Benefits of Manufacturing in Mexico
Manufacturing in Mexico has rapidly grown as a result of a significant political and economic reorganization in the early 1990s. The economy shift resulted in the North American Free Trade Agreement (NAFTA) with the US and Canada. State-owned companies were privatized changing Mexico’s economy into an export-oriented industrial one. As trade between Mexico and the US increased, a “manufacturing belt” of maquiladoras, factories in Mexico that produce goods for US markets. Mexico maquiladoras are built with foreign capital in Mexican border cities (Tijuana, Juarez, Matamoros). Mexican trade with the US accounted for 80 percent by the 21st century.
By the 2000s China’s “special economic zones” began offering cost-competitive alternatives, however. As a result, maquiladoras in Mexico began producing more valuable automotive, aeronautical, and electronic products. Clothing exports continued to decline, but automotive and electronic exports remained cost-competitive due to NAFTA. US suppliers provide duty-free equipment and raw materials for manufacture/assembly which are re-exported back to the US. Finished product profits are realized by the US, but the maquiladoras Mexico provide employment to many.
Mexico’s IMMEX Program
The IMMEX (Promotion of the Manufacturing, Maquila and Export Services Industry) Decree was created in 2006 by the Federal Government with the intent to increase Mexico’s competitive advantage in global export markets. The IMMEX Program integrates the benefits of legacy programs and simplifies relations with government authorities. It allows temporary importation of goods used to produce, transform, or repair foreign goods temporarily imported, which will eventually be exported without requiring payment of import tax, value-added tax, and countervailing duties (where applicable).
Impacts of IMMEX
US-based companies question how the duty-free maquiladora IMMEX program helps improve their operations by reducing costs. The IMMEX includes holding, industrial, services, shelter, and outsourcing companies, providing they meet the requirements set forth in the Decree for the Promotion of the Manufacturing, Maquila and Export Services Industry (IMMEX Decree) published in the Official Gazette of the Federation on 1 November, 2006.
The IMMEX program offers maquiladoras the opportunity to import (tax free) goods necessary to produce, transform, or repair (foreign) goods and subsequently export them. The main benefit of the IMMEX program is the ability to defer taxes on goods that are temporarily imported into Mexico and the ability to consolidate import declarations.
Key benefits to IMMEX participants include:
• No General Import Tax required in Mexico (i.e.: IGI, Arancel-Ad-valorem); this varies according to the type of goods/materials and industry;
• No VAT (typically 15% of the import value or 10% for US border cities);
• No compensatory quotas (duties applied to protected products (i.e.: anti-dumping);
• Reduced Customs fee (DTA) (from 8% to 1.76% of the value for machinery; a fixed fee of 179.00 pesos for goods);
• No domestic purchase taxes (which are applied to exported goods);
• Virtual pedimentos (import/export declarations) between IMMEX-registered companies are permitted;
• Consolidated Import pedimentos are permitted;
• VAT refunds received (within 20 days) when a company shows a positive balance on its declarations;
• The import of machinery, equipment, and parts is permitted in accordance with the Sectorial Benefits Program (PROSEC), and
• Automatic inscription in the National Importers registry.
The increase in manufacturing has resulted in some maquiladoras owned by the US, Japan, and European countries to become “sweatshops” (young women working 10hours/day, 6 days/wk. for 50-cents/hour). NAFTA has required maquiladoras improve worker conditions and wages. Even skilled workers in air-conditioned garment maquiladoras are paid $1-$2/hour.
Border town costs of living is generally higher (approximately 30%) than in southern Mexico, and single maquiladora women live in shantytowns around factories that have no electricity or running water.
Companies that own the maquiladoras typically do not inform their employees about unions and union benefits. Although companies have upgraded workers’ standards, most employees work as many as 75 hours/week. Some northern Mexico maquiladoras are equally responsible for significant industrial and environmental pollution and damage.
Today’s IMMEX Program
Today, one of Mexico’s primary and most important customs programs is IMMEX. Laws make its utilization by US companies complex/difficult. Cross-border operations and strategies must be thoroughly evaluated to effectively leverage IMMEX benefits within regulatory guidelines.
As of 2014, the IMMEX program included approximately 6,171 companies, employing approximately 2,464,669 workers.
The IMMEX sector is the second most important source of foreign currency in Mexico. Crude oil exports rank number one.
The IMMEX sector also holds significance for US/Arizona’s economy. It serves as a major destination for Arizona manufacturing products and market for Arizona business services. Thirty-percent of Sonora maquiladoras are owned by Arizona parent companies.
IMMEX manufacturing sectors include companies involved in manufacturing transportation equipment (including Mexico’s auto industry). Mexico’s auto industry accounts for 16% of all companies, 32% employment, and 44% of total IMMEX manufacturing sector revenues. Computer and electronic manufacturing employment ranks second, and employment in the electrical equipment, appliance, and component manufacturing areas ranks third.
IMMEX non-manufacturing sectors include companies involved in agriculture, mining (excluding oil and gas), agriculture and forestry materials trade, warehousing and storage, administrative/support services, waste management and remediation, etc. Agriculture-based companies are the leading non-manufacturing sector. It includes 25% of all companies, 51% of all employees, and 20% of total IMMEX non-manufacturing sector revenues.
The attractiveness of maquiladoras, compared to China’s “cheap assembly,” has declined in recent years. Within the last ten years, more than 500 plants have closed adding to significant unemployment. a loss of several hundred thousand jobs.
Mexico’s Growing Economy
Mexico economic growth and economic development have performed well in comparison to other major Latin American economies in recent years, largely because of its thriving manufacturing sector. Unlike Brazil and Argentina, whose manufacturing sectors are slumping, Mexico has continued to see solid growth because of its integration with and dependence on the U.S. market. Although low global oil prices will put pressure on the Mexico economy growth, the performance of the manufacturing sector — especially in high-end manufacturing — will be a key driver of Mexico’s economic development and growth this year and beyond.
Mexico has significantly benefitted from its focus on the US market and diversified manufacturing production. Unlike the slowing economies of Brazil and Argentina (that, with Mexico, comprise more than 80% of Latin America’s manufacturing output), Mexico has not experienced any slump or slowdown in its manufacturing sectors. Mexico has also performed better primarily due to its more-open economy and support of free trade. Brazil and Argentina, both implement a protectionist import-substitution model, and overall South American trade with the US is less than Mexico’s trade with the US. Mexico’s manufacturing output increased by 3.4 percent in the first three-quarters of 2014. Brazil and Argentina’s dropped off by 1.8% and 2.4%, respectively.
Additionally, the robust auto industry and non-manufacturing activities have contributed to more evenly distributed employment across the country since implementation of the IMMEX Program (2006). Although Mexico’s border states account for 60% of the IMMEX Program companies and employment, centrally located Guanajuato Querétaro have also experienced increases. The highest number of companies is in Baja California (approximately 18% of the total). The number one city having the highest IMMEX Program employment rate is Chihuahua (13% of the total). Sonora averages 6% in both the number of employees and the number of companies in the IMMEX Program.
China’s rising wages has created changes within the global manufacturing industry. Mexico’s average manufacturing labor cost today is approximately 20% lower than China’s. At the turn of the century, in 2000, Mexico’s labor costs were 58% higher than China’s. The explanation lies in the particular Mexico regions and types of products that are manufactured. For example, Monterrey (northern Mexico) is primarily a steel producing area. The GDP per capita tops $40,000. Additionally, a relatively large share of US export-oriented, middle-oriented, and high-end type of manufacturing occurs in northern Mexico. The electronics industry also significantly contributes to the economy of northern states, such as Chihuahua, Baja, California, and Tamaulipas. Meanwhile, the low-end manufacturing of products such as textiles and garments continues to grow in southern Mexico, in cities such as Campeche and Veracruz. Labor costs in this region mirror China’s.
Fueling Economic Growth and Development
NAFTA continues to contribute to free trade and Mexico’s overall economic growth and development. Democratic reforms which contribute toward political stability and human development are intended to improve productivity and economy. Mexico manufacturing as a result has benefitted more than China’s has.
Mexico’s four largest maquiladora industries (apparel, transportation equipment, computers and electronics / electrical machinery) collectively account for three quarters of its maquiladora production. Compared to similar and similarly-sized US industries, all four Mexico maquiladora industries show significantly higher economic volatility than those in the US. Conversely, employment volatility is much lower than that of the US.
The Arizona-Mexico region and economic relationship continues to grow. The maquiladora model was conceived and implements more than 40 years ago. Since then, Arizona’s companies have capitalized on their geographical location and proximity to Mexico’s assembly and production plants – particularly assembly and production plants located in nearby Sonora.
Export data specific to the maquiladora sector is not available, however, the top five manufacturing exports from Arizona to Mexico (computer/electronics, electrical equipment, machinery, transportation equipment, and primary metal manufacturing) imply a strong IMMEX maquiladora relationship. Manufacturing exports come from Michigan, California, and Illinois and use Arizona’s border ports to Mexico. These provide further opportunities for Arizona’s companies to expand trade relationships with the IMMEX sector.