Latin-American Markets Supplement: Maquiladoras, Key to Active Trading

The manufacturing sector slump may have slowed the pace of trade growth between the U.S. and Mexico, but there is little reason to believe businesses have soured on the region.

That’s the view of the U.S. State Department’s Berta Gomez, who notes in a report that "maquiladora" plant growth precedes the North American Free Trade Agreement (NAFTA) that receives much of the credit for the trading boom.

"Reports often omit the contribution of the decades-old initiative that produced the maquiladora plants in Mexico that specialize in assembling finished goods for export, and have helped turn Mexico’s northern border into one of the most productive industrial zones in the Americas," writes Gomez concerning the success of maquiladoras.

But the effects of NAFTA should not be discounted either. "In 1993—the year before NAFTA liberalized trade among the U.S., Canada and Mexico—U.S.-Mexico trade totaled $81 billion. Seven years later, bilateral trade had more than tripled to $247 billion," Gomez points out.

As of late 2001, more than 3,300 maquiladoras were operating throughout Mexico. These plants employ more than 1 million people and generate up to 40 percent of Mexico’s exports, according to the U.S. Department of Commerce. Nearly two-thirds of the plants are concentrated in Mexico’s northern states along the U.S. border.

The plants import partially finished products and components and then assemble or otherwise add value to what has been brought in before shipping the products back to the company of origin—most often the U.S.

The maquiladoras trace their roots to the 1960s, when Mexico’s Border Industrialization Program was launched to attract foreign investment. Based on a production-sharing model that had been tried in Portugal, the maquila plants, as they came to be known, were allowed to import duty-free the equipment and materials needed for production.

For its part, the U.S. changed its customs regulations, relaxing import duties on the goods that would be returning from Mexico made from U.S. components or materials. Maquiladora plants established by multi-national corporations flourished in the 1980s and ’90s.

There are challenges facing Mexico and its maquiladoras—including China’s emergence as a manufacturing site and its acceptance into the World Trade Organization.

Components brought in from non-NAFTA countries have not been eligible for duty-free importation into Mexico since January of 2001. Thus, maquila materials imported from Europe or Asia for use in a product later exported to the U.S. will not enjoy refunded or waived import duties on the intermediate goods.

Despite the challenges, the maquilas have demonstrated their staying power, notes the State Department’s Gomez. "The sector withstood the peso crisis of 1994-95, generating 80,000 new jobs in the recession year of 1995, when employment and production in most sectors of the Mexican economy were falling," she writes.

The success of the maquiladoras and NAFTA have secured Mexico’s spot as a leading site of opportunity for manufacturers and recyclers.

On the recycling side, momentum toward increased U.S.-Mexican trade may have slowed somewhat in recent years, if statistics gathered by the United States Geological Survey (USGS), Reston, Va., are correct.

In 1998—when steelmakers in both the U.S. and Mexico were operating in a healthier climate for basic materials—Mexico imported a greater amount of ferrous scrap than it did last year. The U.S. sent 961,000 metric tons of ferrous scrap to Mexico that year, compared to just 821,000 metric tons last year. A reviving steel sector in North America may regain some of that ground in 2002, both recyclers and steelmakers hope.

Scrap moving the other direction also has slowed since the steel industry slump has hit both nations. Ferrous scrap moving from Mexico to the U.S. dropped from 75,000 metric tons in 1998 to 51,000 metric tons in 2001.

Copper scrap trading levels fell in many categories in 2001 compared to 2000, although Mexico (along with Canada) remains a leading source of imported copper scrap for U.S. consumers. Mexico’s aluminum smelters remain an important destination for scrap dealers, however. While China is followed by Canada as the leading destinations, Mexico and South Korea vie for third in the export rankings.

Several grades of secondary fibers are generated at these plants, in addition to the considerable amounts of old corrugated containers (OCC) generated at maquiladoras of all types in northern Mexico.