Source: http://www.dol.gov/ilab/media/reports/nao/maquilad.htm
Timestamp: 2013-05-23 23:03:56
Document Index: 788341257

Matched Legal Cases: ['art. 89', 'art. 7', 'art. 19', 'art. 20', 'art. 364', 'art. 445', 'art. 161']

ILAB - An Overview of the Maquiladora Program
by Gerard Morales Benjamin Aguilera David K. Armstrong
Gerard Morales is a partner with the law firm of Snell & Wilmer. Benjamin Aguilera and David K. Armstrong are associates with Snell & Wilmer. Snell & Wilmer has offices in Phoenix and Tucson, Arizona, Orange County, California and Salt Lake City, Utah.
AN OVERVIEW OF THE MAQUILADORA PROGRAM
I. Introduction A. Maquila Operations	B. The Maquiladora Concept and its Privileged Status II. Advantages of Maquiladoras	III. The Maquila Program - Governmental Approval	IV. Types of Maquiladoras	A. Maquiladora only or Sub-contract	B. Shelter Operations	C. Sub-Maquila	V. Sales of Maquiladora Products in Mexico	A. Requirements	B. Importation Duties	C. Quality Control	D. PITEX Program	VI. Real Estate	A. Use of Real Estate in the Restricted Zone	VII. Labor Relations	A. Minimum Wages	B. Profit-Sharing	C. Work Hours and Overtime	D. Fringe Benefits	E. Legal Holidays and Vacation	F. Labor Unions	G. Confidential Employees	H. Termination of Employment	I. Restrictions in the Employment of Non-residents	J. Taxation of Non-resident Employees	VIII. Tax System	A. Income Tax	B. Tax on Royalties, Trademarks and Patents	IX. Environmental Regulations	X. U.S. Customs Regulations and Tariffs Applicable to Maquiladora's Products	A. Item 9801.0010	B. Item 9802.0040	C. Item 9802.0060	D. Item 9802.0080	E. The Generalized System of Preferences	XI. Mexican Customs Regulations Applicable to the Maquila Program A. Importation of Goods and Equipment	B. Guarantee of Import Duties	XII. Other Customs Issues	XIII. Agreements Between Maquiladoras and Clients	XIV. Termination of a Maquila Program	XV. Nafta's Impact On The Maquiladora Program	XVI. Conclusion	AN OVERVIEW OF THE MAQUILADORA PROGRAM
I.	INTRODUCTION A.	Maquila Operations Maquila operations involve the importation of foreign merchandise into Mexico on a
temporary basis, where it is assembled, manufactured or repaired and then exported, either to the
country of origin or to a third country.(1)
Mexico is a prime location for U.S. assembly activities abroad due to lower wages, utilities
and overhead and the proximity to the U.S. Transportation costs from practically any location in
continental U.S. to the Mexican border are lower than to almost any point overseas. As a result
of those incentives to U.S. investment, the maquila industry, Mexico's second largest industry,
is today an integral part of Mexico's economic structure.
As of June 1994, 2032 maquila plants employing in excess of 468,000 workers were
operating in Mexico. The great majority of them are U.S. owned.(2)
B.	The Maquiladora Concept and its Privileged Status Legally, the Maquiladora program is a creature of the Mexican Executive branch of
government pursuant to the powers granted to that branch under article 89(1) of the Political
Constitution of the United Mexican States.(3) Originally, a company organized under the
Maquiladora Program was the only type of company expressly authorized to have one hundred
percent foreign ownership without prior authorization.(4)
The rather privileged position which maquila operations occupy under the Mexican legal
system has been justified on the basis of the need to promote foreign investment as well as on the
essential nature of those operations. Foreign investment is viewed by the Mexican Government
as a way to transfer technology to Mexico, to upgrade workers' skills and to increase demand for
Mexican goods.(5) Furthermore, since, ordinarily, maquiladoras are required to export most of
their production(6), they do not constitute recognizable competition for entities dependent upon the
Mexican domestic market.
Mexico's determination to continue favoring the maquila industry is demonstrated by the
new Maquiladora Decree promulgated in December, 1989 (the "1989 Maquiladora Decree"). This
new decree is designed to further promote this industry by liberalizing previous regulations
applicable to the industry.
Maquila operations are a consequence of the international economy. The industrial
processes, know-how, tools and labor of various countries are combined in the manufacture and
assemblage of products, thus increasing efficiency and lowering production costs. Some writers
have described this process as a "global mandate" that unskilled assembly be performed in low
wage areas, while more skilled tasks are completed in developed countries where there is an
abundance of trained technicians.(7)
However, an analysis of the Maquiladora industry without considering the impact of the
North American Free Trade Agreement ("NAFTA"), entered into by the United States, Canada,
and Mexico effective January 1, 1994, would be incomplete.
Under NAFTA, tariffs, as well as the restriction on maquilas to sell in the internal market,
will be phased out gradually. Foreign corporations with manufacturing facilities in Mexico under
the Maquiladora Program will be ahead in getting their products to the expanded North American
consumer market and, moreover, will have already experienced the Mexican market and the way
II.	ADVANTAGES OF MAQUILADORAS The following are some of the basic advantages that maquila operations provide to
investors from industrialized nations:
1.	Important savings in operational costs may be derived from the relatively low labor,
utilities and overhead costs in Mexico;
2.	Maquiladoras may import temporarily into Mexico raw materials, components, and
products necessary to fulfill its maquila program duty free, even if those materials, components
and products could be obtained in Mexico;
3.	Maquiladoras, in 1994, may sell up to 55% of their "increased production" in the
Mexican market (restriction on Maquiladora sales in the Mexican market will be phased out over
seven years; by January 1, 2001, all Maquiladora production may be sold in Mexico);
4.	Products exported by Maquiladoras are not included in the foreign currency
controlled market; and
5.	Maquiladoras qualify for preferred treatment under the Reciprocal Credit Payments
Agreement between central banks in Latin America (Convenio de Pagos de Creditos Reciprocos). Accordingly, maquila operations provide a vehicle through which easy and ready access to other
Latin American markets may be obtained.
III.	THE MAQUILA PROGRAM - GOVERNMENTAL APPROVAL The 1989 Maquiladora Decree implemented a simplified system to establish and administer
a Maquila program. The new system decentralizes the application process and allows regional
offices to now handle every aspect of the program. In addition, the 1989 Decree eliminates the
previous burdensome requirement to renew the maquiladora permit every two years. The 1989 Decree instituted a new procedure for "single or exclusive office" processing to
expedite the multiple steps a company must undertake to obtain authorization to operate as a
maquiladora. A simplified customs procedure is also now available.
Under the new system, the Mexican Ministry of Commerce and Industrial Development
(SECOFI) has created a single or exclusive office ("ventanilla unica") wherein applicants can make
a coordinated filing to obtain the different ID numbers and registrations necessary to operate under
the Maquila Program. Upon application for a maquila license, the SECOFI will coordinate with
other Mexican governmental agencies to provide for the maquila enterprise the following: -- Maquila license and import permits;
-- ID number in the National Registry of the Maquila Registry; -- ID number in the Federal Taxpayer Registry; -- Registration in the Foreign Investment Registry; -- Registration at the Mexican Ministry of Foreign Relations; -- Registration at the Mexican Housing Institute (INFONAVIT). There are, however, other registration requirements a maquila enterprise must procure by itself
(i.e., incorporation documents, ID number from the Mexican Social Security Institute (IMSS),
among others.) All second tier documents are obtained once the SECOFI has issued the Maquila
After approval is obtained, a maquiladora may begin to temporarily import into Mexico
items which are essential or desirable for its operations, even though some or all such items may
be available in Mexico.(8)
IV.	TYPES OF MAQUILADORAS The activities performed by maquiladoras have been traditionally carried out under three
A.	Maquiladora only or Sub-contract Under this type of arrangement, the maquiladora provides manufacturing services and
technical supervision. Accordingly, the maquiladora assumes liability for the quality and
efficiency of the production. Maquiladoras under this type of arrangement charge fees on the basis
of the quantity of products processed. Their ownership may be Mexican, foreign or mixed.
B.	Shelter Operations Under the Shelter Operations arrangement, the maquiladora provides manufacturing,
assemblage or repair services on a contract basis as well as the equipment and tools necessary for
those services. However, the foreign entity owns the technology, and consequently, is responsible
for the industrial processes and for the quality and quantity of production. This is accomplished
through on-site technicians appointed by the foreign entity. The maquiladoras charge fees on the
basis of the amount of time applied in the manufacturing, assemblage or repair process. Their
ownership may also be Mexican, foreign or mixed.
C.	Sub-Maquila With the exception of those maquiladoras involved with textiles, maquiladoras may sub-contract their operations to other maquiladoras or to companies without a maquila program,
provided that (a) the authorization of the Ministry is obtained, and (b) the maquiladora actually
finishes the production process.
V. SALES OF MAQUILADORA PRODUCTS IN MEXICO A. Requirements The 1989 Maquiladora Decree introduced a new approach to the sale of Maquila products
in Mexico. Under the old program, the Ministry could authorize the maquiladora to sell in
Mexico part of its production provided: (1) Mexican industry does not produce the product and
it is currently imported into Mexico; (2) there are no government incentives which encourage
Mexican production of the products; (3) the product contains at least 20% Mexican input, such
as labor, materials, utilities and depreciation; and (4) import permits have been obtained and any
import duties have been paid for any non-Mexican components in the product.(9) The 1989
Maquiladora Decree rejects these criteria. Under the 1989 Maquiladora Decree, a Maquila
enterprise must still obtain a permit from SECOFI before it can sell its products in Mexico.(10) However, the percentage of sales has been increased in 1994, from twenty percent (20%), to fifty-five percent (55%), of the value of the previous year's export sales. The 1989 Maquiladora
Decree continues to impose the condition that the Maquila not reduce the amount of exports by
the sales to the domestic market.(11) Thus, a maquiladora enterprise that produced one thousand
units for export the previous year must produce one thousand five hundred and fifty units the
current year in order to sell five hundred and fifty units on the domestic market. A second
requirement to sell products in the domestic market is that the Maquila enterprise must maintain
a positive balance of foreign currency.(12) The 1989 Maquiladora Decree defines the balanced
foreign currency account as the positive difference between foreign currency earned from export
sales and foreign currency expended for the importation of the components to be incorporated into
the products to be sold in Mexico.(13)
B.	Importation Duties Importation duties are determined based on the value of the foreign content of the final
products, in accordance with the tariffs schedules. The maquiladora, however, may elect to pay
the importation duty based solely on the tariff applicable to the foreign components, provided the
Mexican contents of the final product is at least 2% during the first year, 3% during the second
year, and 4% thereafter.
C.	Quality Control A maquiladora must essentially apply the same quality control to the products to be sold
in Mexico as it applies to the products designated for exportation. The Ministry conducts periodic
reviews and audits to determine compliance with the specific requirements applicable to the
D.	PITEX Program (Off-Spring of Maquila)
Companies which market the majority of their products to the Mexican domestic market
may want to consider the PITEX program as an alternative to a Maquiladora operation. PITEX
is one of the successful offshoot programs born out of the Maquila experience. The PITEX
program was developed to offer some of the same duty-free benefits enjoyed by Maquila
operations to other Mexican companies which sell most of their products on the domestic Mexican
On May 3, 1990, the president of Mexico enacted the "Decree Establishing Temporary
Import Programs to Produce Export Articles" ("PITEX"). The purpose of PITEX is to promote
exports of non-petroleum products, vertical integration, and sales of export quality products in the
Mexican domestic market. A company seeking to work under PITEX must obtain authorization
from the Ministry of Commerce and Industrial Development (SECOFI).
A company working under PITEX may temporarily import duty-free raw materials and
parts, packaging and containers, and fuels and other complementary products to be incorporated
into export products if annual sales abroad amount to at least a half-million dollars or invoice
exports are at least 10 percent of total sales. The company can sell the other 90 percent of
production in the Mexican domestic market with duty-free components without special
authorization from Mexican authorities. In addition, exporters that annually export at least 30
percent of total sales may obtain authorization to temporarily import machinery and equipment and
computers, anti-pollution equipment and research equipment, among others, in connection with
the production of export products. Under this option, there is access to Mexico's domestic market
for up to 70 percent of the products manufactured. However, under both options the exporter
must maintain a positive foreign currency balance with respect to its program. It is anticipated
that the PITEX Program will continue to expand as an alternative to the Maquiladora program for
those companies more heavily involved in selling to the Mexican domestic market. VI.	REAL ESTATE A.	Use of Real Estate in the Restricted Zone The Mexican Constitution forbids the ownership of real estate located within 100
kilometers (62 miles) of the border and 50 kilometers (31 miles) along the seashore (the
"Restricted Zone") by foreigners or by Mexican corporations with foreign participation. Foreigners can however control and use Mexican real property within the Restricted Zone through
the use of a Fideicomiso or Mexican bank trust.
Under a Fideicomiso arrangement, the Foreigner is named as beneficiary of a trust which
holds title to the real property. A Mexican banking institution acts as Trustee. The Foreigner
retains the right to control, use, rent, or sell the property just as if actual fee ownership were held. Prior to 1989 the term of a fideicomiso was 30 years. Under current law, the term is 50 years and
the term may be automatically renewed upon expiration for an additional 50 year term.
Also, current legislation allows Mexican corporations to directly own property in the
Restricted Zone even if such corporations were owned 100% by Foreigners. This is a radical
change to prior law and opens the door for increased foreign investment in Mexico.
VII. LABOR RELATIONS A.	Minimum Wages
Labor relations in maquiladora operations are regulated by the Mexican Federal Labor Law
(Ley Federal de Trabajo) (hereinafter the Labor Statute). Under the Labor Statute, a maquiladora
must at least pay to its employees the minimum wage determined by the Minimum Wage
Commission. As discussed below, they must also register their employees with and pay required
contributions to the Social Security and Housing Institutes.
B.	Profit-Sharing The Labor Statute imposes upon employers the obligation to distribute 10% of the annual
profits to the employees. However, under certain circumstances such distribution may be limited
to one month's pay. The amount distributed as profit-sharing is determined from what is termed the "profit
tax." From the profit tax, the corporation is allowed to make deductions for items such as losses
from prior years (carryforwards), and certain dividends.
Specific rules apply to the distribution of profits to the employees. Profits are distributed
pro rata among employees based upon two factors:
1.	The number of days worked during the year; and 2.	Their base salaries.
Profit sharing is not applicable to newly established concerns during their first year of
C.	Work Hours and Overtime The maximum work week is forty-eight hours. A 40-44 hour week is common practice,
particularly in office positions. Work days in excess of eight hours are also common.
Double time must be paid for the first nine hours of overtime each work-week and triple
pay if unusual circumstances require more than nine extra hours in any work-week. Triple pay
is also provided for work on the seven legal holidays. If a worker is required to work on Sunday,
he is entitled to a 25% bonus based on his regular salary. This applies even if the worker is given
a day off during the work-week. In addition to the above requirements, a Christmas bonus
equivalent to fifteen days wages must be paid before December 20th every year. D.	Fringe Benefits Mexican social security covers an employee's medical expenses, workman's compensation,
and age and disability pensions. The Mexican social security is administered by the Mexican
Institute of Social Security (IMSS). The cost of fringe benefit programs to the employer is
between 12-16% of wages. The Mexican government recently enacted substantial amendments to the Social Security
Law that took effect on July 21, 1993. In general, the amendments provide for (1) an increase in
contributions for the employers, employees and even the Mexican government; (2) an increase in
the base to which the contributions rates are applied; (3) an increase in the maximum salary for
contributions; (4) additional contributions for the retirement savings program; and (5)
simplification of the program's administration. Concurrent with the amendment to the Social
Security Law, the one percent tax federal tax that employers were required to pay on their payrolls
was abolished. According to the IMSS, the overall increase in contributions due to the amendment
is 1.5%, distributed as follows:
Employers	1.2%
Employees	0.25%
Federal government	0.05% In addition, employers pay the equivalent of 5% of wages into a low cost housing program
administered by Mexico's Housing Institute (INFONAVIT). Employers are also required to
provide transportation to and from work for employees when the plant is located outside the area
served by public transportation systems. E.	Legal Holidays and Vacation There are seven legal holidays which must be granted to employees: January 1st, February
5th, March 21st, May 1st, September 16th, November 20th, and December 25th. December 1st
is an obligatory holiday every six years for the inauguration of a new president. Commonly
observed religious holidays include the Thursday and Friday of Easter week, November 1st and
2nd, and December 12th. These and other holidays are ordinarily agreed to in collective-bargaining agreements.
Currently the law requires that six working days vacation be granted after the first year of
service. Two additional days vacation must be granted for each of the first three subsequent years,
and for every five years of service after the fourth year. A premium of 25% of the regular salary
must also be paid during the vacations.
F.	Labor Unions Mexico's Labor Statute permits labor unions to organize groups of employees for the
purpose of negotiating collective bargaining agreements with their employers. In order to
constitute a labor organization under Mexican law, a labor union must consist of at least 20
members, who are active employees of one or more employers. (14)
Mexican labor contracts ordinarily provide for benefits greater than the above-described
benefits required by statute. Collective bargaining agreements are subject to renegotiation every
two years. In the event of a strike by the employees, a Federal Labor Judge decides whether the
strike is permitted, in which case workers are entitled to their wages for the duration of the
strike.(15)
G.	Confidential Employees "Confidential employees" are those who exercise the functions of management,
supervision, inspection and auditing when these functions are of a "general nature." The term
"general nature" is not defined in the law. There is considerable flexibility in designating
employees as confidential. The importance of designating an employee as a confidential employee is that (1) the
employer is not required to reinstate confidential employees in the case of unjustified dismissals,
(2) they may not belong to a union, (3) the computation of their share in a company's profits is
subject to specific rules, and (4) they are not entitled to vote in strike decisions.
H.	Termination of Employment In order to terminate an employee, the employer must give the employee a statement of the
date of termination of employment, together with a reason therefor. There must be "reasonable
cause" for the termination. If an employee is discharged without "reasonable cause," the
employee can seek reinstatement to his position or three months wages plus indemnification
(normally six months wages plus twenty days severance pay for each additional year seniority). However, the applicable statute of limitations is extremely short.(16) Employees of more than
twenty years of service may prove to be very difficult to discharge because of special provisions
in the Labor Statute.(17)
It is important to note that Mexico's labor laws apply not only to maquiladora employees
who are Mexican citizens, but also to U.S. citizens employed by the maquiladoras in Mexico. In
this regard, the issue of the extraterritorial reach of Title VII of the Civil Rights Act of 1964 has
been the subject of litigation in recent years. Clearly, Title VII exempts from coverage aliens
employed outside of any State (� 702; 42 U.S.C. � 2000e-1). Until recently, U.S. citizens
employed outside the United States and its territories were out of Title VII's reach, even if they
are employed by U.S. employers. The Civil Rights Act of 1991 changed this. Section 109 of that
Act provides that U.S. citizens employed in foreign countries by American-owned or controlled
companies are covered by Title VII as well as by the Americans With Disabilities Act (ADA). There is an exemption if compliance with Title VII or ADA would cause the company to violate
the law of the foreign country in which it is located.(18) I.	Restrictions in the Employment of Non-residents Mexican law requires that 90% of the employees of a Maquila be Mexican citizens. Executives are generally excluded from the calculation of this percentage. The immigration of
foreigners for managerial or other positions is usually permitted only if qualified Mexicans are not
available. A maquiladora may hire non-Mexican personnel required for its Mexican operations,
provided that such personnel do not exceed 10% of its employees. Three kinds of permits may
be obtained for non-Mexican personnel: 1.	Business Visa. This visa may be obtained for representatives of the client
who will not provide "direct" services to the maquiladora.
2.	Technical Visitor Visa. This visa may be obtained for technicians who will
perform specific types of work for the maquiladora on a temporary basis.
3.	Non-Immigrant Visa. This visa may be obtained for persons who will work
at the maquiladora on a permanent basis. J.	Taxation of Non-resident Employees The Mexican Ministry of Finance and Public Finance (SHCP) recently released
private ruling No. 325-A-I-4148, dated March 3, 1993, which provides guidance regarding
taxation of non-resident employees paid by a foreign employer but rendering their services to
maquiladora enterprises in Mexico for 183 days or more ("Non-resident employees").
In general, the ruling is favorable to Non-resident employees and their employers. First,
there is an express exemption from Mexican tax for managerial, administrative, and executive
personnel. However, production and quality control personnel are expressly excluded from this
benefit. Second, under the ruling, the employee is entitled to a credit against his or her Mexican
income tax for U.S. income taxes paid on the income. Third, the ruling eliminates taxation of
vacation pay to non-resident employees. Fourth, the ruling increases the ceiling for payments to
non-resident employees subject to a 15% rate. And fifth, the ruling establishes procedural rules
for the payment of the tax and the computation of the 183-day threshold.
According to the ruling, the tax is calculated as follows:
*	The first NP $32,000 (approx. U.S. $10,000) is tax exempt;
*	On the amount in excess of NP $32,000 up to NP $288,000 (approx. U.S.
$90,000), the tax is 15%;
*	On any amount in excess of NP $288,000, the tax is 30%.
Also according to the ruling, the three options for paying the tax are as follows:
*	Withholding of the tax by the foreign employer. The foreign employer remits the
tax to the Mexican tax authorities through a foreign branch of a Mexican bank
authorized to accept deposits of Mexican taxes;
tax to the Mexican maquiladora. The maquiladora in turn remits the tax to the
Mexican tax authorities through a Mexican bank;
*	Payment of the tax directly by the employee to the Mexican tax authorities through
deposit with a Mexican bank.
It is important to note that the ruling states that to avoid indexation and interest up to the
date of payment, the tax must be paid to the Mexican tax authorities from the date the non-resident
employee receives his or her first payment for the services rendered in Mexico, regardless of
whether the 183-day test will be met or not. If the 183-day test is not met, the maquiladora can
request a refund of the tax paid on behalf of the non-resident employee. VIII.	TAX SYSTEM A.	Income Tax
Maquiladoras must pay income tax on their profits at a rate of 34% (recently reduced from
35%). Maquiladoras, like other entities, must make estimated tax payments on a monthly basis. Such taxes may be creditable against taxes payable in the U.S. or other countries.
B.	Tax on Royalties Trademarks and Patents Royalties paid to foreigners for transfer of technology are taxable at the rate of 15%, which
is withheld by the maquiladora. Trademarks and patents are subject to 30% withholding tax. The maquiladoras are also subject to the Value Added Tax Statute. This Statute, however,
exempts from taxation maquiladoras' exports.
IX.	ENVIRONMENTAL REGULATIONS Under Mexico's Environmental Law, the Ministry of Social Development (SEDESOL)
shall grant authorization (issue "environmental operating licenses") to build and operate industrial,
commercial and service plants only after due consideration of the environmental impact on the area
where the plant is to be located. It is important to note that "risk materials and risk residues" from raw materials imported
temporarily into Mexico must be returned to the country of origin within the terms determined by
the Ministry of Social Development (SEDESOL).
X.	U.S.CUSTOMS REGULATIONS AND TARIFFS APPLICABLE TO
MAQUILADORA'S PRODUCTS Maquiladoras' products enter the U.S., duty-free or paying duty only on the value added
to the products in Mexico. The conditions and requirements applicable to these imports are set
forth in the U.S. Customs Laws and Harmonized Tariff Schedule ("Tariff Schedule"). Chapter
98 of the Tariff Schedule sets forth four different situations whereby maquila operations acquire
the advantage of reduced duty or duty-free treatment for its products upon reentry into the U.S. These four situations are outlined below:
A.	Item 9801.0010: Articles Not Advanced or Improved Abroad: Duty-Free Item 9801.0010 of the Tariff Schedules of the United States provides:
Products of the United States when returned after having been exported, without having
been advanced in value or improved in condition by any process of manufacture or other
means while abroad may enter duty-free. (Emphasis added).
The importer must strictly comply with U.S. Customs regulations requiring documentation
of U.S. origin at time of entry as a condition precedent to qualification for duty-free entry for the
product component.(19)
Item 9801.0010 treatment does not apply to any article:
(a) exported with benefit of duty drawback (whereby duties are reduced or
refunded on goods that are exported and subsequently returned to the United States);
(b) of a kind with respect to the importation of which an internal-revenue tax is
imposed at the time such article is entered, unless such article was subject to an internal-revenue tax imposed upon production or importation at the time of its exportation from the
United States and it shall be proved that such tax was paid before exportation and was not
(c) manufactured or produced in the United States in a customs bonded warehouse
or under subheading 9813.00.05 - and exported under any provision of law.
B.	Item 9802.0040: Articles Imported for Repairs or Alterations: Duty on Value of
Repairs or Alterations Item 9802.0040 of the Tariff Schedules of the United States provides:
Articles returned to the United States after having been exported to be advanced in value
or improved in condition by any process of manufacture or other means requires duty only
upon the value of the repairs or alterations. (Emphasis added).
To be eligible for Item 9802.0040 treatment, the repair or alteration cannot result in the
creation of a new and different commercial article. For example, if processing in the foreign
country transforms or alters the article such that it differs in name, value, appearance, size, shape
and use from the article as originally exported, Item 9802.0040 treatment is not available.(20)
"Repairs" or "alterations" do not include intermediate processing operations which are
performed as a matter of course in the preparation or manufacture of finished articles.(21) C.	Item 9802.0060: Non-Precious Metal Articles Exported for Processing: Duty only
upon the value of such processing outside the United States Item 9802.0060 of the Tariff Schedules of the United States provides:
Any article of metal (as defined in U.S. Note 3(d) of this subchapter) manufactured in the
United States or subjected to a process of manufacture in the United States, if exported for
further processing, and if the exported article as processed outside the United States, or
the article which results from the processing outside the United States, is returned to the
United States for further processing requires a duty upon the value of such processing
outside the United States. (Emphasis added). For articles admitted under Item 9802.0060, two values are reported from which the rate
of duty is derived, as follows:
(a)	the total value of the article less the value of the foreign processing; and (b)	the dutiable value, i.e., value of the foreign processing. D.	Item 9802.0080: Articles Assembled Abroad with American Components: Duty on
Full Value of Article less the Cost or Value of the American Component Item 9802.0080 of the Tariff Schedules of the United States provides:
Articles assembled abroad in whole or in part of fabricated components, the product of the
United States, which (a) were exported in condition ready for assembly without further
fabrication, (b) have not lost their physical identity in such articles by change in form,
shape, or otherwise, and (c) have not been advanced in value or improved in condition
abroad except by being assembled and except by operations incidental to the assembly
process such as cleaning, lubricating, and painting requires a duty upon the full value of
the imported article, less the cost of value of such products of the United States. (Emphasis
For purposes of Item 9802.0080 "assembly" signifies the fitting or joining together of parts
themselves already finished, manufactured or fabricated components, but it does not include
manufacture, production or fabrication of essential parts to be used in the assembly process. So
long as the components are exported in a condition ready to assemble without further fabrication
and have not lost their "physical identity," the article will qualify for Item 9802.0080 treatment. The factors used to determine whether an article has lost its "physical identity" include the
emergence of a new article, having a distinctive name, character, or use which is different from
that originally processed before manufacture.
For example, cuff components and collarbands manufactured in the U.S. and assembled
into men's shirts in Mexico are entitled to duty allowance upon return to the U.S. Those
components do not lose their physical identity because such components are ready for assembly
without further "fabrication" and are not advanced in value except by operation incidental to
assembly.(22) However, the process of bending steel strips into a square side letter C form,
covering them with vinyl sheets and riveting them into the button plates of softside luggage
constitutes "fabrication" under Item 9802.0080.(23)
For an article admitted under Item 9802.0080, two values are reported from which the rate
(a)	the value of the U.S. fabricated components; and
(b)	the dutiable value, i.e., the total value of the articles less the value of the
U.S. fabricated components.
In fact, a large quantity of the products that qualify under this Item, consist of transfers
between related firms or semifinished products which have no observable market value. Those
products must, therefore, be given a "constructed value" as they pass through U.S. Customs,
which, in essence, consists of variable production costs, plus a mark-up for general expenses and
profit.(24)
E.	The Generalized System of Preferences In addition to the privileges which maquiladora products may enjoy under Chapter 98 of
the Tariff Schedules, many of those products may also enjoy duty-free treatment under the
Generalized System of Preferences (GSP). The GSP is a program adopted by 27 industrialized
nations, including the U.S., to encourage exports of developing countries, with the object of
stimulating their economics. Those developing countries that are allowed to export certain
products into the U.S. duty-free, are designated Beneficiary Developing Countries (BDCs) as
defined in Title V of the Trade Act of 1974, 19 U.S.C. � 2462. Products from particular BDC
countries must meet certain requirements to qualify as GSP-eligible.
With the removal in 1988 of Hong Kong, the Republic of Korea, Singapore and Taiwan
(the "four tigers") from the U.S. GSP program, Mexico became the largest beneficiary of the U.S.
GSP. The importance of BDC status was the subject of a recent decision of the Court of
International Trade. The Court held that products manufactured in a non-BDC could become
entitled to duty-free treatment if the direct cost of processing, performed in a BDC prior to
entering the U.S. equals at least thirty-five percent (35%) of the product's appraised value and the
product is imported directly from the BDC.(25) The impact of that decision on the U.S.-Mexico
trade, in general and on the maquiladora industry in particular, is both foreseeable and
XI.	MEXICAN CUSTOMS REGULATIONS APPLICABLE TO THE MAQUILA PROGRAM A.	Importation of Goods and Equipment Once the Mexican Ministry of Commerce and Industrial Development ("SECOFI") has
approved the operation of a subsidiary in Mexico of a foreign company under the maquiladora
program, the subsidiary may import on a temporary basis the following merchandise:
1.	Raw materials and auxiliary components, as well as containers, packing
materials, labels and brochures necessary for production;
2.	Tools, equipment, security and production fixtures, as well as work
manuals and industrial plans;
3.	Machinery, equipment, instruments and spare parts related to the
production. As well as laboratory equipment used for measurement, for quality
control and for training of personnel;
4.	Containers and trailers. Under the 1989 Maquiladora Decree, once a maquila enterprise is approved, the Ministry
of Commerce will notify the Secretary of the Treasury. The Ministry of the Treasury, through
the Mexican Customs Office (Direccion General de Aduanas) must authorize the temporary
importation of all the goods mentioned above. The maquiladora enterprise must start temporary
imports within a year from the date of approval. This term may be extended for three additional
The Mexican Customs Office may authorize the importation of the goods mentioned in item
1 above for a maximum period of one year. However, once these goods are imported into
Mexico, their stay cannot exceed six months from the date they entered into the country; such term
can be extended to the maximum term allowed of one year previous notification to the Ministry
Machinery and equipment, items 2 and 3 above, may remain in Mexico for as long as the
maquila license is valid, which under the 1989 Maquiladora Decree is for an indefinite term.
Once a maquiladora is operating and has obtained approval from the Customs Office, it
may carry out emergency importation of spare parts and materials, when the lack of the same may
adversely affect its production.
Containers and trailers listed in item 4, may only remain in Mexico for a maximum term
It is important to mention that the 1989 Maquiladora Decree expressly recognizes the
opportunity to import duty-free telecommunication and computer hardware equipment. However,
the enterprise must nevertheless satisfy importation requirements and obtain licenses required by
the Mexican Ministry of Communication and Transportation (SCT) before the equipment may be
B.	Guarantee of Import Duties The Mexican Customs Office requires some form of guarantee for the payment of import
duties, including interest accrued thereon. In order to satisfy this requirement a maquiladora may:
1.	Deposit money with a Mexican financial institution authorized for such
2.	Pledge or mortgage goods or property.
3.	Obtain a bond from an authorized bonding company.
4.	Obtain a personal guarantee from an approved third person (i.e., foreign
5.	Accept administrative embargo.
The trend in the maquiladora industry, previous approval by the Mexican Customs Office,
is to get the guarantee from the Mexican subsidiary's foreign parent company that import duties
will be paid when the manufactured or assembled goods return to the country of origin.
XII.	OTHER CUSTOMS ISSUES In 1988, Mexico substantially liberalized most of its restrictions on imports. The more
lenient regulations included a significant reduction of import duties and an elimination of
regulations requiring prior import permits for a significantly broad category of merchandise. At
this time, Mexico's system of classification of import and export items was restructured to be
uniform with international standards.
Mexico also recently became a member of the General Agreement on Tariffs and Trade
("GATT"). As part of its involvement with GATT, Mexico has agreed to further streamline or
eliminate barriers to trade with foreign countries and to establish foreign trade standards that
conform to GATT standards.
Additionally, in the past year, Mexico has established a number of new regulations and
procedures relating to the import/export industries in Mexico. Specific standards have been
adopted for various industries that ensure higher quality products.
XIII.	AGREEMENTS BETWEEN MAQUILADORAS AND CLIENTS Aside from the maquila agreement itself, which establishes the terms of the relationship
between the maquiladora and the foreign entities (the maquiladora clients), other agreements are
frequently negotiated between maquiladoras and their clients, including transfer of technology
agreements, agreements granting use of trademarks and commercial names, and bailment
XIV.	TERMINATION OF A MAQUILA PROGRAM Maquiladora enterprises may terminate their maquila program by requesting the program
cancellation to the Ministry of Commerce and Industrial Development (SECOFI) 30 days in
advance. In order to obtain the program cancellation, the maquiladora must show that it has
fulfilled its tax, labor and other mandatory obligations.
XV.	NAFTA'S IMPACT ON THE MAQUILADORA PROGRAM Under NAFTA, tariffs will be phased out gradually over a period of years (e.g., existing
draw-back, waiver and remission programs will be eliminated on January 1, 2001 for U.S.-Mexico
trade; restriction on maquila sales in the Mexican market will be phased out over seven years with
guaranteed access at 50% level in year 1 and by January 1, 2001, all maquila production may be
sold in Mexico). A key benefit of the current Maquila program is duty exemption. Therefore,
one would think that the effect of NAFTA would be to nullify the benefits of the Maquila
Program. However, the Maquiladora Program has seen an increase in maquila facilities as more
companies elect to move productive facilities to Mexico. Different reasons account for such a
trend. First, currently, the great majority of maquiladora plants obtain raw materials, parts, and
components from the United States, therefore, under this scenario, the NAFTA rules of origin will
have no effect on the operating procedures for maquiladora plants. Second, even under NAFTA,
foreign companies with manufacturing facilities in Mexico will be ready to sell their products in
the Mexican market immediately once NAFTA comes into full effect. Third, foreign corporations
will gain experience with the Mexican market and the way of doing business.
XVI.	CONCLUSION Mexico's maquila industry represents an opportunity for the U.S. manufacturing industry
of immense magnitude. Low wages, proximity, low transportation costs, favorable tariff treatment
and Mexico's active encouragement, most recently reflected in the 1989 Maquila Decree have
brought about a multi-billion dollar industry in the U.S.-Mexican border. The current
international political climate and the recent pronouncements of Mexico's President Salinas de
Gortari, who has made the attraction of foreign capital to his country the focus of his economic
development program, forecast the continuous growth of this industry along our Mexican border,
even within NAFTA.
1. These operations are also called "In Bond" operations, since the foreign firms
contracting for such services have to post a bond for capital brought from outside but
used in Mexico. Tarbox, An Investors Introduction to Mexico's Maquiladora Program, 22 TEX. INT'L L.J. 109(1986). 2. MAQUILA SCOREBOARD, TWIN PLANT NEWS, June 1994, at 41. 3. MEX. CONST. art. 89(1) (Mexico). The legislation which is cited as the basis of the
1989 Maquiladora Decree is contained in articles 63, 75 to 81, 84 to 89, 110, and 116
of the customs law. The pertinent sections of the Customs Law provide for temporary
importation of goods. Articles 84 through 87 specifically regulate payment or
exemption of duties for the temporary importation of goods under the Maquiladora
Program. Articles 110 and 116 provide for the permanent importation of goods
processed under the Maquiladora Program. MEX. CONST. arts. 63, 75-81, 84-89,
110, 116 (Mexico). 4. General Resolution 2, Rule 1 to the Foreign Investment Law, OFFICIAL GAZETTE,
June 21, 1989 (Mexico). 5. Bustamante, Maquiladoras: A New Face of International Capitalism for Mexico's
Northern Frontier, in Women, Men and the International Division of Labor (Nash &
Fernandez-Kelly eds. 1983). 6. J. Grenwald and K. Flamm, The Global Factory 149-150 (1985). But see 1989
Maquiladora Decree arts. 19 to 24, authorization for sales in the domestic market of up
to fifty percent of increased total production. Decreto para el Fomento y Operacion de
la Industria Maquiladora de Exportacion (the "1989 Maquiladora Decree," arts. 19 to
24, OFFICIAL GAZETTE, December 22, 1989, Mexico). 7. J. Grenwald, and K. Flamm, The Global Factory 149-150 (1985). 8. 1989 Maquiladora Decree, Cap. II, art. 7. 9. Tarbox, supra, at 135 n. 208. 10. 1989 Maquiladora Decree, art. 19. 11. Id. at art. 20. 12. Id. 13. Id. 14. Mexican Federal Labor Law, Title 7, Cap. II, art. 364. 15. U.S. Dep't. of Commerce, Investing in Mexico, OVERSEAS BUSINESS REPORT
(Dec. 1985); see also Mexican Federal Labor Law, Title 8, Cap. I, art. 445. 16. Mexican Federal Labor Law, Title 2, Cap. IV, arts. 46-52. 17. Mexican Federal Labor Law, Title 4, Cap. IV, art. 161. 18. After several courts had held that the Age Discrimination in Employment Act of 1967 (ADEA), 29 U.S.C � 621 et seq., did not apply overseas, Congress amended that Act
to provide "the term employee includes any individual who is a citizen of the United
States employed by an employer in a workplace in a foreign country." 29 U.S.C. �
630(f). Congress also amended Section 4(g)(1), to provide "if an employer controls a
corporation whose place of incorporation is in a foreign country, any practice by such
corporation prohibited under this section shall be presumed to be such practice by such
employer". 29 U.S.C. � 623(h)(1). In order to avoid potential conflicts with foreign
law, Congress further amended the ADEA by providing that it is not unlawful for an
employer to take action prohibited by ADEA where compliance with ADEA would
cause the employer to violate the laws of the country in which the workplace is located.
29 U.S.C. � 623(f)(1). In EEOC v. Arabian American Oil Company (ARAMCO), 499
U.S. 244, 111 S. Ct. 1227 [55 FEP cases 449] 1991, the Supreme Court held that Title
VII of the Civil Rights Act does not apply extraterritorially to regulate the employment
practices of United States employers who employ United States citizens outside the
territorial jurisdiction of the United States. The Court's decision was based on the long
standing principle of American law that, unless a contrary Congressional intent
appears, legislation is meant to apply only within the territorial jurisdiction of the
United States. In ARAMCO, the Court, in effect, invited Congress to amend Title VII,
if it disagreed with the Court's decision. 19. United States v. Oxford Industries, Inc., 668 F.2d 507 (1981). 20. Dolliff and Co., Inc. v. United States, 599 F.2d 1015 (1978). 21. Id. 22. Air-Sea Brokers, Inc. v. United States, 596 F.2d 1008 (1978). 23. Samsonite Corp. v. United States, 11 ITRD 1833 (BNA 1989). 24. J. Grenwald and K. Flamm at 36, 37; see also Note, The Texas-Mexico Twin Plant's
System: Industry and Item 807.00 of the United States Tariff Schedules 16 TEX.
TECH. L. REV. 963 (1985). 25. Madison Galleries Ltd. v. United States, 870 F.2d 627 (1989). ILAB Home