Mexico: Maquiladoras and foreign investment

   The North American Free Trade Agreement 20 years ago ushered in a new era of interplay between nations and multinational corporations that continues to impact cross-border commerce.  
   The agreement helped contract manufacturing flourish in Mexico, as multinational companies used the country to lower production costs while simultaneously satisfying the voracious consumer demand for its northern neighbors.
   While contract manufacturing is a global strategy independent of NAFTA, the agreement solidified Mexico’s position as a strategic manufacturing center for North America. During the years immediately following NAFTA, 21 countries had interests in Mexican free trade zones, called maquiladoras, with the United States stimulating most of their business by investing in 1,656 plants. By 1995 Japan had invested in 56 maquiladoras near the Mexico-U.S. border, and Korea had invested in 29, according to Solunet, a database for the maquila industry, with most of that activity taking place in Baja California. 
   Much of the investment in maquiladoras was driven by U.S. subsidiaries of large Japanese and Korean companies in response to rising labor costs in Asia and the simultaneous devaluation of the peso, according to the U.S. International Trade Commission. Boston Consulting projects labor costs in Mexico this year will be 15 percent lower than in China after being 58 percent more expensive in 2000.
   A classic maquiladora scenario involves a U.S. manufacturer buying U.S.-origin components and sending them to a subsidiary company that rests on the Mexican-side of the border for assembly. When the finished product is shipped back to the United States for sale, duty is not paid on the value of the components that comprise the finished good. 
   This practice was actually more prevalent prior to NAFTA. Today, maquiladoras have matured into more complex types of production and become more deeply integrated in global supply chain management.
   As foreign capital flowed into Mexico, these manufacturing zones have moved up the value chain into services and intellectual property creation. Auto parts manufacturer Delphi, for instance, has a technical center in Juarez working on design, development and research projects. 
   NAFTA put the maquiladora concept into overdrive. Now, Mexico’s manufacturing sector is riding high on three factors: shrinking labor cost differential to China; a short supply chain to the United States and Canada; and liberal trade policies. 
   Thus, Mexico has been and remains a hotbed for contract manufacturing and, accordingly, a significant trade partner of the United States and Canada, its top and No. 2 export markets, respectively. 
   But who won, and who lost? Did Mexico’s economy reap the benefits as promised?
   Trying to keep score is fruitless because many of the benefits are just starting to be realized. NAFTA drove trade liberalization in Mexico, and the country is now experiencing meaningful increases in trade with non-NAFTA partners. NAFTA was a first step towards this maturity and diversification.
   Mexico now has 12 free trade agreements that extend outside Latin America, into Europe and Asia, making it one of the most globalized countries in the world. Increasing trade liberalization with other countries is steadily reducing its reliance on the United States as an export market, which is generally advantageous.
   Furthermore, while NAFTA did not itself create maquiladoras, it did stimulate a demand for them and subsequently solidified the framework necessary to scale them. Mexico’s policymakers now have an enormous amount of practical experience in developing free trade agreements. 
NAFTA, in other words, led to trade liberalization becoming an independent policy agenda for Mexico’s lawmakers, which in turn led to better trade policy for other industries, not just those taking place in the maquiladoras.
   While NAFTA’s impact on Mexico’s economy may have been more muted than proponents argued in an effort to get it enacted, it’s wrong to ignore its longer-term impact in Mexico’s advancement as a global actor.
   Mexico’s post-NAFTA free trade agreements have varied in scope. The Mexico-EU Free Trade Agreement seeks to open up opportunities with demand-based markets. Other agreements with nations like Chile, Uruguay, and those in the Northern Triangle seek to strengthen trade linkages within the region. Agreements with Japan and Israel benefit a narrower portion of Mexico’s overall economy. And, though it has not yet been ratified, the Trans-Pacific Partnership would further liberalize trade between Mexico, Canada, the United States, and nations of the Pacific Rim, with the notable exclusion of China. 
   The proliferation of trade agreements, however, also complicates trade compliance because of differing rules of origin to determine which products are eligible for preferred duty rates. There are no standards for these rules; one study looked at more than half of the free trade agreements ratified by Mexico, Chile, and Peru and determined that only 40 percent of the products traded as a result of those agreements were governed by the same rules of origin. 
   As this trend continues, companies that profit from the trade agreements face a honeycomb of compliance requirements. The difficulty for multinationals is consolidating them. While business wants easy, straightforward trade regulations, this is difficult to achieve from a diplomatic perspective.
   As free trade agreements increase in number and scope, compliance has become more challenging, and multinationals need carefully crafted supply chain structures, processes, and automation to ensure compliance. These are necessary costs of doing business globally.
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This analysis was published in the June 2015 issue of American Shipper.