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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 maquilasto 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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