federal reserve

I SSUE 6NOVEMBER/D ECEMBER 1999 t h w e u s o tt ss

e c y o n o m

bank of dallas THE BINATIONAL IMPORTANCE OF THE MAQUILADORA INDUSTRY

EXICO’S MAQUILADORA INDUSTRY is part of a world- wide phenomenon more commonly known as production sharing. Through the maquiladora framework, foreign manufacturers—predominantly U.S. companies—are able to locate labor-intensive operations in labor-abundant M Mexico, thus achieving lower labor costs in the overall production process. Mexico, in turn, receives investment—factories, machinery and equipment, state-of-the-art production technology— INSIDE from countries such as the United States that have a relative abun- dance of capital. Thus, Mexico is able to attract some of the foreign America’s Trade Deficit: direct investment it needs to grow. The Latest False Alarm Maquiladoras have not only become an increasingly significant component of the Mexican economy, they are also an important part Speeding Up the of U.S. corporate strategy in achieving competitively priced goods in Broadband Wagon the world marketplace. As a result, consumers worldwide reap the benefits of maquiladora production in the form of lower-priced Can Mexico Weather goods. This article examines the importance of the maquiladora in- Its Next Election Cycle? dustry for both the U.S. and Mexican economies. employment has risen considerably.1 In Table 1 Maquiladora Industry Key Indicators 1998, maquiladoras provided almost 8 percent of Mexico’s formal employment, Percent change JanuaryÐ Percent change up from just over 2 percent in 1983. 1998 year ago June 1999 year ago They accounted for a greater share of Plants 2,983 9.8 3,219 10.8 the country’s manufacturing employ- Employment 1,008,031 12.2 1,096,619 11.8 ment—almost 28 percent—up from 7.2 Total raw materials 39.1 8.8 21.3 16.1 percent in 1983. Undeniably, maquila- (billions of U.S. dollars) doras have been very important to Mex- Imported 38.1 8.4 20.7 15.8 ico in job creation. Domestic 1.1 28.2 .6 26.9 As a key component of Mexico’s ex- Value added 10.6 19.4 6.2 22.6 port platform, the maquiladora industry (billions of U.S. dollars) also contributes to enhancing the coun- Exports 52.9 17.0 29.2 16.4 try’s place in the world economy. Chart (billions of U.S. dollars) 3 depicts the industry’s export growth SOURCES: Instituto Nacional de Estadística, Geografía e Informática. Export data, Banco de México. since 1983. On an average annual basis, maquiladora exports grew 20.4 percent during 1983–98 and totaled almost $53 billion last year. During the first six sectors represented over 74 percent of months of this year, maquiladora exports Importance for Mexico maquiladora employment and nearly 80 grew 16.4 percent relative to the year- percent of maquiladora production dur- earlier period and represented almost Jobs, Exports and Foreign Ex- ing the first six months of 1999. 46 percent of the country’s total exports change. In 1998, the maquiladora in- The maquiladora industry’s impor- and the majority—51.1 percent—of its dustry stood at nearly 3,000 plants with tance for the Mexican economy has been manufacturing exports. over a million workers, and growth con- increasing over time, especially in the The maquiladora industry’s solid ex- tinues strong this year. During the first areas of job creation, exports and for- port record has placed it among Mex- six months of 1999, plants and employ- eign exchange. Chart 2 shows the in- ico’s top foreign exchange generators, ment grew at 10.8 percent and 11.8 per- dustry’s employment growth trend from affording the country a stronger posi- cent, respectively, relative to the year- 1983 through 1998. During this period, tion in its external-sector accounts. As earlier period. Table 1 summarizes the maquiladora employment grew at an Chart 4 shows, since the early 1980s ma- industry’s key indicators for 1998 and the average rate of 14.1 percent per year. quiladoras have been Mexico’s second- first six months of 1999. Chart 1 shows Maquiladora employment growth has largest source of foreign exchange, after the industry’s principal sectors: electron- been so dynamic, especially vis-à-vis oil. However, in 1998, because of the ics, transportation equipment, and tex- growth in the Mexican economy, that precipitous drop in the oil price—and tiles and apparel. Together, these three its share in formal and manufacturing the maquiladora industry’s continued

Chart 2 Chart 1 Maquiladora Employment Maquiladora Employment (Annual growth rates) and Production Shares Percent in Principal Sectors, January–June 1999 35

Percent 30 50 Employment 25 40 Production 20 30 15 20 10 10 5 0 Electronics Transportation Textiles and equipment apparel 0 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 SOURCE: Instituto Nacional de Estadística, Geografía e SOURCE: Instituto Nacional de Estadística, Geografía e Informática. Informática.

Page 2 Southwest Economy November/December 1999 jobs—85.4 percent—was attributable to Chart 3 Maquiladora industry Exports these companies. When Mexico’s maquiladora program (Annual growth rates) began in 1965, most maquiladora com- Percent panies were basically assembly opera- 45 tions requiring unskilled labor. The in- 40 dustry has evolved significantly over the

35 years to where the maquiladora factory floor now involves much more sophisti- 30 cated production techniques. Concomi- 25 tantly, maquiladora operations have in-

20 creasingly required much more skilled labor. For example, during January– 15 June 1999, technicians represented 12.1 10 percent of maquiladora employment,

5 compared with 8.8 percent in 1975. Moreover, the skill level of the maquila- 0 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 doras’ largest labor component—direct 3 SOURCE: Banco de México. line workers —has been upgraded to suit newer technologies. Some of the highest state-of-the-art production technology in Mexico today robustness last year—foreign exchange the industry’s settlement in these cities is found in maquiladora companies. Re- generated through oil fell behind that of and its consistent employment growth, search and design centers are now part maquiladoras for the first time, making these two locations now have among of the maquiladora landscape as well. A maquiladoras the country’s top foreign the nation’s lowest unemployment rates. key example of this is the Delphi Mexi- exchange source. Last year, maquila- Last year, the open unemployment rate co Technical Center in Ciudad Juárez. doras contributed $10.3 billion in for- in Ciudad Juárez and Tijuana was more This center, which until recently was eign exchange for Mexico. The figure than 2 percentage points below the na- part of the General Motors maquiladora for the first six months of this year is tional average (Chart 5).2 The maquila- production infrastructure, is dedicated $6 billion, signaling that maquiladora dora industry has become so important to the research and design of auto parts value added at year-end will likely sur- in border cities that in Ciudad Juárez, used by General Motors cars through- pass the 1998 total. for example, more than 57 percent of out the world. Considered the most ad- Regional and Technological De- all jobs came from maquiladora compa- vanced of 27 such centers around the velopment. The maquiladora industry nies in 1998. Moreover, the overwhelm- world, it employs some 21,500 workers has also contributed to Mexico’s re- ing majority of the city’s manufacturing at 15 plants in Ciudad Juárez. Opened in gional and technological development. April 1995, the center doubled capacity Maquiladoras are concentrated in Mex- within four years. Mexico is thus prov- ico’s northern border states, specifically ing to be a formidable production site at Chart 4 in cities adjacent to the United States. Top Foreign-Exchange The two most important locations are Generators for Mexico Ciudad Juárez, Chihuahua (across from Billions of U.S. dollars Chart 5 El Paso, Texas), and Tijuana, Baja Cali- 16 fornia (across from San Ysidro and Open Unemployment Rate 14 San Diego, California). Together, these Ciudad Juárez and Tijuana Mexico total 12 Percent Percent two cities represented 35 percent of 10 3.5 7 Mexico’s total maquiladora industry em- Oil Ciudad Juárez 8 3 Tijuana 6 ployment in 1998 and 39 percent of Mexico total its maquiladora production. For all 6 2.5 5 4 border cities combined, 1998 maquila- Maquiladora 2 4 2 dora employment and production shares Tourism 1.5 3 were 65.5 percent and 73.4 percent, 0 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 1 2 respectively. SOURCES: For the oil sector, data through 1987 are .5 1 Before the maquiladora program’s from PEMEX; remaining oil data are from Banco de México, Secretaría de Hacienda 0 0 implementation, cities along Mexico’s y Crédito Público and Instituto Nacional 1994 1995 1996 1997 1998 de Estadística, Geografía e Informática. northern border had among the highest Maquiladora and tourism data are from SOURCE: Instituto Nacional de Estadística, Geografía e unemployment rates in the country, Banco de México. Informática. typically in double digits. Because of

Federal Reserve Bank of Dallas Page 3 all levels of the manufacturing technol- A case in point is the U.S. auto in- Dominican Republic, with 3.4 percent.7 ogy spectrum. dustry. During the mid- to late 1970s, the For certain products, the maquiladora The regional and technological de- U.S. auto industry faced intense compe- share of U.S. imports coming from Mex- velopment that maquiladoras have tition from Japanese carmakers and, as ico is almost absolute. For example, brought to the border is spreading to a result, saw its world market share fall. 99.7 percent of total 1997 U.S. imports Mexico’s interior as more and more In response to these developments, the of motor vehicles from Mexico and 99.8 maquiladoras locate there.4 Maquiladora U.S. auto industry restructured to be- percent of television receivers came growth in the interior is helping allevi- come more competitive internationally, from maquiladoras. Indeed, through its ate some of the physical and social and part of its restructuring strategy in- maquiladora industry, Mexico is the infrastructure pressures that dynamic volved more use of production-sharing leading exporter of television sets to the growth has brought to the border cities. operations. Thus, as their maquiladora United States.8 However, because border growth is still operations grew from the early 1980s Mexico’s use of U.S. components very strong, it continues to attract peo- onward, U.S. automakers were able to relative to U.S. production-sharing op- ple from the interior. This has created regain some of the market share they erations in other parts of the world is problems for some border locations, had lost and maintain a stable share substantial. In 1997, 58 percent of the such as insufficient or inadequate hous- since—despite continued intense com- value of U.S. components incorporated ing for maquiladora workers. Maquila- petition from Asian and other foreign in worldwide production-sharing opera- dora companies are now working with carmakers. tions was derived in Mexico. In the the Mexican government to build ade- Maquiladora production ultimately case of motor vehicles, while U.S.-made quate and affordable housing for work- garners the largest benefits for the U.S. parts represented 56 percent of the ers and assist them with financing. The consumer—indeed, the world con- value of finished vehicles imported from first such program was launched by sumer—since this strategy results in Mexico under production sharing, they Delphi Automotive in 1997. Since then, lower-priced consumer goods than represented only 1 percent of the value other large maquiladora companies would be the case if the goods were of vehicles imported from Japan and have followed with similar programs. produced entirely in the United States. Germany. The price of U.S.-brand-name cars to- This high degree of U.S. content in day is lower because the U.S. automo- Mexican maquiladoras highlights, in yet Importance for the United States bile industry—like the auto industry in another way, the production sharing the rest of the world—has made exten- between maquiladoras and U.S. pro- International Competitiveness. sive use of production-sharing opera- ducers. According to the U.S. Interna- Maquiladoras have offered an important tions. If U.S. automakers were forced tional Trade Commission, 82 percent of investment option for U.S. companies to produce cars entirely in the United the materials imported by maquiladoras wanting to locate in Mexico. Since its States, they would face wage rates that and similar operations are of U.S. ori- inception, the maquiladora program has in 1998 were almost $22 per hour. gin.9 This translated into $31 billion worth allowed for the duty-free importation of Under maquiladora production-sharing of U.S. components used by the indus- materials into Mexico5 and for 100 per- operations, they can achieve wage rates try in 1998. Moreover, these U.S. sup- cent foreign ownership of operations. on their labor-intensive production op- plier industries are usually higher-tech These features—which predated Mex- erations of around $5 per hour. Clearly, manufacturers that employ thousands ico’s current policy of freer foreign such cost benefits in a competitive en- of high-skilled workers throughout the trade and investment by almost three vironment have translated into lower- United States. In fact, a 1988 survey of decades—plus Mexico’s availability of priced cars for the consumer.6 maquiladora companies in Ciudad Juárez low-cost labor relative to the United States Production Sharing, U.S. Content alone showed that maquiladoras in this resulted in U.S. companies creating ma- and U.S. Jobs. Mexico’s maquiladoras city had suppliers in every U.S. state ex- quiladoras for their labor-intensive man- are just one example of the production cept Hawaii.10 Even though the nature ufacturing processes. Examples of in- sharing that takes place between U.S. and importance of suppliers varied dustries that have a labor-intensive companies and countries throughout across the different maquiladora com- work component are the top three ma- the world. However, maquiladoras rep- panies surveyed, there were substantial quiladora production sectors mentioned resent the preferred production-sharing linkages with the U.S. economy. earlier: electronics, transportation equip- strategy of U.S. producers. Moreover, Thus, maquiladoras support U.S. jobs ment, and textiles and apparel. By gen- given the proximity of maquiladoras to through their extensive use of U.S. sup- erating important labor-cost reductions the United States, these operations have pliers. Because U.S. production-sharing through their maquiladora operations, a high degree of U.S. content (raw ma- operations in East Asia are not as reliant U.S. companies have been able to re- terials and components originating in on U.S. suppliers as are maquiladoras, main competitive in the world market- the United States). the positive impact on U.S. employment place and thus have retained or even In 1997, over 36 percent of total U.S. of these more distant operations is increased their world market share in production-sharing imports came from either absent or not as significant. Also, the production of goods in these and Mexico. The next highest source was because some U.S. companies have been other sectors. Japan, with 20 percent, followed by the able to stay in business as a result of

Page 4 Southwest Economy November/December 1999 their maquiladora production-sharing most U.S. border cities, has a high un- 1 Formal employment refers to employment registered with Instituto strategy, we can assume that without employment rate relative to the nation, Mexicano del Seguro Social (IMSS), the Mexican social security such a strategy and unable to cope with its maquiladora linkages are important system. 2 The definition of open unemployment in Mexico is narrow; it is de- intense international competition, these to the extent that they raise the city’s rived from considering as employed anybody who may have worked companies would likely have closed overall employment level. Also, since at least one hour during the unemployment survey week. However, and the direct U.S. jobs they now sup- the jobs that maquiladoras create in El even when considering broader definitions of unemployment, border port would not exist. Hence, for all Paso are in the white-collar professions cities have lower rates than the rest of the nation. For a complete list these reasons, maquiladoras help pre- or in higher-skilled manufacturing, ma- of definitions of all the unemployment indicators used in Mexico, see Business Frontier, Federal Reserve Bank of Dallas, El Paso Branch, serve U.S. jobs and generate new jobs quiladoras also work to move the city Issue 1, 1999, p. 5. in the long run. up the economic ladder. 3 Direct labor represented 80.8 percent of total maquiladora employ- Border Development. The maquil- ment during the first six months of this year. Although the majority of adora industry’s large presence on Mex- these workers—56 percent—was female, this share is down con- ico’s northern frontier has resulted in Conclusion siderably from 78.3 percent in 1975. In fact, when looking at specific locations, the female share has dropped even lower. For example, important benefits to U.S. border cities. during January–June 1999, Ciudad Juárez showed an almost even Because of the maquiladora industry’s Overall, the maquiladora industry is split between female (50.4 percent) and male (49.6 percent) workers, large trade flows going through border an important positive force behind the while Tijuana showed males holding a slight majority (50.7 percent) ports of entry, transportation and cus- growth and development of both the over female workers. 4 toms services and the industrial real Mexican and U.S. economies. It has Examples of specific cities in the interior that have witnessed im- portant maquiladora industry growth are Hermosillo, Sonora and estate sectors have flourished on the proved to be a consistent engine of job, Torreón, Coahuila. In the last five years, the number of maquiladora U.S. side. Maquiladoras also create jobs export and foreign exchange growth in plants in Hermosillo grew over 126 percent, and employment grew in the legal, accounting and financial Mexico. Maquiladoras have also con- nearly 246 percent. The corresponding figures for Torreón are 84 professions. Even the hotel, car rental tributed to Mexico’s regional and tech- percent and 198 percent, respectively. Also, the state of Jalisco has and restaurant industries in border cities nological development. For the United been so successful in attracting higher-tech maquiladoras, especially in the electronics industry, that the area is now being dubbed the profit from maquiladoras since corpo- States, the maquiladora industry has Silicon Valley of Mexico. rate personnel and other maquiladora proved to be a vehicle by which U.S. in- 5 As of 2001, the North American Free Trade Agreement will impose visitors usually stay and eat on the U.S. dustry has retained or even enhanced North American rules of origin to determine duty-free status on in- side.11 its international competitiveness and puts imported by maquiladoras into Mexico. This action will replace Beyond the service industry, however, has resulted in lower-priced goods for the maquiladora program’s current rule of allowing duty-free impor- tation of inputs regardless of country of origin. the U.S. border is increasingly benefit- consumers. Moreover, the high degree 6 For a comprehensive look at the current state of the U.S. auto indus- ing from maquiladoras in manufactur- of U.S.-generated content in maquila- try, see Randall Miller, The Road Ahead for the U.S. Auto Industry, ing. Because maquiladora companies dora operations reflects important pro- U.S. Department of Commerce, Office of Automotive Affairs, March use the just-in-time inventory system, duction and employment linkages 1999. Also, for information on wages in the Mexican auto industry, they have been urging and even requir- between maquiladoras and producers see Fifth Annual Report to Congress Regarding the Impact of the North American Free Trade Agreement upon U.S. Automotive Trade ing their suppliers in the United States throughout the United States. For U.S. with Mexico, U.S. Department of Commerce, Office of Automotive and elsewhere to locate closer to them. border cities—traditionally high-unem- Affairs, July 1999. This has prompted maquiladora suppli- ployment locations—the presence of 7 U.S. International Trade Commission, Production Sharing: Use of ers to expand or even relocate their maquiladoras across the border has U.S. Components and Materials in Foreign Assembly Operations, operations to cities like El Paso. An ex- translated into more abundant and bet- 1994–97, December 1998, p. 1-8. 8 Ibid., p. 1-6. ample of a maquiladora supplier indus- ter-paying jobs. Although under NAFTA 9 Ibid., p. 2-2. try that has been attracted to El Paso is the maquiladora industry faces new 10 See William L. Mitchell and Lucinda Vargas, “The Economic Impact plastic-injection molding. North American rules of origin for their of the Maquiladora Industry in Juárez on El Paso, Texas, and Other In 1998, there were over 50 plastic- imported inputs in 2001, these changes Sections of the United States” (Grupo Bermúdez Industrial Develop- injection molding companies in El Paso are not expected to derail the industry’s ers, Ciudad Juárez, Chihuahua, 1989, photocopy). 11 Delphi Automotive, until last year a part of General Motors, has con- with some 3,700 employees. These com- pattern of solid growth into the next ducted annual studies since 1996 on the total estimated economic panies mostly service the maquiladora century. impact on El Paso of Delphi’s operations in Ciudad Juárez. In June industry across the border in Ciudad —Lucinda Vargas 1998 this figure was close to $278 million. Also, the El Paso Foreign Juárez in sectors that range from auto- Trade Association recently conducted a study on the economic im- motive and computers to medical and pact of Juárez’s overall maquiladora industry on El Paso. The results Vargas is senior economist at the El Paso will be available soon. consumer goods. Moreover, employment Branch of the Federal Reserve Bank of 12 In 1990, hourly compensation rates were estimated at $6 for apparel in plastics manufacturing in El Paso— Dallas. and $7.50 for rubber and miscellaneous plastics. In 1997, the esti- up 85 percent since 1990—is highly mates were $8.60 for apparel and $11.10 for plastics. The compen- skilled. From 1990 through 1998, for ex- sation differential between the two subsectors was smaller in 1998, ample, the hourly compensation rate with apparel’s compensation rate at $10.90 and plastics at $11.40. Notes Affecting apparel’s much higher compensation performance in 1998 paid by this sector was, on average, was the sector’s smaller employment base, which apparently gener- 21.5 percent higher than the apparel ated higher overtime payments. A version of this paper was first presented on April 28, 1999, in sector, El Paso’s largest and most estab- El Paso, Texas, at an international economic forum, “A Look at the 12 lished manufacturing sector. Economies of Brazil, Mexico and El Paso del Norte,” sponsored by For a city like El Paso, which, like the El Paso Branch of the Federal Reserve Bank of Dallas.

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