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Maquiladora

A low-cost manufacturing operation in Mexico that manufactures goods for export to the United States

What is Maquiladora?

A maquiladora is a mode of manufacturing in Mexico that is established by a foreign company, involving the export of the manufactured goods to the company’s country of origin. The factories benefit from duty-free and tariff-free imports of raw materials, machinery, and equipment to be used in the manufacturing process. The manufactured goods are exported to other countries, mainly the United States and Canada.

 

Maquiladora

 

Maquiladoras capitalize on the cheap labor force in Mexico while transferring manufacturing knowledge to the Mexican labor force. Such an arrangement also allows manufacturing companies to enjoy the benefits of free trade agreements while maintaining a domestic administration facility.

 

Summary

  • A maquiladora is a low-cost manufacturing operation in Mexico that manufactures goods for export to the United States or Canada.
  • The manufacturing operation capitalizes on the cheap labor force in Mexico and the benefits of the free trade agreement between Mexico, Canada, and the United States.
  • A maquiladora enjoys favorable tax treatment, such as duty-free and tariff-free imports.

 

Understanding Maquiladora

Factories operating under the maquiladora are most often located near the U.S.-Mexico border for easier importation of raw materials and export of finished products. For a company to be considered a maquiladora, it must obtain approval from Mexico’s Secretary of the Economy.

The designation allows factories to enjoy the benefits of the free trade agreement that exists among the three partner countries. Examples of such benefits include access to foreign capital investments, duty-free import of raw materials, equipment, and machinery, and other benefits.

Maquiladoras are established under the Twin Plant Agreement, which allows the company to establish a manufacturing operation in Mexico and an administration facility in the United States. The factory may be located along the U.S.-Mexico border or in any other location in the country except Mexico City, Monterrey, or Guadalajara urban areas where industries are already concentrated.

Most of the time, maquiladoras are located in strategic locations, such as near airports, railroads, and ports for easier importation and exportation of goods.

 

History of Maquiladora

The concept of maquiladora started in the 1960s when the Bracero program ended. The Bracero program lasted from 1942 to 1964, and it allowed skilled farm workers to work on U.S. farms seasonally.

The Mexican government established the maquiladora program in 1964 in response to increased unemployment after the Bracero program ended. The maquiladora program aimed to strengthen the Mexican economy and boost industrial growth by allowing foreign-owned companies to establish factories in Mexico. Foreign factories would also benefit from a vast supply of cheap labor from skilled Mexican workers while also earning foreign exchange for Mexico’s developing economy.

The maquiladora program is considered one of the largest foreign exchange earners in Mexico. When the North American Free Trade Agreement (NAFTA) was ratified in 1994, it gave the maquiladora program a boost with multiple incentives and tax benefits.

NAFTA classified Northern Mexico as an export processing zone, thereby allowing foreign corporations to manufacture goods in Mexico at lower production and labor costs. The number of factories also doubled from 564 in 1989 to 1460 in 1994.

 

Products Manufactured in a Maquiladora

The maquiladora program does not place limitations on the products that can be assembled, packaged, processed, or manufactured. However, companies that assemble firearms and products with radioactive content must get consent from the Secretary of Defense and the Mexican Nuclear Regulatory Authority, respectively.

Also, manufacturing operations in Mexico depend on the parent company’s direction, opportunities available in the market, and duties charged on imports into such markets. Some of the top industries using maquiladoras include medical devices, consumer products, electronics, and the automotive sector. The industries are set up mostly in Rosarito, Tijuana, and Aguascalientes.

 

Categories of Maquiladoras Program

The Secretariat of Economy classifies the maquiladoras program, also known as the IMMEX program, into five main categories based on the manufactured products or exported services. The categories include:

 

1. Holding Company Program

A company designated as a holding company holds IMMEX registration that includes the manufacturing operation in Mexico and one or more subsidiaries.

 

2. Industrial Program

The industrial category encompasses a manufacturer that is involved in converting raw materials into finished goods for export.

 

3. Services Program

The services program covers companies that support the exportation of goods across manufacturers within Mexico.

 

4. Shelter Program

The shelter category includes registered Mexican companies that agree to take legal risks and any arising liabilities from manufacturers operating under its IMMEX registration. The program allows foreign companies that provide production materials and manufacturing technologies to do business in Mexico without registering with IMMEX.

 

5. Outsourcing Program

This program allows companies without the capacity to carry out their production processes to manufacture goods through a third party.

 

Tax Considerations for Maquiladora

The main federal tax laws that maquiladoras are required to comply with include the Income Tax law and Assets Tax Law. The income tax law evaluates the company’s profits and employee withholding, and the company must submit payments to the tax authorities by the eleventh day of each month. Since maquiladoras get their raw materials, equipment, and machinery from their parent companies on loan, the profits remaining to be taxed are marginal.

On the other hand, the Assets Tax Law charges a tax on the assets owned by the maquiladora, and the factories must submit provisional payments every month. However, the tax on assets can be offset by the income tax paid to the government.

 

Learn More

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Imports and Exports
  • Mexican Peso (MXN)
  • Net Export
  • Non-Tariff Barriers

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