Nearly every major U.S.-based thermal equipment manufacturer is doing a brisk business in Mexico these days. What's driving this activity south of the border? It can be summarized in one word¿Maquiladoras. "Maquiladora" means "bonded assembly plant" and is derived from the Spanish term "maquila," the payment in corn that a miller keeps for milling corn. In modern day Mexico, the term refers to a factory that performs labor-intensive operations for foreign manufacturers. For example, a lawnmower manufacturer may ship loose parts into Mexico to be assembled and then ship back into the U.S. as a complete lawnmower. Why do maquiladoras exist? The simple answer: low labor costs.

Evolution of Maquiladoras
Maquiladoras originated in Mexico as "zona libres" or "free zones" located along the Mexican/U.S. border. Typical Mexican trade barriers (e.g., high tariffs, import permits, and restrictions on foreign investment) were all but ignored because they were too difficult to enforce. U.S. businesses located close to the border took advantage of zona libres to keep their labor costs down.

In 1965, roughly 3,000 individuals were employed at maquiladoras, most owned by small U.S. companies.

The first Mexican maquiladora law was passed in 1971. In addition to zero tariffs on incoming machinery, raw materials, and supplies, companies were allowed to be 100% foreign owned. Until then, all maquiladoras had to be owned 51% by Mexican nationals. The number of Mexicans employed by maquila jumped to 29,000 by 1972.

In 1972, the Mexican government allowed for maquiladoras to be located nearly everywhere in Mexico, not just on the northern border. With the official sanction of the Mexican government, maquiladora employment grew to over 130,000 by 1982.

International attention was drawn to Mexico in the mid-1980s when labor rates fell below those of Asia's Four Tigers¿South Korea, Taiwan, Hong Kong, and Singapore. Employment jump to 429,000 by 1989.

NAFTA took effect in 1994 immediately eliminating many tariffs. By 1996, maquila employment had jumped to 754,000.

What's Going on Now
Industry experts say there are several factors influencing the current activity in Mexico.

  • NAFTA - over the five year period from 1994 to 1999, tariffs on many automotive parts have been reduced by 75%. The remaining 25% will be eliminated over the next decade. Automotive manufactures find it profitable to work from Mexico. General Motors, for example, employs over 74,000 in 54 factories in 27 different Mexican cities.
  • In July 2000, Mexico struck a trade agreement with E.U. The influx of European companies and their demand for capital equipment has substantially increased. These European companies find Mexico attractive not only because of the low labor cost, but also because Mexico provides easy access to the world's largest consumer market¿the U.S.
  • Mexico's industrial infrastructure is improving quickly including natural gas distribution. Mexico's Ministry of Energy has made commitments to invest heavily in the natural gas industry to meet the demand. Mexico is 14th in the world in natural gas reserves. To their credit, the Ministry of Energy is hinting at privatization.
  • High oil prices also benefits Mexico, which ranks 5th in the world in oil production. With 99% of all oil production owned by the state, higher oil prices mean more profit for the Mexican government.
  • The labor market is stable. The supply of low-skill and moderate-skill labor seems endless, so labor rates are not expected to rise.
  • Absence of restrictive EPA and OSHA-type regulations. Most agree that some improvements need to be made, but currently maquiladoras are not saddled with the expensive regulations that add to U.S. production costs.
  • Finally, the newly elected Opposition Party seems to be committed to cleaning up corruption in the government. The Rule of Law is the businessman friend and Mexico has not been friendly in this respect.

Mexico is prospering and growing because they are removing trade restrictions and providing a fair and predictable business environment. Three cheers for laissez-faire (hands-off) government policies toward commerce¿more evidence that a government that governs least governs best.