Economy

The Lessons Of Mexico's Maquiladoras: Where Free Trade And Labor Rights Compete

A "maquiladora" in Mexico
A "maquiladora" in Mexico
Daniel Lederman and Julia Oliver

CIUDAD JUAREZ – A maquiladora, or maquila, is an offshoring factory or manufacturing plant operated under U.S.-Mexico free trade agreements to encourage the development of industry in Mexico.

Mexico allows materials used in maquilas to enter duty-free, provided the finished product is then immediately exported out of Mexico. The U.S. in turn charges these products a much lower tariff than products from other countries. Companies using this labor arrangement include Levi’s and Siemens.

The world is as interconnected as ever, and there is no better place to see that than the U.S.-Mexico border. Lined with factories, the border between both countries has become less clear because of NAFTA (North American Free Trade Agreement), international production chains and other economic and social links.

On the Mexican side of the border, almost 3,000 factories import components and raw materials. Workers assemble the products – most of the finished goods are destined for the U.S. market.

The big question is: does this benefit Mexican workers?

These export-oriented industries provide almost two million jobs, which translates into a strong drive for development in Mexico. But as it turns out, these job posts can disappear very quickly. In this sense, the economic benefits for the U.S. depend largely on the labor conditions of Mexican workers, who absorb up and down cycles through a series of adjustments.

While the U.S. economy is rarely unstable, this is an important finding that could have political implications in the whole world. Mexico resembles a growing number of countries that promote the export-oriented industry as a strategy for development and enact trade reforms that integrate the local economy to the global market.

A study conducted by the World Bank International Trade Department, The Inter American Development Bank and Macalester College, used data from Mexican social security records and U.S. customs records between 2007 and 2009 to analyze how economic shocks emanating from the U.S. are transmitted to the offshoring maquiladoras of northern Mexico. The study produced four specific conclusions:

First, the study showed that when Mexican imports fell during the crisis, employment in the maquiladoras did as well. This defies common sense with regard to what you would normally expect in trade. Normally, when imports drop, employment increases because industries that compete with imports thrive.

In the typical scenario, a decrease in imports cushions the negative impact of a decrease in export demand. However, the findings in the study are consistent with an environment that relies heavily on imports for the assembly of finished goods, as is the case in northern Mexico.

Such an environment, the study showed, is subject to large fluctuations in employment. In fact, the maquiladora industry is doubly affected when the U.S. economy deteriorates: first, because American consumers buy less, and second, because they stop sending raw goods and U.S.-manufactured components to Mexico.

Unskilled workers most at risk

Second, the study showed that financial crises translated into layoffs and not salary cuts. The reason can be the small size of individual companies, who take wages as given. International trade shocks do not affect worker’s salaries; they tend to affect employment instead.

A third trend that appeared in the study was that the level of competitiveness among maquiladora employees increased in response to financial crises. Data suggested that the increase in imports and exports was conducive to a disproportionate hiring of unskilled workers and that trade shocks caused job losses in this specific group. In other words, the main beneficiaries of an increase in trade are the least skilled workers, but they are also the ones most at risk of loosing their jobs when trade is suddenly reduced.

Fourth, the study revealed that trade shocks that affect employment in related industries also affect maquiladora factories. This can be described as a “domino effect” that propagates through factories in northern Mexico and increases employment instability in the sector. The data confirmed that a decrease in related imports affects the number of jobs in an economic scale that is equal to the decrease in direct imports. For example, a decrease in computer chip imports – which has a great impact on workers that work in computer assembly plants – can cause similar damage to employees from the service industry (such as restaurants, retail stores) who serve workers in computer assembly plants.

These lessons learned from Mexico shed light on the relationship between trade and employment in a labor environment that is becoming more and more common throughout the world: that of export-oriented industries that depend on the regularity of imports.

If globalization and its associated trade flows are generally beneficial for development, and the links between the U.S. and Mexico have been beneficial for both countries, it is also important to know how this affects workers. At a time when more and more developing countries are adopting export-focused strategies for growth, Mexico’s experience helps politicians understand how these strategies impact workers’ lives.

Ideally this type of analysis will help countries develop complementary policies to stabilize employment in sectors that depend on foreign trade.

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Geopolitics

Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3

-Analysis-

LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.


Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

commons.wikimedia.org

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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