What is a maquiladora?
Under a 1989 decree, a maquiladora is a factory or manufacturing facility in Mexico that has received approval for operation from the Secretariat of Commerce and Industrial Development. Foreign entities own these corporations, which were first developed in the 1960s to address unemployment and encourage foreign investment. As a result, they typically operate near the border between the United States and Mexico. Businesses operating under the maquiladora model can benefit from several advantages. Typically, these factories export their products outside of Mexico.
Understanding a Maquiladora
As previously mentioned, a maquiladora is a factory owned and run by a foreign company located in Mexico. The first of these plants was established in 1961 to boost the domestic market and draw in foreign investment. Many of these companies are situated along the border between the United States and Mexico. The structure of a maquiladora system is set up so that the parent company is located in the United States while the manufacturing operation or factory is located in Mexico.
The Mexican Secretary of Economy officially decides whether to classify a plant as a maquiladora.
This distinction is significant because it makes the plant eligible for unlimited foreign capital investment and duty-free imports, which apply to raw and semi-finished goods. The factories that participate in the maquila program, also known as twin plants, manufacture various goods. Thousands of maquiladoras produce everything from clothing and consumer electronics to cars, drones, medical devices, and aircraft components. Export may be direct or indirect, whether by selling products or shipping through another factory or export company.
These factories have certain tax advantages that make them attractive to businesses. Companies can capitalize on a cheaper labor force in Mexico and benefit from business in the U.S. The presence of maquiladoras contributed significantly to the industrialization of the Mexican-American border.
Benefits of a Maquiladora
As noted above, several benefits come with establishing a maquiladora. We’ve listed some of the most common ones below.
Economic Benefits
The first obvious advantage is the economic benefit of establishing maquiladoras for Mexico and border cities and states where they may be. Once these factories are set up, they provide a source of labor for residents and can help boost the local economy. Maquilas effectively help industrialize border cities in Mexico that may otherwise be characterized by high unemployment.
The economies of border cities and states also benefit because of the administrative centers set up on the U.S. side and the transport and customs services resulting from import-export operations.
Costs and Incentives
Companies can benefit from lower costs and tax benefits by setting up maquilas. Labor costs are relatively low in Mexico, which makes production cheaper. That’s because a larger labor pool may be looking for work.
Maquilas also help companies cut costs associated with tariffs and duties. For instance, companies are exempt from the 16% value-added tax (VAT) on raw materials used for production. They are also exempt from paying duties when they export goods marked “Made in Mexico” to Canada and the U.S. This is because of the trade relationship between the U.S. and Mexico under the U.S.-Mexico-Canada Agreement (USMCA).
Access to Labor
Border towns are commonly known for their high unemployment rates, where people actively seek work. Setting up a maquila in a Mexican town gives companies access to a more excellent and cheaper labor pool. Although many people available for work may be unskilled, it allows workers to transition to the skilled category.
Aside from a few exceptions, maquilas can be set up anywhere in Mexico. But from a logistical standpoint, it makes more sense to establish a presence along the border of Mexico and the United States. Many maquiladoras are also strategically located close to airports, roads, railroads, and shipping ports. Proximity helps lower costs, including transport expenses, and improves supply chain management. For instance, a company may decide to locate the parent company in San Diego and the plant in Tijuana rather than setting up a shop in Detroit and Matamoros.
Maquiladoras and Labor Exploitation
Although they may provide numerous economic benefits, maquilas have come under fire for the way they may exploit the labor force. Although they provide competitive wages for those who work in these facilities, the pay is still relatively low. The pay can be at or below the poverty line. Wages are usually based on daily rather than hourly rates, and workers are often contracted for 48-hour shifts each week.
American border and migrant policies, as well as an increased military presence at the border, make this worse. Migrants who want to enter the United States from Central America often seek work in these facilities. This demand for employment from non-Mexicans allows corporate management to take advantage of these workers by paying them drastically lower wages.
The conditions of employment may also be a big issue for plant workers. For instance, workers may experience health risks and unsafe working conditions. Housing conditions may be unsound or inadequate, especially for migrant workers.
There is often a need for more representation for workers. Labor unions may exist on paper, giving workers false hope that their needs and demands are met. Employment contracts are often written in favor of plant owners rather than workers, giving virtually no protection to workers’ rights.
History of Maquiladoras
The end of the Bracero program in 1964 catalyzed the development of the maquiladora system. The Bracero program allowed Mexican agricultural workers to be employed in the U.S. seasonally. To address the high rates of unemployment that the ending of the Bracero program created, the Mexican government created the Maquiladora program. This provided U.S. corporations with a vast supply of cheap labor.
The ratification of the North American Free Trade Agreement (NAFTA) in 1994 ended tariffs that impacted the maquiladoras system. Mexican import duties were waived, and these factories could take advantage of preferential duty rates for specific products. This led to an explosion in the number of maquiladoras—the second half of the 1990s saw the number of maquiladoras nearly double each year—not to mention a boost in economic growth to the tune of $345 billion in 2014.
Improvements were made to the maquiladora program through the IMMEX program, formerly known as the Maquiladora Program. This new program increased the benefits, further reducing costs, increasing operational efficiencies, and modernizing the establishment process. Under the program, companies can register as one of the following entities:
- Holding Company
- Industrial
- Outsourcing
- Services
- Shelter
The IMMEX Program has led to significant growth in the industry. Reports indicate that exports increased between 2005 and 2017, from $210 billion to $419 billion.
Maquiladoras FAQs
How Have Maquiladoras Impacted the Mexican Economy?
Maquiladoras have a significant impact on Mexico’s economy. They employ millions of workers each year, many of whom are unskilled. By giving them access to employment, these plants help individuals leap from unskilled to skilled workers. These facilities also make up a good portion of the goods exported to the United States.
Are maquiladoras similar to sweatshops?
While there may be unsafe working conditions or unscrupulous maquila owners who take advantage of their employees by paying them low wages, they don’t have the same reputation as sweatshops. Sweatshops don’t provide their workers with a living wage, and the overall conditions are unsafe to the point where they may even be dangerous. Many of these establishments employ children and women and do not provide job security or wage guarantees.
Where are maquiladoras generally located?
Although there’s no limitation to where maquiladoras can be located, they are generally found along the border of the United States and Mexico.
Who Benefits the Most from Maquiladoras?
Border cities and states tend to benefit the most from maquiladoras—those in Mexico benefit from creating plants and facilities and from a boost in labor and employment. American companies can benefit from cheaper labor costs, reduced production costs, import-export tariffs, and duties.
Conclusion
- Foreign companies that own low-cost factories in Mexico run them as maquiladoras.
- Most facilities are near the border between the United States and Mexico.
- When these factories assemble goods, they send them back to the U.S. and other countries.
- Companies can benefit from the USMCA, the IMMEX Program, and the fact that workers in Mexico are cheaper and have some tax breaks.
- People don’t like maquiladoras because they misuse their workers, even though they do good things for the community.
