International Trade: Mexico's Maquiladora Decline Affects U.S.-Mexico Border Communities and Trade; Recovery Depends in Part on Mexico's Actions
Published: 2003-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Mexico's maquiladoras have evolved into the largest component of U.S.-Mexico trade. Maquiladoras import raw materials and components for processing or assembly by Mexican labor and reexport the resulting products, primarily to the United States. Most maquiladoras are U.S. owned, and maquiladoras import most of their components from U.S. suppliers. Maquiladoras have also been an engine of growth for the U.S.-Mexico border. However, the recent decline of maquiladora operations has raised concerns about the impact on U.S. suppliers and on the economy of border communities. Because of these concerns, GAO was asked to analyze (1) changes in maquiladora employment and production, (2) factors related to the maquiladoras' decline, and (3) implications of recent developments for maquiladoras' viability.
section_title: What GAO Found
paragraphs: After growing rapidly during the 1990s, Mexican maquiladoras experienced a sharp decline after October 2000. By early 2002, employment in the maquiladora sector had contracted by 21 percent and production had contracted by about 30 percent. The decline was particularly severe for certain industries, such as electronics, and certain Mexican cities, such as Tijuana. The downturn was felt on the U.S. side of the border as well, as U.S. exports through U.S.-Mexico land border ports fell and U.S. employment in manufacturing and certain other trade related sectors declined. The cyclical downturn in the U.S. economy has been a principal factor in the decrease in maquiladora production and employment since 2000. Other factors include increased global competition, particularly from China, Central America, and the Caribbean; appreciation of the peso; changes in Mexico's tax regime for maquiladoras; and the loss of certain tariff benefits as a result of the North American Free Trade Agreement. Maquiladoras face a challenging business environment, and recent difficulties have raised questions about their future viability. Maquiladoras involved in modern, complex manufacturing appear poised to meet the industry's challenges. Still, experts agree that additional fundamental reforms by Mexico are necessary to restore maquiladoras' competitiveness. U.S. trade and homeland security policies present further challenges for maquiladoras.

section_title: Letter
paragraphs: Mexico’s Maquiladora program, which was established in 1965 to attract  investment and create jobs along the U.S.-Mexico border, has evolved into  the largest and most dynamic component of U.S.-Mexico trade. U.S.  companies own the vast majority of maquiladora plants, and maquiladoras  import about 80 percent of their components from U.S. suppliers. With  double-digit growth rates in output and employment until its peak in the  last quarter of 2000, maquiladora-based production has been one of the  engines of regional employment and income growth for the U.S.–Mexico  border. However, over the past 2 years, the level of employment and  production in maquiladora operations has declined sharply. This decline  has led a number of observers to express concern about the future viability  of maquiladoras. Some observers in the United States are also concerned  that the decline of Mexico’s maquiladoras could adversely affect U.S.  companies that supply these plants and could hurt the economy of border  communities.
In response to your concern about the significance of these developments,  this report analyzes (1) the ways in which the communities along the U.S.- Mexico border are integrated and how maquiladoras have contributed to  U.S.-Mexico interdependence; (2) recent changes in maquiladora  production, employment, and cross-border trade; (3) factors that have  affected employment and production in the maquiladora sector; and (4)  factors that could affect the maquiladora industry’s future viability.
To address these objectives, we met with U.S. and Mexican government  officials in Washington, D.C., and Mexico City. We contacted business and  nonprofit sector representatives, academicians, and other experts on the  maquiladora industry in the United States and Mexico, and we reviewed  extensive documentation and academic research provided by these  sources. We obtained and analyzed official data on employment and trade  trends from both U.S. and Mexican government agencies. We also  conducted a series of semistructured interviews with 29 representatives of  business associations consisting of maquiladora-specific and principal  industry sector organizations at the local and national levels. We relied on  business associations because, as representatives of the maquiladoras, they  could comment on issues facing their members, such as increased  competition, and could explain the reasons for plant closures, changes in  employment levels, and other changes within the industry. We conducted  site visits in three major border “twin cities”: San Diego, California–Tijuana,  Baja California; El Paso, Texas–Juarez, Chihuahua; and McAllen, Texas– Reynosa, Tamaulipas.
subsections: section_title: Background
paragraphs: Mexico’s Maquiladora program has been a central feature of the U.S.- Mexico border. The U.S.-Mexico border stretches nearly 2,000 miles, from  the Pacific Ocean in California to the Gulf of Mexico in Texas. Four U.S.  states (Arizona, California, New Mexico, and Texas) and six Mexican states  (Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora, and  Tamaulipas) make up the border. Texas contains the longest section of the  U.S. border with Mexico, with several large and numerous small border  crossings across the Rio Grande. Compared with Texas, California’s border  with Mexico is relatively short, but it includes San Diego–Tijuana, the  single busiest U.S.-Mexico border crossing. Arizona’s principal border  crossing with the Mexican state of Sonora at Nogales plays a significant  role in agricultural trade. The relatively small border crossings between  New Mexico and Mexico reflect the sparsely populated areas in that region  of the border. Figure 1 shows the U.S.-Mexico border, including all U.S. and  Mexican border states, some Mexican border cities with varying  concentrations of maquiladora plants, and some ports of entry on the U.S.  side of the border.
During the 1990s, the population along the border experienced significant  growth. On the U.S. side, the population increased by 21 percent,  considerably more than the overall U.S. population, which grew by 13.2  percent. Some cities on the U.S. border experienced significant increases in  population, such as Yuma, Arizona, and McAllen, Texas—respectively, the  third and fourth fastest growing metropolitan areas in the United States.  Population on the Mexican side of the border increased even more rapidly,  growing by 32 percent between 1990 and 2000. The majority of the border’s  residents live in communities along the border that are composed of twin  cities—a city on each side of the border—such as San Diego–Tijuana and  El Paso–Juarez. The San Diego–Tijuana area alone has a combined  population of about 4 million, and the El Paso–Juarez area has a population  of 1.9 million.
The Maquiladora program was first established by the government of  Mexico in 1965 as part of the Border Industrialization Program (BIP) and  maquiladoras have been a driving force in the development of the U.S.- Mexico border region. Under the BIP, Mexico encouraged foreign  corporations to establish operations along the northern border to provide  employment opportunities for Mexican workers displaced after the  termination of a temporary cross-border work arrangement known as the  Bracero Program. Also known as “in-bond” plants, maquiladoras were  allowed to import temporarily, on a duty–free basis, raw materials and  components for processing or assembly by Mexican labor and to re-export  the resulting products, primarily to the United States.
The maquiladoras have undergone a dynamic evolution over the last four  decades. In the mid-1960s, maquiladoras consisted primarily of basic  assembly operations taking advantage of Mexico’s low labor costs. By the  1980s, U.S. multinationals representing various industrial sectors  established maquiladora plants along the U.S.-Mexico border. Japanese and  European companies also established maquiladora plants in Mexico to  compete in the U.S. market. Since the 1980s, some firms moved from low- skilled assembly work to more advanced manufacturing operations.    Researchers from Mexico’s Colegio de la Frontera and San Diego State  University note that the number of “technical workers” employed by  maquiladoras increased significantly from the early 1980s to the 1990s.  Some maquiladoras now employ workers in development and design as  well as manufacturing. For example, Delphi Automotive in Juarez, the  largest private employer among maquiladoras in Mexico, now has a  sophisticated research and development center that employs hundreds of  highly skilled workers and engineers.
Over the years, as maquiladoras evolved and expanded, the term  maquiladora has come to be used loosely to refer to almost any subsidiary  plant of a foreign company involved in export from Mexico, particularly  those located along the U.S. border. However, the Maquiladora program  continues to be quite distinct from other efforts initiated by the Mexican  government to encourage exports. Firms must register with the  government of Mexico to be considered maquiladoras and, once registered,  are eligible for several key benefits, such as preferential tariffs on inputs  and machinery, and simplified Mexican customs procedures. In this report,  we define maquiladoras as those firms officially participating in Mexico’s  Maquiladora program.
In addition to the Maquiladora program, the U.S.-Mexico trade relationship  has also been influenced by other important developments such as NAFTA.  NAFTA was concluded between the United States, Mexico and Canada in  1992 and entered into force on January 1, 1994. This agreement provided,  among its other provisions, for the elimination of tariffs and other barriers  to U.S.-Mexico bilateral trade by 2008. It also required Mexico to change  certain provisions of the Maquiladora program, such as elimination of duty- free benefits for imports of components from non-NAFTA countries. U.S.- Mexico trade has expanded sharply since NAFTA’s inception. Much of this  trade involves “production sharing,” whereby final goods are produced  with parts, labor, and manufacturing facilities from the United States and  Mexico. Because it enables firms to increase specialization, take advantage  of low labor costs in Mexico, and attain other efficiencies, production  sharing is a key benefit to U.S. companies under the Maquiladora program.
section_title: Maquiladoras Contribute to Integration along the Diverse U.S.-Mexico Border
paragraphs: A variety of social and economic factors create strong linkages between  communities on both sides of the U.S.-Mexico border, and maquiladoras  play a critical part in this interdependence. Residents in the twin cities  cross the border about one million times every day to work, shop, attend  classes, visit family, and participate in other activities. Maquiladoras have  increased trade between the United States and Mexico and have helped to  develop the economies of several border regions. While communities along  the U.S.-Mexico border share certain traits, each region is distinct.
subsections: section_title: Multiple Social and Economic Ties Fuel Integration at the Border
paragraphs: A wide range of social ties—educational, political, cultural, and familial— contribute to integration along the U.S.-Mexico border. For example,  certain U.S. universities in border cities offer combined degrees or  exchange programs with their counterparts on the Mexican side. In some  schools, such as the University of Texas at El Paso and the University of  Texas–Pan American, Mexican nationals cross the border regularly to  attend classes. Political interaction and cooperation between local  authorities of twin cities enhance integration. Cultural and family ties also  contribute significantly to integration at the border. The U.S. counties with  the highest concentration of Hispanics are located along the southwest  border, and by far most of the Hispanics in southern border states are of  Mexican descent.
Trade and retail sales contribute to economic interdependence at the  border. Approximately $200 billion in trade went through the U.S.-Mexico  border in 2002. Much of U.S.-Mexico trade occurs between border states.  For example, 62 percent of U.S. exports to Mexico originated in Texas,  California, Arizona, and New Mexico; of this, 70 percent was destined for  Mexican border states. Research by the Federal Reserve Bank of Dallas  indicates that trade between the United States and Mexico has positive  effects on border communities, because U.S. border cities typically provide  a variety of services such as transportation and customs brokerage. Retail  sales to Mexican nationals also contribute significantly to the economies of  cities on the U.S. side of the border. According to one estimate, retailers in  Texas annually make an estimated $15 billion in sales to Mexican shoppers.  In McAllen, Texas, 35 percent, or about $700 million worth, of retail sales  are made to Mexican nationals. Residents from Tijuana make 1.5 million  trips per month into the San Diego area, mainly to shop. In El Paso, Juarez  residents account for more than 20 percent of retail sales. On the other  hand, because of the high cost of pharmaceuticals in the United States, a  growing number of U.S. residents regularly cross the border into Mexico to  purchase prescription drugs.
section_title: Maquiladoras Drive U.S.– Mexico Trade and Border Integration
paragraphs: Maquiladoras import most inputs from the United States and export most  of what they produce back to the United States. Growth in U.S.–Mexico  trade and economic interdependence at the border during the last decade  can be explained to a great degree by the participation of maquiladoras in  supplying a strong U.S. market during the 1990s. Mexican exports  increased by about 340 percent between 1993 and 2001, in large part  because maquiladora-related exports increased by over 400 percent during  this time, according to a report by the Mexican Commission on Northern  Border Affairs. By 2001, maquiladoras accounted for 41 percent of total  Mexican trade with all countries – 34 percent of Mexico’s imports and 48  percent of its exports (see fig. 2). Trade with the United States makes up a  significant share of maquiladora trade. In 2001, 79 percent of maquiladora  imports of components and parts for production were from the United  States and 98 percent of their exported products were destined for the U.S.  market. Maquiladora trade between the United States and Mexico totaled  about $121 billion in 2001, with maquiladora exports ($75 billion)  accounting for more than half of Mexico’s total exports to the United  States. Border cities are typically seen as the primary beneficiaries of  growing U.S.-Mexico trade. However, states such as Florida, Tennessee,  and Ohio, which doubled their exports to Mexico during the second half of  1990s, have also benefited from growing U.S.-Mexico trade.
Furthermore, maquiladoras are directly connected to U.S. companies  through ownership and production ties. The list of Mexico’s top 100  maquiladora employers includes such U.S. firms as Delphi, RCA, Ford  Motor Company, Tyco, General Electric, General Instruments, Johnson &  Johnson, and ITT. All told, 79 percent of the top 100 maquiladora employers  are from the United States. Maquiladoras are important to the United States  because they are a strategic means by which U.S. companies stay  competitive in the global marketplace. By offering lower production costs,  maquiladoras enable U.S. companies to produce goods more cheaply in  Mexico than in the United States. In essence, maquiladoras and U.S.  companies are part of a greater production-sharing model, which is an  important part of overall North American production. Moreover, more than  26,000 U.S.-based companies, located mainly in the Midwest, supply  maquiladoras with raw materials and components.
The Mexican border region has benefited in terms of job creation from the  dominant presence of maquiladoras on the Mexican side of the border.  Overall, 77 percent of all maquiladora establishments are located in the six  Mexican border states shown in figure 3. Also, about 83 percent of  maquiladora employment was located in border states. During most of the  1990s, maquiladoras represented more than half of the industrial activity in  the states of Chihuahua and Tamaulipas. During the same time period, the  maquiladoras represented nearly three quarters of industrial production in  the state of Baja California, which contained almost one third of Mexico’s  maquiladora firms.
Cities on the U.S. side of the border have benefited from the large flow of  trade created by maquiladoras. Between 1990 and 2002, more than half a  million jobs were added to the U.S. border region, including jobs in  services, retail trade, finance, and transportation, and after 1995,  employment growth in the U.S. border region exceeded the U.S. national  average (see app. I for details). The employment gains are particularly  notable, because the border region historically has had high rates of  unemployment.   Some studies have outlined the effect of overall border  economic trends on local border communities. For example, researchers  estimated that in one Texas border community, in 2001, services and  supplies purchased by maquiladoras amounted to $136 million and a total  of 32,577 jobs were sustained by maquiladoras and related manufacturing  activity.
The same researchers estimated that 15 percent of maquiladora workers’  salaries was spent in the region on goods and services. In one Arizona  border community, researchers surveyed maquiladora workers and found  that workers who crossed the border to shop made an average of 5.5 trips a  month and spent about $35 on each trip. Almost one third of retail sales in  the same Arizona community are attributed to Mexican nationals,  according to local sources.
Despite their role in generating employment in Mexico, the maquiladoras’  benefit to the country remains a subject of some debate. Some express  reservations about the maquiladoras’ ability to generate economic  development for Mexico, since these plants have generally been unable to  establish a network of domestic inputs providers or create significant  linkages to the internal Mexican economy. In April 2002, for example, the  former Mexican Foreign Minister noted that without proactive Mexican  government policy to set up domestic suppliers, the benefits of the  maquiladora industry would never extend beyond the border. In addition,  critics in the environmental and labor movements on both sides of the  border also assail these plants. Some environmental groups claim that  maquiladoras are responsible for the growing pollution problem in the  border region. Similarly, some labor organizations criticize the  maquiladoras for the low wages paid to workers and for allegedly poor  working conditions.
section_title: Border Has Distinct Regions with Varying Degrees of Integration
paragraphs: Although communities along the U.S.-Mexico border share certain traits,  they are also quite distinct. The level of integration between cross-border  twin cities depends on location, population, economic profile, and cross- border political cooperation. We observed some of these differences during  fieldwork in three border areas: McAllen–Reynosa, El Paso–Ciudad Juarez,  and San Diego–Tijuana.
McAllen–Reynosa. McAllen and Reynosa are economically interdependent.  Both are medium-size cities, McAllen with a population of about 569,000,  and Reynosa with about 420,000, and there are no other sizeable urban  areas nearby on either side of the border. Officials at the McAllen  Economic Development Corporation (MEDC) capitalized on the  interdependence between McAllen and Reynosa and incorporated it into  their economic strategy for the region starting in 1988. At that time,  McAllen had high unemployment and Reynosa’s economy was based on  subsistence farming. Working with political leaders in McAllen and  Reynosa, MEDC developed a strategy based on promoting industrial  development in Reynosa, recognizing that if companies opened  maquiladoras there, McAllen would benefit by providing inputs and  offering management, engineering, warehousing, trucking, legal, and  accounting services. In the 14 years since its establishment, MEDC has  recruited 178 companies to the area, in diverse manufacturing sectors, such  as electronics, auto parts, and telecommunications.
El Paso–Ciudad Juarez. Although El Paso and Ciudad Juarez are also  closely integrated, such ties have developed differently than in McAllen– Reynosa. Ciudad Juarez is a larger metropolitan area, with a population of  1.2 million, and it is home to more maquiladora employees than any other  Mexican city. On the U.S. side, El Paso and the neighboring communities in  southern New Mexico are much smaller. El Paso’s economy has been  shaped by economic activity in Ciudad Juarez, especially that of providing  services to maquiladoras. In addition, Juarez residents contribute to El  Paso’s economy by purchasing items ranging from cars to clothing and  services such as financial and health services. In 2001, there were  approximately 46 million northbound crossings via the three international  bridges that connect the two cities. However, business leaders and other  observers whom we met in the El Paso–Juarez area frequently noted that  integration and economic dependence between El Paso and Juarez  occurred spontaneously, rather than by design. The development of  maquiladoras on the Mexican side occurred much earlier than in Reynosa  and was largely attributed to individual efforts by entrepreneurs in Juarez  and El Paso that began in the 1960s, rather than to a collective vision.  However, in recent years, in Santa Teresa, a nearby border community in  southern New Mexico, developers created a strategic plan to build an  industrial park as a supplier base, with warehouse and distribution  facilities, to service maquiladoras. The Santa Teresa port of entry opened  11 years ago. Developers envisioned that this border crossing would serve  as an alternate point of entry to El Paso for cross border trade.
San Diego–Tijuana. The dynamics of integration between San Diego and  Tijuana are notably different from other cross-border twin cities. In this  area, economic dependence is more one-sided.   Unlike El Paso or McAllen,  San Diego is a large metropolitan area in its own right, with a population of  close to 3 million. Many of the major economic activities in San Diego,  including defense and space manufacturing, biosciences, and tourism, are  not directly connected to Tijuana. While Hispanics account for at least 50  percent of the population in most U.S. counties along the Southwest  border, they account for only about 27 percent of the population in San  Diego County, suggesting lower levels of family ties or connections to  Mexico. In contrast, Tijuana, with a population of about 1.2 million, is  heavily dependent on maquiladoras, and the city is closely tied to the U.S.  market. In addition to U.S. companies, Tijuana has also been the preferred  location for Japanese and Korean maquiladora investments, which have  made this area the world’s leading producer of color televisions. More than  600 maquiladora plants, employing approximately 150,000 people are  located in Tijuana. Moreover people in Tijuana are more likely to cross the  border to shop or do business in San Diego than vice versa; in fact, it is  estimated that two out of three residents of San Diego have never been to  Tijuana. In contrast, Tijuana residents spend between 3 to 5 billion dollars  in purchases in the San Diego region, mostly in the communities adjacent  to the border. In addition, 7 percent of economically active people in  Tijuana work in San Diego, earning an estimated $650 million a year in  wages and salary income.
section_title: After Rapid Growth, Maquiladoras and Border Region Experienced Declines Beginning in 2000
paragraphs: Maquiladora production and employment grew rapidly throughout the  1990s but declined sharply after October 2000. Within the diverse  maquiladora sector, the decline was particularly steep in certain industries  and in some border cities.   Overall, Mexican manufacturing production in  the border region also declined and cross-border trade flows fell. At the  same time, U.S. border employment in manufacturing and certain other  trade-related sectors contracted. Nevertheless, the U.S. border region  continued to experience stronger employment growth than did the United  States as a whole.
subsections: section_title: Maquiladoras Grew Rapidly in the 1990s, with Growth Varied by Region and Industry
paragraphs: During the 1990s, maquiladoras proved to be one of the more dynamic  components of Mexican manufacturing. Maquiladora production increased  by 197 percent from January 1993 until its peak in October 2000, while  overall manufacturing production in Mexico increased by only 58 percent  in the same time period (see fig. 4). During that time period, maquiladora  employment tripled, adding more than 900,000 jobs to the Mexican  economy. In 2000, maquiladoras accounted for about 4 percent of total  employment and about 20 percent of manufacturing employment in  Mexico.
With respect to employment, most major Mexican border cities and  industrial sectors experienced growth in maquiladora employment over the  decade, although some grew faster than others. For example, Tijuana and  Mexicali tripled their maquiladora employment, and the electronics  industry more than doubled its maquiladora employment in the border  region. The electronics industry, which was already the largest maquiladora  employer, added more than 200,000 jobs in the border region during the  1990s. For the Mexican border region as a whole, maquiladora employment  rose 145 percent—from 342,555 in January 1990 to 839,200 in October 2000  (see app. V, table 8, for more information). While maquiladoras have  typically been concentrated in the border region, maquiladora employment  growth throughout the rest of Mexico was actually higher than in the  border region during the 1990s. Growth in the nonborder region was  particularly strong in the textile and apparel sector, in which employment  rose in the nonborder region from about 22,000 in 1990 to about 224,000  jobs in 2001 (fig. 5). As a result of the stronger growth in the nonborder  region, the share of textile and apparel maquiladora employment in the  border region fell from 49 percent in 1990 to 17 percent in 2001. Much of  the investment in the apparel sector occurred in anticipation of duty-free  treatment for most U.S. imports of apparel from Mexico under NAFTA in  1999.
section_title: Maquiladora Decline Started in 2000, Unevenly Affecting Industries and Border Cities
paragraphs: After growing since the program’s inception over 35 years ago, particularly  in the 1990s, Mexican maquiladora production and employment began to  decline sharply in late 2000. Maquiladora production declined about 30  percent from late 2000 to early 2002. At the same time, maquiladora  employment contracted about 20 percent, losing nearly 290,000 jobs  nationally, about 174,000 of which were located in the border region.  Similarly, the number of maquiladora establishments (factories) in  operation began to decline as well (see fig. 6). Nevertheless, even with the  pronounced declines, the overall numbers of maquiladora employees  remain at levels similar to those in 1998–1999.
While the Mexican maquiladora downturn was evident both nationally and  in the border region, certain industries experienced larger declines (see fig.  7). For instance, in the border region, the electronics industry experienced  one of the steepest and largest maquiladora employment declines of any  industrial sector, contracting by 31 percent and losing more than 112,000  jobs in the 2-year period between October 2000 and October 2002. In  contrast, the automobile and auto parts industry experienced a less severe  maquiladora employment decline of 13 percent (about 24,000 jobs) in less  than a year, before resuming some growth in November 2001. Textiles and  apparel also experienced a steep employment decline, falling by 26 percent  and losing more than 12,000 jobs. Nationally, the textile and apparel  industry lost more than 70,000 jobs. In all other border industrial sectors  combined, maquiladora employment declined by about 16 percent over a  little more than a year but has grown by about 4 percent since January  2002.
As figure 8 illustrates, the decline in maquiladora employment also affected  cities in the Mexican border region differently. The two largest border  cities, Juarez and Tijuana, both experienced significant declines in  maquiladora employment, accounting for over half of the total jobs lost in  the border region. After peaking in October 2000, by December 2002,  maquiladora employment had fallen 27 percent in Juarez and 30 percent in  Tijuana. The smaller city of Nogales, Sonora, experienced one of the  sharpest percentage changes in maquiladora employment in the border  region, declining by 44 percent. In contrast, the city of Reynosa  experienced a decline of only about 5 percent between September and  December 2000, and its maquiladora employment has since rebounded,  with 7 percent growth since January 2001. Reynosa’s decline in electronics  and auto parts employment was much less severe than other cities.
section_title: Mexican Border Experienced Overall Decline in Manufacturing and Cross-Border Trade
paragraphs: The decline in Mexico’s maquiladora production contributed to a decline in  overall manufacturing production in Mexico’s border region. Figure 9  shows the growth of manufacturing production for three Mexican border  states: Baja California, Coahuila, and Sonora. Baja California, the state with  the largest share of maquiladoras, grew more rapidly than the other border  states but also experienced the largest decline in overall manufacturing  production after October 2000. Similarly, manufacturing production in  Coahuila, Nuevo Leon (not shown), and Sonora also experienced  downturns beginning in late 2000 and early 2001.
During the maquiladora decline, exports, imports, and overall trade  through U.S.-Mexico land border ports also dropped. The value of cross- border trade dropped 5 percent in 2001 and remained flat in 2002, owing in  large part to the 10 percent decline in U.S. exports to Mexico through these  ports. Although each of the four major land border ports experienced some  decline, Nogales experienced the greatest decline, losing about 20 percent  of its value between 2000 and 2002 (see app. IV, table 7, for levels of U.S.  trade with Mexico through the four main land border points).  Maquiladoras, which accounted for 40 percent of U.S. exports to Mexico  and 54 percent of Mexican exports to the United States in 2001, contributed  to this decline.
section_title: U.S. Border Employment in Manufacturing and Transportation Services Fell, but Overall Employment Growth Continued
paragraphs: The decline in Mexico’s maquiladoras was also felt on the U.S. side, as  manufacturing employment in border municipalities declined by 6 percent  overall from 2000 through 2002. Other U.S. sectors related to trade also  experienced declines in employment at the border. U.S. border  employment in transportation and public utilities, which includes trucking  and warehousing, was down 4 percent, and employment in wholesale trade  was down 3 percent overall. Similar to the maquiladora employment  declines in Mexico, employment declines on the U.S. side of the border also  varied by region. For example, manufacturing employment declined by 18  percent overall in Texas’ border cities, and employment declines in  wholesale trade and transportation and in public utilities were more  pronounced in Arizona. (App. I provides a detailed analysis of employment  trends in the U.S. border region.)
Despite the contractions in manufacturing and certain other trade-related  sectors, other sectors in the U.S. border region grew. As a result, total  nonagriculture-related employment in the border area grew by 4 percent  even after the U.S. economic slowdown began in 2000 and national  employment contracted 1 percent through 2002. Some border metropolitan  areas maintained even stronger employment growth. For example, the  McAllen area grew by 9 percent between 2000 and 2002, while Laredo grew  by 6 percent, and San Diego and Las Cruces grew by 5 percent each over  the same period. On the other hand, El Paso’s overall nonfarm employment  fell, primarily because its mix of industries is weighted towards sectors  that have been shrinking (see app. I for details).
section_title: Cyclical and Structural Factors Cited in Maquiladora Decline
paragraphs: The decline in maquiladora production and employment since the last  quarter of 2000 is attributable to both cyclical and structural factors.  Government researchers, academicians, economic studies, and industry  representatives agree that the cyclical downturn in the U.S. economy has  been a primary factor in the decline. However, industry sources and other  experts emphasized that the maquiladoras have also been adversely  affected by structural factors, such as increased competition in the U.S.  market, particularly from China, Central America and the Caribbean, and  by the strength of the Mexican peso, which has further eroded the  maquiladoras’ competitiveness. Changing Mexican tax policies have also  contributed to the maquiladora decline by creating a climate of uncertainty  for foreign investors. Meanwhile, owing to commitments undertaken under  NAFTA, Mexico has phased out some of the key benefits of the  Maquiladora program.
It is clear from our research that all of these factors were at work before  and during the recent maquiladora downturn, and that each was changing  in a direction adverse for maquiladora production and employment.  However, the sheer number of simultaneous changes over a relatively brief  period makes it difficult to isolate or quantify the impact of individual  factors. Although many government, academic, and industry sources  generally refer to the cyclical downturn in the U.S. economy as a principal  factor in the decrease in maquiladora employment and production since  the last quarter of 2000, there is no such agreement on the relative  importance of other factors associated with the decline of the  maquiladoras. Therefore, the order in which we present these other factors  is generally based on the results of our semistructured interviews with  industry associations (see app. VI).
subsections: section_title: U.S. Economic Slowdown Adversely Affects Maquiladoras
paragraphs: In explaining the decline in maquiladora production and employment  beginning in the last quarter of 2000, government, academic, and industry  sources generally emphasized the role of the downturn in the U.S.  economy. Of the 23 industry association representatives we interviewed  whose membership had experienced a decline in production or  employment, about three-quarters cited the recent downturn in the U.S.  economy as a major factor. As noted earlier in this report, maquiladora  production is often linked to U.S. manufacturing through production- sharing arrangements. In fact, about 98 percent of maquiladora production  is destined for the U.S. market. Thus, it is not surprising that the  maquiladoras are very sensitive to fluctuations in U.S. manufacturing and  demand. Our analysis of economic data supports the conclusion of experts  and interviewees, demonstrating that historically maquiladora employment  typically grows when the overall U.S. economy expands and is negatively  influenced when the U.S. economy slows down (see app. II for a discussion  of the effect of the economic downturn in the United States on employment  for various maquiladora industrial sectors). Moreover, maquiladora  employment has been even more sensitive to changes in U.S.  manufacturing production, particularly in sectors such as textiles and  autos, and a sharp drop in U.S. manufacturing has characterized the  present U.S. economic slowdown.
As figure 10 illustrates, maquiladora employment shows a correlation with  U.S. economic performance over the past two decades. On average,  maquiladoras added almost 118,000 employees annually from 1995 to  2000. During this period, U.S. annual economic growth averaged 3.6  percent. However, in 2001, as U.S. economic growth slowed to 1.4 percent,  the maquiladoras lost nearly 229,000 jobs.
Moreover, although the Mexican economy as a whole is very closely linked  to that of the United States, the maquiladoras appear to have been affected  by the U.S. economic slowdown more severely than the Mexican economy  overall. While Mexico’s economy contracted .2 percent in 2001, it resumed  growth at .7 percent in 2002. However, the maquiladora sector declined  both years 9.2 percent and 8.3 percent, respectively. Of the industry  associations indicating that their membership had experienced a decline in  employment or production, about half reported that the maquiladoras had  been more negatively affected by the U.S. economic downturn than had  other businesses in Mexico.
section_title: Mexico Faces Increased Global Competition in the U.S. Market
paragraphs: Among the 23 industry associations that indicated a decline in their  memberships’ employment or production, mounting foreign competition in  the U.S. market was the most frequently offered explanation for the decline  of the maquiladoras over the past 2 years. Over one-half of the  representatives of industry associations referred specifically to the role of  China in the maquiladoras’ decline. One maquiladora spokesman, for  example, suggested that China’s entrance into the World Trade  Organization (WTO) has made that country a more attractive choice for  foreign direct investment, while foreign investment in Mexico’s  maquiladoras has decreased.
Among the major suppliers of imports to the United States, Mexico ranked  second and China third in 2002. As figure 11 illustrates, both Mexico and  China experienced significant growth in exports to the United States from  1995 to 2002. However, between 2000 and 2002, U.S. imports from Mexico  grew at a slower pace than those from China. As a result, the gap between  Mexico and China narrowed in China’s favor.
As appendix III details, Mexico recently lost market share in 47 out of 152  major U.S. import categories. At the same time, China gained U.S. market  share in 35 of those 47 import categories, including toys, furniture,  electrical household appliances, television and video equipment and parts,  and apparel and textiles. Some of these industries represent significant  sectors of maquiladora production.
Recent International Trade Commission (ITC) staff research suggests that  while Mexico does face increased competition from China in the U.S.  market, some sectors are more threatened than others. According to the  ITC staff research, a growing share of some textiles and apparel products  sold in the United States are being produced in China rather than Mexico.  In contrast, this staff research notes that within the machinery sector, the  data did not indicate a shift in competitiveness away from Mexico towards  China. Mixed results are apparent in the electronic products sector. Mexico  lost U.S. market share to China in the telephone and telegraph equipment  segment in both 2001 and 2002, and Mexico’s gain in the computer  hardware segment in 2001 was more than offset by a sharp loss to China in  2002.
The ITC staff research noted above concludes that China has competitive  advantages over Mexico in terms of labor costs, electricity costs, and  diversity of component suppliers. In this context, it is worth noting that  wages along the U.S.-Mexico border, where the maquiladoras are  concentrated, tend to be higher than in other areas of Mexico. More  recent ITC staff research indicates that the cost of water for industrial uses  (important in the textiles industry) and corporate income tax rates are  lower in China. On the other hand, the ITC staff research suggests that  Mexico’s comparative advantages include lower transportation costs,  shorter transit time, and lower international communication costs. Mexico  also provides greater protection for intellectual property, more  transparency in regulation and administration, and a network of free-trade  agreements with third countries.
Several industry representatives noted that Mexico also faces increased  competition from countries in Central America or the Caribbean. One  industry spokesperson noted that the U.S. decision in May 2000 to grant  NAFTA-parity access to Caribbean Basin Initiative (CBI) countries had  eroded Mexico’s ability to compete in the U.S. apparel market, particularly  because a number of Central American and Caribbean countries have  lower labor costs than Mexico. According to a Mexican economic research  group, manufacturing wages in Mexico are almost 67 percent higher than in  the Dominican Republic and about 92 percent higher than in Honduras.
The heightened global competition from China and CBI countries is part of  a larger phenomenon in which the benefits enjoyed by maquiladoras and  other Mexican producers have eroded as U.S. trade preferences or  liberalization accorded to other countries have expanded. The recent  experience of the Mexican textiles and apparel industry, one of the major  maquiladora sectors, illustrates this point. In 1994, NAFTA gave Mexico  preferential access for its textiles and apparel. Other countries’ exports to  the United States and Canada generally did not receive similar  advantages. U.S. imports of Mexican textile and apparel products grew  rapidly, with Mexico’s share of total U.S. imports in this sector doubling  from 7 percent in 1994 to 14 percent in 2000 (see fig. 12). Mexico surpassed  both China and the Caribbean Basin countries to become the largest  supplier to the U.S. market. However, under the Trade and Development  Act of 2000, the United States allowed textile and apparel products from  Caribbean Basin countries that met certain requirements to receive  preferential access to the U.S. market. This legislation also stipulated that  to benefit from the special treatment, CBI-based apparel operations must  use U.S.-made inputs, and, according to a Mexican textile industry  association, operations have shifted from using Mexican textiles. In  addition, under the WTO Agreement on Textiles and Clothing, all quotas on  textile and apparel products are being phased out by 2005. For some  products quotas have already been removed. Despite the recent U.S.  recession and a decline of total U.S. imports of textiles and apparel by 5  percent between 2000 and 2002, U.S. imports of textiles and apparel from  China rose 12 percent, making China again the largest foreign supplier to  the U.S. market. Figure 12 shows these changing patterns of U.S. imports in  textiles and apparel from Mexico, China, and CBI countries.
section_title: Industry Representatives Blame Strong Peso for Loss of Competitiveness
paragraphs: Many industry representatives whom we contacted also called attention to  the role of the strengthening Mexican currency in eroding the  maquiladoras’ competitiveness. Historically, growth periods in the  maquiladoras have been associated with devaluations of the peso. For  example, after the peso was devalued in 1984, there was a 3-year surge in  U.S. automotive industry investments in maquiladora plants. Similarly,  according to a study by the El Paso Branch of the Federal Bank of Dallas,  the peso devaluation in December 1994 played a key role in spurring the  expansion of Mexico’s maquiladoras during the second half of the past  decade. However, beginning in the last quarter of 1998, the Mexican peso  consistently appreciated against the dollar in real terms, a trend that  continued while the maquiladoras experienced their greatest employment  decline, from the end of 2000 to the beginning of 2002 (see app. II for the  relative dependence of maquiladora employment on the real peso exchange  rate). As the peso appreciated in real terms, maquiladora operating  expenses increased.
Moreover, this real appreciation of the Mexican peso took place as the  currencies of some of Mexico’s East Asian competitors were depreciating  against the dollar. For example, figure 13 compares the performance of the  Chinese yuan to the Mexican peso, in real terms, between 1995 and 2002.    Unlike the peso, the yuan has actually depreciated since early 1998.
section_title: Changes in Mexican Tax Policies Raise Investor Uncertainty
paragraphs: Among industry groups whose members had experienced losses in  employment or production, about two-thirds of those we interviewed  indicated that uncertainty resulting from Mexican government tax policies  was a major factor in the maquiladoras’ decline. These groups noted that  such uncertainty had caused some firms to withdraw from, or downsize,  their operations in Mexico and had also discouraged new foreign direct  investment in Mexico. In particular, industry representatives said that  frequent changes to the fiscal regime had increased the tax burden and  administrative costs to maquiladoras. They were also concerned that the  frequent changes reduced the maquiladoras’ ability to develop long-term  investment plans.
In addition to the duty-free treatment on import of parts, components, and  other inputs, maquiladora plants enjoyed, at least until the mid-1990s, a  virtual freedom from taxation. Though legally subject to income taxes, in  practice, the companies paid only a small assets tax, a flat minimum of 2  percent of the value of the maquiladora’s assets. Moreover, the  maquiladoras were permitted to use the cost of wages to offset their tax on  assets. This virtually eliminated taxes for some maquiladoras. According to  experts, the twin benefits of duty-free import and minimal taxation were  primary incentives for foreign firms to establish manufacturing operations  in Mexico.
The tax regime applicable to maquiladoras remained constant for almost 30  years but began to evolve rapidly in the 1990s. The most significant of these  tax changes, the treatment of what are known as “permanent  establishments” is frequently noted by industry groups and others as a  cause of investor uncertainty about the industry.
A permanent establishment typically is a branch of a company from one  country that is doing business in another “host” country, and which may be  taxed in that host country. According to U.S. Treasury officials, permanent  establishment is a concept found in virtually all double taxation treaties.  Mexico adopted the permanent establishment concept as part of its income  tax law in 1981. According to U.S. Treasury officials and Mexican tax  experts GAO consulted, Mexico essentially exempted maquiladoras from  the tax that could be imposed on permanent establishments until 1998.  However, starting in 1998, Mexico began seeking to treat the foreign parent  companies of maquildoras as having permanent establishments in Mexico  for tax purposes. By treating the maquiladoras as permanent  establishments, the Mexican government could subject the foreign parent  companies to taxation, potentially allowing Mexico to increase the  revenues it collects from maquiladora operations.
The right of the Mexican government to tax maquiladoras as permanent  establishments was affirmed in the U.S.-Mexico tax treaty of 1992.  However, U.S. companies with maquiladora operations in Mexico were  concerned that Mexico’s application of permanent establishment to their  maquiladora operations would subject them to double taxation. This could  occur if Mexico imposed a broad definition of how permanent  establishments could be taxed that the U.S. Treasury would not accept,  because it would prevent the U.S. parent company from getting a full credit  in the United States from the taxes actually paid in Mexico. Resolution of  potential problems, such as double taxation, associated with the treatment  of maquiladoras as permanent establishments has necessitated a series of  additional bilateral agreements between the United States and Mexico. It  took several years and several different iterations to finally resolve such  practical problems, and this caused a prolonged period of uncertainty for  maquiladoras. Other changes in Mexico’s tax regime have contributed to  the climate of investor uncertainty. In 2002, for example, Mexico limited the  ability of businesses, including maquiladoras, to take a tax credit on  salaries. According to industry representatives, this provision could have  significantly increased the tax burden on some maquiladoras. However,  according to Mexican officials, this tax provision has subsequently been  ruled unconstitutional.
section_title: NAFTA Phased Out Some Maquiladora Benefits
paragraphs: The phasing out of maquiladora benefits as part of NAFTA was also cited by  industry associations as a major factor in the decrease in maquiladora  production and employment. When NAFTA was signed in 1993, it  envisioned fundamental changes to the maquiladora model. The most  significant of these changes was embodied in Article 303 of NAFTA, which  eliminated duty drawback (or refunds of duties) for inputs of non-NAFTA  origin as of January 1, 2001, if the final products incorporating these inputs  are to be subsequently exported to another NAFTA country. For various  reasons, notwithstanding the 7-year grace period provided, the  maquiladoras did not develop a network of domestic suppliers in Mexico.  As a result, implementation of Article 303 has adversely affected the  competitiveness of maquiladoras that rely on non-NAFTA suppliers for  inputs and resulted in closure of some maquiladora firms.
According to officials with the Office of the U.S. Trade Representative,  some aspects of the Maquiladora program were not consistent with  NAFTA’s trade objectives. For example, the duty drawback provisions of  the Maquiladora program were in conflict with NAFTA’s rules of origin  requirements. Under NAFTA’s rules of origin, goods traded among NAFTA  partners are allowed duty-free status only when the goods comprise a  minimum percentage of North American content. However, the  Maquiladora program provided duty drawbacks for inputs imported to  Mexico from any source, including non-NAFTA countries, undermining the  duty-free benefits that North American products were to receive in Mexico  as a result of NAFTA. Second, such drawback programs represented an  advantage for exporters versus firms involved in production for the  domestic market, since the latter would not receive an equivalent duty  drawback. In negotiating NAFTA, the United States hoped to reverse this  advantage, which led to the development in Mexico of an economic system  with separate production tracks for exports and for goods destined for  domestic consumption. In fact, U.S. officials explained that they envisioned  the gradual phasing-out of maquiladoras with the implementation of  NAFTA, as duty-free treatment would apply to all trade among NAFTA  member countries.
The rationale behind Article 303 was to encourage firms to develop North  American suppliers for critical inputs by providing an incentive for  maquiladoras to shift sourcing of components or inputs to North America,  including Mexico. The development of a network of North American  suppliers would mean that more value would be added during the  production process in Mexico, the United States, and Canada.The  elimination of duty drawback would necessitate significant changes in the  sourcing of maquiladora inputs, particularly for maquiladora operations of  some Japanese and other Asian companies that were heavily dependent on  certain inputs from the Far East. The implementation of Article 303 was  therefore scheduled for January 1, 2001, 7 years after NAFTA’s entry into  force, to allow the maquiladoras to relocate their supply chain to North  America. However, a network of Mexican domestic suppliers for the  maquiladoras largely failed to materialize during this period. Maquiladora  observers have suggested several explanations, principally the scarcity of  credit in Mexico to support entrepreneurial activity and the lack of an  entrepreneurial culture among Mexican businesses.
Under NAFTA, Mexico could have chosen to counter the loss of duty  drawback following implementation of Article 303 by reducing or  eliminating its most favored nation duties on key inputs. U.S. officials note  that Canada eliminated hundreds of its most favored nation duties before  Article 303 took effect. Instead, in order to cushion the impact of NAFTA  Article 303, Mexico instituted a measure known as the sectoral promotion  program with targeted and reversible tariff reductions.
Since Article 303 was implemented, maquiladoras that depend on inputs  from outside North America have seen their competitiveness erode. Some  maquiladoras have reported production cost increases of up to 20 percent  due to the implementation of Article 303. Japanese, Korean, and Taiwanese  companies involved in maquiladora production have been particularly  affected by the implementation of Article 303 and have led the way in  relocating from Mexico to other countries. Industry associations we  contacted, representing maquiladoras in the Tijuana area, where Asian- owned maquiladoras are concentrated, as well as an association  representing Japanese business in Mexico, attributed the departure of  maquiladora firms from Mexico, at least in part, to the implementation of  Article 303.
section_title: Maquiladora Downturn Spurs Some Positive Changes, but Fundamental Challenges to Future Viability Remain
paragraphs: Significant challenges continue to confront Mexico’s maquiladoras,  although recent industry and government action and the prospect of future  Mexican reforms may bolster prospects for maquiladoras’ recovery. The  downturn during the past 2 years has accelerated ongoing industry  evolution and has been a catalyst for several industry and government  changes to improve the competitiveness of the sector. However,  maquiladoras still face fundamental challenges. For the most part, meeting  these challenges depends on further action by the government of Mexico,  but some of the challenges are related to U.S. policies that are likely to put  additional pressure on maquiladoras.
subsections: section_title: Maquiladoras Face Serious Challenges and Questions about Viability
paragraphs: The factors described in the previous section as having a role in the  maquiladora’s recent decline still confront the industry. As a result, some  Mexican government officials have stressed the need to move beyond the  current “maquiladora model” to attract a new generation of more  technologically advanced operations that would allow Mexico to remain  competitive.
Given the continuous evolution of maquiladora operations, Mexico’s  maquiladora industry is now a complex sector with substantial diversity.  One academic expert concludes that as firms become involved in more  sophisticated, capital-intensive operations, they are less likely to close and  move their plants because of cyclical downturns such as the one  maquiladoras faced after 2000. Some Mexican maquiladoras are now  recognized as having sophisticated production and management methods.  According to industry experts, such maquiladoras are better positioned to  weather the maquiladora downturn and deal with continuing challenges.  Nevertheless, researchers point out that the transition to more advanced  production practices is quite uneven. Many maquiladoras remain oriented  toward lower-skill activities that involve few Mexican inputs besides labor.  The downturn of the last several years has resulted in a shake-out involving  some losers, notably among this type of operations.
section_title: Downturn Catalyst for Industry and Government Efforts to Improve Competitiveness
paragraphs: One positive aspect of the recent maquiladora downturn is that it has  spurred some actions by industry and the government of Mexico to restore  Mexican competitiveness. In the face of increased global competition,  maquiladoras are seeking to capitalize on Mexico’s unique competitive  advantages, particularly those associated with that country’s proximity to  the United States and its growing network of free trade agreements. For  example, noting the recent establishment of plants in Juarez by several  computer manufacturing firms, one industry analyst explained that  Mexico’s quick time-to-market location is essential for the success of both  new products as well as repairs in the computer value chain. Similarly, a  senior industry expert noted that the growth of automotive maquiladoras,  in northern and central Mexico, underscores the competitive advantages  resulting from the efficient combination of U.S. and Mexican inputs.  According to this source, notwithstanding the arrival of new competitors,  the Mexican automotive industry is poised to take advantage of the full  opening of the regional North American automotive market that will occur  in 2004. Mexico also stands to benefit as a direct and indirect automotive  sector exporter to the United States and other countries with which Mexico  has signed trade agreements.
Some industry sources reported unexpected benefits associated with the  recent losses experienced by the maquiladoras. According to industry  representatives in Juarez, the rapid pace of maquiladora growth had put  intense pressure on local infrastructure during the late 1990s. Local  authorities simply could not keep up with the demand for health,  education, and other services associated with the dramatic increases in  population growth that accompanied the expansion of maquiladoras. They  viewed the slowdown of the past 2 years as a welcome respite.
In addition, a number of industry representatives noted that the downturn  has resulted in significant drops in employee turnover and in the associated  hiring and training costs. Prior to the downturn, they said, maquiladoras in  some border cities reported very high employee turnover rates because the  rapid growth in maquiladora establishments allowed workers to  continuously find new jobs in other plants. One expert suggested that such  turnover in some border cities had reached 80 percent at the height of the  maquiladora boom. Consequently, employers had significant hiring and  training costs and were forced to keep some positions overstaffed to  compensate for the turnover. This could have more fundamental  implications for the ability of some maquiladoras to build a highly skilled  workforce, since it is not feasible to invest in significant training for  workers whose expected tenure with a firm is only a few months. Industry  sources told us that the turnover rates had dropped sharply since the  downturn, and some maquiladoras report that this has had a positive effect  on administrative costs as well as the cost of training new employees.
Finally, industry sources stressed the importance of Mexican government  action for the development of a favorable business environment that can  respond quickly to changing market forces faced by maquiladoras. In  response to industry pressure, the Mexican government recently undertook  several measures in support of the maquiladoras, primarily aimed at easing  irritants.
On May 12, 2003, the Mexican government issued a decree modifying  certain aspects of the Maquiladora program. The reforms are aimed  primarily at simplifying regulations that apply to companies that provide  support and logistic services to maquiladoras, and to enhance legal  certainty for Mexican exporters, including maquiladoras. An important  provision of the new decree will be streamlined customs requirements  for companies with several subsidiaries operating under the  Maquiladora program. This would allow such companies greater  flexibility in the transfer of finished or semi-finished products from one  subsidiary to another. The decree also contains provisions that would  reduce administrative costs and procedures. For example, a  maquiladoras will only have to submit a single report on an annual basis,  which can be submitted electronically. Based on initial industry  reaction, it is unclear whether the new decree will satisfy critics seeking  greater legal certainty and improved incentives for maquiladoras.
In response to the recent crisis in the maquiladora industry, Mexico has  greatly expanded its sectoral promotion program (PROSEC). First  launched in November 2000, PROSEC was intended to reduce the  impact of NAFTA Article 303 (which became effective January 1, 2001)  by providing that duty rates on imported inputs from non-NAFTA  suppliers of either 0 or 5 percent. Initially, maquiladora industry  representatives complained that PROSEC was too restrictive because it  applied to very few imported inputs. However, throughout 2001 and  2002, the list of products eligible for tariff reduction under PROSEC was  progressively expanded to include more than 16,000 products from 22  industry sectors, including electronics and textiles and apparel.
In September 2002, the Mexican government provided additional  support to the maquiladoras through a program called the Information  Technology Agreement (ITA) Plus. ITA Plus immediately removed  tariffs from inputs, parts, and components used in the electronic and  high-technology sectors, regardless of the country of origin. It also  provided for the gradual removal of tariffs from semifinished and  finished products in those sectors. According to Mexican officials, in  addition to lowering tariffs on electronic and high technology inputs,  ITA Plus may help to reduce the administrative burden on the  maquiladoras.
The Presidential Council for Competitiveness was created in July 2002  to promote investment, increase employment, and accelerate Mexico’s  economic growth. A cooperative effort between government and  business that is chaired by the Minister of Economy, the council’s  activities include the creation of fiscal stimulus packages for export  factories in twelve different sectors of the economy, including  maquiladoras as part of the in-bond industry. One objective of the  council is the development of manufacturing clusters, which will deepen  the supply chain in Mexico. In support of the work of the council, the  Secretariat of the Economy has agreed to fund, through the National  Council of the Maquiladora Export Industry (CNIME), a comprehensive  study on the maquiladora industry.
Recent agreements between the United States and Mexico have largely  resolved the threat of double taxation of U.S. firms that was raised by  Mexico’s efforts to define maquiladora parent companies as permanent  establishments, discussed above. As a result of a Second Additional  Protocol to the U.S.-Mexico tax treaty, signed in 2002, the United States  will be able to provide a foreign tax credit to U.S. firms that have paid  income taxes to Mexico with respect to their maquiladora operations.  Mexico has also independently announced that it will make no changes  to existing agreements on permanent establishment until 2007.
These steps by the Mexican government seem to reflect wider recognition  by officials in Mexico City of the maquiladoras’ importance to Mexico.  Industry representatives complained that the Mexican government was  slow to respond to the challenges faced by the maquiladoras. According to  these representatives, the Mexican government initially took “a wait and  see” approach to the maquiladoras decline, in the belief that labor-intensive  maquiladora operations leaving Mexico would be readily replaced by better  paid, more profitable industries. As job losses continued in the first three  months of 2002, maquiladora representatives pressured the government to  implement remedial measures.
section_title: Future Challenges Remain, Involve Difficult Reforms
paragraphs: Notwithstanding the initiatives discussed above, government, industry and  academic sources suggest that meeting remaining challenges to the future  success of the maquiladoras will, in some cases, require fundamental  Mexican reforms in several areas, including energy, infrastructure and  labor. However, the initiatives Mexico is pursuing in these areas may be  difficult to bring about.
subsections: section_title: Some Consider Energy Reform Vital to Mexico’s Competitiveness
paragraphs: Government officials and industry representatives stated that there is an  urgent need for energy reform in Mexico. Energy sector reform is  important to the maquiladora industries because they require reliable and  competitive energy prices to compete with suppliers in other nations. The  ITC, for example, has noted that electricity and industrial water costs are  two areas in which Mexico is less competitive than China. The Fox  administration maintains that without energy reform, Mexico may  experience a power crisis as early as 2004, and it introduced an energy  reform bill in August 2002. The legislation stalled in the Mexican Congress,  however, because some legislators opposed aspects of reform dealing with  privatization that would entail amending the Mexican constitution.
section_title: Upgrading and Modernizing Mexican Infrastructure Is Critical
paragraphs: Maquiladora and other Mexican industry associations cite improving  Mexico’s infrastructure as critical to advancing Mexico’s competitiveness.  According to a report by the Mexican Government Commission for Border  Affairs, the six Mexican states that border the United States share the  advantage of an adequate basic infrastructure, with a road network  variously described as good, fluid, or satisfactory. However, even in this  region, about 32 percent of the Mexican federal highways are in poor  condition. Another study found that critical problems persist in Mexico’s  road infrastructure, notably, limited public or private investment in  highways in recent years. Some maquiladora representatives we spoke  with cited infrastructure shortcomings as a disincentive for potential  investors in maquiladoras.
section_title: Need for Mexican Labor Reform Acknowledged
paragraphs: According to Mexican labor officials, as part of its platform to modernize  Mexico and improve its international competitiveness, the government has  sought to reform the labor code. Maquiladora representatives stated that  improvements in labor productivity depend on reform of labor regulations  to provide increased flexibility to employers. The Fox administration has  responded to this need for labor reform by developing a labor reform  package that represents a compromise between labor groups, business,  and government. Key elements of the reform package include the use of  secret ballots in union elections, the allowance of more than one union to  represent worker interests, expanded employer flexibility to hire workers  on a trial basis, and a strengthened binding arbitration process. This reform  package was not passed by the Mexican Congress before congressional  elections were held in July 2003, in part because it lacked consensus  support within the Mexican labor movement.
section_title: Worker Skills in Mexico Must Be Improved
paragraphs: A consultant for the maquiladora industry cites worsening shortages of  trained labor in most cities where maquiladoras are concentrated as among  the challenges confronting the industry that the government must address.  One academic study of the maquiladoras’ viability found that to develop  more technology-intensive operations, Mexico needs a large number of  highly educated workers. However, according to the Commission on  Border Affairs, the data indicate a low level of educational attainment in  the economically active population along the border, with over one-third of  adults having completed only primary education or less. The search for  better educated workers has led a number of companies to establish  assembly plants in cities further from the border, with better reputations  for good public secondary education and trade schools.
section_title: U.S. Policies May Exert Additional Pressure on Maquiladoras
paragraphs: Action by Mexico is key to the maquiladoras’ future viability, particularly  since U.S. approaches to trade liberalization and homeland security may  put additional pressure on maquiladora operations. Industry  representatives noted that present U.S. policies in these areas could  undermine current benefits and reduce future competitiveness.
subsections: section_title: U.S. Trade Liberalization Could Affect Maquiladora Development
paragraphs: Regarding U.S. trade policy, the future development of the maquiladora  industry in Mexico may also be affected by further changes in competitors’  access to the U.S. market. The United States is engaged in trade  negotiations in several venues, including the Doha Round among the 146  members of the WTO, the Free Trade Agreement of the Americas (FTAA)  involving 34 nations of the Western Hemisphere, and the U.S.-Central  America Free Trade Agreement. These negotiations may reduce barriers to  non-NAFTA countries’ products to levels similar to those enjoyed by  NAFTA participants, Mexico, and Canada. For example, in the WTO, the  United States has proposed to eliminate all industrial tariffs by 2015, and in  the FTAA, the United States has proposed to phase out textile and apparel  tariffs within 5 years after the agreement is implemented, if its hemispheric  partners reciprocate. As we concluded in a 2001 report, expansion of  trade benefits to wider numbers of competitors, while benefiting U.S.  consumers and other trade partners, dilutes the benefits of prior trade  preferences. Some business association representatives that we  interviewed expressed concern that future U.S. trade agreements would  erode benefits provided to Mexican suppliers in the U.S. market under  NAFTA. Representatives for one industry association expressed hope that  the United States would use negotiations such as the FTAA to strengthen  regional competitiveness relative to global competitors such as China.
section_title: U.S. Homeland Security Measures Could Slow Cross- Border Movement of Goods and Personnel
paragraphs: Maquiladora industry experts also expressed concern that U.S. security  measures instituted at ports of entry after September 11, 2001, could erode  the Mexican maquiladora industry’s advantage of proximity to U.S.  markets. Of particular concern are U.S. government measures that require  advance notice for transborder shipments of goods and additional  information on the entry into and departure from the United States of every  foreign citizen. Companies that use just-in-time operations, an important  element in some maquiladora operations, could be especially hurt by  requirements related to advance notice for shipments, because they could  not ship goods immediately on receiving an order. Firms that rely on  regular and efficient movement of workers and service operations across  the border could be especially affected by the information requirements for  Mexican workers who cross the border frequently. For example, at one  major border crossing in downtown El Paso, less than a mile from  Interstate 10, significant congestion would result if U.S. authorities had to  screen traffic bound for Mexico to obtain information from every departing  alien. Successful implementation of these new requirements will require  close coordination of U.S. and Mexican national and local officials as well  as adaptation of the private industry to the new requirements.
section_title: Conclusion
paragraphs: Both the United States and Mexico have an interest in the future of  maquiladoras given their central role in U.S.-Mexico trade and the border  economy. Partly driven by maquiladoras, Mexico has assumed a more  prominent place among U.S. trade partners in recent years, becoming the  United States’ second leading trading partner, after Canada. Moreover,  production and employment linkages have developed between  maquiladoras and producers throughout the United States and are based on  the high volume of U.S.-generated components used in maquiladora  operations. Businesses in communities on the U.S. side of the border  provide services to the maquiladoras, such as customs brokerage and  commercial transportation. Retail sales to Mexican citizens in U.S. border  communities contribute substantially to U.S. business and tax receipts. The  decline in Mexico’s maquiladora production and employment has already  taken its toll on cross-border trade and trade-related employment in certain  U.S. border communities. Maquiladoras have become an even more  important element of the Mexican economy, particularly over the decade of  the 1990s, when maquiladora growth propelled Mexico into the ranks of the  world’s leading exporters and generated 900,000 new jobs. Employment  created by maquiladoras on the Mexican side of the border has become a  mainstay of economic activity in that country. The decline over the past 2  years has served as a catalyst for further transformation of the industry, as  well as Mexican industry and government efforts to restore  competitiveness. The challenges still confronting maquiladoras and the  pressure from U.S. trade and homeland security policies lend urgency to  Mexican efforts to create an environment where cross-border links  between U.S. and Mexican firms and communities can continue to prosper.
section_title: Agency Comments and Our Response
paragraphs: We provided a draft of this report for comment to five U.S. government  agencies: Department of State, the Office of the U.S. Trade Representative,  U.S. Customs and Border Protection (formerly U.S. Customs), Department  of the Treasury, and the U.S. International Trade Commission. We also  asked for comments from three Mexican government agencies: the  Ministry of the Economy (Secretaría de Economía) the Ministry of the  Treasury (Secretaría de Hacienda), and the National Institute of Statistics,  Geography and Information Technology (Instituto Nacional de Estadística,  Geografía e Informática). We received informal written comments from all  of these U.S. and Mexican government agencies, except Mexico’s Ministry  of Economy. In addition, the Department of State provided formal written  comments, which are reprinted in appendix VII.
In general, all of the agency comments were technical or editorial in nature,  which we incorporated as appropriate in the text of our report. In addition,  U.S. ITC staff had more extensive comments related to our decision to  exclude firms operation under the so-called PITEX program from the  general scope our work, noting that PITEX firms are important in certain  sectors, such as autos, and account for a substantial share of Mexico’s total  exports to the United States. While we recognize that firms operating under  PITEX are an important element in U.S-Mexico production-sharing  operations, as are maquiladoras, we limited our report to the Maquiladora  program for several reasons. First, our requesters specifically expressed an  interest in the maquiladora industry and the effects of the recent decline of  the maquiladoras along the U.S.-Mexico border. Unlike maquiladoras,  which are still concentrated along the border, firms operating under the  PITEX program are spread throughout Mexico. Secondly, the data the  government of Mexico collects on maquiladoras are significantly more  extensive and are not altogether comparable to the data collected on  PITEX firms. Thus, there would have been problems in comparing the two  types of operations. Finally, the data available on PITEX firms suggest that  they have experienced trends in recent years not unlike those observed  among maquiladoras. Including data on PITEX firms would not have  significantly altered our message.
We are sending copies of this report to other interested members of  Congress, the Secretary of State, the Secretary of the Treasury, the U.S.  Trade Representative, the Secretary of the Department of Homeland  Security, the Commissioner of Customs, and the Chairman of the U.S.  International Trade Commission. We will also make copies available to  others upon request. In addition, the report will be available at no charge  on the GAO Web site at http://www.gao.gov.
If you, or your staff, have any questions about this report, please contact  me on (202) 512-4347. Other GAO contacts and staff acknowledgments are  listed in appendix VIII.
section_title: Structure of Employment Growth in the U.S.- Mexico Border Area
paragraphs: This appendix examines U.S. employment changes along the U.S.-Mexico  border and explores whether employment in the border areas of the United  States has been disproportionately affected by the recent slowdown in U.S.  economic activity and the associated decline in cross-border trade between  the United States and Mexico. For the purpose of this analysis, the U.S.  border with Mexico is defined as the metropolitan statistical areas (MSA)  closest to the U.S.-Mexico border, comprising the MSAs for San Diego,  California; Tucson, Arizona; Las Cruces, New Mexico; and El Paso,  Brownsville, Laredo, and McAllen, Texas.
U.S. employment in the border area increased by approximately 591,000  jobs between 1990 and 2002, largely owing to the overall national trend in  employment growth. For example, according to our analysis, 60 percent of  the jobs gained were due to the growth of the national economy. However,  230,000 of those jobs could be linked to local factors, that is, factors  associated with the area’s attractiveness for employment creation. Most of  the new jobs were added from 1995 to 2002.  However, the ways in which  each border subregion benefited from the employment growth vary  considerably.
subsections: section_title: U.S. Border Employment Outpaced Nation’s since 1995
paragraphs: U.S. employment in the U.S.-Mexico border area grew by 35 percent  between 1990 and 2002, gaining 591,000 jobs. The services sector was the  largest employer and accounted for approximately 48 percent of the job  growth (282,000 jobs) during this period. Other sectors with notable  employment growth were retail trade (93,000 jobs); finance, insurance, and  real estate (20,000 jobs); transportation and public utilities (31,000 jobs);  and government (128,000 jobs).  As figure 14 shows, total nonfarm  employment growth rates in the border region were generally similar to  those observed for the United States from 1993 to 1995.  However,  employment growth in the border MSAs exceeded employment growth at  the national level after 1995. Furthermore, growth of nonfarm employment  in the border area continued even after the U.S. economic slowdown began  in 2001. Laredo and McAllen grew fastest, followed by Brownsville, Tucson,  Las Cruces, and San Diego.
Some border industries experienced a decline in employment in 2001 and  2002, particularly manufacturing (down 6 percent), transportation and  public utilities (down 4 percent), and wholesale trade (down 3 percent)  (see table1). As table 1 shows, declines in manufacturing were relatively  more severe in Texas (down an average of 18 percent), while declines in  wholesale trade and transportation and public utilities were more  pronounced in Arizona (down 9 and 11 percent, respectively). A closer look  at Texas further shows that the manufacturing, transportation, and public  utilities sectors declined after 2000 in all four Texas border MSAs.
subsections: section_title: Analysis of Employment Trends
paragraphs: To analyze the factors at the national and local levels that contributed to  the employment trends described above, we employed a methodology  known as shift-share analysis that decomposes employment growth (or  decline) in a region over a given time period into three components: the  national growth effect, the industry-mix effect, and the local (competitive)  effect.   1. National growth effect. The national growth effect is that part of a  regional change in total employment ascribed to the national growth  rate of total employment. It assumes that the region’s employment  growth matches the overall national rate. The national growth  component is the change that would be expected given that the local  area is part of a changing national economy.
Our analysis shows that from 1990 through 2002, the border counties  gained 339,100 jobs due to economic trends at the national level (see  table 2). However, the actual gain occurred prior to the year 2000 as an  estimated 15,800 jobs were lost due to the national trend in 2001 and  2002.  The border area’s biggest employer, the service sector, had the  highest national growth component (97,300 jobs), followed by the  government (71,200 jobs), and retail trade sectors (65,900 jobs). Our  analysis incorporating possible differences among the border  subregions shows that from 1990 through 2002, nonfarm employment  growth in San Diego accounted for nearly 50 percent of the increase in  employment due to employment expansion at the national level.
2.
Industry-mix effect. An industry-mix effect is the amount of change  that a region would have experienced had each of its industries grown  at their industry national rates, less the national growth effect. This  component identifies the share of local job growth that can be  attributed to the region’s mix of industries and seeks to address  whether employment growth in an area outpaced the nation owing to a  concentration of faster growing industries.
For the period 1990 to 2002, the border area gained 21,200 jobs owing to  a concentration of faster growing sectors there than in the nation as a  whole. This gain in total employment was achieved primarily with  employment gains in the services (114,400 jobs) and construction and  mining (4,200 jobs), and it occurred despite employment losses totaling  95,200 jobs from other sectors, notably manufacturing (69,800 jobs),  government (10,500 jobs), and wholesale trade (8,500 jobs). Moreover,  47 percent of the employment growth due to the industry-mix effect  occurred between 2001 and 2002. In subregions, the industrial mix  component for all sectors decreased total nonfarm employment during  1990–2002 only in El Paso, Texas.  3. Local (competitive) effect. A local (competitive) effect seeks to isolate  the extent to which factors unique to the local area have caused growth  or decline in regional employment. The effect is defined as the  employment change that remains after the national and industrial mix  components have been accounted for, and it is therefore the purely  regional aspect of the region’s employment growth. If a region’s  competitive share is positive, the region is considered to have local  advantage in promoting employment growth. This advantage could  result from such factors as local businesses having superior technology,  management, location,  market access or the local labor force’s having  higher productivity, lower wages, or both. A negative competitive share  component could be caused by local shortcomings in any or all of these  aspects.
Local conditions appear to have been a significant factor in the increase  in U.S. border employment, particularly since 1995. Across all sectors,  the competitive share component—employment growth attributable to  local conditions—totals to a net addition of 230,000 jobs. This indicates  that the border area was competitive in securing additional  employment from 1990 through 2002.  As figure 15 shows, nearly all of  these employment gains were realized in the years since 1995.  Furthermore, 43 percent of border area employment gains owing to  local factors were achieved between 2001 and 2002. The top three  sectors in competitive share gains in employment from 1990 through  2002 were services (70,600 jobs), government (67,200 jobs), and  manufacturing (37,500 jobs). However, for the 2000–2002 period, the  transportation and public utilities sector showed a reduction in jobs  (approximately 300 jobs) owing to local factors. In addition, factors  unique to the local area caused employment declines in certain  subregions and sectors during 1990–2002, notably, in Laredo, Texas, in  construction and mining; El Paso, Texas, in wholesale trade and  services; Brownsville, Texas, in finance, insurance, and real estate;  Tucson, Arizona, in transportation and public utilities; and Las Cruces,  New Mexico, in government employment.  Furthermore, subregions in  Texas generally lost their local edge in securing manufacturing  employment from 1990 through 2002 and this loss was more  pronounced in 2001 and 2002. Similarly, owing to local factors from  2001 to 2002, Tucson, Las Cruces, and El Paso lost jobs in  transportation and public utilities; Tucson, El Paso, and Laredo lost  employment in wholesale trade; and El Paso lost service employment;  and Brownsville and Las Cruces lost employment in the finance, real  estate, and insurance sector.
section_title: Effect of U.S. Economic Conditions on Employment in Mexican Maquiladoras
paragraphs: Our statistical analysis shows that the key factors cited in our  semistructured interviews as responsible for the maquiladora downturn— namely, the U.S. general economic slowdown, particularly in U.S.  manufacturing, and the real peso-dollar exchange rate—are significant  determinants of maquiladora employment. We found a strong relationship  between maquiladora employment and U.S. economic conditions. This  relationship is stronger than that between maquiladora employment and  the real peso-dollar exchange rate, but considerably weaker than that  between maquiladora employment and changes in U.S. manufacturing  shipments. We also found that maquiladora sectors are more sensitive to  changes in U.S. manufacturing shipments than to broader U.S. economic  conditions.
A major reason for the rapid growth of the maquiladora industry has been  its direct tie to the U.S. economy, particularly to U.S. manufacturing. As a  result, the maquiladoras are partly independent of Mexico’s internal  economic trends. This independence from the Mexican economy has made  the industry a stabilizing force when the Mexican economy heads into  recession. However, the direct tie to U.S. manufacturing also makes the  industry predisposed to U.S. business cycles. As mentioned previously in  the main body of this report, the number of maquiladoras and the  employment they generate has declined from a peak reached in 2000. This  decline has been attributed to several factors. The most important of these  factors is the downturn in the U.S. economy. An additional factor that has  been alleged to contribute to the apparent decline has been cost increases  due to increases in the inflation adjusted value of the peso relative to the  dollar, i.e., the real exchange rate of the peso. This appendix investigates  the relationship  between maquiladora employment in Mexico and U.S. economic  performance and the real peso exchange rate.
To determine the link between maquiladora employment and U.S.  economic conditions, we assembled data on maquiladora employment in  total and by main sectors as well as data on U.S. GDP on a quarterly basis  from January 1980 to December 2002. We then converted all of these data  to their natural logarithms and performed a regression of maquiladora  employment on the real peso-dollar exchange rate and the real U.S. GDP.  The results of the regression are presented in table 3. = α+β lnY + γlnΩ + ε  Where X is Maquiladora employment, Y is U.S. Gross Domestic Product, Ω is the exchange  rate of the dollar relative to the peso, and α, β, γ are positive constants to be estimated. J  represents the maquiladora sectors and ln indicates natural logarithms.
As table 3 shows, maquiladora employment is very sensitive to U.S.  economic growth and the exchange rate. Our results show that a 1 percent  rise (or fall) in U.S. GDP increases (decreases) total maquiladora  employment by 3.68 percent, while a 1 percent rise in the real peso  exchange rate decreases maquiladora employment by 0.17 percent.  Maquiladora employment is consequently more responsive to changes in  the U.S. economy than to changes in the real exchange rate of the peso. In  addition, maquiladora employment in the automotive sector is most  responsive to change in U.S. GDP, while maquiladora employment in  electrical apparatus and machinery is least responsive. The automotive  sector is also the most responsive to real exchange rate variations, while  the electrical materials sector is least responsive.
To investigate the stability of our estimates, we divided our sample into  three separate time periods: 1980 to1985, 1986 to1993, and 1994 to 2002.  Respectively, these three periods correspond roughly to the periods before  and after the implementation of Mexican economic policy reform and after  the implementation of NAFTA. Our analysis of the effect of U.S. GDP and  the real peso-dollar exchange rate on total maquiladora employment during  these three periods is shown in table 4. As the table shows, the  responsiveness of maquiladora employment to U.S. economic conditions  and the real peso exchange rate is fairly consistent with our results in table  3. However, the strongest maquiladora employment responsiveness to U.S.  GDP growth occurred in the pre-NAFTA reform period (1986 to 1993). The  post-NAFTA period (1994 to 2002) has a lower response coefficient for GDP  and a higher response coefficient for exchange rates. It should be noted  that the peso depreciated considerably in December 1994, after the onset of  the “peso crisis.”
We also looked into whether the U.S. manufacturing sector has a unique  effect that cannot be captured by overall U.S. GDP. To do so, we obtained  data on U.S. manufacturing shipments and performed a set of regressions  similar to those we performed using GDP. The results of our analysis  appear in table 5.
As can be seen from table 5, a 1 percent change in U.S. manufacturing  shipments induces an employment growth in maquiladoras of  approximately 6.7 percent. Overall, the table shows, the maquiladora  employment’s response to changes in U.S. manufacturing shipments is  larger than its response to changes in U.S. GDP. We also found that certain  maquiladora sectors, such as textile products, furniture and transportation  equipment, are particularly sensitive to changes in U.S. manufacturing  shipments.
section_title: Mexico-China Competition in the U.S. Market for Imports
paragraphs: Although U.S. imports from Mexico ($130.8 billion) exceeded those from  China ($109.2 billion) in 2001, these figures represented a decline of 3.2  percent for Mexico and an increase of 1.9 percent for China. In 2002, both  countries experienced growth, but U.S. imports from China grew faster  than U.S. imports from Mexico. This development, coming at a time of  decreased maquiladora employment and increased plant closings, has led  to speculation that Mexico is losing ground because of China’s production  cost advantages.
To highlight the competition between Mexico and China, we selected U.S.  imports items from Mexico in 1995 and 2002, with a value of more than  $100 million in 2002. We also obtained information on U.S. imports from  China that matched the categories of the imports from Mexico. We then  selected U.S. imports for which the share from Mexico had declined  between 1995 and 2002 and matched them with imports for which the share  from China had increased between 1995 and 2002.
In 2002, the United States imported from Mexico 152 categories of items  valued at more than $100 million each. The total value of these items was  $123.1 billion, while the total value of the same categories of items from  China was $88.2 billion. From 1995 to 2002, the share of U.S. imports from  Mexico decreased for 47 of the 152 categories. For these 47 categories, in  2002, the total value of imports from Mexico was $25.5 billion and the value  of imports from China was $23.4 billion. China’s share of U.S. imports  increased for 35 of the 47 categories. The total value of these 35 items was  $20 billion for Mexico and $23 billion for China.
Table 6 shows the top 25 U.S. import categories in which imports from  China increased, while imports from Mexico declined between 1995 and  2002. As the table shows, Mexico and China appear to be in direct  competition for several import categories. Although a direct causal link is  difficult to establish, China seems to have gained U.S. market shares at the  same time that Mexico has lost them in some import categories, such as  toys, furniture, electrical household appliances, television and video  equipment and parts, and apparel and textiles. Maquiladoras are  concentrated in the categories where China appears to have gained U.S.  market shares.
section_title: U.S.–Mexico Trade, by U.S. Port, 1999–2002
paragraphs: Trade with Mexico through U.S.-Mexico border crossings dropped in 2001  and remained flat in 2002. Whereas, total trade through the 4 major land  border ports fell by 5 percent in 2001, U.S. exports to Mexico through these  ports fell by 10 percent. The port of Nogales, Arizona, experienced the  sharpest decrease in trade, with total trade declining by 9 percent in 2001  and 13 percent in 2002. Table 7 provides information on U.S. imports,  exports, and total trade with Mexico by border crossing. The four border  crossings examined—Laredo, El Paso, San Diego, and Nogales—are  Customs districts that represent 33 individual ports of entry along the U.S.- Mexico border.
section_title: Maquiladora Employment Statistics
paragraphs: After growing rapidly throughout the 1990s, Mexican national maquiladora  employment peaked in October 2000 and declined sharply through March  2002. However, the rise and decline in maquiladora employment varied by  state and city. As table 8 shows, the city of Tijuana experienced both the  greatest percentage increase in maquiladora employment (233 percent  from 1990 through October 2000) and the greatest decline (30 percent  through December 2002). For each state or city, table 8 shows the number  of jobs in 1990, followed by the number of jobs at the peak of employment  (usually around October 2000) and at the lowest point, or trough, following  the peak. The table also includes the changes in employment in absolute  and percentage terms. The rise and decline of maquiladora employment  also varied by industry. Table 9 shows employment changes for three key  industries—electronics, autos and parts, and textiles and apparel—along  with details on the rise, peak, and trough for the top five border region  cities in terms of maquiladora employment.
section_title: Objectives, Scope, and Methodology
paragraphs: Our work focused on employment and production trends on the U.S.- Mexico border and recent trends in the maquiladora industry. We also  analyzed data on overall U.S.-Mexico trade and compared trends along the  border with developments in the broader U.S. and Mexican economies. To  complete our objectives, we conducted interviews with government  officials in the U.S. and Mexico, as well as semistructured interviews with  29 industry associations. Between November 2002 and February 2003, we  conducted site visits in three areas of the border with a considerable  maquiladora presence: McAllen, Texas–Reynosa, Tamaulipas; El Paso,  Texas–Juarez, Chihuahua; and San Diego, California–Tijuana, Baja  California. Our selection criteria consisted of two characteristics integral  to the maquiladora industry: (1) the number of maquiladora employees and  (2) the number of maquiladora plants.
In addition to conducting site visits in selected border areas, we met with  U.S. officials and traveled to Mexico City to meet with Mexican government  officials. In the United States, we met with officials from the Department of  State, Office of the U.S. Trade Representative, International Trade  Commission, Environmental Protection Agency, Immigration and  Naturalization Service, Department of Labor, Department of  Transportation, Department of the Treasury, and U.S. Customs. In Mexico,  we met with officials from the Ministry of Economy; Ministry of Labor;  National Institute of Statistics, Geography and Information Technology;  Ministry of Treasury; Ministry of Government; and Ministry of  Environment. We obtained, reviewed, and analyzed data from maquiladora  industry experts, nongovernmental organizations, and Mexican and U.S.  government agencies.
We also met with academics at educational institutions in Mexico and the  United States, including San Diego State University; the University of  California, Los Angeles; University of California, San Diego; University of  Texas at El Paso; Colegio de la Frontera, Tijuana; Universidad Nacional  Autónoma de Mexico; and Universidad Autónoma Metropolitana de  Xochimilco. In addition, we met with numerous representatives of industry  and nongovernmental organizations as well as other maquiladora experts.
To understand how communities along the U.S.-Mexico border are  integrated and the role that maquiladoras play in U.S.-Mexico  interdependence (objective 1), we interviewed experts on the maquiladora  industry, academics, and representatives of nongovernmental  organizations.   We reviewed extensive documentation and academic  research provided by these sources, analyzing economic, social, and  political linkages between border communities and the influence of the  maquiladora industry in the border region. We identified similarities and  differences between border communities with regard to social and  economic integration.
To review the status and trends in trade, employment, and output  (objective 2), we obtained original official data on employment and trade  from both U.S. and Mexican government agencies.   We analyzed the data to  identify trends in employment and production in the U.S.-Mexico border  area. We compared our analysis of trends along the border with  developments in the broader U.S. and Mexican economies. For example,  for the United States, we conducted a shift-share analysis that decomposes  employment growth (or decline) in a region over a given time period into  three components: the national growth effect, the industry mix effect, and  the local (competitive) effect. To assess the quality and reliability of the  data, we conducted in-person meetings with government officials of the  National Institute of Statistics, Geography and Information Technology in  Mexico City to discuss the methodology for collecting the data and any  known limitations or biases. For instance, statistics on maquiladora  employment and production are affected when companies leave the  program. Although establishments and employees are no longer considered  part of the maquiladora sector and statistics correctly show a decline in  maquiladora employment, the firms and employees may still remain in  operation outside of the program. We also analyzed the data sources for  internal consistency, as well as external consistency with other sources of  information, such as our structured interviews. Although both U.S. and  Mexican statistics have some limitations, we consider the data sufficiently  reliable to present general trends and magnitudes in production,  employment and trade.
To identify the factors that have affected employment and production in  the maquiladora industry (objective 3), we analyzed economic data and  conducted semistructured interviews. Specifically, to determine the link  between maquiladora employment and U.S. economic conditions, we  assembled data on maquiladora employment in total and by main sectors as  well as quarterly U.S. GDP data from January 1980 to December 2002. We  then converted all of these data to their natural logarithms and performed a  regression of maquiladora employment on U.S. real GDP, U.S.  manufacturing shipments and the real peso-dollar exchange rate. The  semistructured interviews were conducted in person and by telephone with  29 representatives of business associations, consisting of organizations  representing principal industrial sectors involved in maquiladora  operations, and maquiladora associations at the local and national level.
Of these 29 organizations, 23 reported their members experienced a decline  in employment and/or production. We asked these 23 organizations to  discuss the major reasons for the maquiladoras’ recent decline. We relied  on business associations to identify the factors affecting employment and  production in the maquiladora industry, because of the direct experiences  of their membership with plant closures, changes in employment levels,  and other company changes. We also relied on associations to comment  generally on issues facing the industry, such as increased competition, and  for information on overall industry trends. In selecting potential interview  participants from maquiladora and other business associations, to ensure  representation throughout the industry, we considered three criteria:  geographic location, industry sector, and country of origin or region of  representation.
Of the 29 associations interviewed, 17 were maquiladora associations and  12 were industry-specific associations. The maquiladora associations were  primarily identified through the membership list for Mexico's National  Council of the Maquiladora Export Industry (Consejo Nacional de la  Industria Maquiladora de Exportación -- CNIME) that has a membership  including 22 maquiladora associations located across Mexico. We  contacted all 22 members and the national association, and we completed  interviews with the national association and 14 local member associations.  We completed additional interviews with two maquiladora associations  that were not members of CNIME, but were included to broaden  representation of country of origin/region of representation (i.e., Japan and  the United States). Of the 12 industry-specific associations, we sought  interviews with associations representing major industrial sectors,  specifically targeting the electronics, automotive, and apparel sectors. Of  the 29 associations, Mexico, the United States, and Japan were the country  of origins/regions of representation included.
We developed 14 questions for the semistructured interview guide, based  on previous research. Six questions were closed ended, and eight were  open ended. Participants’ responses to the open-ended items were content- analyzed by two trained coders, and intercoder reliability values were  computed. Reliability values ranged from 58 percent to 100 percent. The  coding category scheme was modified until 100 percent agreement was  reached between the two coders. The results will not be generalizable  outside our sample; however, we believe we have included associations in a  way that is as balanced and inclusive as possible within the number of  interviews we were able to conduct.
To identify the implications of recent developments in the maquiladora  industry for the border region and U.S.-Mexico trade (objective 4), we  analyzed documents and interviews citing factors that might influence the  recovery of maquiladora production. We also analyzed the debate about the  viability of the industry and some initiatives to identify and address its  recovery. The information on foreign laws in this report does not reflect  our independent legal analysis, but is based on interviews and secondary  sources.
We performed our work from July 2002 through July 2003 in accordance  with generally accepted government auditing standards.
section_title: Comments from the Department of State
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those listed above, Joel Aldape, Bronwyn Bruton, Gezahegne  Bekele, Francisco Enriquez, Reid Lowe, Alison Martin, and Timothy  Wedding made key contributions to this report.
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