What Is a Maquiladora?

A maquiladora (also known as a twin plant) is a manufacturing operation or factory in Mexico, usually near the U.S.-Mexico border, that operates under a favorable duty- or tariff-free basis. The administration facility of the parent company of a maquiladora is located in the United States.

The presence of maquiladoras is the result of an agreement established between Mexico and the U.S. in the 1960s. These factories have certain tax advantages that make them attractive to businesses. Companies can capitalize on a cheaper labor force in Mexico and also receive the benefits of doing business in the U.S. The presence of maquiladoras contributed significantly to the industrialization of the Mexican-American border.

Key Takeaways

  • A maquiladora is a low-cost factory in Mexico, usually located near the U.S.-Mexico border, that assembles products and then exports them back to the United States.
  • Companies can capitalize on a cheaper labor force in Mexico and also receive the benefits of doing business in the U.S., including certain tax advantages.
  • The North American Free Trade Agreement (NAFTA) expanded the maquiladora program by ending tariffs.

Understanding Maquiladoras

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 the 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 that produce everything from clothing and consumer electronics to cars, drones, medical devices, and aircraft components. Maquiladoras are attractive to businesses because of the customs and duties reduction they offer and because Mexican labor is plentiful and significantly cheaper than paying for American labor.

The structure of a maquiladora system is set up so that the parent company is located in the United States and the manufacturing operation or factory is located in Mexico. The Twin Plant Agreement does not require that all participating companies are located near the border. However, from a logistical standpoint, it makes more sense, 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, for example. Creating geographic proximity minimizes the cost of transportation and improves supply chain management. Many maquiladoras are also strategically located close to airports, roads, railroads and shipping ports.

History of Maquiladoras

The creation of the maquiladora system was spurred by the end of the Bracero program in 1964. The Bracero program allowed for Mexican agricultural workers to be employed in the U.S. seasonally. In order to address the high rates of unemployment that the ending of the Bracero program created, the Mexican government created the maquiladora program. This provided U.S. corporations with a vast supply of cheap labor.

When the North American Free Trade Agreement (NAFTA) was ratified in 1994, ending tariffs that impacted the maquiladoras system, the number of maquiladoras exploded. In the second half of the 1990s, the number of maquiladoras nearly doubled each year.