Despite recession, maquiladoras still a strong driving force
June 27, 2002
The recession in the U.S. was also felt by Mexico, the 2nd largest trading partner of the U.S. But, through the maquiladora program, which has been in effect for 37 years, the blow was softened.
The recession in the U.S. was also felt by Mexico, the 2nd largest trading partner of the U.S. But, through the maquiladora program, which has been in effect for 37 years, the blow was softened. Mexico had over 150 plant closings in 2001, but even more new plants sprung up to replace them. Some consider this program to be the largest factor to the U.S. leveling the playing field with Asia and Europe, and it should play a significant role in overcoming the economic slowdown the manufacturing industry faces.
The economic slowdown and the events of Sept. 11 pushed the U.S. and Mexico quickly into a recession, significantly impacting Mexico's maquiladoras (foreign-owned manufacturing and assembly plants). Despite these challenges, the industry established 207 new industrial operations throughout Mexico in 2001 and continues to purchase billions of dollars' worth of goods and services.
The maquiladora program was launched in the mid-1960s. Its objective was to create employment along the northern states of Mexico, which were experiencing high levels of unemployment after the termination of the Brazero Program between the U.S. and Mexico.
The Brazero program was a migrant worker program initiated by the U.S. in the 1940s that allowed Mexican nationals to enter the country temporarily to work in the agricultural sector. However, after the U.S. ended the program, many of the laborers tried unsuccessfully to find work in the region. This shortage of work was caused, in part, by the lack of infrastructure and underdevelopment along the 2,000-mile U.S.-Mexico border. As such, job possibilities were limited to seasonal, tourist-related work, and they offered very little chance of long-term employment.
After a lengthy study conducted by the Arthur D. Little Foundation that examined employment feasibility along the U.S.-Mexico border, a clearer picture emerged on the best alternative to create new jobs. Out of this study began the Border Industrialization Program, which paved the way for foreign-owned operations to build assembly plants in Mexico, making products as varied as automotive components and television sets. Later these operations became known as maquiladoras.
Since the program's inception, the maquiladoras have endured several recessions and peso devaluations yet continue to be a driving force in Mexico's overall economy. Nearly 50 percent of Mexico's total worldwide exports come from the maquiladoras. They also have been a primary generator of new jobs for Mexicans, accounting for three out of every 10 new jobs in the mid-1990s.
In 2001 cutbacks in maquila production, especially in the automotive sector, affected cities such as Cd. Juarez, Chihuahua, which experienced about 50,000 job losses. Overall, more than 200,000 jobs were lost, and 157 operations closed their doors. The number of job losses and plant closures was the highest in the 37-year history of the maquila program.
On the upside, however, 207 new maquila plants opened in 2001 in a variety of industrial sectors (see Figure 1), from automotive to consumer electronics.
Most direct foreign investment into Mexico continues to be maquila-related. Figure 2shows country of origin for the 207 new maquiladoras opened in 2001.
It is clear that whatever affects the U.S. economy also directly affects these 3,000 or so maquiladoras. More than 80 percent of the products these operations produce are made for the U.S. consumer market, especially television sets, which are now made almost entirely in Mexico then shipped to the United States. Figures show 19 million TVs were produced in 2000. Although the final figures for 2001 are not yet available, a decrease in production is expected.
Another area of invisible trade that continues to sustain many U.S.-based suppliers is the amount of materials and components needed to create millions of products and subcomponents that are assembled or manufactured by the maquilas. At last count, from January to November 2001 more than 25,000 U.S.-based suppliers sold more than $50 billion worth of raw material, components, and indirect supplies, such as packaging and printed materials, to the maquilas.
In fact, some would say the maquila industry has become the focal point of manufacturing in North America, allowing the U.S. to compete against rising competition from Asia and the European Union.
As the need for just-in-time delivery to the maquilas increases, more suppliers have moved closer to the U.S.-Mexico border to meet their demand. The maquilas have also created new opportunities for small and medium-sized suppliers that already are located in the border region and can immediately provide services and materials to them.
One often overlooked fact is that the maquila program was developed many years before the inception of the North American Free Trade Agreement (NAFTA), which went into effect in 1994.
Many people mistakenly believe Mexico became the U.S.'s second-largest trading partner because of NAFTA. The first is Canada. However, the maquila program was and continues to be the primary driving force of trade between the U.S. and Mexico before and after NAFTA.