Made in Mexico

For decades, China and smaller Asian countries have become the

go-to nations for factories and foreign-owned manufacturing. But in recent years,

eyes have slowly turned towards the potential of Mexico to become a

manufacturing powerhouse. We dig into the history of Mexico’s

maquiladoras–foreign-owned Mexican factories– and why they might be the future of production.

What are Maquiladoras, or twin plants?

Maquiladoras are manufacturing plants in Mexico where the administration is based in the United States, while the manufacturing is done in Mexico. These companies use the lower labor cost in Mexico but do business in the United States. They do not have to pay import duties on the equipment or materials they send to Mexico. So, workers in Mexico make products and then send them back to the U.S. or other countries to be sold. Some of these companies include “Casio, Hitachi, Honeywell, Hyundai, and Samsung.” (San Diego)

So, how did all this begin?

It started in 1965 when the Mexican government was concerned about unemployment. They were established under the Twin Plant Agreement. This agreement allows companies to manufacture in Mexico while having their administration in the U.S. The only exception is “Mexico City, Monterrey, or Guadalajara urban areas where industries are already concentrated.” (CFI)

There are three main types of maquiladoras. The first is a Mexican company that has a parent company. The parent company is in control of all operations. The employees report to the U.S. company and have special permits to work in Mexico. The second is a Mexican firm that acts like a subcontractor, making the items and sending them to the U.S. The last type is shelter maquiladoras. “A shelter simply provides U.S. companies with some protection from Mexican financial and legal exposure. These types of maquiladoras accept technology, capital equipment, and component parts from a non-Mexican firm for assembly in Mexico and subsequent exportation. The sheltering entity provides plant space, Mexican transportation, Mexican brokerage, daily administration of Mexican employees, and daily plant operations. The sheltering entity bills the prime contracts on

a fully-burdened hourly basis.” (San Diego)

What are the benefits to these companies?

The main reason they were created was to increase employment in Mexico which they do. They give additional income to the border regions. They also transfer technology, increase foreign exchange, and increase competition in the U.S. They increase jobs in the U.S. as well with by hiring the administration for the companies. Maquiladoras also get tax treatments like duty-free and tariff-free imports, which is also beneficial. (CFI)

Are we the only ones doing this?

No. The United States is just one of other countries building twin factories. “...scores of major Chinese companies are investing aggressively in Mexico, taking advantage of an expansive North American trade deal. Tracing a path forged by Japanese and South Korean companies, Chinese firms are establishing factories that allow them to label their goods ‘Made in Mexico,’ then trucking their

products into the United States duty-free. This practice is called “...nearshoring. International companies are moving production closer to customers to

limit their vulnerability to shipping problems and geopolitical tensions. After going through the pandemic and the supply chain crisis, the China Covid shutdown, many North American manufacturers would like to eliminate the risk,’ said Sean Seo, a Seattle-based executive for DY Power. “Globalization has ended,’ he declared. ‘It’s local-ization now.’” (Goodman)

They could also cash in on recent U.S. incentives. “The CHIPS Acts,

which devotes $50 billion to semiconductor manufacturing and

research, and the Inflation Reduction Act, which offers $369

billion of incentives to mitigate climate change, are aimed at

stimulating U.S. domestic investment. But both have provisions

that could benefit Mexico, including funding for the United States

to work with partner countries to make the semiconductor supply

chains more secure, and incentives for consumers to purchase

clean cars with parts made in countries with which the United

States has a trade agreement, such as Mexico.” (Goodman)

In short, as long as working conditions are monitored and wages

permit families to fully meet their needs, many can

benefit–including you.

Made in Mexico: References

CFI Team. (2023, January 13). Maquiladora. Corporate Financial Institute.

https://corporatefinanceinstitute.com/resources/management/maquiladora/

Goodman, Peter S. (2023, June 20). Why Chinese Companies Are Investing Billions in

Mexico. The New York Times.

https://www.nytimes.com/2023/02/03/business/china-mexico-trade.html

Maquiladoras/Twin Plants. The City of San Diego.

https://www.sandiego.gov/economic-development/sandiego/trade/mexico/maquil

adoras

Swanson, Ana. (2022, September 13). The U.S. Touts Big Investments for Mexico, Testing

Its Nationalist Policies. The New York Times.

https://www.nytimes.com/2022/09/13/world/americas/us-mexico-investments-bid

en.html

Tavernise, Sabrina, etal. (2023, February 21). Why ‘Made in China’ Is Becoming ‘Made

in Mexico.’ The New York Times: The Daily Podcast.

https://www.nytimes.com/2023/02/21/podcasts/the-daily/us-mexico-trade-china.h

tml