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The Texas economy: Mexican maquilas and U.S. jobs.

The Texas Economy: Mexican Maquilas and U.S. Jobs

During the last three decades, the manufacturing sector has undergone an international reorganization and integration.

The mid-1960s saw not only the rise of Mexico's in-bond plant, or maquila, system but also the development of similar in-bond systems in the newly industrialized Pacific nations. Taiwan, Korea, and other traditionally low-wage countries made use of the same special U.S. tariff programs Mexico used to enter the international network of production sharing that is common among in-bond plants. Mexico and Asian countries became major competitors.

Firms in developed countries had for many years located manufacturing plants in less developed countries. However, these plants chiefly served local or regional markets. Foreign plants owned by U.S. companies, for example, exported very little to the United States. In the late 1960s, U.S. firms began to integrate their foreign affiliates into global systems of production, of which the Mexican maquilas were only a part. With widening disparities between labor costs in the United States and less developed countries and falling communication and transport costs, U.S. firms began incorporating their foreign manufacturing affiliates into a network designed to serve U.S. markets.

One result of these changes in the organization of manufacturing was the emergence of a maquila-related controversy - particularly heated in Texas and California - that has continued to the present. In fact, for the last twenty-five years, maquila opponents and maquila advocates have focused their energies upon one pair of competing arguments. Opponents argue that maquilas cost U.S. jobs. Advocates, on the other hand, claim that those jobs would go abroad anyway. Tentative, statistically based research suggests that both sides of the argument are equally correct - that maquilas do cost U.S. jobs but that many jobs that go to maquilas would not stay in the United States in any case.

How could both arguments be correct? The answer lies in the maquila systems themselves - two sorts of mexican maquila systems exist, rather than one, and each of the systems validates the argument of one side in the controversy.

The first of the two systems includes products with high shipping costs. Joseph Grunwald notes that U.S.-targeted producers for whom shipping costs are important tend to locate in Mexico rather than Asia. One result is that, compared to its Asian competitors, Mexico's inbond system is more heavily concentrated in products with high shipping costs. When these high-shipping-cost industries are established to supply a U.S. market, their principal choices of location are likely to be Mexico or the United States. Their shipping costs could increase considerably if they located in Asia instead of Mexico or the United States. For such industries, the influence of Mexican-U.S. wage differentials upon Mexican maquila growth would be relatively strong.

Do maquilas take U.S. jobs? Those concentrating on products with high shipping costs probably do. An accompanying chart reveals the relation between the ratio of Mexican to U.S. manufacturing wages and the growth rate of maquila employment. Generally speaking, as the Mexican-U.S. wage ratio falls, maquila employment growth accelerates, with a one-year lag.

The second of the two systems includes products with low shipping costs. When shipping costs account for only a small portion of total delivered-product costs, Asian plants can compete strongly with Mexican plants and Asian workers can compete with Mexican workers. Here it is Mexican-Asian wage differentials that count. When Asian wages rise above Mexican wages, the jobs go to Mexico. When Mexican wages rise relative to Asian wages, the jobs may go to Asia.

Would those jobs go to Asia if they did not go to Mexico? They probably would. The second chart depicts both the ratio of Mexican manufacturing wages to an average of manufacturing wages in Hong Kong, Korea, Singapore, and Taiwan and rates of growth in maquila employment. On average, as the Mexican-Asian wage ratio falls, maquila employment growth accelerates, again with a lag of about a year.

The evidence that both the maquila advocates and their opponents are correct is only tentative. Nevertheless, the statistical results up to now are striking. In a recent research project, I applied statistical modeling to the question, including Mexican-Asian and Mexican-U.S. wage relationships in a model that tests their relative effects upon maquila employment growth during the 1970s and 1980s. To the extent that changes in Mexican-Asian wage ratios explain changes in maquila employment, the advocates are correct. Those maquila jobs would probably go to Asian countries if they did not go to Mexico. To the extent that changes in Mexican-U.S. wage ratios explain changes in maquila employment, the opponents are correct: maquilas take U.S. jobs. The modeling results suggest that the influences of these two factors are almost exactly equal. Considering the difference between Mexico's maquilas and Asia's in-bond plant systems, why should anyone be surprised that both arguments are valid?
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Title Annotation:off-shore industries
Author:Gruben, William C.
Publication:Texas Business Review
Date:Jun 1, 1990
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