A maquiladora or maquila is a factory that operates under preferential tariff programs. These programs were established and administered by the United States and Mexico. One of the main advantages of a maquiladora is all production materials, components, and equipment that is associated with this type of factory can enter the Mexican borders without paying duties. The output from these factors is then exported to the USA at much lower tariffs than would be the case if they were being shipped to third party countries.
The term “Maquiladora” has acquired widespread usage in Latin America as well as some parts of Asia. It is used to describe similar arrangements, although the countries involved may be other than the USA and Mexico. In Mexico, the maquiladora has significance to business people. The town of Tijuana is particularly famous for these types of factories, with many choosing them because of their numerous advantages over conventional companies.
What is it?
The Maquiladora Program came into being in 1964. Under the arrangement, maquiladoras could be wholly owned by non-citizens. This was part of the National Border Industrialization Program in Mexico. This program had started as far back as 1961, with the implicit purpose of boosting employment by attracting foreign investors to the region. By 1989, there were specific reforms to the program as a consequence of the relaxation of the stringent foreign investment rules that existed in Mexico at the time. Under those amendments, maquiladoras were allowed to sell up to half of their total output to the Mexican market. As a consequence of the Maquiladora Program, the border region experienced unprecedented growth rates, with falling unemployment and underemployment.
Whereas the maquiladora industry was acknowledged as a vital facet of the Mexican economy, there was always a feeling that some of the opportunities that it offered were not fully explored until the advent of the North American Free Trade Agreement (NAFTA) which was enacted in 1994. Although NAFTA eliminated some customs benefits that existed in the maquiladora era, it was still an essential aid to the industry. However, there were still very stringent rules of origin that were referenced whenever making decisions about preferential tariffs. NAFTA was beneficial in as far as it allowed maquiladoras to sell manufactured products to Mexico without facing the same stringent restrictions as other types of businesses. Moreover, NAFTA removed several quotas that had previously been used to impede businesses from fully penetrating the American and Mexican markets.
Why is it important?
The Maquiladora Program remains relevant to any entrepreneur in Mexico regardless of the ever-changing rules surrounding this opportunity. Some entrepreneurs have been put off by the often complex laws that govern an otherwise straightforward process. Small and medium-sized American companies have nevertheless been able to take advantage of the Maquiladora Program to penetrate the Mexican market. Some of the benefits that have been reported include halving labor costs across the board on average. Using the program can allow a company to access the highly skilled and conscientious workforce in Mexico. For example, it could be possible to negotiate a six-day working week for the employees that were located near the border region, hence providing flexibility to the manufacturer. There were other logistical advantages, such as proximity to the border entry points into the USA.
American companies need to understand how the program works and how they can go about establishing a Maquiladora. Some Fortune 500 firms have been successful in this endeavor, even when working on their initiative. However, consultancy services are of the essence for any American company that is considering this option. It may also be necessary to contract a local manufacturer that can reliably deliver the required supplies. The only difficulty is in finding a reliable partner. Then there is the option of using a corporate shelter service. Some argue that this is the quickest and most convenient approach to establishing a Maquiladora. However, the actual workings of this type of system are not yet fully understood. Using corporate shelters allows foreign manufacturing companies to develop a Maquiladora without owning a Mexican business in the first place. A case in point is the Made in Mexico subsidiary, which works with the Tecma Group of Companies in an arrangement that is consistent with the laws of both the American and Mexican jurisdictions.
What shippers need to know
For shippers, this creates new business opportunities and an alternative to a highly competitive market in either the USA and Mexico. The industry can also participate in the supply chains that include Maquiladoras. For example, there may be instructions for using production volumes and specifications required to assemble or manufacture the client’s product. In this case, the corporate shelter firm looks for appropriately-sized and designed buildings.
Once the client chooses a building, the shelter firm leases it for them. The shelter firm will also take care of all of the real estate transactions, securing the requisite permits and embedding the legal work that is required to acquire and operate in the facility. The shelter service also obtains the maquiladora register, import permits, and local and federal licenses and permits. It will be responsible for opening the corporate bank accounts and also establishing an appropriate accounting framework that incorporates a tax payment program. Later on, the prospective employees will be interviewed and hired as the client firm moves or purchases equipment and machinery required for assembly or manufacturing its product. The loop closes when the client designates a production supervisor whose responsibility is to oversee the manufacturing operation.
The role of the maquiladora is to ensure that all the relevant laws in Mexico are followed while at the same time shielding the parent company from some of the operational challenges that would occur in a typical partnership. Some of the key compliance areas that need to be considered include zoning rules, labor laws, customs rules, taxation, facilities management, and environmental issues. Through careful research and development, a shelter firm can establish a framework for compliance with the fiscal and practice laws of the locality. In the case of cross border transactions, the shelter firm can complete the border documentation and arrange for transportation. On the face of it, this is an alternative to traditional shipping. Still, it can also offer opportunities for foreign companies to work with the Maquiladora system to enhance their international trade.
The Maquiladora program is a Mexican initiative that allows foreign businesses, including the ones owned by Americans to benefit from tax incentives and other benefits that might be granted to a domestic company. This is a convenient way for foreign businesses to penetrate the Mexican and American markets. It also has implications for the shipping industry as far as it offers complementary and supplementary services.