September 26, 2017 CHTCS

What Are Maquiladoras and Why Are They So Common Along the US-Mexican Border?

In a raucous of rumors, promises, and realities, the Trump Administration is vacillating a clear solution for updating the North American Free Trade Agreement (NAFTA) and a potential border adjustment tax. As a result, business on the U.S. border will continue as usual with business supply chains using the Maquiladora industry through the Maquiladora program, IMMEX, to manufacture goods.

Based on the eternal search for low-wage labor sources, the Maquiladora industry was born in Nogales, Sonora 50 years ago under the National Border Development Program (PRONAF) by the Mexican government. Subsequently, a diverse development of first, second, and third-tier maquiladoras now perform manufacturing services from simple assembly to more complex production operations. Growing with global economy demands for on-time delivery, quality manufacturing, and low labor costs, the Maquiladora industry is a mix of foreign-owned and locally-owned businesses found mostly along the U.S./Mexico border.

Essentially, the Maquiladora Manufacturing Industry and Export Services or IMMEX is a program affording Mexican manufacturing companies a 16% value added tax incentive from the Mexican government. Basically, a foreign-owned or locally-owned business operating a factory that produces goods, may “temporarily” import production inputs and assets if they are then exported in a final product. The inception of NAFTA in 1993, enhanced the IMMEX program by creating a free trade zone through tax exemptions Mexico-wide. Maquiladoras mainly service US-based clientele, but through 11 different free trade agreements with 43 countries, Mexico hosts maquiladoras investments from many other countries including Germany, Canada, Great Britain, Australia, Korea, Japan, Israel and several South American countries.

REGISTRATIONS

HOLDING COMPANY IMMEX

With more than one legal entity operating in Mexico, one entity is designated the “holding” company operating as the controlling entity for IMMEX compliance.

INDUSTRIAL IMMEX

Typical maquiladoras registration for transforming raw materials into finished goods that are exported.

SERVICES IMMEX

At the discretion of the Department of Economy, a service provider that distributes goods meant for export from one manufacturer to another within Mexico.

SHELTER IMMEX

Operates as a “shelter” entity for foreign manufacturers who want to make products in Mexico without registering with IMMEX.

THIRD-PARTY IMMEX

Registration for a manufacturing entity operating with third party manufacturers or subcontractors.

Maquiladora operations are primarily found in industrial and business parks adjacent to the U.S.-Mexico border reaping additional benefits from designated Foreign Trade Zones. The manufacturing ecosystem of Nogales, Mexico and Santa Cruz County, Arizona is an example of the symbiosis of increased flexibility and trade benefits. Strategic border locations offer flexibility for distribution costs and easy transportation through new larger Ports of Entry. The Ambos Nogales manufacturing hub allows for reduced inventory costs for importers who enjoy shipping duty-free or delaying duty payments.

IMMEX* EMPLOYMENT & PLANTS by state

IMMEX Employment & Plants by State, Instituto Nacional De Estadistíca y Geografía

Bursting the Maquiladora Bubble with Human Rights, Champlain College Global Connections.

MEXICO’S BALANCE OF TRADE

Balance of Trade, Trading Economics, 2017.

The outlook for Maquiladoras is fuzzy. Global trade participation has reached the limits of cheap labor, and the U.S. continues to embrace nationalism whilst rejecting globalism. The balance of trade forecast for Mexico has been dubious but is projected to downturn to -1,000 USD million by years end and exceed -4,000 USD million by 2020. Increased competition with China has hampered Maquiladora growth but has also strengthened Mexico’s resolve to improve the ratio of production output to wages. Changes to NAFTA and a border tax adjustment are pending, but it isn’t halting the Maquiladora industry growth as expected. Just last month, Salvador MaeseBarrraza, President of the Association of Maquiladoras of Mexicali revealed the electronics industry will invest $1.6 billion in new plants and production lines this year adding to the already 300,000 direct and indirect jobs in Mexicali, Baja California.

MAQUILADORA INDUSTRIES

Mexico Manufacturing Industries, North American Production Sharing, Inc.,2017.

PROS OF MAQUILADORAS

  • Location
    • Foreign Trade Zones offer tariff advantages and reduced paperwork.
    • Lower distribution costs
  • Large skilled & non-skilled employment base
  • Women in the workforce
  • Political improvements; multi-party democracies
  • Economic growth
    • Increase workforce buying power
    • Low labor costs; $1.90/hour

CONS OF MAQUILADORAS

  • Environmental negligence
  • False “paper” unions
  • Living wages near or at poverty level
  • Health risks
  • Unsafe working conditions
  • Poor labor protection laws
  • Sexual harassment
  • Inadequate housing for employees

Without overgeneralizing, the Maquiladora Industry has reaped a labor supply chain nightmare over the last 50 years. Businesses from the U.S. with high compliance standards have slowly improved the workforce environment, but many abusive working conditions still exist in the Maquiladora Industry. Generations of workers have been underrepresented allowing for an unsettling cycle of near forced labor conditions. Some rigidly controlled maquiladoras where political partnerships between companies, government authorities, and unions disempower the workforce. Laborers are silenced from asking for safer living/working conditions, better wages, and fair treatment in fear of reprisal such as less overtime or firing. Very few choices are presented to the Maquiladora working class to improve their work environment placing the burden of improvement on the Maquiladora Industry itself.

Without overgeneralizing, the Maquiladora Industry has reaped a labor supply chain nightmare over the last 50 years. Businesses from the U.S. with high compliance standards have slowly improved the workforce environment, but many abusive working conditions still exist in the Maquiladora Industry. Generations of workers have been underrepresented allowing for an unsettling cycle of near forced labor conditions. Some rigidly controlled maquiladoras where political partnerships between companies, government authorities, and unions disempower the workforce. Laborers are silenced from asking for safer living/working conditions, better wages, and fair treatment in fear of reprisal such as less overtime or firing. Very few choices are presented to the Maquiladora working class to improve their work environment placing the burden of improvement on the Maquiladora Industry itself.

  • Wage stabilityin Mexico has led to a competitive advantage over China as labor costs have increased 5 times in 10 years, superseding costs of labor in Mexico by January 2014.

Average compensation costs for manufacturing workers, The Boston Consulting Group, 2016.

  • Increasingly poor U.S. trade relations with China resulting in increased taxes and tariffs have significantly affected U.S. business operational costs. Meanwhile, Mexico will continue to enjoy tariff-free imports and exports even as part of the renegotiated NAFTA.
  • Offshore manufacturing is benefited by closer proximity to manufacturers like in Mexico. Operation difficulties in China make it increasingly less efficient to conduct due diligence or compliance measures.
  • The supply chain backbone of efficient transit time is highlighted in reduced shipping times from Mexico over China thus lower costs.
  • Intellectual property protection continues to haunt China manufacturing with a major counterfeit problem while Mexico has ensured its courts will respect the security of intellectual property.
  • Mexico has dedicated both labor laws and structured education programs specifically to meet the needs of the industrial sector. In contrast, China has done little to protect its workforce.