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NAFTA, Mexico Maquiladoras: Frequently Asked Questions

Discussion of any issues related to importing to Mexico.

NAFTA, Mexico Maquiladoras: Frequently Asked Questions

Postby bridgat » Mon Nov 17, 2008 12:31 pm

DOCUMENT TEXT: Please Note: Due to the large number of requests for information on the maquiladora industry, the Office of NAFTA is making this information available. However, the Office of NAFTA neither encourages nor discourages U.S. firms to set up maquiladoras in Mexico. U.S. firms with an interest in the maquiladora industry should direct their questions to the SECON contacts listed at the end of this document.

1) What is a "Maquiladora"?

A maquiladora is a Mexican corporation operating under a special customs regime which allows the corporation to temporarily import into Mexico duty-free, raw materials, equipment, machinery, replacement parts, and other items needed for the assembly or manufacture of finished goods for subsequent export.(1)

The maquiladora program enables companies to import in-bond and duty-free all the machinery, tools, equipment, and raw materials necessary to assemble and manufacture products for export. Companies may reexport the finished or semi-finished
product from Mexico or may sell it in the Mexican market, subject to certain restrictions. Foreign investors may own 100 percent of the equity in a maquiladora operation, although many maquiladoras are owned by Mexican companies. The term "maquiladora" originates from the Spanish word "maquila" which historically refers to the payment millers receive from farmers for grinding corn into meal, or adding value.(2)

2) What is the History and Background of the Maquiladora Program?

The maquiladora program began in May 1965. There are 21 countries with maquiladora interests operating in Mexico. The U.S. holds the lion's share with more than 85% of investments, followed by Japan, Switzerland, Singapore, Holland, Spain and Ireland. 73% of maquiladoras are located at the northern border with 35% in Baja California Noret, 7% in Sonora, 12% in Chihuahua, 8% in Coahuila, and 11% in Tamaulipas. (3) Initially, maquiladoras could only be established in the border areas of Mexico and in the Baja California free trade zone. The original purpose of the maquiladoras was to provide work for excess labor in the border areas and to encourage Mexican exports. The maquiladora program was also intended to lead to the transfer of technology to Mexico. Over time, the maquiladora program evolved so that maquiladoras could be set up anywhere in Mexico and were allowed to sell a portion of their production in the Mexican domestic market upon payment of import duties and other taxes on the imported raw materials used in the processing of the good. U.S. tariff schedule provisions, known as the "9802" (formerly known as 806/807), greatly assisted the development of the maquiladora industry.(4) Goods entering the United States under these provisions are U.S. goods that have been advanced in value abroad. U.S. duties on qualifying goods are only assessed on the value-added abroad. This program predates the establishment of the maquiladora program. Finally, encouraged by few restrictions on foreign investment in the maquiladora industry, foreign companies helped the development of the maquiladora industry in Mexico.(5)

International competition has forced many U.S. companies to develop the concept of production sharing to remain competitive with European and Far-East companies. When Mexico established the maquiladora program in 1965, U.S. corporations began to realize the advantages of establishing operations in Mexico, a country which offered lower production costs (including lower labor and transportation costs), closer proximity to the United States, and the availability of immediate technical assistance from parent companies, thereby producing higher product quality.(6) However, despite these advantages, the program did not really become popular with U.S. corporations until the mid-late 1980s.

In the first half of 1996, nearly 40 percent of Mexico's exports were generated by the maquiladora sector. Around 60 percent of the sector is concentrated along the U.S. border. As of March 1996, there were 2,288 maquiladoras, and 781 (34 percent) were located in the interior states of Mexico. The border cities of Tijuana, Ciudad Juarez, Matamoros, Mexicali. Reynosa, Nogales, and Tecate are home to over half the plants and 60 percent of employment in maquiladoras. Each of Mexico's 31 states has at least one maquiladora. As mentioned above, foreigners can own up to 100 percent of maquiladora plants. In 1995, 43 percent of the maquiladoras were owned by Mexican companies, 38 percent by U.S. firms, 14 percent by joint Mexican-U.S. companies, 2 percent by Japanese, and 3 percent by other. The largest concentration of maquiladoras is in electronics, textiles, and auto parts and accessories.(7)

3) What are the Key Features of the Maquiladora Program?

The maquiladora industry is governed by the Decree for the Development and Operation of the Maquiladora Export Industry (the "Maquiladora Decree"), published on December 22, 1989 in the Mexican government Diario Oficial. The Maquiladora Decree was amended effective January 1, 1994 to comply with certain provisions of NAFTA. In addition to this decree, maquiladoras are governed by special provisions in the Customs Law and Regulations and General Customs Rules issued by the Department of Finance and Public Credit (Hacienda), as well as other laws in Mexico.(8) The key features are
the following:

1) Maquiladora Registration Number: In order to operate as a maquiladora, a Maquiladora Registration Number must be obtained from the Ministry of the Economy (SECON). Only individuals who are Mexican citizens or companies incorporated under Mexican law may obtain a Maquiladora Registration Number.(9)

2) Maquiladora Export Program: In order to obtain a Maquiladora Registration Number, a company must file a Maquiladora Export Program with the local SECON office where the maquiladora operation will be established or in Mexico City. The Maquiladora Export Program is a document containing information about the proposed maquiladora company. It describes the manufacturing process and the products to be produced and/or service to be performed, the list of raw materials and machinery/equipment to be temporarily imported into Mexico, stipulates the amount of labor to be used, and details an export program. Once approved by SECON, the Maquiladora Registration Number is issued and Mexican Customs is notified so that the company may begin its operations.(10)

3) Types of Merchandise: The following types of merchandise may be imported temporarily on a duty-free basis under the maquiladora program: raw materials and auxiliary materials (containers, packaging materials, labels and brochures necessary for the manufacturing/assembly of the product); tools, equipment, production, and industrial safety accessories and products necessary for hygiene, sanitation, and for the prevention and control of environmental contamination of the production plant, work manuals and industrial blueprints, telecommunication and computer equipment; machinery, apparatus, instruments, and replacement parts for the production process, laboratory, measuring and testing equipment for the products and equipment necessary for quality control and for training of personnel and administration; trailers and containers.(11)

4) Simplified Customs Procedures: Maquiladora imports qualify for expedited customs procedures. Maquiladora imports are exempted from many of the non-tariff requirements applicable to products imported on a permanent basis, such as Mexican official standards or "NOMs." Also, maquiladoras are not subject to the value-added tax on raw materials, machinery, equipment, and other items imported under the program. Finally, maquiladoras are allowed to use a consolidated import declaration or "pedimento" and, upon prior authorization from SECON, are not required to classify the imported items under a specific Mexican Tariff Schedule number, but may import those items under a special tariff classification applicable to maquiladora imports.(12)

5) Geographic Location: Until 1972, maquiladoras were restricted to the border states and the Baja California free trade zone. Under the Old Maquiladora Decree (superseded by the current Maquiladora Decree in 1989), maquiladoras could not be established in areas of high industrial concentration. Currently, however, maquiladoras may be established anywhere in Mexico provided environmental laws and regulations are met.(13)

6) Duration of Approvals: Under the Old Maquiladora Decree, approvals for Maquiladora Export Programs were valid for two years. Under the current Maquiladora Decree, approvals for Maquiladora Export Programs are open-ended. Subsequent importations under the program, however, do require approvals.(14)

7) Length of Temporary Importations: The Maquiladora Decree and General Customs Rules permits fuels, lubricants, auxiliary materials, and spare parts used in production process to be imported for up to one year and raw materials, parts, and components to be incorporated into the finished product for export, as well as containers, packaging materials and trailer boxes for up to two years. Machinery and equipment is permitted to remain in Mexico for as long as the Maquiladora Export Program is in effect.(15)

8) Period for Effecting the Initial Temporary Importation: The time period effecting initial temporary importations listed in the Maquiladora Export Program (which the maquiladora will make to begin its operations) is one year from the time the maquiladora authorization is granted, with the possibility for what is usually a one-time extension of three months upon prior authorization from SECON. In special circumstances, a second three-month extension may be granted.(16)

9) Subsequent Importations: Subsequent importations necessary for the continued operations of the maquiladora require authorization from SECON for an extension of its Maquiladora Export Program. Approvals for subsequent importations are valid for one year for raw materials and two years for machinery and equipment. In other words, importations of these items must be effected within these time frames or a new authorization will be required. Only those items listed specifically in the
Maquiladora Export Program or in the request for authorization for subsequent importations may be imported duty-free under the maquiladora program.(17)

10) Authorization in Dollars and Pesos: Authorizations issued for temporary importations may be expressed in U.S. dollars as well as in pesos, provided the rate of exchange and the date are specified.(18)

11) Sales into the Domestic Market: As a result of the NAFTA, maquiladoras are allowed to sell an increasingly higher proportion of the amount of the prior year's exports into the Mexican market. As of January 1, 2001, maquilas will be allowed to sell all of their production into the domestic market. When a maquiladora sells into the domestic market, however, it must pay the applicable Mexican import duties on imported raw materials used in the production depending on their specific tariff classification and customs value, as well as any other charges or taxes that are applicable. Finished products sold in the Mexican domestic market must also satisfy non-tariff requirements, such as the NOMs, and must be of the same quality as the finished products produced for export.(19)

12) Transfers Between Maquiladoras: The transfer of merchandise, raw materials, equipment, and finished products between maquiladoras is permissible under the Maquiladora Decree. Provided certain requirements are met, such transfers may be treated as exports by the transferring maquiladora and a temporary importation by the transferee. The transferee then becomes liable for any applicable import duties and other charges if the transferred merchandise is subsequently imported into Mexico on a permanent basis.(20)

13) Exportation of Waste and Scrap: Waste and scrap which is not considered hazardous under Mexican law may be exported to the country of origin, destroyed, or donated to charitable or educational institutions, provided the applicable Mexican legal requirements are met. With prior approval from SECON, waste and scrap may also be sold into the Mexican domestic market. Waste and scrap considered to be hazardous must be exported to the country of origin.(21)

14) Recognition of Specialized Companies: The current Maquiladora Decree recognizes the existence of specialized maquiladora companies, such as agroindustrial maquiladoras and companies involved in the exploitation of mineral resources, fishing and forestry, service maquiladoras, and companies operating as "shelters.(22)

4) How Does One Establish a Maquiladora?

There are three different methods for establishing a maquila operation in Mexico: contract manufacturing, shelter operation, or subsidiary (stand-alone) maquila corporation.

Contract Manufacturing

One way for a foreign company to have goods manufactured in a maquiladora is to enter into a contract with an existing Mexican manufacturer or contract assembler to manufacture/assemble the product for the U.S. client.(23)

Under this arrangement, the maquiladora often has full responsibility for the following: shipment from the border to the Mexican maquiladora facility, customs clearance and paperwork, materials and production management, quality control of the product, and overall administration of the Mexican operation.(24)

The foreign company would provide the specifications and requirements for the product. Usually the Mexican contractor is paid on a per piece basis. The advantage of using this method is that it involves usually the least risk to the foreign company. The Mexican subcontractor is completely responsible for all aspects of production and compliance with Customs regulations. The disadvantages include difficulty in finding a qualified contractor willing to bid on the project, little control over operations, greater risk of failure to perform by the contractor, and greater cost due to the compensation owed the Mexican contractor.(25)

Shelter Operations

A second method is to contract with a shelter operator located in Mexico. In this situation, the Mexican company provides the facilities in Mexico for the manufacturing process and provides services including inspection, customs, shipping, general administrative services, warehousing, and personnel management. The foreign company, however, assigns representatives to manage and run the production process and provide quality control in Mexico. The foreign company provides the technical knowledge and the Mexican shelter operator supplies its knowledge of the Mexican corporate structure, the maquila permit, labor hiring and administration, and Mexican customs procedures.(26) In this type of maquiladora operation, the shelter operator is usually paid on a clock-hour basis (usually the number of hours worked by the Mexican employees at agreed upon rates). This compensation is not usually dependent upon the success in meeting quality control objectives or in meeting production schedules. Shelter agreements are generally for a fixed number of years, during which time the U.S. company will learn how to do business in Mexico from the shelter operator and will usually convert to a stand-alone operation at the end of the contract. The advantages of a shelter agreement include quicker start-up time for the foreign company and lower start-up expenses. The disadvantages include the increased cost over a stand- alone operation and less control of the Mexican maquila operation, which is usually owned by the shelter operator.(27)

Subsidiary or Stand Alone Operations

The third way to establish maquila operations in Mexico is to incorporate a wholly-owned subsidiary corporation in Mexico. This situation requires the foreign company to obtain a maquila permit and any other necessary permits, import the raw materials and equipment, hire the personnel, and begin operations. This is the most direct method of setting up a maquila operation in Mexico.(28)

Foreign companies interested in this type of maquiladora operation should obtain the services of a Mexican lawyer to set up a Mexican corporation and to assist in the necessary contracts between the parent company and subsidiary. In order for foreign companies to incorporate in Mexico, authorization and approval of the corporate name must be obtained from the Department of Foreign Affairs. In addition, the Charter and By-Laws of the company must be prepared, notarized before a Mexican notary public, and registered in the Public Registry of Property and Commerce. The stock certificates must also be publicly recorded. In addition, the company must obtain a Federal Taxpayer's Registration Number from Hacienda, register with the National Registry of Foreign Investments, the Institute for the National Housing Fund for Workers and the Mexican Social Security Institute, and other Mexican agencies.(29)

Once the subsidiary has been incorporated, it must then obtain approval to operate under the maquiladora program by applying for a Maquiladora Registration Number and approval for its Maquiladora Export Program from SECON.(30)

When the foreign company submits the formal application to SECON, the agency will return to the company a letter of conditions, which will be taken directly from the information provided in the formal application. The company reviews and signs the letter of conditions and returns it to SECON. SECON will then issue a letter of authorization for the company to begin operations and an authorization to import the necessary equipment and machinery. The company should then take the letter of authorization to Mexican Customs to import the necessary equipment and raw materials.(31)

Major advantages for foreign companies include the greatest amount of control that this arrangement provides and its cost- effectiveness. Disadvantages include the longer time required to establish operations and the greater likelihood of making mistakes (often due to the lack of knowledge of doing business in Mexico).(32)

5) What are the True Labor Costs Involved in Operating a Maquiladora?

Reduced labor cost has always been an incentive for foreign companies to establish maquiladora operations in Mexico; however, companies must give special consideration to other important labor matters when deciding whether or not to set up a maquiladora operation. While wages for maquiladora laborers are often less than $1 an hour, employment in maquiladoras include many fringe benefits for employees. These jobs are formal sector jobs that make workers eligible for health, retirement, and housing benefits from the Social Security Institute.(33)

These benefits, such as the minimum wage, maximum hours and overtime pay, paid holidays, vacation pay, Christmas bonus, employer housing contributions, profit sharing, paid maternity leave, social security, retirement savings, and training, mandated under Mexican law must be taken into consideration when calculating the cost of Mexican labor.(34)

6) Where are Maquiladoras Locating in Mexico?

Today, about 66 percent of maquiladoras are located along the U.S.-Mexico border, with most of the border maquiladoras located in the cities of Tijuana, Ciudad Juarez, Matamoros, Mexicali, Reynosa, Nogales, and Tecate.(35) Current trends indicate that while big existing plants are expanding on the border, new maquiladoras are gravitating towards the interior of Mexico. The border has become saturated with companies and, because the outlook for the maquiladora industry is high rates of growth, many companies are looking to the interior.(36) The cities of Monterrey, Torreon, and Gomez Palacio are expected to generate the most maquila growth in the near future. For example, Monterrey has experienced a 27 percent increase in maquilas in the past two years and currently has more maquiladoras than border cities Reynosa, Matamoros, and Nuevo Laredo. Higher real estate costs on the border, less expensive labor, and less competition for workers in the interior are fueling this movement towards the interior. Interior maquiladoras also experience lower turnover rates and less absenteeism. Turnover rates along the border often reach 20 percent a month due to maquila workers quitting and moving between maquiladora employers.(37)

Interior municipalities often offer incentives to attract maquiladoras, such as an exemption from the local payroll tax, property tax exemptions, and training costs.(38) Despite these advantages, however, the majority of today's maquiladoras are still concentrated along the border, as many firms still prefer the close proximity of border maquiladoras to the United States.

7) Can Maquiladoras Sell Their Production Into the Mexican Domestic Market?

NAFTA stipulates that the level of permitted sales by maquiladoras into the Mexican domestic market as a percentage of the value of the previous year's exports be incrementally increased from 1994 to 2000. As of January 1, 2001, however, all restrictions on domestic sales will disappear. The proportion of the maquiladora's production which may be sold into the domestic market from 1994 to 2000 is as follows: 55% (1994), 60% (1995), 65% (1996), 70% (1997), 75% (1998), 80% (1999), and 85% (2000). Again, note that these percentages are based on the value of the previous year's exports. Typically, maquiladoras in their first year of operation may not sell to the Mexican market; however, it is possible to obtain special permission from SECON based on anticipated exports for the first year.(39) The current level of taxes and the paperwork required to obtain authorization to sell maquila products in Mexico, however, discourage most firms from trying to tap the Mexican market. In 1995, 98 percent of maquiladora production was exported, although some of the maquiladora exports are later re-imported into Mexico through normal trade channels.(40)

8) What is the Effect of NAFTA on Maquiladoras?

NAFTA will affect the maquiladora program in two phases. In the first phase (January 1, 1994- December 31, 2000), the main provisions affecting the maquiladora sector are the phased elimination of import duties on products manufactured or assembled in the maquiladoras upon importation into the United States or Canada, provided those products satisfy the NAFTA rules of origin, and the phased increase in permitted sales into the domestic market of Mexico. During this phase, maquiladoras will continue to benefit from the waiver of Mexican import duties on raw materials. The maquiladora industry will be most affected by NAFTA in the second phase, beginning on January 1, 2001. As of that date, all of a maquiladora's production may be sold into the domestic market of Mexico and there will be restrictions on the duty-relief available on non-NAFTA originating raw materials used by the maquilas in the manufacture or assembly of finished products.(41)

NAFTA's provisions on foreign investment and Mexico's foreign investment law of 1994 eliminate virtually all restrictions on foreign investment in the manufacturing sector. Thus, foreign companies need no longer set up a maquiladora facility to assemble in Mexico. Regarding the long-term future of the maquiladora program, there are differing opinions as to the continued existence of the program. After 2001, the industry is due to lose its special tariff status, but some within the industry are lobbying for a continuation of this status. It is currently unclear as to whether or not the Mexican government will allow a continuation. Theoretically, the maquiladora program should end in the year 2001. However, some argue that the continued implementation of NAFTA will require only minor changes in the maquiladora program, leaving the basic incentives for the industry intact. The generally accepted wisdom of the industry itself is that it will either be extended, as is, or continued under a different name or as a new program to avoid closing factories or losing manufacturing cost benefits. Thus, the future of the maquiladora program is currently unclear and interested firms should closely follow the developments in the program over the next few years.

9) Who Should a U.S. Company Contact for More Information about Maquiladoras?

U.S. firms interested in establishing a maquiladora should contact either the local SECON office in the Mexican state in which they wish to locate or the SECON office in Mexico City at:

Secretaria de Economia (SECON)

Manuel Pacheco, Director de Promoción del Desarrollo Regional de la Industria Maquiladora (Director of Maquiladoras) or

Victor Ortiz, Deputy Director of Maquiladoras

(1) 1Carlos Angulo Parra, Edmundo Elías Fernández, and Carol S. Osmond, "Maquiladoras in the New Environment"
(Ciudad Juarez, Mexico: Baker & McKenzie, September 1996), 2.

(2) 2Laredo Development Foundation, Los Laredos: Trade Center of the Americas (Laredo: Laredo Development
Foundation, 1996), 15.

(3) U.S. Department of Commerce, Cable from AmEmbassy Mexico, "Mexican Maquiladoras-Still Growing After All
TheseYears", August 1996.

(4) 4Angulo, Elías, and Osmond, 3.

(5) 5Angulo, Elías, and Osmond, 4.

(6) 6Laredo Development Foundation, 15.

(7) 7U.S. Department of Commerce.

(8) 8Angulo, Elías, and Osmond, 4.

(9) 9Ibid., 5.

(10) 10Ibid.

(11) 11Ibid., 5-6.

(12) 12Ibid., 6.

(13) 13Ibid.

(14) 14Ibid., 7.

(15) 15Ibid.

(16) 16Ibid.

(17) 17Ibid., 7-8.

(18) 18Ibid., 8.

(19) 19Ibid., 8-9.

(20) 20Ibid., 9.

(21) 21Ibid.

(22)" 22Ibid.

(23) 23Humberto Gayou Madrigal and Terry Johnson, "Getting Started: Three Ways to Set Up a Maquila," Twin Plant News,
Mexico Option 1996, 25.

(24) 24Angulo, Elías, and Osmond, 32.

(25) 25Gayou and Johnson, 25.

(26) 26Ibid., 25-26.

(27) 27Ibid., 26.

(28) 28Ibid., 25.

(29) 29Angulo, Elías, and Osmond, 29-30.

(30) 30Ibid.

(31) 31Laredo Development Foundation, 17-18.

(32) 32Gayou and Johnson, 25.

(33) 33U.S. Department of Commerce.

(34) 34Angulo, Elías, and Osmond, 44-47.

(35) 35U.S. Department of Commerce.

(36) 36Mike Patten, "Is the Border Becoming Too Crowded?" Twin Plant News, August 1996, 31.

(37) 37Ibid., 32.

(38) 38Ibid., 33.

(39) 39Angulo, Elías, and Osmond, 14.

(40) 40U.S. Department of Commerce.

(41) 41Angulo, Elías, and Osmond, 10.
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