Mexico’s Maquiladora program has been a key feature of the US and Mexico economic relations. In 1964 when the US terminated the Bracero Program1, there arose widespread unemployment in the Mexican economy, to curtail, which the Border Industrialization Program, was developed in 1965. The Maquiladora2 program was first established by the Mexican government in the US-Mexico borders and has driven growth in both the US and Mexico (GAO 2003, 5).
Presently the alliance faces challenges due to growing economic uncertainty and there are questions of viability of the option. The maquiladora industry is argued to be of great importance to the US economy due to the amount of trade generated between Mexico and US and because majority of the plants are of US origin (Villarreal 2005). Of the top twenty maquiladora companies in Mexico, ten were from the US (Villarreal 2005). Almost 35 percent of the Mexico’s imports and 50 percent of the total exports are due to maquiladora industries (Maquila Portal 2004).
Post- NAFTA the Mexican government’s policy towards maquiladoras changed drastically. The NAFTA phases were established in two phases, first, NAFTA regulations allowed maquiladoras to import products duty-free into Mexico regardless of the country wherefrom the product was being imported. In this phase there was seen an increase in sale of the goods of the maquiladora industry in the domestic market. In the second phase, when the import of products for maquiladoras was from the US or Canada there was no duty i.e. duty was levied on non-NAFTA countries. In 2001, maquiladoras comprised 40 percent of the US exports to Mexico and 54 percent of the Mexico’s imports into the US (GAO, 2005).
Therefore, a typical maquiladora plant imports raw materials from US, manufacture them in Mexico and ships them back to the US. The US taxes were the only value-added by manufacturers in Mexico. Thus, Maquiladoras flourished under the countries’ special laws.
The first maquiladora was set up in the US-Mexico border of El Paso, Texas. The economic importance of maquiladoras on the US economy is observable through similar rise or fall in the growth rate of the maquiladoras and the US GDP since inception. Both US GDP growth rate and the growth rate of Maquiladora export from 1987 to 2001 have shown are positively associated (Federal Reserve Bank of Dallas 2001). The recession of the US economy affects the maquiladora growth, which was observable in 2001 too.
Even during recession, production remains the key to remain competitive for the US firms. Therefore, with NAFTA in the 1994 the US-Mexico economic relationship became stronger. The US-Mexico trade data for 2003 shows that Mexico sold 90 percent of its exports to the US and 92 percent of its imports are from the US. Interestingly the top Mexican imports were those sample goods, which were assembled and sent back as exports to the US3. The top Mexican imports were in automotive spare parts and the same were assembled and sent back which again formed a major part of the Mexican exports to US4.
Maquiladoras respond to the changes of the US industrial production by aiding in increase or decline of employment in the maquiladora plants. For instance, a 1 percent increase in the US industrial production increases maquiladora employment by 1.3 percent (Gruben 2001). Therefore, there is a positive effect on the increase in the maquiladora economic activity, especially in the US border region. Further Texas hosts the majority of the maquiladoras along the US border reaping benefits from the alliance (Vargas 2001). A drop in the maquiladora production led to a drop in the overall trade in the US-Mexico land-border, trade which dropped by 5 percent in 2002 which was primarily due to a decline by 10 percent in the US exports to Mexico (GAO 2003). In 2000, the cities in the borderland of US-Mexico had a maquiladora employment and production equal to 35.4 percent and 40.4 percent (Vargas 2001, 26). The Texas borders have reaped important benefits from the maquiladora alliances. The maquiladoras create jobs in the US in terms of legal, transportation, hospitality, as well as manufacturing. Further, the labor bottleneck in the US is also solved through the US-Mexico alliances.
There are around 3500 maquiladoras in Mexico and 90 percent of them are by manufacturers originating from the US. According to the GAO, figure “Maquiladoras, which accounted for 40 percent of U.S. exports to Mexico and 54 percent of Mexican exports to the United States in 2001, contributed to this decline” (GAO 2003, 22) the decline in the Mexican maquiladoras affected the US border areas as well as in U.S. sectors related to trade. Clearly, a decline in the production of maquiladoras has a negative impact on US trade as well as industrial production. Thus, maquiladoras have a positive impact on the US economy.
Reference
Federal Reserve Bank of Dallas. Nafta, the US Economy, and Maquiladora. ISSUE 1, EL PASO: Federal Reserve Bank of Dallas, 2001.
Federal Rewserve Bank of Dallas. “The Maquiladora Industry in Historical Perspective.” Business Frontline (FEDERAL RESERVE BANK OF DALLAS), 1998.
GAO. Mexico’s Maquiladora Decline Affects U.S.-Mexico Border Communities and Trade; Recovery Depends in Part on Mexico’s Actions. Report to Congressional Requesters, Washington DC: United States General Accounting Office, 2003.
Gruben, William C. Was NAFTA Behind Mexico’s High Maquiladora Growth. Economic and Financial Review, Third Quarter, Dallas: Federal Reserve Bank of Dallas, 2001.
Maquila Portal. “Mexico Now.” Maquila Portal (March-April ) Year 2, Number 9, 2004: 14.
Vargas, Lucinda. “Maquiladoras Impact on Texas border Cities.” Federal Reserve Bank of Dallas, 2001: 25-30.
Villarreal, M. Angeles. U.S.-Mexico Economic Relations:. CRS Report for Congress, Washigton DC: Congressional Research Service, 2005.
Footnotes
- The Bracero Program was a U.S. program that allowed Mexican agricultural workers to enter the US for temporary employment during World War II. This was designed in order to attract Mexican labor into the US during the paucity of labor during WWII.
- Maquiladora is derived from a Spanish word maquilar meaning the services provided by a miller when he grinds wheat into flour.
- Data from Foreign Trade Statistics, US Census Bureau.
- US Census Bureau.