What is a Maquiladora
A maquiladora is Spanish term for a factory located near the United States-Mexico border that operates under a favorable duty- or tariff-free basis. Maquiladoras are a product of the Twin Plant Agreement established between the two countries in the 1960s and have certain tax advantages that make them attractive to businesses. The word “maquiladora” is commonly used in English rather than its translation, “assembly plant.” Maquiladoras are also called “maquilas.” As of 2018, maquiladoras accounted for 65% of Mexico's exports and employed 30% of its workforce.
Breaking Down Maquiladora
The Mexican Secretary of the Economy determines whether a plant is officially considered a maquiladora. This official designation is important because it qualifies the plant for unlimited foreign capital investment and duty-free imports. Duty-free imports apply to the raw and semi-finished materials that will be exported after manufacture or assembly as well as to machinery that will be used in the process. When a U.S. company imports the finished product, it pays duties on the value added to the product by Mexican assembly, but not on the raw materials that were previously exported.
There are thousands of maquiladoras, producing everything from clothing and consumer electronics to cars, drones, medical devices, aircraft components and much more. Maquiladoras are attractive to businesses not only because of the customs and duties reduction but also because Mexican labor is plentiful and significantly cheaper than American labor.
Maquiladora System Structure
Under the maquiladora system, the parent company is located in the United States and the manufacturing or assembly plant is located in Mexico. The Twin Plant Agreement does not require participating companies to locate near the border, but it generally makes more sense, for example, to locate one plant in San Diego and the other in Tijuana rather than locating one plant in Detroit and the other in Mexico City. Geographic proximity minimizes transportation costs and improves supply chain management. U.S.-Mexico border city pairs with maquiladoras include the following:
- San Diego - Tijuana
- El Centro - Mexicali
- Nogales - Nogales
- Sierra Vista-Douglas - Agua Prieta
- El Paso - Ciudad Juarez
- Del Rio - Ciudad Acuna
- Brownsville - Matamoros
Many maquiladoras are strategically located not only in relation to their cross-border counterparts but also in relation to airports, roads, railroads and shipping ports. Maquiladoras contributed significantly to the industrialization of the Mexican-American border.
The creation of the maquiladora system was spurred by the 1964 end of the Bracero program that let Mexican agricultural workers work in the United States seasonally. The Mexican government addressed unemployment near its borders by creating the Border Industrialization Program, or the Maquiladora Program. The cheap labor the system provided, as well as a cheap peso, created huge growth in maquiladoras even before 1994's North American Free Trade Agreement (NAFTA). Once NAFTA was ratified, the number of maquiladora plants exploded, nearly doubling each year in the second half of the 1990s. As of 2018, President Donald Trump has asked Mexico to end the maquiladora program as he seeks to renegotiate or end NAFTA.