Global Policy Forum

By Daniel B. Wood

While storm clouds crackle loudly above pedestrian-choked streets outside, the quiet "whoosh" of pneumatic compressors permeates a near-empty factory here.

A year ago, 300 workers sat at the Shamrock-green benches loading computer cables into plastic bags beneath glaring fluorescent lights. Today, every other chair is vacant.

"Business is muy malo [very bad], how you say ... sluggish," says Manuel Estarron, floor supervisor for PPH Electronicos, one of several hundred maquiladoras that dot the hillsides of Tijuana, the largest US-Mexico border town.

For the first time in their 35-year history, jobs and production at maquiladoras are falling, prompting concerns about the health of these border factories that have come to symbolize the growing integration of the US and Mexican economies.

The impacts are sharpest in Mexico, where employment at maquiladoras has plunged by 160,000 from more than 1 million - a roughly 15 percent drop.

North of the border, the effects range from higher-priced goods at Costco or Wal-Mart to the prospect of more goods - whether components or finished products - being made in places such as China, Malaysia - or in the US.

"The maquiladora industry is in trouble right now," says Boris Kozolchyk, a trade expert at the University of Arizona, Tucson. "Investors and manufacturers are beginning to realize this is not an endless up and up, but that maquiladoras have hit a plateau and may even go down."

The causes are simple in some respects, complicated in others, but are tied especially to three factors.

No. 1 is the slowing US economy, which creates a drag on the demand for everything from apparel and car parts to furniture and TV sets. As the US economy rebounds, maquiladoras are sure to recover some of their lost ground.

The second factor is tax hikes on goods arriving from outside the continent - a provision of the 1994 North American Free Trade Agreement (NAFTA). Since last year, the new duties have pushed up the prices of all kinds of raw materials and components entering Mexico - and rippling into the cost of the finished products on US store shelves.

A third reason is the entry of China into the World Trade Organization, which has caused manufacturers and buyers to look increasingly toward production there. Aggressive marketing by some Chinese officials and a strong peso - which raises labor costs in Mexico - are said by some observers to be accentuating this effect.

"Of all the problems hitting maquiladoras right now, the biggest is the slowing of the US economy," says Gary Hufbauer, senior economist at the Institute for International Economics in Washington. Since NAFTA, "Mexico is much more closely tied to the ups and downs of the American economy. That is good when we're booming and bad when we are not."

But even when the US booms again, the tax changes and China's new status could pull business away from maquiladoras.

The NAFTA tax provision is "removing some of the advantages maquiladoras had over goods our purchasers could get elsewhere," says Daniel Romero Mejia, president of the Mexican Maquiladora Association in Tijuana.

Bigger market for US materials

While that spells trouble in Tijuana, it is music to the ears of many American companies, which are now in a tax-favored position to sell components or materials to the maquiladoras.

"We are seeing a very positive fallout ... increasing the purchase of raw materials from US companies, especially in California," says Victor Castillo, a trade specialist at Southwestern College in San Diego. This kind of integration among NAFTA economies is what the treaty's backers had hoped for, he says.

Another problem for maquiladoras, some say, is increased security since Sept. 11, which has dramatically slowed the ability of cargo trucks to move back and forth across the US border.

"I'm not saying that I will move my operation to Taiwan, China, or Korea, but all these headaches mean I will at least be investigating that option," says one US-based maquiladora owner who asked not to be identified.

'Think twice' before going offshore

But the option of shifting operations to Asia may not be that attractive right now either, say other observers. The one-time cost of moving an operation to foreign shores is very high.

And despite savings in labor costs - Chinese labor costs just a fraction of the $5.30 per day typical in Mexico - the additional costs of shipping goods back to US shores weigh heavily when compared to the ease of trucking components across the border.

"As bad as things are in Mexico right now for US maquiladora owners, they'd better think twice before moving offshore to Asia," says economist Mr. Hufbauer.

Indeed, he and other experts see many maquiladora owners riding out the current slowdown - and hoping that the US economy will regain momentum soon.

"The good news is that this could be temporary," says Mr. Kozolchyk. "If the US economy rebounds, you could see a turnaround for the better in the investment in maquiladoras."

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