Explaining Mexico's Maquila Boom

EXPLAINING MEXICO'S____ MAQUILA BOOM David Ehrenthal andJoseph Newman JLn the past twenty-five years the character and composition of U.S. direct investment in Mexico has changed markedly. Most important has been the shift in investment to Mexico's maquiladora, or in-bond, sector, which assembles and exports products using imported parts. This development has been fueled from both sides of the border: by U.S. investors reacting to economic, regulatory, and political changes in Mexico and by the Mexican government seeking to improve its precarious economic situation. The result has been dramatic growth of the maquiladora sector , which in the first half of 1987 accounted for close to half of Mexico's exports to the United States. Mexico's maquiladora, or maquila, sector has emerged as a key arena of change in U.S.-Mexican relations in the 1980s. Out of the traditional dependent relationship, in which Mexico relied heavily on American capital a new, more interdependent U.S. -Mexican industrial alliance is evolving. A host of incentives—intensified international economic competition , the decline in the ability of American firms to defend U.S. market shares, low and falling unit labor costs in Mexico, and preferential duties on U.S. goods assembled abroad—have all stimulated increased U.S. investment in Mexico's maquila sector and, with it, the industrial interdependence between the two nations. The level of U.S. direct investment in Mexico has displayed fairly steady growth since 1965. The only major deviations from this trend occurred in 1976, and again between 1982 and 1985. In 1976 the outflow of capital reflected investors' uncertainty about Mexico's future economic David Ehrenthal and Joseph Newman are M.A. candidates in the Latin American Studies Program at SAIS. They are co-founders of a group examining Latin American trade and investment opportunities. 189 190 SAIS REVIEW growth and stability.1 This "confidence" crisis, caused by an overvalued peso and a deteriorating economic situation, was eventually resolved through an International Monetary Fund (IMF) stabilization program. An ominous liquidity crisis in 1982 provoked the second major downturn, which lasted significantly longer than the first. Bridge loans from the U.S. government, credit from the U.S. Commodity Credit Corporation , and an unplanned purchase of Mexican oil to fill the U.S. Strategic Petroleum Reserve temporarily resolved the crisis.2 This second downturn and the sluggish recovery that followed actually caused a net outflow of U.S. direct investment in Mexico. During this twenty-three year period, the composition of U.S. direct investment in Mexico changed substantially. The mining share fell from almost 10 percent to less than 1 percent, and the petroleum share, despite a temporary rebound between 1978 and 1981 , declined markedly as well. The manufacturing share of total U.S. direct investment in Mexico, however, rose from 64 percent in 1965 to 80 percent in 1985. Further, U.S. investments in manufactures, such as transportation equipment, electronic machines, and chemicals, grew especially fast, more than doubling between 1977 and 1985, due to the growing importance of maquilas in the U.S. direct investment portfolio. All of these shifts not only reflected economic, political, and regulatory changes in Mexico but also mirrored changes in the global economy within which U.S. multinationals operate. The Growth of U. S. Direct Investment in Maquilas Why were U.S. firms so willing to transfer their operations into Mexico's maquila sector? A variety of economic, regulatory, legal, and political factors must be evaluated before selecting an overseas production site. Most firms send assembly operations abroad primarily to reduce production costs.3 Lower production costs are in turn a function of an ample and productive labor supply, industrial parks, convenient transportation , accessible utilities, available supplies, low building costs, available 1.For more information on Mexico's economic crisis, see Judith Adler Hellman, Mexico in Crisis (New York: Holmes and Meier, Inc., 1983), 3-172. 2.For an in-depth analysis of Mexico's crisis in August of 1982, seeJoseph Kraft, The Mexico Rescue (New York: Group of Thirty, 1983). 3.By assembly, we mean products that are under 806.30 and 807.00 of the United States Tariff Schedule. Section 806.30...