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Flight Of Assembly Plants To Asia Hurting Mexican Economy

Like Puerto Rico And Elsewhere In The Caribbean, Cheaper Labor Costs In The Far East Cited As Main Reason


November 28, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

CHETUMAL, Q.ROO, MEXICO — The Mexican economy is suffering considerably from the flight of assembly plants, called maquiladoras to Asia in search of substantially lower labor costs.

Nearly 40% of the plants, set up by U.S. and multinational corporations along the U.S.-Mexican border have left Mexico within the past 30 months, taking with them close to 100,000 well-paying jobs, at least by Mexican standards.

The region most affected by the transfer of assembly operations out of Mexico has been the northern area of the country, near the border with the U.S. Most of the assembly plants were set up in that section to cut down on transportation costs of the assembled products that usually were trucked to stateside locations.

The flight of the maquiladoras had begun even before the events of 9/11 had deeply affected the Mexican economy. Tied as it is to the U.S. economy–90% of its trade is with its northern neighbor--the Mexican economy had begun to feel a downturn at the start of the third quarter of 2001. In addition, some of the major unions representing workers in the maquiladoras industry had been pressuring hard for wage and benefits increases. In fact, a strike at the main Volkswagen auto assembly plant in Mexico led to cancellation of VW’s plans to open a second and larger assembly plant in central Mexico in 2002.

The maquiladoras benefited from certain government actions, especially the signing of the North American Free Trade Agreement, Nafta. For instance, the products imported for later assembly are tax-exempt making it easier to remove from customs and speeding delivery to the plants. Also, U.S.-registered long-distance trucking companies are allowed to pick up the finished goods from the plants and transport them north without having to pass the load on to other vehicles.

"The competition from the Far East has hurt more than just the northern regions of the country," said Artemio Santos Santos, Secretary of Economic Development for the State of Quintana Roo in the southeastern region of Mexico. "The success of the maquiladoras program in the north had us bidding for the establishment of some of those assembly plants down here as well. The southern region of this state registers one of the highest unemployment rates in the country and it does not benefit from the tourism in the northern part of the state, in Cancun, and the Riviera Maya.

"But the competition from Asia, particularly from China, has affected just about all of the nations of the Caribbean. Think about it for a moment. Mexico’s minimum wage is almost 50% below that of most of the islands of the Caribbean, to say nothing of Puerto Rico and the Dominican Republic. Puerto Rico, for instance, is tied to the U.S. minimum wage, which provides for an hourly rate one and one half times higher than our daily minimum wage. If the multinationals and conglomerates are fleeing Mexico because they can get substantially cheaper labor in China, they are sure to leave Puerto Rico as well," Santos said.

"All you have to do is look at the labels on clothes in the department stores, all types of clothes, from designer wear to day-to-day off the rack clothing," added Santos. More and more you find the Made in China label or one from some other nation in the Far East. And the same thing goes for electronics, leather goods, and just about anything else that can be mass produced."

Santos said the flight of the maquiladoras has had even greater implications in other areas of the country. Quintana Roo, for instance, had moved to improve the port facility at Puerto Morelos to allow for the reception of large cargo vessels. This was in anticipation of the installation of maquiladoras in southern Quintana Roo, held out as a promise by the previous national administration.

Also, the Puebla-Panama Plan, PPP, offered by incoming president Vicente Fox two years ago has had to be placed on hold. The plan envisioned construction of highways and a rail line between Puebla, the states in the south of Mexico and the Central American countries all the way down to Panama.

It also provides for duty free interchange of products between these countries. The port facility at Puerto Morelos also would allow for some Central American countries to ship their products up by truck and load them onto ocean going cargo vessel leaving for the U.S. and Europe.

In terms of the maquiladoras, shipping assembled goods out of Puerto Morelos would somewhat make up for the difference in labor costs between southern Mexico and the Orient. However, it still is cheaper to move operations to China, with its other incentives, than to pay for start-up costs in Mexico as well as the steeper prices for labor and the continuing problems with unions.

The Mexican government is seeking other mechanisms to induce the maquiladoras to stay. Although the labor unions remain somewhat intransigent, government is looking for ways to provide further tax exemptions, pick up some of the labor benefits costs and reduce charges for energy, now provided by the government-owned Federal Electricity Commission.

However, no plans for new assembly plants have been announced for more than a year and several of the plants in the textile industry have announced their intention to leave by the middle of 2003.

This Caribbean Business article appears courtesy of Casiano Communications.
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