Maquiladoras And The Naftas Impact

.. mpetition. Since many manufacturers are moving to just-in-time inventory systems, the quick delivery possible from Mexicos border towns offers a substantial advantage over Asian alternatives. The NAFTAs Impact on the Maquiladora Industry Traditionally, Maquiladoras offered foreign businesses several advantages over other forms of direct foreign investment. Since the signing of NAFTA, however, many of these advantages are either being phased-out or granted to all Mexican companies. The most significant advantages of operating as a Maquiladoras include: 100% foreign investment, operation without ownership of assets, tax sheltering of cost centers, and 100% duty-drawback or waivers for temporary imports. Furthermore, the NAFTA attempted to address the labor exploitation and environmental problems associated with the Maquiladora industry.

100% Foreign Investment One of the benefits of the Maquiladora program is 100% foreign investment of Mexican operations, which formerly was not allowed. However, Mexicos Foreign Investment Law has changed through the years (most significantly in 1989 and 1994)full investment is now allowed in most business ventures. Operation Without Ownership of Assets Another advantage that Maquiladoras have is that they can receive production materials and capital goods as loans from their parent and client companies. As a result, most Maquiladoras have little of no inventory of fixed assets, eliminating the need to pay the Mexican asset tax of 2% of all assets. In January 1995, the Mexican IRS reported that Maquiladoras would now have to factor the depreciation of loaned assets in price-transfer calculations, which is the first step toward phasing-out this advantage by 2001.

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Tax Sheltering of Cost Centers When Maquiladoras are structured as cost center (providing manufacturing services for a foreign parent) the foreign corporation has traditionally paid the Mexican company for operating costs plus negligible profit. By doing this they avoid Mexicos 34% corporate income tax, 10% mandatory profit sharing, and asset taxes. Now the Mexican IRS is changing the way Maquiladoras must declare assets. Over the next few years, Maquiladoras will be forced to raise their declared profit percentage to a rate that is comparable to that of two unrelated companies performing the same transaction at arms length. This is the type of transfer pricing procedure that is implemented by most trading blocks, like the EC. It will soon be effect throughout North America.

100% Duty-Drawback or Waivers for Temporary Imports Maquiladoras have always allowed Mexican companies 100% duty drawback or waivers in imported components that are exported as final goods. Since 1994, this has provided many Maquiladora programs a way to use non-NAFTA materials within products without the need to pay the corresponding duties over those materials when importing or exporting goods to other NAFTA nations. On January 1, 2001, Maquiladoras that manufacture goods for export to NAFTA partner countries will no longer be allowed to take the waiver. The waiver will still be available for goods that are going to non-NAFTA countries. The NAFTA and Labor Exploitation In 1995 the NAFTAs of Labor created the National Administrative Office (NAO) as well as the North American Agreement on Labor Cooperation (NAALC).

Both were intended to stop labor abuses. The NOA was established to monitor labor complaints that NAFTA critics voice regarding unfair labor practices. The NAO can recommend ministerial consultations as well as imposed heavy sanctions against Mexico. Unfortunately, the side agreements proved useless. The NOA cannot force Maquiladoras to allow unionsthe most they can do is recommend ministerial consultations. Sexual harassment and discrimination continues as well. The NAFTA and the Environment The NAFTA has also created side agreements covering the environment.

One of them is the North American Development Bank (NAD Bank). Its purpose was to finance wastewater treatment projects along the border in the poorer communities. However, the most important criteria that needed to be met in order to receive funds were meeting certain market considerations. With this program NAFTA encouraged growth without regard for the environment through its practice of placing market consideration above environmental protection. Another is the Commission for Economic Cooperation (CEC). The CEC was established to investigate governmental non-enforcement of environmental laws.

Unfortunately it has no power to enforce ,they can only investigateand they cant even do that until Mexico collects the data on the pollution for them. Possible Strategy for the Maquiladora Industry As long as the Mexican currency is weaker than the US dollar I dont think that the changes are going to dramatically effect the flow of US companies to the south. However, the Maquiladora industry cannot count on this for continued growth. By the year 2001 the Maquiladora industry as we know it now will have significantly changed when the phasing out is complete. Maquiladoras will no longer be tax break establishments; they will be just like other foreign investments. In order for them to fully compete in the near future they must become more efficient and leaner.

The impact of globalization is forcing manufacturers to produce more rapidly and cheaply than ever before and to continuously improve. Because there will be no differentiation between the non-Maquiladora and Maquiladora industries I feel the inefficient producers will be wiped out. Therefor, Maquiladora employees will need better training, education, incentives as well improved working conditions and higher wages. Operations will also have to be streamlined in order to reap the benefits of economies of scale and scope. In addition, Mexicans as well as US citizens will start to demand more accountability from the Mexican government and the Maquiladora industry. They need to be more responsible for their actions.

What will the U.S. corporations do when human rights activists and environmentalists start lobbying and protesting on their US sites? Do they want to risk losing their shareholders to this type of negative attention? Bibliography Benitez, Gerardo, Latin American Perspectives: The Maquiladora Program Its Challenges Ahead, THE WHARTON JOURNAL, December 11, 1995. Clifford, Frank and Mary Beth Sheridan, Borderline Efforts on Pollution, THE LOS ANGELES TIMES, June 30, 1997, 1. Naumann, Ann K. and Mireille Hutchinson, The Integration of Women into the Mexican Labor Force Since NAFTA THE AMERICAN BEHAVIORAL SCIENTIST, June/July 1997, 950-956.