Maquiladoras

A maquiladora is an assembly or manufacturing plant, in most cases along the border between two countries, which receives imported materials and equipment duty-free, assembles the product, and then exports the product back to the originating country with very low or no tariffs. The word maquiladora comes from the Spanish word maquilar, which means to assemble, and was first used to describe plants established under a special program on the Mexican side of the U.S. Mexican border. The term and concept have since spread to areas in other countries where trade barriers are reduced on imported materials to assemble goods for export.

Mexico's maquiladora program was established in 1965 to create jobs for Mexican workers after the end of the Bracero program, which had allowed Mexican workers to find temporary agricultural-based employment in the United States during and after World War II. When that program was terminated in 1964, Mexico designed the maquiladora program to encourage manufacturing along its northern border and thus provide jobs for Bracero workers and the rural poor. In the beginning, maquiladoras could only locate within approximately 12 miles of the U.S. border and only served the purpose of labor-intensive job creation and foreign currency flow.

In the 1970s, U.S. companies began to develop the concept of the “twin plant,” where they would locate capital-intensive operations on the U.S. side of the border and labor-intensive operations on the Mexico side of the border to capitalize on the low-priced labor. Well-known city pairs include El Paso, Texas, and Ciudad Juarez, Mexico; San Diego, California, and Tijuana, Mexico; and McAllen, Texas, and Reynosa, Mexico.

In 1986, Mexico joined the General Agreement for Tariffs and Trade, which changed the country's complex import policies and tariffs. Over the next 4 years, Mexico's tariffs dropped by 45%, which attracted a new wave of foreign investors and pushed maquiladora employment up to a growth rate of nearly 20% per year. Later, in 1994 with the initiation of the North American Free Trade Agreement (NAFTA) with Canada and the United States and the severe peso devaluation, maquiladora operations continued to expand to take advantage of even cheaper labor as well as more favorable trade terms.

As competition increased, some international firms began to increase the technical sophistication of work that took place within their maquiladora operations. While labor-intensive tasks remained the norm, maquiladora operations expanded to incorporate research and design along with high-tech assembly and manufacturing. By 2001, maquiladora exports represented almost half of Mexico's exports, and maquiladora employment had increased to employ 3% of the country's total workforce.

Since 2001, Mexico's maquiladora sector has struggled to remain competitive due to the U.S. recession in 2001, a stronger peso, and increased global competition. Between 2001 and 2002, 420 maquiladora plants closed in Mexico, and nearly 229,000 jobs were eliminated. A “permanent establishment” clause, added to Mexican tax laws in 1998 when limits on domestic consumption of maquiladora production were phased out, meant that these plants now had to pay taxes on assets and income in Mexico. The maquiladoras also lost their duty-free privileges with non-NAFTA countries in 2001 with the onset of NAFTA Article 303. The Mexican government created sectoral promotion programs to protect duty-free benefits of non-NAFTA component imports, but extensive paperwork makes participation difficult. The Mexican maquiladora industry also faces increasing competition from lowcost operations in China, the Caribbean, and Latin America.

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