FREE ESSAY ON MAQUILADORAS AND THE NAFTA'S IMPACT

MAQUILADORAS AND THE NAFTA'S IMPACT

Introduction
In this paper I will discuss the history and practices of the Maquiladora industry. I
will discuss its background, its problems, the benefits it offers to United States
companies, and the impact the NAFTA has and will have on the industry. In addition, I
will make a suggestion on a possible strategy the Maquiladoras can adopt in order to
address the challenges brought on by the NAFTA, to ensure it remains a strong force in
the future.
Background
Mexican agricultural workers had been granted temporary work visas allowing them to work
in the United States' agricultural industries through a program called the Bracero
Program until 1965 when this program was terminated. As a result of this termination, the
unemployment rate had exceeded 70% in certain border cities. In May of 1965 the Border
Industrialization Program was established as a replacement for the Bracero program. It
was later renamed the Maquiladora Program. The program was established by the Mexican
government to provide employment for Mexico's rapidly growing population along its border
with the United States. This program was utilized to keep Mexicans from entering the
United States. The idea was that Mexican workers would be kept on the Mexican side of the
border if they were given factory jobs on the Mexican side. The Maquiladora program also
wanted to attract foreign manufacturing facilities, technology, and know-how by giving a
permanent tax holiday to manufacturing companies that would set up "twin plants" on the
Mexican side of the border. 
In the beginning of the program, all foreign-owned operations had to be located within a
20-kilometer strip along the US-Mexican border. Since 1972 they can be located anywhere
in Mexico. In 1996 there were around 2,500 Maquiladoras - 35% of them were located in the
interior states of Mexico. Last year there were over 3,000 and more and more of these
operations are being located outside of the border regions. Each of Mexico's 31 states
has at least one Maquiladora.
What is a Maquiladora?
Maquiladoras, also referred to as "in bond" or "twin" plants, are allowed to temporarily
import into Mexico (free of tax) machinery, equipment, replacement parts, raw materials,
and just about anything that was used in the assembly or manufacture of semi-finished or
finished products. Once assembled or manufactured, the Maquila products must be exported
unless special permission is obtained to sell a limited amount of output in the Mexican
market. When these products are imported back to the United States, import duties are
levied on the foreign value-added only. If Maquila products stay in Mexico, the are
subject to applicable Mexican duties. 
The Exploitation of Cheap Labor 
The largest issue surrounding the Maquiladora industry is the exploitation of cheap
labor. The working conditions are often unsafe, workers are not compensated adequately
for their labor, attempts to unionize are discouraged; and sexual discrimination and
harassment are too common. 
The conditions in and outside the Maquiladoras are terrible. Workers perform tasks such
as welding without protective masks, leather gloves, or goggles (in many instances) and
industrial accidents and toxic exposures are common. This, along with malnutrition caused
by low salaries, produce skin illnesses, cancer, irregularities in menstruation,
abortions, tumors, intoxication and birth of undernourished or disabled babies. 
Of the employees, many are young girls and women ranging from the ages of 14 to 20. They
work 6 days a week in 10-hour shifts. The average weekly salary for a Maquiladora worker
is US$35 - $45 even though the average monthly rent for a house with public services such
as running water and electricity is around $200 a month. 
For the most part, Maquiladoras are unorganized. In those that are organized,
state-controlled unions represent the workers. Although some companies are unionized on
paper, the unions, for the most part, function to reinforce management policies rather
than for the benefit of workers. Then there are what are called "phantom" unions. These
unions do not fight for the worker's rights. The workers do not even know them and have
never seen their union leaders. When a conflict arises in a factory, management informs
the worker that their unions have accept these or those conditions. Not only are they not
protected by existing unions, those that attempt to unionize and are often threatened or
bribed by plant managers and the government.
In many companies, discrimination against and harassment of the female employees is very
common. Female job applicants are required to produce urine samples to be used for
pregnancy test, while some have company doctors and nurses examine the applicants or ask
confidential information concerning their contraceptive practices. This is done because
pregnant women are refused employment. Sexual harassment is often the rule rather than
the exception. Rapes occur frequently and few are reported because women fear being fired
or blacklisted. Shame and humiliation also keep them quiet. In Mexico, men and women are
equal before the law, but the law does not recognize discrimination as a problem to be
solved.
The Pollution Brought on by the Maquiladoras
The increased pollution, accompanied by the dumping of tons of hazardous wastes, poses a
serious health threat to the residents of Mexico as well as the resident of the bordering
US states. There are several canals that are "black" with chemical wastes that have been
measured at levels that greatly exceed permissible standards. One factory was caught
dumping drums of paint, solvents, and shellac into a drain. In other areas there are
abandoned lead smelters and air full of soot and dust from brick-making ovens and
smoldering tire dumps. 
Main Advantages for the United States' Companies
For the United States companies this was a great advantage since Maquiladoras operates at
very low costs in places where the currency is weaker than the dollar-such as Mexico. The
less a currency is worth, the more relative value the dollar has. Since Mexico's peso is
relatively week, companies can trade their dollars for pesos with which they pay workers
and expenses. The products they manufacture, however, are sold for dollars, increasing
their profits by huge margins whenever the local currency falls. They could enhance
competitiveness, reduce their costs, and maintain quality by placing their
labor-intensive operations in the less developed Mexico, benefiting from the lower wage
rates there. 
For many US companies, manufacturing in Mexico has become necessary to battle overseas
competition. Since many manufacturers are moving to "just-in-time" inventory systems, the
quick delivery possible from Mexico's border towns offers a substantial advantage over
Asian alternatives.
The NAFTA's Impact on the Maquiladora Industry
Traditionally, Maquiladoras offered foreign businesses several advantages over other
forms of direct foreign investment. Since the signing of NAFTA, however, many of these
advantages are either being phased-out or granted to all Mexican companies. The most
significant advantages of operating as a Maquiladoras include: 100% foreign investment,
operation without ownership of assets, tax sheltering of cost centers, and 100%
duty-drawback or waivers for temporary imports. Furthermore, the NAFTA attempted to
address the labor exploitation and environmental problems associated with the Maquiladora
industry.
100% Foreign Investment
One of the benefits of the Maquiladora program is 100% foreign investment of Mexican
operations, which formerly was not allowed. However, Mexico's Foreign Investment Law has
changed through the years (most significantly in 1989 and 1994)-full investment is now
allowed in most business ventures.
Operation Without Ownership of Assets
Another advantage that Maquiladoras have is that they can receive production materials
and capital goods as loans from their parent and client companies. As a result, most
Maquiladoras have little of no inventory of fixed assets, eliminating the need to pay the
Mexican asset tax of 2% of all assets. In January 1995, the Mexican IRS reported that
Maquiladoras would now have to factor the depreciation of "loaned" assets in
price-transfer calculations, which is the first step toward phasing-out this advantage by
2001.
Tax Sheltering of Cost Centers
When Maquiladoras are structured as cost center (providing manufacturing services for a
foreign parent) the foreign corporation has traditionally paid the Mexican company for
operating costs plus negligible profit. By doing this they avoid Mexico's 34% corporate
income tax, 10% mandatory profit sharing, and asset taxes. Now the Mexican IRS is
changing the way Maquiladoras must declare assets. Over the next few years, Maquiladoras
will be forced to raise their declared profit percentage to a rate that is comparable to
that of two unrelated companies performing the same transaction at "arm's length". This
is the type of transfer pricing procedure that is implemented by most trading blocks,
like the EC. It will soon be effect throughout North America.
100% Duty-Drawback or Waivers for Temporary Imports
Maquiladoras have always allowed Mexican companies 100% duty drawback or waivers in
imported components that are exported as final goods. Since 1994, this has provided many
Maquiladora programs a way to use non-NAFTA materials within products without the need to
pay the corresponding duties over those materials when importing or exporting goods to
other NAFTA nations. On January 1, 2001, Maquiladoras that manufacture goods for export
to NAFTA partner countries will no longer be allowed to take the waiver. The waiver will
still be available for goods that are going to non-NAFTA countries.
The NAFTA and Labor Exploitation
In 1995 the NAFTA's of Labor created the National Administrative Office (NAO) as well as
the North American Agreement on Labor Cooperation (NAALC). Both were intended to stop
labor abuses. The NOA was established to monitor labor complaints that NAFTA critic's
voice regarding unfair labor practices. The NAO can recommend "ministerial consultations"
as well as imposed heavy sanctions against Mexico. Unfortunately, the side agreements
proved useless. The NOA cannot force Maquiladoras to allow unions-the most they can do is
recommend "ministerial consultations." Sexual harassment and discrimination continues as
well. 
The NAFTA and the Environment
The NAFTA has also created side agreements covering the environment. One of them is the
North American Development Bank (NAD Bank). Its purpose was to finance wastewater
treatment projects along the border in the poorer communities. However, the most
important criteria that needed to be met in order to receive funds were meeting certain
market considerations. With this program NAFTA "encouraged" growth without regard for the
environment through its practice of placing market consideration above environmental
protection. Another is the Commission for Economic Cooperation (CEC). The CEC was
established to investigate governmental non-enforcement of environmental laws.
Unfortunately it has no power to enforce ,they can only investigate-and they can't even
do that until Mexico collects the data on the pollution for them.
Possible Strategy for the Maquiladora Industry
As long as the Mexican currency is weaker than the US dollar I don't think that the
changes are going to dramatically effect the flow of US companies to the south. However,
the Maquiladora industry cannot count on this for continued growth. By the year 2001 the
Maquiladora industry as we know it now will have significantly changed when the phasing
out is complete. Maquiladoras will no longer be "tax break" establishments; they will be
just like other foreign investments. In order for them to fully compete in the near
future they must become more efficient and leaner. The impact of globalization is forcing
manufacturers to produce more rapidly and cheaply than ever before and to continuously
improve. Because there will be no differentiation between the non-Maquiladora and
Maquiladora industries I feel the inefficient producers will be wiped out. Therefor,
Maquiladora employees will need better training, education, incentives as well improved
working conditions and higher wages. Operations will also have to be streamlined in order
to reap the benefits of economies of scale and scope.
In addition, Mexicans as well as US citizens will start to demand more accountability
from the Mexican government and the Maquiladora industry. They need to be more
responsible for their actions. What will the U.S. corporations do when human rights
activists and environmentalists start lobbying and protesting on their US sites? Do they
want to risk losing their shareholders to this type of negative attention?
Bibliography
Benitez, Gerardo, Latin American Perspectives: The Maquiladora Program Its Challenges
Ahead, THE WHARTON JOURNAL, December 11, 1995.
Clifford, Frank and Mary Beth Sheridan, Borderline Efforts on Pollution, THE LOS ANGELES
TIMES, June 30, 1997, 1.
Naumann, Ann K. and Mireille Hutchinson, The Integration of Women into the Mexican Labor
Force Since NAFTA THE AMERICAN BEHAVIORAL SCIENTIST, June/July 1997, 950-956.