NAFTA AND THE MAQUILADORAS: BOON OR BANE?

1. INTRODUCTION In recent years, the effect of the North American Free Trade Agreement (NAFTA), implemented in 1994, on the Mexican maquiladora industries has been a subject of continuing controversy. Accordingly, a primary purpose of this study was to examine the nature of the NAFTA impact, if any, on the maquiladora value added at both the aggregate and the industry level where suitable data are available. While certain provisions of the NAFTA were potentially favorable to the maquiladoras in the early years of the agreement, other aspects of the pact revoked some of the special status given to those firms. The goal of NAFTA with respect to the maquiladoras appeared to be to integrate them more fully into the domestic (Mexican) economy while further opening Mexico to international trade with the United States and Canada. The Mexican maquiladora or production sharing program was begun in 1965 under the Border Industrialization Program, developed after the United States ended the Bracero program. The maquiladora industry as a whole has grown from nearly 76,000 employees in 1974 to almost 1.3 million in 2000. (1) In the year 2000, annual output of the maquiladoras in current prices was about 751.6 billion pesos. This total price consisted of approximately 583.7 billion pesos worth of imported (to Mexico) intermediate goods; 63.9 billion pesos of domestic intermediate goods; and 85.2 billion pesos in salaries, wages, and benefits to employees. (The remaining 18.8 billion pesos was profit.) The contribution of foreign exchange from the maquiladora operations for the year 2000 was about 168 billion pesos. To put these data in perspective, we note that the value added by the maquiladoras was about 3% of total gross domestic product (GDP) for Mexico, and payments to maquiladora employees were about 5.2% of the total national figure. In addition, the maquiladoras accounted for about 4% of national employment. The year 2000 maquiladora foreign exchange earnings of 167.9 billion pesos stands in contrast to an overall balance of trade deficit of 167.8 billion pesos for Mexico. (2) Thus, the maquiladoras are clearly an important source of employment and earnings and a critical generator of foreign exchange for Mexico. The advent of the NAFTA in 1994 changed the business environment for the maquiladoras. While some provisions of the NAFTA promoted a more favorable climate, other facets of the agreement as well as a tax law change worked to remove over time some special provisions that the maquilas have historically enjoyed. In their earlier article, Truett and Truett (1993) examined the factors affecting maquiladora output in the pre-NAFTA era. The purpose of this article was to attempt to determine the net effect, if any, of NAFTA on the real output, excluding imported intermediate goods, of the maquiladoras between 1994 and 2001 and to once again investigate the factors that do appear to affect industry production. NAFTA Article 303 eliminated duty-free imports into Mexico from countries that cannot meet NAFTA rules of origin (50% or more of North American content). Before NAFTA, component parts from countries like Japan or Singapore could enter the United States inbond to be shipped along with other U.S. parts for assembly in Mexico. They could enter Mexico duty-free, with duty being assessed only on the value of the finished product as it reentered the United States. Before NAFTA, the duty would be assessed at the Most Favored Nation rate on the value of the non-U.S. parts. After NAFTA and during the transition period between 1994 and 2001, the U.S. duty charged would be at the NAFTA duty rate for components that satisfied the rules of origin requirements, and Mexico continued to let the parts enter duty-free. However, after January 2001, Mexico could charge a duty on the nondomestic parts as they were imported, resulting in a double duty being paid on some components. Nevertheless, NAFTA does allow Mexico to refund to the maquiladora firm the smaller of the duty paid to the United States or Mexico (Shoesmith, 1994, p. …