Over the last 40 years, Mexico has made concerted efforts to open its economy and expand its industrial base. Starting with the Border Industrialization Program in 1964, Mexico has tried to lure foreign investment into the country through a series of trade, customs and economic policies. We have outlined below the key policies and how they affect manufacturing operations in Mexico.
THE MAQUILADORA PROGRAM
In 1965 the Mexican government established the in-bond or maquiladora program, a program that allows duty-free importation of raw materials, components and equipment needed for the assembly or manufacture of finished goods for subsequent export. The program originated from the need to industrialize northern Mexico and slowdown migration to the U.S. by creating jobs along the border.
Defined more precisely, Maquiladoras are foreign-owned, controlled or subcontracted manufacturing plants that process or assemble imported components for export. They operate under a special customs regime which allows the maquiladora to temporarily import into Mexico on a duty free basis, machinery, equipment, materials, parts and components. These items can be used for the assembly or manufacture of finished goods for subsequent export as well as administrative equipment such as computers, and communications devices, subject only to posting a bond guaranteeing that such goods will not remain in Mexico permanently.
A maquiladora program entitles the company to foreign investment participation in the capital and in management of up to 100% without need of any special authorization. The first maquiladoras were established in 1966 in Tijuana, Baja California and Ciudad Juarez, Chihuahua under what was referred to as the ‘Border Industrialization Program’. Currently, the maquiladora industry is ruled by the Decree for the Development and Operation of the Maquiladora Export Industry.
Maquiladoras are governed by special provisions in the Customs Law and the Foreign Trade General Rules issued annually by the Ministry of Finance (SHCP), as well as other laws of general application in Mexico, such as the General Law of Commercial Companies, the General Law of Ecological Equilibrium and Environmental Protection, the Federal Labor Law, and the Social Security Law.
Refer to the Legal and Incorporation chapter in the Information Center for information on:
Industry Size
There are 2,860 maquiladora companies operating in Mexico with nearly 90% of them in the border zone. These companies have a combined gross production of $85.74 billion and represent 55% of Mexico’s manufacturing exports. Major maquiladora locations include Matamoros, Ciudad Juarez, Nogales, Mexicali, Nuevo Laredo, Reynosa, and Tijuana. From a U.S. perspective, 70% of the labor-intensive Fortune 500 companies have maquiladora operations.
(Source: INEGI, Federal Reserve Bank of Dallas)
Maquiladora Employment
In Mexico, the export sector is the leading generator of jobs: more than half of the new jobs created between 1994 and 2000 related to export activity. Employment in the maquila sector has been steadily growing and maquiladoras are now responsible for over 15% of Mexico's manufacturing jobs. As of today, the maquiladora industry currently employs 1,137,862 people. Export-oriented manufacturing jobs pay wages nearly 40% higher than the rest of the manufacturing industry.
Mexico’s Border States account for most of maquiladora employment, though employment in the interior of Mexico has steadily increased during the last decade. Refer to the following graph from the Federal Reserve Bank of Dallas:
Main Maquiladora Sectors:
The electronics and automotive sectors are the two main sectors both in terms of employment and number of plants. The textile apparel industry is still important, though it has lost some ground in recent years. In contrast, manufacturers of electrical machinery, equipment and accessories are increasing their presence rapidly.
Moving Operations into Mexico
When moving operations into Mexico, foreign manufacturers have three options: establish their plant in Mexico by themselves; find a contract manufacturer, or rely on a shelter company.
Companies can establish a subcontracting relationship with a U.S. or Mexican subcontractor with plants in Mexico. In this arrangement, the foreign firm normally provides the components or raw materials, specialized equipment, etc., while the sub-contractor carries out all the manufacturing or assembly work and takes charge of the import-export process as well.
B. Shelter Operation
Establishment of a shelter operation whereby the foreign company maintains control of the production process, providing research and development, raw materials, equipment, capital and often quality control. The shelter operator assumes responsibility for other associated operations, i.e., set-up, legal, accounting, customs and labor and serves as a liaison with the Mexican Government. The shelter company then usually charges the foreign company on a per hour/worker basis.
C. Direct Ownership
The foreign parent company establishes a Mexican corporation, which will carry out the manufacturing-assembly operations with direct control assumed by the foreign parent company. It is important to note that corporations can be 100% foreign-owned.
For more information on subcontracting and shelter operations, refer to our Shelters and Contract Manufacturing chapter in the INFO CENTER.
Specialized Maquiladoras
The current Maquiladora decree recognizes the existence of specialized maquiladora companies such as agro-industrial maquiladoras, as well as companies involved in the exploitation of mineral resources, fishing and forestry, service providers and companies operating as shelters.
Service activities may include repair services; maintenance of plants, machinery and equipment; telecommunications; personnel training and other types of support services needed by the maquiladora industry. There is also the possibility of establishing maquiladoras that offer services to financial institutions, such as check processing, credit card services, data-processing and telemarketing.
Types of Production
Maquiladoras may have different types of production, including the simple assembly of temporarily imported parts; the manufacture from start to finish of a product using materials from various countries, including Mexico; or any conceivable combination of the various phases involved in manufacturing, or even non-industrial operations, such as data-processing, packaging, and sorting coupons.
The PITEX Program
On May 3, 1990, the Federal Government enacted the PITEX PROGRAM, "Programa de Importación Temporal para la Exportación" (Temporary Importation Program for Exportation). This program is designed to assist Mexican companies by making it possible for them to enjoy the benefits of the maquiladora program, including importation of machinery, raw materials and packaging into Mexico for assembly or production without paying import duties with the condition that they are re-exported as a processed product.
However, PITEX companies that subsequently decide to sell part of their production in the domestic Mexican market are required to pay the corresponding customs duties and value added taxes.
The PITEX program allows the temporary import of the following goods:
On May 12, 2003, President Vicente Fox published in the Federal Official Gazette amendments to the “PITEX Decree”. The most relevant amendment refers to the concept of submaquila that was added to the PITEX Decree.
NORTH AMERICAN FREE TRADE AGREEMENT: NAFTA
On Dec 17, 1992, U.S. President George Bush Sr, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas signed the North American Free Trade Agreement (NAFTA), between Canada, Mexico, and the United States, which went into effect on January 1st 1994. NAFTA's main objectives, according to the official three-nation summary are:
Mexico’s Trade Policy
During the last four decades, Mexico has made a dramatic transition from a relatively closed economy to become one of the most open countries in the world. This process began with Mexico’s entry to GATT in 1986, and continued with the signing of free trade agreements with 32 countries, including the North American Free Trade Agreement (NAFTA) in 1994.
Mexico is now one of the main trading economies of the world. According to the World Trade Organization, Mexico became the 8th biggest exporter and the 7th biggest importer worldwide in 2003, reaching $344.3 billion of merchandise trade. See figure below:
