially slower real domestic economic activity can be expected to influence maquiladora growth adversely. Moreover, it is expected that the increased investment (both foreign and domestic) in Mexico likely to result from the North American Free Trade Agreement (NAFTA) will be accompanied by increases in both Mexican wages and the demand for Mexican labor.

However, the implementation of NAFTA will also create incentives for the maquiladora industry that should compensate for the slowdown in the U.S. economy and the increase in Mexican wages. In the past, a major competitive advantage of maquiladora production has been the favorable tariff treatment provided by the U.S. government through the Generalized System of Preferences (GSP) program and HTS (Harmonized Tariff Schedule) provisions 9802.00.60 and 9802.00.80.(1) Currently, only U.S. components enjoy preferential treatment under HTS provisions; under NAFTA, maquiladoras can trade Mexican, Canadian, and foreign (i.e., Japanese) components duty-free, providing that their products comply with percentages on rules of origin.

The most important changes associated with NAFTA will affect nontariff provisions, in particular, those that allow the importation of goods duty-free pending exportation to the importing country. This in-bond arrangement will be replaced in each partner country with a duty refund program. Under this new program, maquiladoras will pay duties on components imported into Mexico and again on these components in the United States if the assembled product does not meet rules of origin standards. To avoid double taxation, the lesser duty payment will be refunded. This means more red tape for the maquiladora, making this measure equivalent to a nontariff barrier. It is also equivalent to lending money to the country with the higher import tariff for the lag between the time that a product is imported and the time when the duty is refunded. The Japanese maquiladoras assembling TV sets may be among the most affected by this measure because of their reliance on a large percentage of foreign components.

Foreign investment in Mexico remains regulated by a 1973 law that primarily promotes domestic investment. However, the 1989 foreign investment decree introduced important changes designed to create an environment more open to foreign trade. Despite the 1989 decree, Mexico's restrictive 1973 foreign investment law remains in effect, and liberalization can be implemented only through executive decrees. Although NAFTA continues the possibility of 100 percent foreign ownership, some changes still have to be made to the 1973 law before liberalization of foreign investment can be effective.


NAFTA has focused attention on the economic performance of the maquiladora industry in the context of trade liberalization. Those maquiladoras that produce products with a large content of North American components will benefit from the elimination of duties and the increased access to the Mexican market afforded by NAFTA. At the same time, the duty refund program will impose higher nontariff restrictions on maquiladoras that use a large percentage of foreign components and machinery (those from outside the free trade region). Most affected will be Japanese maquiladoras that assemble television sets from components mainly imported from Japan.

The effect on Texas will be mainly positive. Mexico is already the state's largest, as well as the nation's third largest, trading partner, and an expanded trading relationship will have a profound impact on Texas. The agreement will favor the maquiladora industry as a whole by gradually eliminating tariffs on components of North American origin and by facilitating access to the Mexican market. A healthier maquiladora industry will mean more jobs for Texas through backward and forward linkages. Furthermore, the emphasis on international trade as a result of NAFTA will highlight the need to improve the environment, infrastructure, and customs services on both sides of the border.


1. GSP makes certain duty concessions to developing nation exporters of eligible products. Under this system, the entire value of the product returned to the United States can be imported free of duty when the local content increases to at least 35 percent. HST item 9802.00.60 permits the reimport of "fabricated" (but in effect unfinished) metal products into the United States for further processing; 9802.00.80 permits only the "assembly" of finished goods for reexport to the United States for final consumption. In 1990 products worth $73.1 billion were imported under item 9802.00.80, while products worth only $1.3 billion were imported under item 9802.00.60.
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Title Annotation:Mexico-US industrial trade
Author:Echeverri-Carrol, Elsie L.
Publication:Texas Business Review
Date:Jun 1, 1993
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