Full text of Business Frontier : Issue 1, 2001 : NAFTA, the U.S. Economy and Maquiladoras

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E l

P a s o

BusinessFrontier
FEDERAL RESERVE BANK OF DALLAS

NAFTA,
the U.S. Economy
and Maquiladoras
Because of NAFTA
and other new, related
rules, the maquiladora
label may no longer
be warranted. What
remains as a viable,
increasingly important
component of the
Mexican economy,
however, is the industrial base created by
maquiladoras — one
that is intimately linked
with the economy
across the border.

EL PASO BRANCH

ISSUE 1 • 2001

Teighth
he North American Free Trade Agreement, now in its
year, is generating the expected increased trade
between the United States, Mexico and Canada. In
addition, the agreement has spurred investment flows
between the three countries.1 Still in question, however,
is NAFTA’s impact on Mexico’s maquiladora industry.
The agreement includes a set of rules for maquiladoras,
the most important of which were slated to begin in
2001. This article first looks at the maquiladora industry’s 2001 performance in light of the U.S. economic
slowdown. It then discusses the NAFTA provisions for
the industry and their impact on it thus far.2

2001 MAQUILADORA PERFORMANCE
Key Indicators
The maquiladora industry is U.S.-demand driven
since most of Mexico’s maquiladora production is
destined for the U.S. market. Chart 1, which traces the
relationship between U.S. economic activity and maquiladora exports, shows that periods of U.S. economic
expansion are associated with sustained maquiladora
export growth. Conversely, periods of deceleration—
such as the one currently under way —exert a downward impact on maquiladora export performance.
As seen in Table 1, the U.S. economic slowdown
has dampened overall maquiladora activity in 2001.
While maquiladora employment growth exceeded 12
percent in 2000, figures for January–May 2001 indicate
growth of only 3.1 percent year-over-year. Also, after
growing 24.5 percent last year, maquiladora exports
through May grew only 6.9 percent from the year-earlier
period.
Although these figures are evidence of a considerable slowdown in maquiladora activity, growth in all
indicators remains positive for the year. This situation

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

nessed a boom from 1995 through 2000 and NAFTA
became effective in 1994, the agreement has also
been credited as a source of industry growth.
However, the December 1994 peso devaluation is what actually spurred the industry’s
rebound. Devaluation resulted, on an overnight
basis, in dramatic cost reductions for maquiladora
companies.3 In fact, recent Dallas Fed research
shows that NAFTA has not been responsible for
maquiladora industry growth. The factors found to
predominantly determine the growth pattern of
maquiladoras are U.S. industrial production and
the manufacturing wage ratio between Mexico
and the United States and between Mexico and
Asia (where the peso/dollar exchange rate is
absorbed).4

Chart 1

U.S. GDP and Maquiladora Exports, 1987–2001
(Annual growth)
Percent
45
40
35
30
Maquiladora exports

25
20
15
10

U.S. GDP

5
0
–5

’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01
NOTE: Data for 2001 are for January through June.
SOURCES: Federal Reserve Bank of Dallas El Paso Branch, with data
from Banco de México and Bureau of Economic Analysis.

Top Sectors and Cities

is comparable with that of the 1990 –91 U.S. recession, when growth in the industry also remained
positive even as it underwent significant deceleration. Maquiladora industry exports grew 12.4 percent in 1990 and 14.7 percent in 1991, down from
average annual growth of 25.3 percent during
1986–89. Maquiladora employment growth decelerated to 3.9 percent in 1990 and 4.7 percent in
1991, down from average growth of 19.8 percent
per year during 1986–89.
Certainly U.S. economic activity explains much
of the growth, or lack thereof, in the maquiladora
industry. Another key factor behind this sector’s
performance is the peso/dollar exchange rate.
This variable determines the cost-effectiveness of
maquiladora operations because it measures the
accessibility, in dollar terms, of labor and other
inputs in Mexico relative to the U.S. and other
economies. Because the maquiladora sector wit-

While overall growth in the maquiladora
industry remained positive through May, it’s
important to note that some sectors have been
more affected by the U.S. economic slowdown
than what the general trend shows. Chart 2 traces
maquiladora employment growth in the industry’s
top three sectors. The U.S. economic slowdown
adversely affected employment in the transportation equipment and electronics sectors more than
in the textiles and apparel sector. Also, both transportation equipment and electronics are underperforming the industry in employment growth
this year.
In terms of cities, Ciudad Juárez and Tijuana
—the top two locations for maquiladora investment—so far show employment growth above
the overall trend. Thus, while total maquiladora
employment during January–May 2001 grew 3.1
percent over the year-earlier period, growth in
Juárez was slightly higher, at 3.5 percent, and
more than twice as high in Tijuana, at 7.8 percent.
Maquiladora employment growth in these two

Table 1

Maquiladora Industry Key Indicators

Plants
Employment
Total raw materials (billions of U.S. dollars)
Imported
Domestic
Value added (billions of U.S. dollars)
Exports (billions of U.S. dollars)

January–May 2001

Year-over-year
change (percent)

3,735
1,276,911

6.2
3.1

3,590
1,285,007

8.9
12.4

23.6
22.8
.8

10.9
10.3
29.7

55.3
53.5
1.8

18.6
18.3
27.6

8.1

22.3

17.8

28.4

32.2

6.9

79.5

24.5

2000

2000 annual growth
(percent)

SOURCES: Federal Reserve Bank of Dallas El Paso Branch, with data from Instituto Nacional de Estadística, Geografía e Informática; export data from Banco
de México.

cities reached double digits last year: 14.2 percent
in Juárez and 16.1 percent in Tijuana. Even though
maquiladora employment growth has managed to
remain positive, this year’s levels have come
down considerably from last year’s.
In Juárez, for example, maquiladora employment peaked in October 2000 at 262,805 workers.
Since then it has closely mirrored the U.S. economic slowdown, especially in the auto industry,
a prime maquiladora sector in Juárez. By May
2001, Juárez maquiladora employment had fallen
to 235,887, a contraction of nearly 27,000 workers
in seven months. Although no maquiladora company has shut down operations in Juárez,
maquiladoras in this city and elsewhere in Mexico
have taken steps to adjust to the U.S. economic
slowdown by eliminating shifts and shortening
workweeks. The employment numbers reflect
these adjustments.
At the same time, however, employment is
being sustained by increased investment in
Mexico stemming from supply- or cost-side factors
rather than demand considerations. The U.S. economic slowdown is motivating some U.S. companies to increase production in Mexico in an effort
to cut costs and thus keep prices down or even
push them lower to stimulate demand. This strategy helps companies preserve their existing market share and can potentially rescue profit margins
from drastic reductions. Indeed, new companies
have opened this year in Juárez and elsewhere in
Mexico as part of this trend.5

NAFTA AND MAQUILADORAS
Phase 1: 1994–2000
NAFTA rules for the maquiladora industry
were stipulated in two phases. The first covers the
period 1994–2000; the second starts in 2001.
During its first phase, NAFTA allowed the
maquiladora industry to preserve one of the
maquiladora program’s essential operational
schemes—duty-free importation of inputs into
Mexico, regardless of origin. Also during this first
phase, NAFTA greatly liberalized maquiladora
sales into the domestic market. For example, in
1993, the year before the agreement’s enactment,
a maquiladora company’s domestic sales were
limited to 50 percent of its previous year’s export
production. In 1994, the allowance of a maquiladora’s sales into the domestic market went up by
5 percent—to 55 percent of the previous year’s
export production— and was raised by increments
of 5 percent annually from 1995 to 2000. Thus, last
year a maquiladora’s domestic sales could equal
85 percent of its previous year’s export production. Moreover, in 2001 the NAFTA limit on

Chart 2

Maquiladora Industry Employment in
Principal Sectors, 1987–2001
(Annual growth)
Percent
40
35
30

Total
Transportation equipment
Textiles and apparel
Electric and electronics

25
20
15
10
5
0
–5
’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01
NOTE: Data for 2001 are for January through May.
SOURCES: Federal Reserve Bank of Dallas El Paso Branch, with data
from Instituto Nacional de Estadística, Geografía e Informática.

maquiladora domestic sales was totally relaxed so
that, if they so desire, maquiladoras are now
allowed to sell 100 percent of their production
domestically.6
So just how many maquiladoras have taken
advantage of the domestic market opening NAFTA
allowed? The answer is not many. Most maquiladoras have set up shop in Mexico with the intent
of serving the U.S. market. Although it’s conceivable that many companies would welcome the
opportunity to expand their market by selling
into Mexico, the trend has been one of focusing
production for the primary, and voluminous, U.S.
market. Moreover, since sales into Mexico would
require the assessment of duties on imported
components — given that duty-free status on
imported inputs is allowed only as long as 100
percent of the production is exported —then
maquiladoras would have to incur additional costs
(applicable tariffs plus administrative costs) before
entertaining sales into Mexico.7
Although few maquiladoras have been selling
directly into the domestic market, they have not
left the Mexican market altogether untapped. To
avoid the cumbersome and costly process of calculating the multiple duty rates on inputs for
product to be sold directly into the Mexican market, companies simply send their product to the
United States for export back to Mexico. Despite
the extra shipping costs, this indirect way of tapping into the Mexican market has resulted in more
favorable overall costs for maquiladoras. Duties
are typically less on the final product—it may
even be duty-free—and the simpler transaction
lowers administrative costs.

In its first phase, NAFTA also liberalized trade
and investment in the textiles and apparel sector
—the maquiladora industry’s second-largest employer.8 Moreover, local-content rules in Mexico’s
automotive sector were relaxed to allow treatment
of maquiladoras as national suppliers for purposes
of complying with local-content requirements.
Finally, prior to NAFTA, maquiladora goods entering the United States were assessed duties on the
part of the good not of U.S. origin. With NAFTA,
the value added to maquiladora output in Mexico,
along with U.S.-origin inputs, is now typically
excluded from duties.

Phase 2: 2001
Starting this year, NAFTA affects the maquiladora industry in one very important way: It abandons the provision of duty-free importation of
inputs into Mexico, regardless of origin. Instead,
North American rules of origin now determine
duty-free status for a given import. Thus, as long
as the source of the inputs is either the United
States or Canada, no duties are assessed. However,
whenever maquiladoras use non-North American
inputs, NAFTA’s Article 303 stipulates that duty
drawback provisions apply. Specifically, these
provisions allow maquiladoras to receive a duty
refund for the lesser of (1) the amount of duties
paid in Mexico for imported inputs or (2) the
amount of duties paid on the final product in the
United States or Canada at the time of importation
from Mexico.
To assess the possible impact of the 2001
NAFTA rules, we need to look at the volume of
inputs maquiladoras import from third countries.
If maquiladoras rely heavily on imported inputs
from sources outside the NAFTA region, it would
appear that starting this year, because the new
rules impose duties on these third-country imports
where no duties were assessed before, maquiladoras will face dramatically increased costs.
Actually, the opposite is true. The overwhelming
majority of materials, parts and machinery imported by maquiladoras —90 percent, according
to Banco de México—is sourced in the NAFTA
region, specifically in the United States. Thus, this
measure of overall maquiladora inputs would continue to enjoy the duty-free privileges that have
applied ever since the maquiladora program
started in 1965.
The fact remains, though, that now not all
inputs imported by maquiladoras can enter
Mexico duty-free. Even if only 10 percent of these
inputs would now face duties because they are
sourced in third countries, this translates into
higher costs for some industry participants, especially if the duties in question are excessively

high. In fact, one of the sectors most vulnerable to
the new rules is the industry’s largest—electric
and electronics —since this sector has important
supplier links with countries outside the NAFTA
region, predominantly in East Asia.
During NAFTA’s first phase, companies in the
electric and electronics sector alerted Mexican
authorities that the new duties they would face in
2001 on their third-country inputs would boost
their costs and threaten the competitiveness of
their investments in Mexico. To ensure compliance with the new North American rules-of-origin
provisions that would be triggered in 2001, some
third-country suppliers relocated to the NAFTA
region. This strategy was pursued especially by
Asian maquiladoras, which, along with maquiladoras in the electric and electronics sector, had the
most extensive supplier links with countries outside the NAFTA region. However, members of the
electric and electronics sector argued that it was
not feasible for some components to be found or
developed in the region or for third-country suppliers to relocate to the region. They contended
that the use of inputs from outside the NAFTA
region would still be required by 2001.
Mexican authorities responded in November
1998 by designating special rules that granted zero
or nominal duties for third-country inputs for
companies in the electric and electronics sector
(maquiladoras and nonmaquiladoras alike).9 Soon
other sectors brought their own case to Mexican
authorities and asked for the same special treatment for their third-country inputs. These developments ultimately resulted in the establishment
of the so-called Sectoral Promotion Programs.

Sectoral Promotion Programs
On December 31, 2000, Mexico passed a
decree creating 20 Sectoral Promotion Programs
(Programas de Promoción Sectorial, or PROSECs)
aimed at ensuring the continued competitiveness
of the maquiladora industry. The PROSECs, listed
in Table 2 with their average import duty, cover
19 specific areas and one miscellaneous area.
They extend preferential duties—of no more than
5 percent—to those third-country inputs that
maquiladoras have designated as critical for their
operation. Some third-country inputs have even
been granted duty-free status. Both maquiladora
and nonmaquiladora companies can use the
PROSECs. They also can petition Mexican authorities to establish additional PROSECs for areas not
covered under the existing programs.
Some maquiladoras have complained that
applying the PROSECs is cumbersome. However,
the industry agrees that the PROSECs have
resolved the potential risk of lost competitiveness

Table 2

Sectoral Promotion Programs (PROSECs)

Sector
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Electrical
Electronics
Furniture
Toys
Footwear
Metals and minerals
Capital goods (machinery and equipment)
Photography
Agricultural machinery
Chemicals
Rubber and plastics
Steel
Pharmaceuticals and medical equipment
Transportation equipment
Paper and cardboard
Wood
Leather and leather products
Automobiles and auto parts
Textiles and apparel
Other industries

Average
import duty*
(percent)
4.40
.02
0
0
4.18
4.32
3.29
.29
0
2.74
2.51
2.75
3.02
.44
1.86
0
0
.48
3.12
1.58

entry into Mexico of inputs, regardless of country
of origin, has been maintained.
Looked at another way, the maquiladora regime
that originated in the 1960s has been replaced
with a more comprehensive, maquiladora-like
regime that supports freer trade and investment
for all of Mexico’s manufacturing industry, since
both NAFTA and the PROSECs apply to maquiladoras and nonmaquiladoras alike. In this sense,
the maquiladora label may no longer be warranted, given that the initial program that established the industry has essentially ceased to exist,
along with its reason for being. What remains as a
viable, increasingly important component of the
Mexican economy, however, is the industrial base
created by the maquiladoras—one that is intimately
linked with the economy across the border.
— Lucinda Vargas
Senior Economist

NOTES
1

* This is the average duty that is applied to inputs imported from countries outside the NAFTA region by companies in the different sectors
specified.
SOURCE: NAFTA Works, Vol. 6, Issue 1, January 2001 (Embassy of
Mexico, Mexico’s Economy Ministry, NAFTA Office).

2

that could have resulted from strict adherence to
North American rules of origin in the determination of duty-free treatment of inputs. Moreover,
since the preferential duties under the PROSECs
apply to inputs that are imported on a temporary
(to be processed for export) or permanent (to
be processed for national distribution) basis, maquiladoras can now more easily entertain direct
sales into the Mexican market —as NAFTA now
allows—because any inputs imported from third
countries are now in a more acceptable and predictable tariff range than they were before 2001.

3

4

5

CONCLUSION
2001 has been an interesting year for maquiladoras. Although the maquiladora industry is still
growing, the U.S. economic slowdown has considerably dampened overall maquiladora activity.
Also, 2001 triggered significant NAFTA provisions
that would have limited duty-free status to maquiladora inputs imported from North America.
Instead, Mexico established sectoral promotion
programs that expanded the range of inputs with
preferential or zero duties to include those
sourced from third countries. Thus, much of the
original maquiladora scheme of allowing duty-free

6

7

8

For a discussion of NAFTA’s impact on trade and investment,
see the following issues of the Federal Reserve Bank of Dallas
El Paso Branch Business Frontier: “NAFTA’s First Five Years
(Part 1),” Issue 2, 1999; “NAFTA’s First Five Years (Part 2):
U.S.– Mexico Trade and Investment Under NAFTA,” Issue 1,
2000; and “U.S.– Mexico Trade: Sectors and Regions,” Issue 2,
2000.
This article completes a three-part series on NAFTA. Parts 1
and 2 appeared in Business Frontier Issue 2, 1999, and Issue
1, 2000, respectively.
Because maquiladora companies have dollar-denominated
budgets but their costs are in pesos, the overnight impact of
any peso devaluation is essentially a reduction in their
peso-based costs. Maquiladoras have therefore responded to
devaluations in Mexico by substantially expanding their
operations.
See William C. Gruben and Sherry L. Kiser, “NAFTA and
Maquiladoras: Is the Growth Connected?” in The Border
Economy, Federal Reserve Bank of Dallas, June 2001.
Two examples of companies that opened new maquiladora
facilities in Juárez in 2001 are Royal Philips Electronics of
the Netherlands and Tatung Co., Taiwan’s No. 1 manufacturer of electronics, home appliances and industrial equipment. Among the companies with new investments in
Mexico this year are Motorola, Xerox Corp., Nokia, Sanyo
Electric Co., IEC Electronics Corp., Escalade, Coastcast Corp.,
ArvinMeritor, Ansell Golden Needles and Guilford Mills.
While under NAFTA maquiladoras can, as of this year, destine their entire production to the domestic market, a new
Mexican government decree, enacted late last year, stipulates
that maquiladoras must export at least 10 to 30 percent of
their production, leaving 70 to 90 percent, not 100 percent,
to be sold domestically.
Prior to NAFTA, any maquiladora product to be sold into
Mexico was assessed duties on all non-Mexican inputs,
including components sourced in the United States. With the
start of NAFTA in 1994, duties on maquiladora products sold
into Mexico are now assessed only on non-NAFTA inputs;
therefore, imported components from the United States and
Canada are excluded from duties.
New NAFTA rules significantly opened up trade and invest-

9

ment for textiles and apparel. This resulted in dynamic
employment growth in this sector during the second half of
the 1990s. Also contributing to this dynamism, however, was
the boost the industry in general got from the December
1994 peso devaluation. In 1993, employment growth in the
textiles and apparel sector was 19 percent. It dipped somewhat in 1994—NAFTA’s first year—to 17.7 percent. However, textiles and apparel employment growth rebounded to
32.1 percent in 1995, the first year of combined NAFTA and
peso devaluation effects. During 1996 and 1997, growth rates
remained above 30 percent.
An argument that this was a potential way for Mexican authorities to handle third-country inputs was made in “The Changing
Dynamics of the Maquiladora Industry: How Much Does
NAFTA Matter?” in Business Frontier, November/December
1994. Indeed, in November 1998, Mexico enacted a decree
granting special treatment to third-country inputs used by
companies in the electric and electronics sector. However,
according to Rudy García, Foreign Trade Manager for
Philips—a leading representative of maquiladoras in the electric and electronics sector—an input that was excluded from
special duty treatment was cathode ray tubes (CRTs). U.S. CRT
manufacturers lobbied against granting preferential duties on
this input when imported by maquiladoras from countries outside the NAFTA region. Thus, the applicable duty on this
input, when imported from a third country, has remained in
the 15–18 percent range. Also, any non-NAFTA inputs that
originate in countries where Mexico has placed antidumping
sanctions, such as China, are excluded from the preferential
tariffs under the PROSECs. In these cases, the more prohibitive countervailing duty rates in place would apply.

Business Frontier is published by the El Paso Branch of the
Federal Reserve Bank of Dallas. The views expressed are
those of the author and do not necessarily reflect the positions
of the Federal Reserve Bank of Dallas or the Federal Reserve
System.
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www.dallasfed.org.
Editor: Lucinda Vargas, Senior Economist
Publications Director: Kay Champagne
Copy Editor: Jennifer Afflerbach
Design: Gene Autry
Layout & Production: Laura J. Bell

Coming Soon! BorderECONOMY
THE

This series of articles on the Texas–Mexico border, published by the Dallas Fed’s Research Department, explores
issues important to the border region’s economy:
• Job growth
• Wages
• Education
• Housing
• Infrastructure
• Maquiladoras
• Immigration
Copies of The Border Economy are available by calling
the El Paso Branch of the Federal Reserve Bank of Dallas
at 915-521-8235. Or you can access The Border Economy
on-line at www.dallasfed.org under the Publications
heading.
FEDERAL RESERVE BANK OF DALLAS