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What is a Maquiladora?

admin | 28.10.2011

Spanish pronunciation: [makiladora]) or maquila (IPA: [maˈkila])

Maquiladora is a concept often referred to as a manufacturing operation producing or assembling goods in a country that is not the client's and as such has preferential duty or tariff treatment. This process normally requires a factory that may import materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then "re-export" the assembled or manufactured product, sometimes back to the originating country. A maquila is also referred to as a "twin plant", or "in-bond" industry. The primary examples of this sort of operation occur in Mexico and to a lesser degree parts of Latin America, but also occurs in other countries in the world that have adequate legislation. Currently about 1.8 million Mexicans are employed by maquiladoras. The term maquiladora, in the Spanish language, refers to the practice of millers charging a maquila, or "miller's portion" for processing other people's grain.

History

In 1964, the United States ended the Bracero Program, which had previously allowed Mexican agricultural workers to work legally in the US on a seasonal basis. Less than a year after the Bracero Program was closed down, the Mexican Government created the Border Industrialization Program (BIP) or what is known today as the Maquiladora Program. The Maquiladora Program was created to solve the problem of rising unemployment along the border as a result of the Bracero Program being terminated. The maquiladoras soon became attractive to US manufacturer primarily due to the availability of inexpensive labor, subsequent peso devaluations and favorable changes in US Customs laws. The North American Free Trade Agreement (NAFTA) was signed in 1994 and it launched even more maquiladora operations. To further illustrate NAFTA’s impact on the Maquiladora industry and Mexican workers one only needs to analyze annual employment figures. Maquila employment during the five years prior to NAFTA, had grown at the rate of 47% and this figure increased to 86% during the five years after NAFTA was passed. By 2001, the number of maquiladora factories grew from approximately 2700 to about 3700. During the 1970s, most maquiladora operations were located along the US / Mexico border. By 1994, maquiladora operations began an inward migration into Mexico’s interior. The maquiladora industry suffered setbacks during the Post 911 recession but by 2004 had recovered and constituted 54% of all US-Mexico trade, and by 2005, maquiladora exports accounted for half of all exports from Mexico. The industry has become a critical source of FDI and foreign exchange for Mexico. In recent history, the maquila industry has faced intense competition from China, India, Malaysia, and Pakistan with the greatest threat coming from China's Special Economic Areas. As labor costs have risen in many of these developing countries along with the costs of shipping goods, some manufacturers have begun returning to Mexico to take advantage of its proximity to the North American market.

Wages and Benefits

In Mexico, there are three different minimum wage structures, depending upon which part of the country a company is operating in. According to the Secretaria Administracion Tributaria (SAT and formerly known as HACIENDA (Mexico’s version of the Internal Revenue Service)), the minimum wage for the border region is considered the highest at 59.82 pesos per day. However, very few maquiladora operations can realistically hire employees at the official minimum wage. The average starting wage for most maquiladora workers is 125 pesos per day. Workers who stay for more than 3 months typically are able to get a significant increase. Mexico has a 48 hour work week, with employees receiving a full day of pay on Sunday. Additionally, Mexico has a socialized medical system which every employer must pay into, social security, severance pay, paid holidays, mandatory bonuses and child care. Maquiladora operations with more than 150 employees are required to keep a doctor on staff in addition to employees legal access to the public medical system. The fully loaded wage rate for a new unskilled laborer working in a maquiladora can range widely depending upon the industry. At present, taking into consideration all cash and non cash fringe benefits, the fully burdened wage is considered to be about $2.30 an hour.

Customs and Preferential Duty Treatment

One of the primary benefits of Mexico’s Maquiladora Program is that all raw materials, parts and machinery are imported into Mexico on a temporary basis duty free for up to 18 months. This can be renewed indefinitely for machinery. Raw materials and parts must leave the country as finished goods on a first-in first-out basis over the 18 month period. If a Maquiladora wishes to import a North American Free Trade Agreement (NAFTA) good into the country on a permanent basis, it may do so with no duty but the company is required to pay the Mexican VAT rate of 10% on the value of the good.

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