coincided with the slowdown in the U.S. economy. Since the great Beyond the Border majority of production is destined for the U.S. market, the industry is particularly sensitive to Increasing Economic Importance U.S. growth rates. Thus, with the : recovery of the U.S. economy as of ’s Bright Spot Even before the devaluation, the 1992 came a resurgence of maquila- maquiladora industry had become dora employment growth (Table 1). an important component of the wo million Mexican workers Mexican economy. In 1994, it con- Maquiladoras and NAFTA T have lost their jobs since the tributed nearly $6 billion in foreign December 1994 peso devaluation, exchange to Mexico, making it the The maquiladora program will and some companies in Mexico have country’s second largest source of change under the North American even shut down operations. But international reserves. The maquila- Free Trade Agreement (NAFTA). while most must ride out dora industry’s share in total Mexi- New rules for maquiladoras are the recession that followed the de- can manufacturing employment taking effect in two phases, the first valuation, the maquiladora industry reached 26 percent last year, up lasts from 1994 through 2000; the is providing one of the country’s from just 5.1 percent in 1982. second starts with the next century. few bright spots—creating jobs, Maquiladora exports play a sig- The maquiladora industry’s basic earning badly needed foreign ex- nificant role in Mexican–U.S. trade. operating framework will not change change and attracting direct invest- At $26 billion, 1994 exports repre- in the first phase, but maquiladoras’ ment in modern plants.1,2 sented more than 43 percent of total access to domestic markets will be Because maquiladoras have U.S. imports from Mexico. Maquila- gradually liberalized. By 2000, ma- dollar-denominated budgets but dora products represented an even quiladoras will be able to sell to pay costs in pesos, the devaluation the domestic market brought a substantial, overnight TABLE 1 85 percent of the reduction in their peso costs. In this Indicators of the Maquiladora Industry value of their ex- Year-to-year sense, the maquiladora industry change Annual growth (percent) port production in benefited from the dollar’s higher 1994 (percent) 1993 1992 1991 the preceding year, value relative to the peso in 1995, Plants 2,085 –1.4 1.9 8.4 12.4 up from 50 percent Employment 579.4 6.9 7.2 8.2 4.7 as evidenced by recent employ- (Thousands of workers) in 1993. And in ment numbers. Imported raw materials 19.9 14.1 23.2 15.6 16.8 2001, maquiladoras In the first five months of 1995, (Billions of dollars) will be allowed to Value-added 5.9 8.6 12.8 16.0 18.4 maquiladora employment rose 9.7 (Billions of dollars) sell 100 percent of percent (relative to the year-earlier Gross production 25.8 12.8 20.6 15.7 17.2 their production period) to a total of 617,984 work- (Billions of dollars) domestically. ers. Ciudad Juarez, , NAFTA’s more across the Mexican–U.S. border from higher share, 52 percent, of manu- important change to the maquila- El Paso, , employs the largest facturing imports from Mexico. dora program takes place under the concentration of maquiladora Although the Mexican maquila- second phase. In 2001, the provi- workers, with about one-fourth of dora program has existed since sion that essentially defines the pro- the total. Maquiladora employment 1965, the industry is perhaps best gram—that of duty-free importation in Juarez grew 12 percent during known for its spectacular growth of inputs into Mexico, regardless the first five months of 1995, far during the 1980s. From 1983 through of origin —is abandoned. Instead, surpassing its growth of 6.1 percent 1988, the number of maquiladora North American rules of origin will in 1994 and 2.3 percent in 1993. plants averaged annual growth of determine duty-free status for a The maquiladora industry should 15.9 percent; employment in the given import, while duty drawback continue to grow this year because industry grew an average 19.7 per- provisions will apply to non-North of its enhanced cost effectiveness cent annually in the same period. American inputs. brought on by the peso devaluation. Other indicators also grew during By the turn of the century, it is The net gain for maquiladoras in this period: imported raw materials very likely that Mexico will have 1995, however, will not equal the rose 27.7 percent, value-added rose revised its tariff schedules for third rate of devaluation since inflation, 20.5 percent and gross production countries in a way that dramatically especially through peso–wage grew by 25.4 percent. reduces most duties, especially for pressures, will have eroded some The industry experienced a de- the inputs maquiladoras rely on of the sector’s gains. celeration during 1989–91, which heavily. Mexico’s intent, in general,

9 Beyond the Border…concluded

will be to ensure that maquiladoras reason for being will have also been continue to find the Mexican invest- eliminated. By 2001, Mexican in- Federal Reserve Bank of Dallas ment climate in 2001 sufficiently dustry will be benefiting from more Robert D. McTeer, Jr. attractive to remain in the country. generalized conditions of freer trade President and Chief Executive Officer Moreover, it’s foreseeable that even and investment that in the past Tony J. Salvaggio zero duties will apply to those inputs were associated exclusively with First Vice President and Chief Operating Officer that are simply unavailable in North maquiladoras. At the start of the Harvey Rosenblum America, as is the case with some next century, there will probably be Senior Vice President and Director of Research electronic components that are few distinguishable characteristics W. Michael Cox Vice President and Economic Advisor produced solely in Asian countries between what is now a maquiladora Stephen P. A. Brown right now. As for the U.S.-imposed and a nonmaquiladora operation Assistant Vice President and Senior Economist duties, these are already low in since by that time maquiladoras, if Research Officers most cases and should remain low they desire, can direct their entire John Duca or fall if such duties are found to production to the domestic market. Robert W. Gilmer be negatively affecting maquiladora Conversely, there will be nonma- William C. Gruben Evan F. Koenig producers, who come primarily quiladora plants directing 100 per- from the . cent of their production to the Economists Kenneth M. Emery An important side effect of the export market, as the maquiladoras Beverly J. Fox duty drawback provisions of 2001 are now required to do. In sum, the David M. Gould is that during the seven-year period maquiladora label may no longer Joseph H. Haslag D’Ann M. Petersen 1994 –2000, maquiladora producers exist by 2001, but the industry itself Keith R. Phillips may encourage third-country sup- will have become a critical part of a Stephen D. Prowse pliers to locate in in more modern Mexican manufactur- Fiona D. Sigalla Lori L. Taylor order to guarantee that duty-free ing sector. Lucinda Vargas treatment will be preserved after —Lucinda Vargas Mark A. Wynne 2000. Another option for maquila- Mine K. Yücel Carlos E. Zarazaga doras is to develop relationships with Notes potential local suppliers that could Research Associates 1 A maquiladora is typically a foreign- Professor Nathan S. Balke, Southern Methodist become new sources to replace University; Professor Thomas B. Fomby, Southern third-country suppliers. Either way, owned manufacturing plant that pro- Methodist University; Professor Gregory W. Huffman, the net result should be greater duces chiefly for exports to the United Southern Methodist University; Professor Finn E. States. Kydland, University of Texas at Austin; direct investment in the region. 2 This column is based on material that Professor Roy J. Ruffin, University of Houston appeared in Business Frontier, a publi- cation of the El Paso Branch of the Executive Editor Conclusion Harvey Rosenblum Federal Reserve Bank of Dallas. For To the extent that NAFTA creates more information about the publica- Editors tion, call (915) 521-8231. Back issues W. Michael Cox • Mine K. Yücel a more competitive Mexican indus- are available on the Dallas Fed’s online Managing Editor trial sector, greater potential local bulletin board Fed Flash, (214) 922-5199 Rhonda Harris sources of supply for the maquila- or (800) 333-1953. Copy Editors doras are likely to emerge, especially Judith Finn • Monica Reeves through joint-venture associations. Graphic Design Thus, as maquiladoras are able to Gene Autry • Laura J. Bell sell more to, and buy more from, their Mexican manufacturing coun- terparts, they will become more The Southwest Economy is published six times entrenched in the national economy. annually by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be In essence, these linkages between attributed to the Federal Reserve Bank of Dallas or the the maquiladora and nonmaquila- Federal Reserve System. dora sectors will end up blending Articles may be reprinted on the condition that the source is credited and a copy is provided to the Research the two into a single, stronger Department of the Federal Reserve Bank of Dallas. Mexican manufacturing sector. The Southwest Economy is available free of Although NAFTA brings about charge by writing the Public Affairs Department, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX the elimination of the maquiladora 75265-5906, or by telephoning (214) 922-5257. program in 2001, the program’s

10