The maquiladora industry dates back to the mid-1960s and was
created by the Mexican government to improve Mexican employment and its economy.
As such, the program subsidized foreign manufacturers to set up manufacturing
facilities on the Mexican side of the US-Mexico border. With the adoption of
NAFTA in 1994, the number of maquiladoras has expanded beyond the border and
into the central part of the country and today, the industry represents 4.0% of
Mexico’s GDP and 40.0% of exports. It is also the country’s second source of
foreign exchange behind oil.
Similar to other “emerging countries”, over the past years, Mexico
has enjoyed a rapid growth in its economy; however, its infrastructure has
struggled to keep up and its rising middle class is now demanding improvements
in domestic programs such as education. However, the country is now experiencing
a slowdown and is in need to boost revenues to jump-start its economy. It is looking
towards its maquiladora industry to help raise the needed revenue.
According to the Journal of Commerce, as part of a larger $14bn tax plan, maquiladoras will face an income tax
increase from 17.5% to 30.0% effective beginning in 2014 and an
additional 16.0% value-added tax will be enacted beginning in 2015. Tax
incentives such as food credit and housing subsidies for workers will also be
eliminated. While it has yet to be signed by Mexico’s president,it is creating a stir.
How will this legislation affect Mexico’s global
competitiveness? Although Mexico has many free trade agreements with countries
world-wide, it remains heavily dependent on the US. In fact, it is estimated
that 80% of maquiladoras are of US origin. This potential tax could possibly result
in an increase in onshoring back to the US. There certainly has not only been
political pressure to bring more manufacturing back to the US but the stubborn
high unemployment rate and sluggish economy has also resulted in increasing
competition among states to attract new businesses by offering generous tax benefits.
Perhaps the Caribbean or Central America may even become alternative outsourcing
locations?
More importantly, it
is unknown how this legislation will impact Mexico. In many ways, the growth of
the automotive industry has helped shift the focus away from border maquilas as
GM, Ford, Nissan, Volkswagen and other automotive manufacturers locate assembly
plants to the country. These facilities generally demand advanced labor skills
and the pay is higher than that of a traditional border maquila. Still, these
facilities depend on maquilas. Will this tax increase jeopardize the country’s
automotive industry?
Mexico is struggling with many issues as it attempts to
break free of its “emerging country” status. Crime and corruption, a growing
middle class, a slowing economy, poor infrastructure and much more needs to be
addressed. While change is definitely needed, perhaps the government should also
consider the privatization of state-own entities such as PEMEX and also work
with industry leaders to address the many challenges to arrive at practical
solutions.
