Border Business: Mexico's Maquiladoras Strong In Tough Economy
They’re not the all-powerful business force they once were, but U.S-owned manufacturing plants just along the border in Mexico remain economically and politically relevant after more than four decades in existence.
These plants — dubbed maquiladoras — began popping up in northern Mexico in the mid-1960s with the demise of the Bracero program. With thousand of Mexican workers returning from their temporary jobs on U.S. farms, the Mexican government sought to open up jobs in the northern border states that the workers had left. The jobs would come in the form of manufacturing plants that foreign companies would open using newly implemented Mexican government tax incentives.
“So they came up with this tax program that allowed imported components to be shipped into Mexico, assembled for export products and then shipped out and therefore the companies could avoid very high import tariffs,” said Tom Fullerton, economics professor at the University of Texas at El Paso who specializes in border business.
Starting in 1965, U.S. companies like RCA and Sylvania jumped at the opportunity, ushering the maquila boom that paved the way for the North American Free Trade Agreement (NAFTA).
“If it weren’t for the maquiladora program, a lot of companies would have closed down in the United States and Japanese companies would have filled the void,” Fullerton said.
While maquilas are in Mexico, they’re completely dependent on the U.S. economy. So they took a big hit a decade ago when — with increased competition from China and other Asian countries — more than 280,000 maquila jobs were lost. To make matters worse, the recent U.S. recession took away nearly 100,000 more positions.
But these days — with the resurgent U.S. auto sector plus rising wages in China — prospects are starting to look up.
“What we’ve been hearing from our contacts along the border is that actually these plants went to China, they’ve been in China for 10 years and some of them are turning back to Mexico,” said Roberto Coronado, a senior economist at the Federal Reserve Bank of Dallas.
Two-thirds of the maquila jobs lost during the last decade have now been regained, according to Coronado. His outlook for the industry is continued growth, albeit at a slow to moderate pace. What remains unknown is what kind of impact the political instability and wave of violence from the drug war in Mexico could ultimately have on maquilas.
“I think that it’s absurd not to consider that the security conditions are not a variable that investors take into account when they’re making their business decisions,” said Gerónimo Gutiérrez, current director of the San Antonio-based North American Development Bank and formerly part of Mexican President Felipe Calderon’s cabinet.
“And I’m sure we have lost good business opportunities because of the insecurity conditions,” Gutiérrez added.
It is likely no other city in Mexico has seen its security situation decay so rapidly in recent years as Ciudad Juárez, across the border from El Paso. Yet business leaders in this region say the maquila industry has for the most part escaped the mayhem.
“We’re fortunate in that the violence has allowed our industry to continue, for the most part, uninvolved,” said Allan Russell, who runs TECMA in El Paso, a company that manages 30 maquilas, most in Juárez. “That war is taking place at a different level than the manufacturing sector.”
Yet he remains vigilant. He’s not oblivious to what’s happening around his plants.
Security has been beefed up. Mexican managers in charge of the plants used to go into town for lunch — now they always stick to the on-site cafeteria. And out of fear for their families, many of these managers have moved to El Paso and commute south every day.
“We don’t want to be coy and ignorant,” Russell points out. “We certainly take (the violence) seriously. We monitor continuously the information flow and the security risks.”
So as long as the political and societal chaos continue to steer clear of Mexico’s manufacturing sector, industry observers are confident that maquilas will survive and thrive.
Investors will always have a need for low-cost labor right across the border, said Dale Robinson, president of the Western Maquila Trade Association in San Diego.
“I think they’ll always be there,” he said. “As long as there’s products to be made any place in the world, people are going to look for the best place to make a quality product for the minimum amount of cost. This is what happens in a global economy.”
It’s also important for maquilas to retain their influence because they will always play a key role in U.S.-Mexico trade relations, said Gutiérrez, the former high-ranking Mexican government official.
Maquilas generate roughly half of all Mexican exports.
“There’s a saying in international relations,” Gutiérrez mused from a conference room overlooking San Antonio’s famous River Walk. “Geography equals destiny. We have a shared future together.”