San Diego Metropolitan - The Connection

Maquiladoras, the popular name for binational production sharing plants, are about to be put to sleep in Mexico at the ripe old age of 38. Beyond 2003, the plants will remain mostly in name, but not under the regimen originally giving them birth. On Jan. 1, 2004, the maquiladora program’s younger sibling, the North American Free Trade Agreement, will turn 10 and take over the family business.

How ironic. Maquiladoras were created by Mexico to offset the potential unemployment along its border states after cancellation of the U.S.-Mexico Bracero program in 1963. Bracero was the equivalent of an agricultural guest-worker program. Now, as the maquiladora program is going by the wayside, the two countries are debating the idea of a new guest-worker program precisely because canceling the Bracero program brought unprecedented illegal immigration into the United States.

The History

Until new laws governing foreign investment took effect in 1993, non-citizens of Mexico were restricted to a maximum of 49 percent stock ownership of a Mexican company. In some cases, ownership was further restricted or prohibited in a particular industrial sector.

The Mexican Border Industrialization Program, or maquiladoras, allowed for the creation of a Mexican corporation that could be 100 percent foreign owned. It allowed the importation into Mexico on a temporary duty-free “in-bond” basis of machinery, equipment, parts, raw materials or other components used in the assembly or manufacture of semi-finished or finished products. Once transformed through assembly or additional manufacturing, most of the products had to be exported from Mexico. It exempted such businesses from paying state taxes. Also, foreign management could work in Mexico without paying income taxes, as long as they remained on the payroll of the parent company outside of Mexico.

In return, wages, wage tax contributions, benefits and most other overhead expenses would be in pesos after depositing dollars into a Mexican company bank account, and, of course, the employment of Mexican labor. Mexico’s gain would be employment and capture of much-needed dollars to meet its foreign obligations.

The maquiladora natural investor market for Mexico was the United States, but Asian countries, particularly Taiwan and Singapore, were formidable competitors because their wages were lower than Mexico’s, and they were offering major incentives to foreign investors. Growth of Mexico’s maquiladora program was slow, compared to Asia’s — until 1984.

In 1981 and 1982, Mexico’s economic roof caved in and the peso suffered serious value loss. This was a plus for the maquiladora industry. Mexican wages became among the lowest in the world while those in the Far East were escalating.

Plus, Mexico was in the enviable geographic position of being next door to the largest consumer market in the world. The rush was on. The maquiladora industry took off with growth topping 20 percent per year from 1984 through 1990, and from 10 percent to 12 percent for most of the 1990s.

The United States and Canada entered into a free trade agreement on Jan. 1, 1989, and Mexico asked the United States to work out a similar agreement that would create a deal among the three countries. The proposal was criticized. Opponents in the United States said Mexicans could not afford to buy our products, jobs would go south and tens of thousands of U.S. workers would be displaced. But after much national debate, political cajoling and arm-twisting, the U.S. Senate ratified the agreement.

Thus, on Jan. 1, 1994, NAFTA was born. The agreement called for the immediate designation of a number of products that could cross the three borders tariff-free. Over the next 10 years that list would be expanded to include all products the three countries manufactured.

This gradual increase in tariff-free products started the clock for the eventual demise of the maquiladora industry as we know it. Simply put, once all manufactured products can cross the three borders without tariffs, the essence and reasons for the maquiladora are no longer present.

As this has unfolded, forces have worked for and against Mexico, a developing nation that is not positioned to author its own economic destiny. Its economy rises and ebbs on the good or bad fortunes of the economically powerful, mainly the United States. But Japan also has played an important part in the industrial development of Mexico, and during the 1980s Japan’s economy went into the dumps. What’s more, Japan was not part of NAFTA — so how would its maquiladora investments fare? The answer was badly, since components not manufactured in one of the three NAFTA countries were not exempt from tariffs. The result was a dwindling of Japanese investment.

Today, another Asian country, China, looms big. Its competitive advantage not only is attracting new investment away from Mexico, but it is causing relocation of companies from Mexico to China.

People in the United States consider Mexico’s wages absurdly low. Yet China’s prevailing wages are about 12 percent of those in Mexico. In pursuit of profit, United States companies are increasingly choosing China over Mexico. A largely overvalued peso and the stalled U.S. economy are exacerbating this situation.

For instance, in Tijuana, the maquiladora industry reached its high point in February 2001 with 820 plants employing 194,500 people. By January of this year, those numbers had slid to 712 plants and 145,900 employees.

To a great degree, it is Mexico’s fault. The country’s leaders have had 37 years to build infrastructure, train workers better, adapt new technology and provide incentives and low-cost loans so Mexican entrepreneurs could invest in manufacturing of components, which are presently imported for maquiladora use. But they did little, so now a new party is about to begin.

Personally, I am betting that Mexicans once again will overcome this new challenge.

Patrick Osio Jr. can be reached through San Diego Metropolitan or by e-mail at posiojr@aol.com.