U.S.-Mexican Relations Lead the Way in the Hemispheric Race to the Bottom: Maquiladoras, Free Trade, and a Can of Worms

• President Obama reports that free trade agreements (FTAs) with Panama, Colombia, and South Korea should be enacted by the end of the year
• In the past, FTAs such as NAFTA have prompted the outsourcing of U.S. jobs, in spite of Washington’s claims to the contrary, causing unemployment in the U.S. and deleterious working conditions in low-wage jobs in partner states abroad
• Maquiladoras, whose proliferation under liberalized trade policies fostered the creation of NAFTA, provide a disturbing example of detrimental working conditions laborers face under FTAs
• Neither U.S. unemployment, nor the success of overseas industry sectors, such as maquiladoras, can be used as an excuse to justify the passage of FTAs as a solution to the current North American economic crisis

In a section of President Obama’s address to Congress that received relatively little attention, he observed that “it’s time to clear the way for a series of trade agreements that would make it easier for American companies to sell their products in Panama, Colombia, and South Korea… If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers.”[1] Obama followed his speech with a press conference, which asserted that the free trade agreements (FTAs) should be passed by the end of the year. He did not mention the disturbing thought that FTAs traditionally have prompted U.S. companies to transfer their manufacturing processes to countries with lower wages, rather than noticeably creating jobs in this country.[2] While proponents of free trade often cite the creation of U.S. jobs in export-oriented industries, the U.S. is at least as likely to import products from overseas countries where manufacturing and labor costs tend to be cheaper.

In fact, these imbalances typically have created a large trade deficit under the North American Free Trade Agreement (NAFTA) among the three signatories: the U.S., Mexico, and Canada.[3] NAFTA already has greatly increased the rate at which U.S. corporations have used both factory shutdowns and the threat of closure of additional facilities as anti-union strategies. This process also has prompted the outsourcing of U.S. jobs to Mexico as manufactured goods flowed from south to north.[4] Overall, the Economic Policy Institute has estimated that NAFTA has cost the U.S. some 879,280 production jobs, “contributed to rising income inequality, suppressed real wages for production workers… and reduced fringe benefits,” which, all-told, has proved woefully detrimental to U.S. workers.[5]

Proposed Free Trade Agreements and Overseas Jobs

By considering these new free trade pacts, President Obama is not only preparing the groundwork for massive job losses at home, but is also maintaining a long tradition of ignoring both the escalating job-drain and detrimental working conditions abroad, which together create a “hemispheric race to the bottom.”[6]

Maquiladoras, a distinct group of foreign-owned manufacturing and processing plants physically located in Mexico but exporting their products abroad, were the original poster children for free trade.[7] In maquiladora manufacturing, the Mexican authorities allowed raw materials to be imported to their country duty-free while lifting export tariffs on finished products. Maquiladoras, also known as maquilas, technically bypassed the Mexican economy, halting within it only to take advantage of low labor costs.[8] Implemented in 1965, the Mexican maquiladora program was one of the first informal free trade agreements worked out with the U.S., and the revenues it generated for businesspeople in both countries helped prompt the creation of NAFTA. Maquilas, therefore, “presaged” free trade policies such as NAFTA while contributing to maquiladorization, or the spread of maquila-like trade liberalization policies and flexible labor usage to other segments of the Mexican economy.[9] These specialized factories exemplified the effects of free trade policies on export-oriented production, suggesting that future FTAs may have similar effects across the globe.

In response to each of the periodic economic crises that have affected Mexico, the maquila-related free trade strategy implemented by the Mexican state included the devaluation of the peso, which ended up allowing the maquiladora industry to grow profusely. The working conditions to be found in maquilas, however, have not markedly improved. In 2006, after the maquila program was folded into the Maquiladora Manufacturing Industry and Export Services (IMMEX) program— which included both Mexican and foreign-owned export-manufacturing plants— statistics regarding these two types of plants were aggregated.[10] It is thus difficult to assess how the current financial crisis and the resultant economic policies have affected the foreign-owned maquila industry. The results of the maquiladora program as an experiment in free trade policies, however, are clear: the detrimental labor conditions and low wages found at many maquiladoras demonstrate that free trade policies are not a reasonable answer to economic crises at home or abroad.

The Pattern of Mexican Maquiladoras: In Crises, Free Trade Policies Fuel the Factories

The recent history of Mexican maquiladoras follows a distinct pattern: first, an economic crisis occurs; then, the state devalues the peso, liberalizes maquila regulations and trade policies, and finally, the maquilas grow. Maquiladoras are thus inherently countercyclical in that many indicators of their success, including their proliferation as well as growth in employment and hourly earnings, closely follow major economic crises and patterns regarding recessions in Mexican history rather than following periods of growth. Their success, however, is not only tied to these events, but to the free trade policies that followed these crises.[11]

Although maquilas predate Mexican neoliberalism and the creation of NAFTA by a number of years, the neoliberal free trade policies adopted following economic crises have led directly to their proliferation and growing importance in the country’s economy. This maquiladorization suggests that production sites with maquila-like working conditions could grow rapidly in other countries as they sign FTAs with the U.S.

The 1981-1982 economic crisis became the key turning point in maquila history. Dollar wages rose much faster in Mexico during this period than in other countries of the Global South, and many foreign corporations threatened to close their factories.[12] The government’s subsequent peso devaluation slashed both the dollar wages paid by firms and the real wages received by workers (in pesos); wages as a percentage of operating costs also fell from 25 to 17 percent.[13] The new neoliberal government quickly made maquilas an official “priority sector,” after which they immediately began their boom. In 1982, their growth rate jumped from 9.5 to 17.5 percent, and 1983 saw the biggest rise in maquila employment yet.[14] Growth in plant size and productivity also ensued; wages as a share of value added fell rapidly.[15] This unprecedented transformation in the function of the maquila sector occurred because of policy changes under the new government, even as the rest of the country fell into a long and deep recession. The quick growth of this low-wage sector of industry during a recession suggests that FTAs will continue to produce similar “solutions” to the globe’s current economic crisis.

Trade liberalization policies affecting maquiladoras continued to proliferate after the 1982 crisis, as was the case of the maquilas themselves. In 1983, President Miguel de la Madrid (1982-1988) passed a new National Development Plan focusing on trade liberalization and established a new agreement with the International Monetary Fund (IMF). He also wrote a new decree on the maquiladoras, altering the laws to facilitate the creation and operation of the specialized factories.[16] Furthermore, Mexico liberalized its laws to allow 100 percent foreign ownership of these firms.[17]

Between 1994 and 1995, as a financial crisis once again was striking the Mexican economy, the state devalued the peso a third time and accepted a USD 17.8 billion IMF stand-by credit, the largest of its kind to any country at the time.[18] Real maquila wages fell significantly, and the maquiladora growth rate proceeded to witness a boom in terms of both number of plants and the magnitude of employment.[19] Economist Paul Cooney reported that “in stark contrast to the -6.2 percent growth rate for the overall Mexican economy, the maquiladora industry expanded by 30 percent in 1995.”[20] The 1994-1995 recession was thus a dramatic instance of the maquiladoras‘ positive response to trade liberalization policies following Mexico’s economic crises. The remarkable booms in this sector were a huge success for U.S. corporations as well as for some Mexican businesspeople, and played a decisive role in convincing the North American nations to rush into enacting NAFTA.

NAFTA predated the 1994-1995 crisis by a year, and extended many of the special legal protections afforded to maquiladoras to other export manufacturers in Mexico as well. Therefore, it is difficult to tell if NAFTA contributed to the post-1995 maquila boom or if the peso devaluation alone brought about its success. Economists William C. Gruben and Sherry L. Kiser noted that “by 1999, the majority of imports that earlier had been processed under the maquiladora program for entry into the United States could enter duty-free without any connection to maquila plants.”[21] On the other hand, by eliminating “priority industries,” the government forced some businesses to become outright maquiladoras in order to continue importing intermediates duty-free, and “some processed products…were able to reenter the United States more cheaply in NAFTA’s wake.” Thus, it is no easy task to tell whether NAFTA contributed to the growth of the maquilas themselves. Nonetheless, the policy certainly has allowed other business enterprises to operate in a manner similar to maquiladoras, outside of maquila laws and regulations.

Once again, recession has hit Mexico with the global financial crisis first seen in 2008. The country’s economy, which is intimately tied to that of the U.S., contracted by 6.1 percent in 2009, with hundreds of thousands of lost jobs witnessed in the manufacturing sector. [22] In 2010, the government passed a new decree on the IMMEX program, which came into effect in early 2011, and was designed to “streamline administrative burdens” as well as clarify tax issues.[23] The effects of this new measure are still unclear. Although the maquila industry is increasingly using local sourcing, development, and sales, the decree still provides tax breaks for foreign-owned plants, demonstrating a continued push for free trade.[24] Most available statistics aggregate the maquilas with domestic-owned production into the IMMEX program, but one statistic is free standing and clear: foreign-owned maquila profits have recovered. Income for these plants, which fell precipitously beginning in October 2008, began to recover slowly in January 2010, and spiked beginning in January 2011.[25] Overall IMMEX program employment has increased since July 2009.[26] It is difficult to assess the effects of the decree itself, but foreign-owned maquiladoras, aided by liberalized trade policies, still recovered faster than the rest of the Mexican economy, even as the U.S. was confronting the pain of its own high unemployment rate.

Throughout the history of maquiladoras, a convergence of neoliberal policies focused on liberalized trade, thus allowing the industry to expand during periods of recession. These booms and the economic benefits that accompanied them, however, have not trickled down to the average Mexican nearly enough, but merely have introduced grossly inferior jobs along with deleterious and even abusive labor conditions.

Flexible Labor Conditions, Job Creation, and the Question of Empowerment

Indefensible working conditions were present in many maquiladoras, including both labor-intensive and newer, more capital- intensive factories. Laborers worked for “long…workdays [as]… part and parcel of the new ‘labor flexibility.'”[27] The Border Committee of Women Workers has reported that supervisors “act[ed] on their whims or show[ed] favoritism in giving out permission for absences or even to go to the bathroom.”[28] Involuntary overtime also has been frequently reported, and management enforced turnover through short-term labor contracts and by opening or shutting down factories with little or no notice, adding to job insecurity.[29] Health hazards abounded, including “lack of…ventilation and the provision of rudimentary face masks… toxic chemicals….back pain…[and] swollen feet,” though the biggest health issue reported by the Border Committee was stress resulting from poor working conditions and from some of the wage- and hour-related practices described below. [30]

The free trade policies that fostered the maquila sector’s growth have not only exacerbated poor working conditions, but also promoted low wages. Although above the minimum, most workers’ pay was below the average for the manufacturing sector as a whole; wages were also distributed using exploitative practices and primitive attitudes. Although real wages have stagnated or fallen, especially in dollar terms, maquiladora managers “ignored” increases in the minimum wage because they already pay a higher salary.[31] Under the new two-tiered wage system, senior employees are able to earn even higher wages. As a cost-saving tactic, some managers have offered severance packages to senior employees and then immediately hired new employees, rendering the concept of seniority “worthless” for former employees who apply to new firms.[32] Workers also had to “meet production quotas to earn… base pay, and [were] then induced to work for the extra pay doled out for pieces produced over and above the daily quota.”[33]

The Border Committee of Women Workers reports that “often, up to 50 percent of a worker’s take-home pay… [was] composed of so-called bonuses.”[34] These could be based on adhering to strict conditions such as not arriving to work more than five minutes late or never asking for time off, including for classifiable emergencies.[35] In other maquilas, production bonuses were earned as a result of “teamwork,” such that either each worker met the quota and the entire team earned the bonus, or no one earned the bonus, creating pressure among employees.[36] They also note that “most maquiladoras… [paid] bonuses in merchandise or scrip, claiming that the workers benefit[ed] because taxes on these sums… [were] not deducted from their paycheck.” This practice, however, is illegal, and many of the “benefits” involved turned out to be fraudulent, as workers still found themselves paying for access to “services,” such as cafeterias and transit.[37]

The Border Committee, asserting that these abuses (and government complicity) actually have worsened since NAFTA’s advent, continued to report labor violations and health hazards under the newer automotive and electronics maquilas.[38] Scholar Michelle Perla’s interviews with workers also suggest that conditions have worsened over the course of the maquila program. She writes that, “in contrast to the early years of the… [maquila] program, beginning in the late 1980s factories in the more labor-intensive sector of the industry with less technology began to speed up production, increase quotas, and cut benefits. In these later years women reported much higher levels of workplace stress.” [39]

It was also common for corporate maquila owners to suppress unions “with the complicity of a wide range of bodies, including the government.” [40] To prevent such organizing, high turnover was often enforced with short contracts or the sudden announcement of factory closures.[41] Sociologist Kathryn Kopinak commented that “while some companies are unionized on paper, the unions function[ed] to reinforce management’s wishes.”[42] Many companies even threatened to eliminate the official unions or to create “protection contracts,” or company unions.[43]

While women and men freely decided to work in maquiladoras, it was not necessarily under conditions of their own choosing. The choice to work in a maquila was made under clear income constraints and usually reflected a lack of better alternative job opportunities, as evidenced by the rise in unemployment during this gestative period.[44] While holding a job may have increased workers’ income and even their autonomy in the home, the job itself, with its often-degrading “flexible” conditions and traditionally low pay, was unlikely to be “empowering.” Michelle Perla brings this fact to light, reporting that women workers often preferred their working conditions when self-employed in the informal sector.[45] Maquiladoras also have not provided nearly as many jobs as Mexico needs or the quality of working conditions that Mexicans deserve, contrary to the “job creation” mantra recited by neoliberal policymakers.[46] The maquila experiment that prompted NAFTA and other FTAs demonstrates the effects of such agreements: not only has the program shifted jobs overseas, but it has also transformed them into low-wage jobs almost inevitably garnished with poor working conditions.

The Maquila Industry as a Bellwether

While the growth of the maquiladora industry might reflect a success story for U.S. investors and some Mexican businesspeople, it certainly was not a boon for Mexican workers, nor has it noticeably created jobs in the U.S. The prolific growth of maquilas following the crisis-driven implementation of free trade policies, and the resultant increase in the number of jobs with detrimental and even inhumane labor conditions, foreshadow the likely negative effects of a round of FTAs with Panama, Colombia, and South Korea.

In his recent speech, President Obama asserted that “what I will not do is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on… We shouldn’t be in a race to the bottom, where we try to offer the cheapest labor… America should be in a race to the top.”[47] He is correct that the U.S. is not in a race to the bottom; that fate belongs to countries such as Mexico, and soon to Colombia, Panama, and South Korea. The basic protections on which U.S. citizens have relied will go neither to workers in the U.S., nor to their counterparts in other countries; in fact, there will be no “race to the top” for labor standards. As NAFTA and the maquiladora program that prompted it have demonstrated, FTAs will not and cannot guarantee the U.S. a lower unemployment rate; in fact, it will more likely bestow jobs with detrimental and even abusive conditions on workers overseas and fail to increase employment back at home.

This analysis was prepared by COHA Research Associate Courtney Frantz.
With special thanks to Jeanne Hahn, Paul McMillin, Myra Thomas, Marissa Luck, and Jennifer Richardson.

References for this article can be found here.

To read more from COHA on Mexico, click here.