Offshore Manufacturing
Offshore Manufacturing
In recent years, offshore manufacturing (manufacturing outside of the borders of a particular country) has provided a useful alternative to giving up the domestic market to low-cost foreign competitors. Offshore manufacturing escalated sharply in the 1960s and 1970s in the electronics industry worldwide as one firm after another set up production facilities in the Far East, principally in Taiwan and Singapore. Those locations were chosen because of low labor costs, the availability of cheap materials and components, and prox-
imity to markets. Now these countries are beginning to give way to the newer "low-cost" countries of Asia (Indonesia, Thailand, Malaysia, Vietnam, and Bangladesh) and Latin America.
Maquiladora Industry Mexico has become one of the newest centers for offshore production for U.S. firms through the maquiladora industry. The
Mexican government estimates that the industry, which already earns more foreign exchange than any industry in Mexico except oil, could employ 1 million people by the year 2000. There are currently nearly 500,000 people employed in maquiladoras.21 Under the maquiladora concept, U.S.-sourced components are shipped to Mexico duty free, assembled by Mexican workers, and reexported to the United States or other foreign markets under favorable tariff provisions. U.S. duties are levied on the imports only to the extent of the value added in Mexico. Since labor is so cheap, the value added is not great. Approximately 97 percent of the components are made in the United States, and the maquiladora concept is especially beneficial for firms where 30 percent or more of the product cost is labor. This industry allows U.S. firms to assemble products more cheaply than would have been possible in the United States and provides employment for Mexicans.22 Map 14.2 identifies the major locations for the maquiladora industry and compares wage rates for Mexico and some other key countries. The maquiladora wage rates vary depending on the industry, but the average hourly labor rate plus benefits in 1988 ranged from $0.75 for the processing of food and related products to $1.15 for the manufacturing of machinery and equipment.23
There are approximately 1500 maquiladoras in Mexico, most of which are owned by U.S. firms. However, Japanese firms are also investing significant capital in Mexico for assembly and export into the United States. It was estimated in 1990 that 65 of the maquiladoras were owned by the Japanese.24
Many firms are combining the maquiladora concept with free trade zones being established by the Caribbean Basin countries. Some of the countries being used most frequently are Costa Rica, the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Panama, and Puerto Rico. The major attractions of these countries are low labor costs, tax incentives, tariff concessions, and access to U.S. markets through specially negotiated agreements or provisions in the U.S. tariff schedule. In Jamaica during the mid-1980s, for example, the minimum salary for skilled workers was $16 per week, investors were exempted from sales and profit taxes, some imports and exports were duty free, and there was free repatriation of profits.25
There are, on the other hand, problems with the maquiladora plants. Many complain that the plants are little more than foreign enclaves on Mexican soil. Given that the firms import 97 percent of the components, the value added in Mexico is practically nothing. Because the goods are produced for export rather than domestic consumption, local consumers do not benefit from the production. In addition, the growth in employment, as noted in Fig. 14.3, has created serious social problems along the border. People are streaming to the border for jobs, because the jobless rate in the border area prior to
the establishment of the maquiladoras was close to 40 percent, and there is not enough infrastructure to handle this influx. Living conditions are poor, and there are charges of severe environmental degradation, which the lax environmental standards have done nothing to impede, and the largest component of the labor force is women.26
In the future, the proposed free trade area comprised of Canada, the United States, and Mexico (discussed in Chapter 11) may change the nature of the maquiladora industry. A key condition behind the maquiladora concept is the existence of tariffs on trade between the United States and Mexico and the fact that those tariffs are relaxed on maquiladora transactions. If there were no tariff barriers between the United States and Mexico, there would still be investment in border industries, but there would be no need to remain there exclusively. Other investment could take place in Mexico and still take advantage of good labor rates.
In recent years, offshore manufacturing (manufacturing outside of the borders of a particular country) has provided a useful alternative to giving up the domestic market to low-cost foreign competitors. Offshore manufacturing escalated sharply in the 1960s and 1970s in the electronics industry worldwide as one firm after another set up production facilities in the Far East, principally in Taiwan and Singapore. Those locations were chosen because of low labor costs, the availability of cheap materials and components, and prox-
imity to markets. Now these countries are beginning to give way to the newer "low-cost" countries of Asia (Indonesia, Thailand, Malaysia, Vietnam, and Bangladesh) and Latin America.
Maquiladora Industry Mexico has become one of the newest centers for offshore production for U.S. firms through the maquiladora industry. The
Mexican government estimates that the industry, which already earns more foreign exchange than any industry in Mexico except oil, could employ 1 million people by the year 2000. There are currently nearly 500,000 people employed in maquiladoras.21 Under the maquiladora concept, U.S.-sourced components are shipped to Mexico duty free, assembled by Mexican workers, and reexported to the United States or other foreign markets under favorable tariff provisions. U.S. duties are levied on the imports only to the extent of the value added in Mexico. Since labor is so cheap, the value added is not great. Approximately 97 percent of the components are made in the United States, and the maquiladora concept is especially beneficial for firms where 30 percent or more of the product cost is labor. This industry allows U.S. firms to assemble products more cheaply than would have been possible in the United States and provides employment for Mexicans.22 Map 14.2 identifies the major locations for the maquiladora industry and compares wage rates for Mexico and some other key countries. The maquiladora wage rates vary depending on the industry, but the average hourly labor rate plus benefits in 1988 ranged from $0.75 for the processing of food and related products to $1.15 for the manufacturing of machinery and equipment.23
There are approximately 1500 maquiladoras in Mexico, most of which are owned by U.S. firms. However, Japanese firms are also investing significant capital in Mexico for assembly and export into the United States. It was estimated in 1990 that 65 of the maquiladoras were owned by the Japanese.24
Many firms are combining the maquiladora concept with free trade zones being established by the Caribbean Basin countries. Some of the countries being used most frequently are Costa Rica, the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Panama, and Puerto Rico. The major attractions of these countries are low labor costs, tax incentives, tariff concessions, and access to U.S. markets through specially negotiated agreements or provisions in the U.S. tariff schedule. In Jamaica during the mid-1980s, for example, the minimum salary for skilled workers was $16 per week, investors were exempted from sales and profit taxes, some imports and exports were duty free, and there was free repatriation of profits.25
There are, on the other hand, problems with the maquiladora plants. Many complain that the plants are little more than foreign enclaves on Mexican soil. Given that the firms import 97 percent of the components, the value added in Mexico is practically nothing. Because the goods are produced for export rather than domestic consumption, local consumers do not benefit from the production. In addition, the growth in employment, as noted in Fig. 14.3, has created serious social problems along the border. People are streaming to the border for jobs, because the jobless rate in the border area prior to
the establishment of the maquiladoras was close to 40 percent, and there is not enough infrastructure to handle this influx. Living conditions are poor, and there are charges of severe environmental degradation, which the lax environmental standards have done nothing to impede, and the largest component of the labor force is women.26
In the future, the proposed free trade area comprised of Canada, the United States, and Mexico (discussed in Chapter 11) may change the nature of the maquiladora industry. A key condition behind the maquiladora concept is the existence of tariffs on trade between the United States and Mexico and the fact that those tariffs are relaxed on maquiladora transactions. If there were no tariff barriers between the United States and Mexico, there would still be investment in border industries, but there would be no need to remain there exclusively. Other investment could take place in Mexico and still take advantage of good labor rates.
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