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Mexico's Border Factories Lose Jobs to Lower-Wage Countries - 2003-11-12

In the past decade, Mexico has become an important exporting nation, thanks, in part, to the so-called maquiladora sector. Maquiladoras are factories, where products are partly assembled, and then trucked over the border to the United States. But this unique economic border arrangement is suffering, as many of these factories move to other low-wage nations like China.

The way it was supposed to work held great promise for both Mexico and the United States. Under special rules established for maquiladoras, products could be partly assembled in Mexico, and then shipped duty-free over the border for completion in U.S. plants. This system created thousands of relatively good-paying jobs for Mexicans and drew billions of dollars of foreign investment. But now, the growth has slowed, and even reversed.

Over the past few years there has been an alarming exodus of factories and jobs to China and other low-cost countries. Mexico's electronics industry is down by more than eight percent. Several high-profile operations, such as one factory owned by the Netherlands-based Philips Electronics, have gone to China. More than 170 factories have closed in Mexico and moved to China in recent years, and some remaining factories have moved part of their operations across the Pacific.

The impact has been hardest on large border centers like Tijuana, just south of San Diego, California, and Ciudad Juarez, just over the Rio Grande River from El Paso, Texas. More than 100,000 jobs have been lost in Juarez alone.

Jon Amastae, director of the Inter-American Border Studies program at the University of Texas-El Paso says his community has felt the impact of job losses in Juarez. "If you have a tremendous reduction in jobs immediately across the river," said Mr. Amastae, "you have a reduction in everything in El Paso, in everything from retail trade - there is still a great deal of bi-national retail shopping - to the transportation industry, which is directly, not indirectly, but directly linked to the maquiladora industry."

Professor Amastae says business leaders in El Paso and Juarez are trying to counter the attraction of China with strategies that are based on proximity to market.

"Apparently, the cost factors in China are low enough so that increased transportation is not a knockout feature," he said. "It is not negligible either, so one emphasis here is to emphasize not just the cost of transporting goods back to the United States, but the effects of being in closer contact with U.S. centers of production."

This proximity factor is most important for heavy goods production and the rapid operating system known as just-in-time production. Automotive parts manufacturers, for example, remain strong in Juarez and other parts of Mexico because of the ease of transporting products to the U.S. market. But many other industries are vulnerable to competition.

Workers in Mexico's maquiladoras earn around two dollars an hour on average, while workers in China earn less than a dollar an hour. This is a great concern for Mario Mora, director of the Juarez Maquiladora Association, who says that the loss of tens of thousands of factory jobs in Juarez is distressing, especially when you take into consideration that each job in an assembly plant generates two or three jobs in the community outside.

Mr. Mora says his organization is seeking help from the government.

But some economists say the Mexican government is partly to blame for what is happening. Mexico City-based economist and TV Azteca commentator Roberto Salinas de Leon says the failure to enact structural reforms has driven some companies away.

"Labor costs only represent 10 percent of total costs of exporting companies and of maquiladoras in general," said Mr. Salinas, "so clearly there is something beyond the labor issue that is making China a more attractive investment regime for transnational companies."

Companies leaving Mexico have cited factors such as taxes and regulations, the high crime rate and the uncertainty of future energy needs as reasons for departing.

President Vicente Fox has proposed sweeping changes in areas such as energy, whereby more private investment could enter the state-owned sector. But political foes on the left have resisted any move that they believe would lead to privatization of the industry. Mr. Fox's party lost badly in July's mid-term election, giving him even less leverage in the Mexican Congress.

Still, Roberto Salinas says politicians may eventually put aside their differences for the good of the nation, once they fully recognize the danger Mexico faces. "There is a certain distant hope that this threat from China and other emerging markets will impose a so-called 'golden straightjacket' that will force the political process to come up with the reforms," he said.

But Mr. Salinas says he does not see that happening any time soon. For now, he says, the gridlock continues and the jobs keep leaving.