History of Mexican manufacturing
In the mid-1960s, Mexico launched the Maquiladora Program as an assembly platform for United States manufacturing.
Under the North American Free Trade Agreement, or NAFTA, the program grew, and by 2006 it employed 1.2 million workers.
In 1990, Mexico established the Programa de Importación Temporal para Producir Artículos de Exportación (PITEX), which by 2006 included 3,620 firms as well as all motor vehicle assembly plants and most of their parts suppliers in Mexico by 2006.
In 2006, the Mexican government merged the two programs to create IMMEX — the Industria Manufacturera, Maquiladora y de Servicios de Exportación.
“Mexico’s contribution of high quality at a lower cost has made it a primary source for manufacturing in a variety of industries, including electronics, aerospace and automotive,” according to NAPS International, an organization that specializes in outsourced administrative and compliance management services. “The IMMEX is a program that enables foreign companies to operate in Mexico under a preferential, low-tax cost structure, while still taking advantage of Mexico’s lower-cost labor.”
According to the University of Arizona, 82 percent of maquiladora plants are located in border states — including Sonora, Mexico — while only 35 percent of PITEX establishments were located in border states.
By creating IMMEX, the Mexican government introduced a single entity responsible for more than 60 percent of Mexico’s total manufacturing employment.
In 2014, IMMEX included more than 6,000 establishments with more than 2 million employees, according to UArizona. The program’s third-quarter revenue in 2014 was roughly $7 billion, making it the second-most important source of foreign currency in Mexico after the exportation of crude oil.
However, IMMEX does not just help Mexico; it also helps Arizona and the U.S.
“The significance of the IMMEX sector for Arizona’s economy is primarily as a destination for Arizona manufacturing products and as a market for Arizona business services,” wrote Vera Pavlakovich-Kochi, senior regional scientist and associate professor of geography at UArizona. “About 30 percent of maquiladoras in Sonora are owned by Arizona parent companies and through a production-sharing model remain competitive in global markets.”
The maquiladora industry
According to NAPS, the Maquiladora Program originally started as a way of alleviating unemployment in the U.S.- Mexico border region.
Since 1965, Mexican maquiladora factories have been run and owned by foreign companies that manufacture products in Mexico and export them to other countries. The factories operate under preferential tax and fiscal programs established by the Mexican government and the foreign company’s nation — primarily the U.S. — which allows most production equipment and materials to temporarily enter Mexico tariff-free.
In 1985, maquiladoras were the largest source of foreign exchange in Mexico, but the industry did not truly boom until after NAFTA was approved in 1994.
According to Made in Mexico, Inc., maquiladoras can save international companies up to 75 percent on labor costs for several reasons:
- The entry-level wage for low-level jobs in Mexico is approximately 25 percent less than the hourly wage paid to workers in the U.S.,
- Mexico has a standard work week of 48 hours,
- Companies can have fast and easy startups with little capital investment, turning projects that would be cost-prohibitive in the U.S. into lucrative possibilities.
And Sonora is the Mexican state leading the way.
According to Mexican company Tetakawi, the state has a climate “ripe for investment” because of its location as well as its labor market.
“Sonora’s propinquity to the U.S., large pool of qualified bi-lingual, Mexican labor, competitive infrastructure, and considerably lower manufacturing operating costs are catching the interest of investors. Sonora represents [and] is characterized by a multitude of reputable and up-and-coming opportunities for businesses, both foreign and domestic,” the company said on its website.
Sonora’s principal industries are aerospace, automotive, metal mechanical, mining, renewable energy, electronics, agribusiness, medical and informational technology.
Nogales, Sonora, just across the border from Nogales, Arizona, leads the state in manufacturing, with the largest number of maquiladoras in Sonora. The border city has roughly 34,000 jobs and more than 100 manufacturing plants.
Computer and electronic product manufacturing make up the majority of the industry in Nogales — about 23 percent — and next come apparel manufacturing and transportation equipment manufacturing, including parts for the aerospace industry, according to UArizona.
On the other side of the border, Arizona manufacturing has been influenced by maquiladoras.
“About 35 percent of Nogales, Sonora, maquiladoras are owned and operated by out-of-Arizona parent companies (including those in California); about 11 percent has parent company in Phoenix or Tucson, while only 20 percent of maquiladoras have parent company (or an outpost of parent company) in Nogales and Santa Cruz County,” UArizona reported.
To learn more about Sonora’s manufacturing sector, click here.
IMMEX and maquiladoras under the USMCA
In 1994, the U.S., Mexico and Canada approved NAFTA — the world’s leading free trade pact.
NAFTA led to growth in many industries, including manufacturing, among the three countries.
The U.S.-Mexico-Canada Agreement (USMCA), which would modernize NAFTA in several ways, could have a significant impact on manufacturers in Mexico, primarily those in the automotive industry.
The automotive industry
Under the USMCA, passenger vehicles and light trucks must have 75 percent of the car’s contents made in North America by 2023.
The U.S. and Mexico will also be maintaining a side agreement that protects both from tariffs on $108 billion worth of automotive parts, and an allowance of 2.6 million cars shipped across the border, according to Tetakawi.
Creating new labor value content
Another provision in the USMCA states that 40 percent of automotive products must be made by workers who earn at least $16/hour. Mexico agreed to give its workers the right to seek union representation as well as other labor protections to comply with the increase in automotive labor.
E-commerce and digital trade
Another part of the USMCA addresses e-commerce regulations, digital trade and intellectual property to bring the agreement into the 21st century.
Under the new agreement, Mexico and Canada would raise their de minimis shipment value levels to $50 USD in Mexico and $40 C in Canada. Duty-free shipment values will increase to $117 USD for Mexico and $150 C for Canada.
The new de minimis levels will make it easier for digital and e-commerce companies to reach new markets in both Mexico and Canada, which will benefit both small businesses and consumers by allowing them to import and export more goods without requiring a formal customs transaction, according to “The USMCA and Its Impact on Arizona,” a paper published earlier this year by the Arizona-Mexico Commission, the Arizona Chamber of Commerce and Industry, and the Arizona Chamber Foundation.
All three countries’ legislative bodies must ratify the agreement, something Mexico has already done. U.S. House of Representatives Speaker Nancy Pelosi said the U.S. will be addressing the agreement in Congress soon, but has wavered on whether Congress will act before the end of 2019.