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A term “cutting the fat” is often used in business. This means in order to run a business effectively, a company must cut costs on a consistent basis. Cutting costs can come in many different ways, whether it means letting go of the least efficient 10% of employment, using a lean production line, or cutting overhead, it is important for any business to operate successfully.
In the United States we have millions of business and one of the ways they are “cutting the fat” is by outsourcing their manufacturing and importing those manufactured goods. The goal of importing is to reduce costs significantly, thus increasing a business’s profit on the sale of those goods. The only reason importing is beneficial is because of the lower labor costs associated with those goods. So what will those businesses do when the cost of labor overseas increases and added with the shipping costs, they are no longer making the margins they once were? Or what do businesses do when they do not have the volume to import from overseas? Is there a smarter way to do business? In the past thirty years, more and more United States companies are outsourcing their manufacturing and importing goods to and from Mexico. So what agreements between the U.S. and Mexico make this possible? What positives and negatives are created from this type of trade?
In the early/mid 1940’s, Mexico was having difficulty keeping natives in Mexico to work. The pay was low, the working conditions were miserable, the living conditions were terrible and there were greater opportunities for Mexicans to work on the boarders and in the United States temporally under the Bracero Program. This program allowed Mexican workers, who were experienced in agriculture and farming, to come to the United States and help with American crops and to flourish our agriculture. Mexicans however stopped harvesting their own crops and hurt their economy by leaving Mexico to make more money in the States. In 1964 the Bracero program was cancelled for various reasons. Even though the program was cancelled Mexican workers stayed in the United States hoping for work. The Mexican Government had to create something that would entice Mexicans to come back to Mexico to work and to help boost the Mexican economy. The only way to do this was to create incentives for foreign investments and foreign innovation companies to begin working with the country.
In 1965 there was a program created between the United States and Mexico called the Border Industrialization Program (BIP), also known as the maquiladora program. This program allowed foreign owned parent companies to operate in Mexico for the assembly, processing, and finishing of tax free foreign materials and components made into products for export, usually back to the country that ordered them. So essentially these Mexican companies would import disassembled goods, assemble/manufacture greater goods from them and ship them back to the U.S to be warehoused and sold. In 1966 the United States and Mexico created new rules to make production more efficient. The program was later expanded to the rest of Mexico in 1972, and in 1989 Mexico allowed 50% of all products manufactured in maquiladoras to be sold in Mexico if at least 15% of the product was made from Mexican parts and if it did not compete with another Mexican made products. This was a large jump from the original 20%.
Program for Temporary Imports to Promote Exports (PITEX)
The Program for Temporary Imports to Promote Exports was established in 1990. Its goal was to increase competition with the maquiladoras. “It offered some of the same duty-free benefits enjoyed by Maquiladora operations to other Mexican companies which sold most of their products on the domestic Mexican market” (United States Labor Department). These businesses were located in southern and central Mexico, unlike the maquiladoras that were in Northern Mexico. This program had its own rules and regulations like the maquiladora program.
North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA) was created and put into effect in 1994. This agreement removed most trading barriers between the United States, Canada, and Mexico. Some of the goals for the NAFTA agreement were to reduce trade barriers, which include the decrease of taxes, improve working conditions in North America, and to create a better and safer market for goods that are produced in North America. This agreement also gives many benefits to us as individuals living in North America; cheaper goods, safer goods, and a better economy.
The North American Trade Agreement had an effect on the Maquiladora Agreement and the Program for Temporary Imports to Promote Exports. As time went on the two began to merge and the Mexican Government decided in 2007 to officially merge the two programs into what is now called the
Maquiladora Manufacturing Industry and Export Services (IMMEX).
Positive effects on U.S. Companies and Economy
What positives can be seen for U.S companies and our economy from maquiladoras and the NAFTA agreement?
According to the report U.S.-Mexico Economic Relations: Trends, Issues and Implications, by Congress Research Services:
In 2008, about 11% of total U.S. merchandise exports were destined for Mexico and 10% of U.S. merchandise imports came from Mexico. In the same year U.S. exports to Mexico increased almost 10%, while imports from Mexico increased about 3%. For Mexico, the United States is a much more significant trading partner. About 82% of Mexico’s exports go to the United States and 50% of Mexico’s imports come from the United States. Foreign Direct Investment (FDI) forms another part of the economic relationship between the United States and Mexico. The United States is the largest source of FDI in Mexico. U.S. FDI in Mexico totaled $91.7 billion in 2007. The overall effect of NAFTA on the U.S. economy has been relatively small, primarily because two-way trade with Mexico amounts to less than three percent of U.S. GDP.
So according to this information the impact that NAFTA and maquiladoras have had on our economy is relatively low. In relationship to our GDP this is true, but still private industry groups say that maquiladoras have helped United States companies stay competitive in a global market by decreasing the cost of goods and shipping. “Hourly compensation costs for production workers in manufacturing Mexico – $1.21 vs. US – $17.70” (Global Trade Watch, The NAFTA Index, October 1, 1998), this is saving American companies a lot of money.
The propinquity of the United States and Mexico, allows American companies to have a greater percentage of U.S. supplies in the final manufactured product, which helps enables U.S. companies that manufacture these components to stay in business and continue to expand. The Federal Trade Commission states that if the components in a manufactured good take up a large percent of the final cost, and the components are from America, then companies are allowed to say Made in U.S.A. (Enforcement Policy Statement on U.S. Origin Claims, section: Remoteness of Foreign Content). This could help sales within the states. This also proximity allows Mexican boarding states to save substantially on the import/shipping of the goods from Mexico, in comparison with importing goods from overseas; it is now just a short drive to receive their goods. These companies in Mexican boarding U.S. states can have a maquiladora just across the border, where their primary assembly and manufacturing takes place and they can have several facilities in the United States where they will warehouse finished goods, do administrative and engineering work and help sustain our economy by increasing job production. It is a win-win for both our friends in Mexico and for the American economy.
The National Institute of Statistics and Geography states, “the maquiladora industry expanded rapidly in the 1990s. The number of plants grew from 1,920 at the end of 1990 to 3,590 in 2000. After 2000, the number of maquiladoras fell to 2,860 in 2003. Since 2004, the number of plants has stayed at approximately the same levels, totaling 2,819 in 2007”. There are also over 1 million Mexicans employed by maquiladoras. So again this helps the U.S. and Mexico. This is a growing field of business and more and more types of businesses are using them. As time goes on and the cost of labor overseas increases, along with the cost of shipping, United States business will no longer be saving enough to continue to import goods. These businesses will need to find a better solution to reduce manufacturing costs and many of them will turn to maquiladoras.
Negative Effects of Maquiladoras
Some say that maquiladoras improve the quality of life for Mexicans and Americans; that their benefits far outweigh the costs. What are those costs?
Critics have stated that by United States businesses working with, or owning maquiladoras, that they are taking away millions of jobs from Americans. As a business owner I can see this point. The company I run is an innovation company, which outsources everything. We use a maquiladora whose headquarters are based in Tucson. We send them a Purchase Order; they then manufacture our goods in Mexico and ship them back to their Tucson warehouse. This company inventories and stores the goods and ships them out when we receive orders. By operating a business like this we cut all overhead and decrease the need for employees while increasing revenues to go into designing new products. Though this is good for us, it does not really benefit the American economy. No matter how big we get we will never need more than 5 employees. A vast amount of American companies that use maquiladoras operate in the same manner.
Along with perhaps hurting America’s job growth, are we hurting anything else? According to the Southwest Consortium for Environmental Research and Policy and the NAFTA index, Air quality, water quality and health are all effecting U.S. boarding states due to so many maquiladoras. Maquiladoras do increase jobs for Mexicans, but with the large increase in jobs in smaller regions of the country, some of the areas cannot accommodate the waste and sewage produced by so many people. “Under NAFTA, maquiladora employment increased by 54% in Ciudad Juárez, spurring significant population growth. Yet Juárez still has no waste treatment facility to treat sewage produced by the 1.3 million people who now live there.” (NAFTA at 5, Global Trade Watch).
Accompanying excess sewage waste, air quality has decreased due to the quick expansion of maquiladoras, “According to the EPA, border area residents are exposed to health-threatening levels of air pollutants, including carbon monoxide. The following US border areas exceed ambient air quality standards: El Paso, TX; Dona Ana County, NM; Imperial County, CA; San Diego, CA; Douglas, AZ; Nogales and Yuma, AZ.” (NAFTA at 5, Global Trade Watch), they also say “The [Texas] Department [of Health] recently declared that, ‘the entire border area remains a high-risk area [for neural tube defects] compared to the rest of the US.'”.
These are staggering facts and something needs to be done to improve these health and environmental issues. Do these costs incur that maquiladoras are not only bad for the American economy, but bad for the Mexican economy as well? Are the costs really worth it?
Though maquiladoras have many pros and cons, they still produce a lot of good for both Mexico and American businesses. No business operation will ever be perfect and these negative issues listed are not everyday occurrences. We must rely on NAFTA and each other’s governments to see that the proper steps are taken to make improvements; mainly environmental improvements.
Maquiladoras in the end are good for business. They allow Mexico’s economy to increase and improve the overall quality of life for those working in them. Yes, they improve the United States economy as well. Although they can decrease job growth, they increase more than decrease. An example if this increased growth is a maquiladora can have a manufacturing plant in Mexico and have several warehouses and businesses linked in the United States. This in turn increases job growth in Mexico and gives many jobs to Americans. Also by saving so much in manufacturing costs it enables U.S. companies to create new innovations, which will be created into products and further help the economy. Thus helping American business rather than hurting them.
In the foreseeable future outsourcing and importing from overseas will not be as appealing as it once was and for a local Tucson company on the boarder of Mexico, maquiladoras improve business dramatically and enable us to “cut the fat” more effectively. For now maquiladoras are safe, efficient and beneficial for the growth of the U.S. economy. The benefits far outweigh the costs.
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