    International Trade: Mexico's Maquiladora Decline Affects
    U.S.-Mexico Border Communities and Trade; Recovery Depends in
    Part on Mexico's Actions (25-JUL-03, GAO-03-891).

    Mexico's maquiladoras have evolved into the largest component of
    U.S.-Mexico trade. Maquiladoras import raw materials and
    components for processing or assembly by Mexican labor and
    reexport the resulting products, primarily to the United States.
    Most maquiladoras are U.S. owned, and maquiladoras import most of
    their components from U.S. suppliers. Maquiladoras have also been
    an engine of growth for the U.S.-Mexico border. However, the
    recent decline of maquiladora operations has raised concerns
    about the impact on U.S. suppliers and on the economy of border
    communities. Because of these concerns, GAO was asked to analyze
    (1) changes in maquiladora employment and production, (2) factors
    related to the maquiladoras' decline, and (3) implications of
    recent developments for maquiladoras' viability.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-03-891
        ACCNO:   A07724
      TITLE:     International Trade: Mexico's Maquiladora Decline Affects
    U.S.-Mexico Border Communities and Trade; Recovery Depends in
    Part on Mexico's Actions
         DATE:   07/25/2003
      SUBJECT:   Foreign trade agreements
    	     International cooperation
    	     International relations
    	     International trade
    	     Labor statistics
    	     Foreign trade policies
    	     Mexico
    	     North American Free Trade Agreement

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    GAO-03-891

                                           A

    Letter

    July 25, 2003 The Honorable Max Baucus Ranking Minority Member Committee
    on Finance United States Senate The Honorable Jeff Bingaman The Honorable
    Kay Bailey Hutchison United States Senate Mexico*s Maquiladora program,
    which was established in 1965 to attract investment and create jobs along
    the U. S.- Mexico border, has evolved into the largest and most dynamic
    component of U. S.- Mexico trade. U. S. companies own the vast majority of
    maquiladora plants, and maquiladoras

    import about 80 percent of their components from U. S. suppliers. With
    double- digit growth rates in output and employment until its peak in the
    last quarter of 2000, maquiladora- based production has been one of the
    engines of regional employment and income growth for the U. S.* Mexico
    border. However, over the past 2 years, the level of employment and

    production in maquiladora operations has declined sharply. This decline
    has led a number of observers to express concern about the future
    viability of maquiladoras. Some observers in the United States are also
    concerned that the decline of Mexico*s maquiladoras could adversely affect
    U. S. companies that supply these plants and could hurt the economy of
    border

    communities. In response to your concern about the significance of these
    developments, this report analyzes (1) the ways in which the communities
    along the U. S. Mexico border are integrated and how maquiladoras have
    contributed to U. S.- Mexico interdependence; (2) recent changes in
    maquiladora production, employment, and cross- border trade; (3) factors
    that have affected employment and production in the maquiladora sector;
    and (4)

    factors that could affect the maquiladora industry*s future viability. To
    address these objectives, we met with U. S. and Mexican government
    officials in Washington, D. C., and Mexico City. We contacted business and
    nonprofit sector representatives, academicians, and other experts on the
    maquiladora industry in the United States and Mexico, and we reviewed
    extensive documentation and academic research provided by these sources.
    We obtained and analyzed official data on employment and trade trends from
    both U. S. and Mexican government agencies. We also

    conducted a series of semistructured interviews with 29 representatives of
    business associations consisting of maquiladora- specific and principal
    industry sector organizations at the local and national levels. We relied
    on business associations because, as representatives of the maquiladoras,
    they could comment on issues facing their members, such as increased

    competition, and could explain the reasons for plant closures, changes in
    employment levels, and other changes within the industry. We conducted
    site visits in three major border *twin cities*: San Diego, California*
    Tijuana, Baja California; El Paso, Texas* Juarez, Chihuahua; and McAllen,
    Texas*

    Reynosa, Tamaulipas. Results in Brief A variety of social and economic
    factors link U. S. and Mexican border

    communities, and maquiladoras play a significant role in this
    interdependence. Trade figures indicate that the four U. S. border states
    account for about 62 percent of U. S. exports to Mexico, while 70 percent
    of

    these exports were destined for Mexican border states. Border communities
    are also drawn together socially by family and educational ties and
    economically by twin- plant production and retail commerce. Residents in
    the twin cities cross the border about one million times every day to
    work, shop, attend classes, visit family, and participate in other
    activities. The maquiladora sector, which relies heavily on imports from
    the United States and represents the principal industrial activity on the
    Mexican side of the border, drives cross- border economic integration as
    well as the increasing U. S.- Mexico interdependence. However, the border
    is a diverse region, and the extent of interdependence between communities
    along the border varies widely.

    After growing rapidly during the 1990s, Mexican maquiladoras experienced a
    sharp decline in production and employment after October 2000. In early
    2002, employment in the maquiladora sector had contracted about 20
    percent, losing nearly 290,000 jobs, and production had contracted about
    30 percent. The decline was particularly severe in certain industries and
    cities. For example, maquiladora employment in the Mexican electronics
    industry declined 31 percent between 2000 and 2002, and Tijuana, a city
    with significant maquiladora electronics manufacturing, experienced a 30
    percent decline in maquiladora employment. In addition, overall
    manufacturing production in the Mexican border region began declining in
    2000. The downturn was felt on the U. S. side as well. For example in
    2001, the value of U. S. exports through U. S.- Mexico land border ports
    fell by 10

    percent. Similarly, employment on the U. S. side of the border declined in
    manufacturing and certain other trade- related sectors. Despite these

    contractions, overall U. S. border employment grew in most U. S. border
    metropolitan statistical areas.

    According to government researchers, academicians, and industry
    representatives, both cyclical and structural factors have contributed to
    the decline in Mexico*s maquiladora employment and production since 2000.
    Representatives of industry groups emphasized, and our economic analysis
    confirms, that the cyclical downturn in the U. S. economy has been a
    primary factor in the decline of the maquiladoras. However, industry
    sources and other experts noted that Mexico*s maquiladoras also face
    increased global competition in the U. S. market, particularly from China,

    Central America and the Caribbean. The real appreciation of the peso
    relative to the dollar and key competitors* currencies has heightened such
    pressure. Additionally, industry representatives indicated that Mexican
    government policies such as changing the tax regime applied to
    maquiladoras have created a climate of uncertainty for investors.
    Meanwhile, owing to commitments undertaken under the North America Free
    Trade Agreement (NAFTA), Mexico has now phased out some benefits to the
    maquiladora sector.

    Factors affecting the recovery of Mexico*s maquiladoras include recent
    industry and government actions and the prospect of future Mexican
    reforms. The recent decline of the maquiladoras has added impetus to the
    ongoing evolution in the industry toward more sophisticated manufacturing
    and prompted the Mexican government to take several

    steps in support of the maquiladoras. For example, the Mexican government
    has greatly expanded the number of components that can be imported by
    maquiladoras and other firms with little or no duty assessments. However,
    government, industry, and other experts agree that additional fundamental
    reforms by Mexico, in areas such as energy and labor practices, are still
    necessary to restore the country*s attractiveness as a business and
    investment location. Though difficult, tackling such reforms is made more
    urgent by U. S. trade and homeland security policies that are likely to
    present further challenges for maquiladora operations.

    Background Mexico*s Maquiladora program has been a central feature of the
    U. S. Mexico border. The U. S.- Mexico border stretches nearly 2,000
    miles, from

    the Pacific Ocean in California to the Gulf of Mexico in Texas. Four U. S.
    states (Arizona, California, New Mexico, and Texas) and six Mexican states
    (Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora, and Tamaulipas)
    make up the border. Texas contains the longest section of the

    U. S. border with Mexico, with several large and numerous small border
    crossings across the Rio Grande. Compared with Texas, California*s border
    with Mexico is relatively short, but it includes San Diego* Tijuana, the
    single busiest U. S.- Mexico border crossing. Arizona*s principal border
    crossing with the Mexican state of Sonora at Nogales plays a significant
    role in agricultural trade. The relatively small border crossings between
    New Mexico and Mexico reflect the sparsely populated areas in that region
    of the border. Figure 1 shows the U. S.- Mexico border, including all U.
    S. and

    Mexican border states, some Mexican border cities with varying
    concentrations of maquiladora plants, and some ports of entry on the U. S.
    side of the border.

    Figure 1: Map of U. S.- Mexico Border Twin Cities

    During the 1990s, the population along the border experienced significant
    growth. On the U. S. side, the population increased by 21 percent,
    considerably more than the overall U. S. population, which grew by 13.2
    percent. Some cities on the U. S. border experienced significant increases
    in population, such as Yuma, Arizona, and McAllen, Texas* respectively,
    the

    third and fourth fastest growing metropolitan areas in the United States.
    Population on the Mexican side of the border increased even more rapidly,
    growing by 32 percent between 1990 and 2000. The majority of the border*s
    residents live in communities along the border that are composed of twin
    cities* a city on each side of the border* such as San Diego* Tijuana and

    El Paso* Juarez. The San Diego* Tijuana area alone has a combined
    population of about 4 million, and the El Paso* Juarez area has a
    population of 1.9 million.

    The Maquiladora 1 program was first established by the government of
    Mexico in 1965 as part of the Border Industrialization Program (BIP) and
    maquiladoras have been a driving force in the development of the U. S.
    Mexico border region. Under the BIP, Mexico encouraged foreign
    corporations to establish operations along the northern border to provide
    employment opportunities for Mexican workers displaced after the
    termination of a temporary cross- border work arrangement known as the
    Bracero Program. 2 Also known as *in- bond* plants, 3 maquiladoras were
    allowed to import temporarily, on a duty* free basis, raw materials and
    components for processing or assembly by Mexican labor and to re- export
    the resulting products, primarily to the United States.

    The maquiladoras have undergone a dynamic evolution over the last four
    decades. In the mid- 1960s, maquiladoras consisted primarily of basic
    assembly operations taking advantage of Mexico*s low labor costs. By the
    1980s, U. S. multinationals representing various industrial sectors
    established maquiladora plants along the U. S.- Mexico border. Japanese
    and European companies also established maquiladora plants in Mexico to
    compete in the U. S. market. Since the 1980s, some firms moved from
    lowskilled assembly work to more advanced manufacturing operations.
    Researchers from Mexico*s Colegio de la Frontera and San Diego State

    1 Maquiladora is a term derived from the Spanish word maquilar, which is
    the service a miller provides when he grinds wheat into flour. Similarly,
    a maquiladora provides assembly services without necessarily taking
    ownership of the goods being assembled.

    2 The Bracero Program allowed Mexican citizens to work on a temporary
    basis in the United States between 1942 and 1964. It was initially
    designed to address labor shortages in the U. S. agricultural and railroad
    industries during World War II. 3 When the BIP was established, companies
    with assembly plants in Mexico would deposit a

    bond with the Mexican Department of Commerce and Industry (Secretaria de
    Comercio y Fomento Industrial) for the value of the duty on imported
    components and machinery. The bond would be returned when the finished
    products assembled using the imported components were exported.

    University note that the number of *technical workers* employed by
    maquiladoras increased significantly from the early 1980s to the 1990s.
    Some maquiladoras now employ workers in development and design as well as
    manufacturing. For example, Delphi Automotive in Juarez, the largest
    private employer among maquiladoras in Mexico, now has a sophisticated
    research and development center that employs hundreds of highly skilled
    workers and engineers.

    Over the years, as maquiladoras evolved and expanded, the term

    maquiladora has come to be used loosely to refer to almost any subsidiary
    plant of a foreign company involved in export from Mexico, particularly
    those located along the U. S. border. However, the Maquiladora program
    continues to be quite distinct from other efforts initiated by the Mexican
    government to encourage exports. 4 Firms must register with the government
    of Mexico to be considered maquiladoras and, once registered, are eligible
    for several key benefits, such as preferential tariffs on inputs and
    machinery, and simplified Mexican customs procedures. In this report, we
    define maquiladoras as those firms officially participating in Mexico*s
    Maquiladora program. In addition to the Maquiladora program, the U. S.-
    Mexico trade relationship

    has also been influenced by other important developments such as NAFTA.
    NAFTA was concluded between the United States, Mexico and Canada in 1992
    and entered into force on January 1, 1994. This agreement provided, among
    its other provisions, for the elimination of tariffs and other barriers to
    U. S.- Mexico bilateral trade by 2008. It also required Mexico to change
    certain provisions of the Maquiladora program, such as elimination of
    duty4

    Among the most important of these programs is PITEX (Program for Temporary
    Importation to Manufactured Exports), established in 1990 as another
    government of Mexico program that allows companies to import components
    duty- free. PITEX requires companies to export a minimum of 30 percent of
    their total annual sales. Companies operating under PITEX are more
    commonly located in the interior of Mexico and typically use more Mexican
    components than do maquiladoras, which are primarily located in Mexico*s
    northern border region. The type of employment and production data the
    Mexican government collects on maquiladoras is not available for PITEX
    firms. The U. S.

    International Trade Commission (ITC) issues an annual report on
    production- sharing trade, including between the United States and Mexico,
    as part of its Industry, Trade, and Technology Review series. In that
    report, the ITC considers trade under the Maquiladora program and the
    PITEX program as production- sharing trade. For comparison of Mexico*s
    imports and exports under the Maquiladora Program and PITEX by Harmonized
    Tariff

    chapters, see Ralph Watkins, U. S. International Trade Commission,
    *Production- Sharing Update: Developments in 2001,* Industry Trade and
    Technology Review, USITC, pub. 3534, July 2002, appendix C.

    free benefits for imports of components from non- NAFTA countries. U. S.
    Mexico trade has expanded sharply since NAFTA*s inception. Much of this
    trade involves *production sharing,* whereby final goods are produced

    with parts, labor, and manufacturing facilities from the United States and
    Mexico. Because it enables firms to increase specialization, take
    advantage of low labor costs in Mexico, and attain other efficiencies,
    production sharing is a key benefit to U. S. companies under the
    Maquiladora program.

    Maquiladoras A variety of social and economic factors create strong
    linkages between Contribute to

    communities on both sides of the U. S.- Mexico border, and maquiladoras
    play a critical part in this interdependence. Residents in the twin cities
    Integration along the

    cross the border about one million times every day to work, shop, attend
    Diverse U. S.- Mexico

    classes, visit family, and participate in other activities. Maquiladoras
    have Border

    increased trade between the United States and Mexico and have helped to
    develop the economies of several border regions. While communities along
    the U. S.- Mexico border share certain traits, each region is distinct.
    Multiple Social and

    A wide range of social ties* educational, political, cultural, and
    familial* Economic Ties Fuel

    contribute to integration along the U. S.- Mexico border. For example,
    Integration at the Border

    certain U. S. universities in border cities offer combined degrees or
    exchange programs with their counterparts on the Mexican side. In some
    schools, such as the University of Texas at El Paso and the University of
    Texas* Pan American, Mexican nationals cross the border regularly to
    attend classes. Political interaction and cooperation between local
    authorities of twin cities enhance integration. Cultural and family ties
    also contribute significantly to integration at the border. The U. S.
    counties with

    the highest concentration of Hispanics are located along the southwest
    border, and by far most of the Hispanics in southern border states are of
    Mexican descent.

    Trade and retail sales contribute to economic interdependence at the
    border. Approximately $200 billion in trade went through the U. S.- Mexico
    border in 2002. Much of U. S.- Mexico trade occurs between border states.
    For example, 62 percent of U. S. exports to Mexico originated in Texas,
    California, Arizona, and New Mexico; of this, 70 percent was destined for

    Mexican border states. Research by the Federal Reserve Bank of Dallas
    indicates that trade between the United States and Mexico has positive
    effects on border communities, because U. S. border cities typically
    provide

    a variety of services such as transportation and customs brokerage. 5
    Retail sales to Mexican nationals also contribute significantly to the
    economies of cities on the U. S. side of the border. According to one
    estimate, retailers in Texas annually make an estimated $15 billion in
    sales to Mexican shoppers. In McAllen, Texas, 35 percent, or about $700
    million worth, of retail sales are made to Mexican nationals. Residents
    from Tijuana make 1.5 million trips per month into the San Diego area,
    mainly to shop. In El Paso, Juarez residents account for more than 20
    percent of retail sales. On the other hand, because of the high cost of
    pharmaceuticals in the United States, a growing number of U. S. residents
    regularly cross the border into Mexico to purchase prescription drugs.

    Maquiladoras Drive U. S.* Maquiladoras import most inputs from the United
    States and export most

    Mexico Trade and Border of what they produce back to the United States.
    Growth in U. S.* Mexico

    Integration trade and economic interdependence at the border during the
    last decade

    can be explained to a great degree by the participation of maquiladoras in
    supplying a strong U. S. market during the 1990s. Mexican exports
    increased by about 340 percent between 1993 and 2001, in large part
    because maquiladora- related exports increased by over 400 percent during
    this time, according to a report by the Mexican Commission on Northern

    Border Affairs. 6 By 2001, maquiladoras accounted for 41 percent of total
    Mexican trade with all countries * 34 percent of Mexico*s imports and 48
    percent of its exports (see fig. 2). Trade with the United States makes up
    a significant share of maquiladora trade. In 2001, 79 percent of
    maquiladora imports of components and parts for production were from the
    United States and 98 percent of their exported products were destined for
    the U. S. market. Maquiladora trade between the United States and Mexico
    totaled

    about $121 billion in 2001, with maquiladora exports ($ 75 billion)
    accounting for more than half of Mexico*s total exports to the United
    States. 7 Border cities are typically seen as the primary beneficiaries of

    growing U. S.- Mexico trade. However, states such as Florida, Tennessee, 5
    Lucinda Vargas, Federal Reserve Bank of Dallas, *The Binational Importance
    of the Maquiladora Industry*, Southwest Economy, Issue 6, November/
    December, 1999. 6 Northern Border Regional Development Program, 2001- 2006
    (Programa de Desarrollo Regional, Frontera Norte 2001- 2006), Commission
    on Northern Border Affairs (Comision para Asuntos de la Frontera Norte).

    7 Exports from PITEX assembly plants ($ 46 million), accounted for another
    one- third of Mexican exports to the United States.

    and Ohio, which doubled their exports to Mexico during the second half of
    1990s, have also benefited from growing U. S.- Mexico trade.

    Figure 2: Maquiladoras* Share of Mexico*s Trade 1990- 2002 Furthermore,
    maquiladoras are directly connected to U. S. companies through ownership
    and production ties. The list of Mexico*s top 100 maquiladora employers
    includes such U. S. firms as Delphi, RCA, Ford Motor Company, Tyco,
    General Electric, General Instruments, Johnson &

    Johnson, and ITT. All told, 79 percent of the top 100 maquiladora
    employers are from the United States. Maquiladoras are important to the
    United States because they are a strategic means by which U. S. companies
    stay

    competitive in the global marketplace. By offering lower production costs,
    maquiladoras enable U. S. companies to produce goods more cheaply in
    Mexico than in the United States. In essence, maquiladoras and U. S.

    companies are part of a greater production- sharing model, which is an
    important part of overall North American production. Moreover, more than

    26,000 U. S.- based companies, located mainly in the Midwest, supply
    maquiladoras with raw materials and components.

    The Mexican border region has benefited in terms of job creation from the
    dominant presence of maquiladoras on the Mexican side of the border.
    Overall, 77 percent of all maquiladora establishments are located in the
    six

    Mexican border states shown in figure 3. Also, about 83 percent of
    maquiladora employment was located in border states. During most of the
    1990s, maquiladoras represented more than half of the industrial activity
    in the states of Chihuahua and Tamaulipas. During the same time period,
    the

    maquiladoras represented nearly three quarters of industrial production in
    the state of Baja California, which contained almost one third of Mexico*s
    maquiladora firms. Cities on the U. S. side of the border have benefited
    from the large flow of trade created by maquiladoras. Between 1990 and
    2002, more than half a million jobs were added to the U. S. border region,
    including jobs in services, retail trade, finance, and transportation, and
    after 1995, employment growth in the U. S. border region exceeded the U.
    S. national average (see app. I for details). The employment gains are
    particularly notable, because the border region historically has had high
    rates of unemployment. Some studies have outlined the effect of overall
    border

    economic trends on local border communities. For example, researchers
    estimated that in one Texas border community, in 2001, services and
    supplies purchased by maquiladoras amounted to $136 million and a total of
    32,577 jobs were sustained by maquiladoras and related manufacturing
    activity.

    Figure 3: Map of Mexico Showing Share of Maquiladora Establishments, by
    State

    The same researchers estimated that 15 percent of maquiladora workers*
    salaries was spent in the region on goods and services. In one Arizona
    border community, researchers surveyed maquiladora workers and found that
    workers who crossed the border to shop made an average of 5.5 trips a
    month and spent about $35 on each trip. Almost one third of retail sales
    in

    the same Arizona community are attributed to Mexican nationals, according
    to local sources.

    Despite their role in generating employment in Mexico, the maquiladoras*
    benefit to the country remains a subject of some debate. Some express
    reservations about the maquiladoras* ability to generate economic
    development for Mexico, since these plants have generally been unable to
    establish a network of domestic inputs providers or create significant

    linkages to the internal Mexican economy. In April 2002, for example, the
    former Mexican Foreign Minister noted that without proactive Mexican
    government policy to set up domestic suppliers, the benefits of the
    maquiladora industry would never extend beyond the border. In addition,
    critics in the environmental and labor movements on both sides of the
    border also assail these plants. 8 Some environmental groups claim that
    maquiladoras are responsible for the growing pollution problem in the
    border region. Similarly, some labor organizations criticize the
    maquiladoras for the low wages paid to workers and for allegedly poor
    working conditions.

    Border Has Distinct Regions Although communities along the U. S.- Mexico
    border share certain traits,

    with Varying Degrees of they are also quite distinct. The level of
    integration between cross- border

    Integration twin cities depends on location, population, economic profile,
    and crossborder

    political cooperation. We observed some of these differences during
    fieldwork in three border areas: McAllen* Reynosa, El Paso* Ciudad Juarez,
    and San Diego* Tijuana.

    McAllen* Reynosa. McAllen and Reynosa are economically interdependent.
    Both are medium- size cities, McAllen with a population of about 569,000,
    and Reynosa with about 420,000, and there are no other sizeable urban
    areas nearby on either side of the border. Officials at the McAllen
    Economic Development Corporation (MEDC) capitalized on the interdependence
    between McAllen and Reynosa and incorporated it into their economic
    strategy for the region starting in 1988. At that time, McAllen had high
    unemployment and Reynosa*s economy was based on

    8 We have prepared several reports on environmental and labor issues
    related to maquiladoras. See U. S.- Mexico Trade: Assessment of Mexico*s
    Environmental Controls for New Companies, GAO/ GGD- 92- 113 (Washington,
    D. C.: Aug. 3, 1992) and U. S.- Mexico Trade: The Work Environment at
    Eight U. S.- Owned Maquiladora Auto Parts Plants, GAO/ GGD94- 22
    (Washington, D. C.: Nov. 1, 1993).

    subsistence farming. Working with political leaders in McAllen and
    Reynosa, MEDC developed a strategy based on promoting industrial
    development in Reynosa, recognizing that if companies opened maquiladoras
    there, McAllen would benefit by providing inputs and offering management,
    engineering, warehousing, trucking, legal, and accounting services. In the
    14 years since its establishment, MEDC has recruited 178 companies to the
    area, in diverse manufacturing sectors, such as electronics, auto parts,
    and telecommunications.

    El Paso* Ciudad Juarez. Although El Paso and Ciudad Juarez are also
    closely integrated, such ties have developed differently than in McAllen*
    Reynosa. Ciudad Juarez is a larger metropolitan area, with a population of
    1.2 million, and it is home to more maquiladora employees than any other
    Mexican city. On the U. S. side, El Paso and the neighboring communities
    in southern New Mexico are much smaller. El Paso*s economy has been shaped
    by economic activity in Ciudad Juarez, especially that of providing
    services to maquiladoras. In addition, Juarez residents contribute to El
    Paso*s economy by purchasing items ranging from cars to clothing and
    services such as financial and health services. In 2001, there were
    approximately 46 million northbound crossings via the three international

    bridges that connect the two cities. However, business leaders and other
    observers whom we met in the El Paso* Juarez area frequently noted that
    integration and economic dependence between El Paso and Juarez occurred
    spontaneously, rather than by design. The development of maquiladoras on
    the Mexican side occurred much earlier than in Reynosa and was largely
    attributed to individual efforts by entrepreneurs in Juarez

    and El Paso that began in the 1960s, rather than to a collective vision.
    However, in recent years, in Santa Teresa, a nearby border community in
    southern New Mexico, developers created a strategic plan to build an

    industrial park as a supplier base, with warehouse and distribution
    facilities, to service maquiladoras. The Santa Teresa port of entry opened
    11 years ago. Developers envisioned that this border crossing would serve
    as an alternate point of entry to El Paso for cross border trade.

    San Diego* Tijuana. The dynamics of integration between San Diego and
    Tijuana are notably different from other cross- border twin cities. In
    this area, economic dependence is more one- sided. Unlike El Paso or
    McAllen, San Diego is a large metropolitan area in its own right, with a
    population of close to 3 million. Many of the major economic activities in
    San Diego, including defense and space manufacturing, biosciences, and
    tourism, are not directly connected to Tijuana. While Hispanics account
    for at least 50 percent of the population in most U. S. counties along the
    Southwest

    border, they account for only about 27 percent of the population in San
    Diego County, suggesting lower levels of family ties or connections to
    Mexico. In contrast, Tijuana, with a population of about 1.2 million, is
    heavily dependent on maquiladoras, and the city is closely tied to the U.
    S. market. In addition to U. S. companies, Tijuana has also been the
    preferred location for Japanese and Korean maquiladora investments, which
    have made this area the world*s leading producer of color televisions.
    More than 600 maquiladora plants, employing approximately 150,000 people
    are

    located in Tijuana. Moreover people in Tijuana are more likely to cross
    the border to shop or do business in San Diego than vice versa; in fact,
    it is estimated that two out of three residents of San Diego have never
    been to Tijuana. In contrast, Tijuana residents spend between 3 to 5
    billion dollars

    in purchases in the San Diego region, mostly in the communities adjacent
    to the border. In addition, 7 percent of economically active people in
    Tijuana work in San Diego, earning an estimated $650 million a year in

    wages and salary income. After Rapid Growth,

    Maquiladora production and employment grew rapidly throughout the
    Maquiladoras and

    1990s but declined sharply after October 2000. Within the diverse
    maquiladora sector, the decline was particularly steep in certain
    industries Border Region

    and in some border cities. Overall, Mexican manufacturing production in
    Experienced Declines

    the border region also declined and cross- border trade flows fell. At the
    Beginning in 2000

    same time, U. S. border employment in manufacturing and certain other
    trade- related sectors contracted. Nevertheless, the U. S. border region
    continued to experience stronger employment growth than did the United
    States as a whole.

    Maquiladoras Grew Rapidly During the 1990s, maquiladoras proved to be one
    of the more dynamic

    in the 1990s, with Growth components of Mexican manufacturing. Maquiladora
    production increased

    Varied by Region and by 197 percent from January 1993 until its peak in
    October 2000, while

    Industry overall manufacturing production in Mexico increased by only 58
    percent

    in the same time period (see fig. 4). During that time period, maquiladora
    employment tripled, adding more than 900,000 jobs to the Mexican economy.
    In 2000, maquiladoras accounted for about 4 percent of total

    employment and about 20 percent of manufacturing employment in Mexico.

    Figure 4: Growth in Maquiladora and Total Mexican Manufacturing
    Production, 1993* 2002

    Note: Certain statistics on Mexican industrial production were not
    available for years prior to 1993.

    With respect to employment, most major Mexican border cities and
    industrial sectors experienced growth in maquiladora employment over the
    decade, although some grew faster than others. For example, Tijuana and
    Mexicali tripled their maquiladora employment, and the electronics
    industry more than doubled its maquiladora employment in the border
    region. The electronics industry, which was already the largest
    maquiladora employer, added more than 200,000 jobs in the border region
    during the 1990s. For the Mexican border region as a whole, maquiladora
    employment rose 145 percent* from 342,555 in January 1990 to 839, 200 in
    October 2000 (see app. V, table 8, for more information). While
    maquiladoras have

    typically been concentrated in the border region, maquiladora employment
    growth throughout the rest of Mexico was actually higher than in the

    border region during the 1990s. Growth in the nonborder region was
    particularly strong in the textile and apparel sector, in which employment
    rose in the nonborder region from about 22,000 in 1990 to about 224,000
    jobs in 2001 (fig. 5). As a result of the stronger growth in the nonborder
    region, the share of textile and apparel maquiladora employment in the
    border region fell from 49 percent in 1990 to 17 percent in 2001. 9 Much
    of the investment in the apparel sector occurred in anticipation of duty-
    free treatment for most U. S. imports of apparel from Mexico under NAFTA
    in 1999. 10

    9 Data on textiles and apparel in the border region were available
    annually only through 2001. The National Institute of Statistics,
    Geography and Information Technology (Instituto Nacional de Estadistica,
    Geografia e Informatica) provided us data broken down by industry and
    region through October 2002.

    10 For information about investment in Mexico*s textile and apparel sector
    in 1999, see Larry Brookhart and Ralph Watkins, U. S. International Trade
    Commission, *Production- Sharing Update: Developments in 1999,* Industry
    Trade and Technology Review, USITC, pub. 3335, July 2000, p. 15.

    Figure 5: Maquiladora Textile and Apparel Employment, Nonborder and Border
    Regions, 1990* 2001

    Maquiladora Decline Started After growing since the program*s inception
    over 35 years ago, particularly

    in 2000, Unevenly Affecting in the 1990s, Mexican maquiladora production
    and employment began to

    Industries and Border Cities decline sharply in late 2000. Maquiladora
    production declined about 30

    percent from late 2000 to early 2002. At the same time, maquiladora
    employment contracted about 20 percent, losing nearly 290,000 jobs
    nationally, about 174,000 of which were located in the border region. 11
    Similarly, the number of maquiladora establishments (factories) in
    operation began to decline as well (see fig. 6). Nevertheless, even with
    the 11 Mexico*s National Institute of Statistics, Geography and
    Information Technology (Instituto

    Nacional de Estadistica, Geografia e Informatica) defines the border
    region as the 41 municipalities located along the U. S.- Mexico border.

    pronounced declines, the overall numbers of maquiladora employees remain
    at levels similar to those in 1998* 1999.

    Figure 6: Maquiladora Employment and Establishments, 1990- 2002

    While the Mexican maquiladora downturn was evident both nationally and in
    the border region, certain industries experienced larger declines (see
    fig. 7). For instance, in the border region, the electronics industry
    experienced one of the steepest and largest maquiladora employment
    declines of any industrial sector, contracting by 31 percent and losing
    more than 112,000 jobs in the 2- year period between October 2000 and
    October 2002. 12 In contrast, the automobile and auto parts industry
    experienced a less severe

    12 Nationally in Mexico, the electronics and electrical components sector
    declined by 32 percent from September 2000 through April 2002.

    maquiladora employment decline of 13 percent (about 24,000 jobs) in less
    than a year, before resuming some growth in November 2001. Textiles and
    apparel also experienced a steep employment decline, falling by 26 percent
    and losing more than 12,000 jobs. Nationally, the textile and apparel
    industry lost more than 70,000 jobs. In all other border industrial
    sectors combined, maquiladora employment declined by about 16 percent over
    a little more than a year but has grown by about 4 percent since January
    2002.

    Figure 7: Mexican Maquiladora Employment in the Border Region by
    Industrial Sector, January 1997* October 2002

    Note: Data broken down by industrial sector in the border region were
    available only through October 2002.

    As figure 8 illustrates, the decline in maquiladora employment also
    affected cities in the Mexican border region differently. The two largest
    border

    cities, Juarez and Tijuana, both experienced significant declines in
    maquiladora employment, accounting for over half of the total jobs lost in
    the border region. After peaking in October 2000, by December 2002,
    maquiladora employment had fallen 27 percent in Juarez and 30 percent in
    Tijuana. The smaller city of Nogales, Sonora, experienced one of the

    sharpest percentage changes in maquiladora employment in the border
    region, declining by 44 percent. In contrast, the city of Reynosa
    experienced a decline of only about 5 percent between September and
    December 2000, and its maquiladora employment has since rebounded, with 7
    percent growth since January 2001. Reynosa*s decline in electronics and
    auto parts employment was much less severe than other cities. Figure 8:
    Mexican Maquiladora Employment, by Border City, January 1990 - December
    2002

    Mexican Border The decline in Mexico*s maquiladora production contributed
    to a decline in

    Experienced Overall overall manufacturing production in Mexico*s border
    region. 13 Figure 9

    Decline in Manufacturing shows the growth of manufacturing production for
    three Mexican border

    and Cross- Border Trade states: Baja California, Coahuila, and Sonora.
    Baja California, the state with

    the largest share of maquiladoras, grew more rapidly than the other border
    states but also experienced the largest decline in overall manufacturing
    production after October 2000. Similarly, manufacturing production in
    Coahuila, Nuevo Leon (not shown), and Sonora also experienced downturns
    beginning in late 2000 and early 2001. 14

    13 Overall manufacturing production consists of manufacturing by both
    maquiladora and nonmaquiladora manufacturing companies. The growth in both
    maquiladora production and total manufacturing production in Mexico is
    shown in figure 3.

    14 Data on manufacturing production were not available for the Mexican
    border states of Chihuahua and Tamaulipas.

    Figure 9: Growth of Manufacturing Production in Mexican Border States,
    1993* 2002

    During the maquiladora decline, exports, imports, and overall trade
    through U. S.- Mexico land border ports also dropped. The value of
    crossborder trade dropped 5 percent in 2001 and remained flat in 2002,
    owing in large part to the 10 percent decline in U. S. exports to Mexico
    through these ports. Although each of the four major land border ports
    experienced some decline, Nogales experienced the greatest decline, losing
    about 20 percent of its value between 2000 and 2002 (see app. IV, table 7,
    for levels of U. S. trade with Mexico through the four main land border
    points). Maquiladoras, which accounted for 40 percent of U. S. exports to
    Mexico and 54 percent of Mexican exports to the United States in 2001,
    contributed

    to this decline.

    U. S. Border Employment in The decline in Mexico*s maquiladoras was also
    felt on the U. S. side, as

    Manufacturing and manufacturing employment in border municipalities
    declined by 6 percent

    overall from 2000 through 2002. 15 Other U. S. sectors related to trade
    also Transportation Services

    experienced declines in employment at the border. U. S. border Fell, but
    Overall

    employment in transportation and public utilities, which includes trucking
    Employment Growth

    and warehousing, was down 4 percent, and employment in wholesale trade
    Continued

    was down 3 percent overall. Similar to the maquiladora employment declines
    in Mexico, employment declines on the U. S. side of the border also varied
    by region. For example, manufacturing employment declined by 18 percent
    overall in Texas* border cities, and employment declines in wholesale
    trade and transportation and in public utilities were more pronounced in
    Arizona. (App. I provides a detailed analysis of employment trends in the
    U. S. border region.)

    Despite the contractions in manufacturing and certain other trade- related
    sectors, other sectors in the U. S. border region grew. As a result, total
    nonagriculture- related employment in the border area grew by 4 percent
    even after the U. S. economic slowdown began in 2000 and national
    employment contracted 1 percent through 2002. Some border metropolitan
    areas maintained even stronger employment growth. For example, the McAllen
    area grew by 9 percent between 2000 and 2002, while Laredo grew by 6
    percent, and San Diego and Las Cruces grew by 5 percent each over the same
    period. On the other hand, El Paso*s overall nonfarm employment

    fell, primarily because its mix of industries is weighted towards sectors
    that have been shrinking (see app. I for details).

    Cyclical and Structural The decline in maquiladora production and
    employment since the last

    Factors Cited in quarter of 2000 is attributable to both cyclical and
    structural factors. Government researchers, academicians, economic
    studies, and industry

    Maquiladora Decline representatives agree that the cyclical downturn in
    the U. S. economy has

    been a primary factor in the decline. However, industry sources and other
    experts emphasized that the maquiladoras have also been adversely affected
    by structural factors, such as increased competition in the U. S. market,
    particularly from China, Central America and the Caribbean, and by the
    strength of the Mexican peso, which has further eroded the

    15 The U. S. border municipalities for which appropriate employment data
    through 2002 were available are San Diego, California; Yuma, Arizona; Las
    Cruces, New Mexico; and Brownsville, El Paso, Laredo, and McAllen, Texas.

    maquiladoras* competitiveness. Changing Mexican tax policies have also
    contributed to the maquiladora decline by creating a climate of
    uncertainty for foreign investors. Meanwhile, owing to commitments
    undertaken under NAFTA, Mexico has phased out some of the key benefits of
    the Maquiladora program.

    It is clear from our research that all of these factors were at work
    before and during the recent maquiladora downturn, and that each was
    changing in a direction adverse for maquiladora production and employment.
    However, the sheer number of simultaneous changes over a relatively brief

    period makes it difficult to isolate or quantify the impact of individual
    factors. Although many government, academic, and industry sources
    generally refer to the cyclical downturn in the U. S. economy as a
    principal factor in the decrease in maquiladora employment and production
    since the last quarter of 2000, there is no such agreement on the relative
    importance of other factors associated with the decline of the
    maquiladoras. Therefore, the order in which we present these other factors

    is generally based on the results of our semistructured interviews with
    industry associations (see app. VI).

    U. S. Economic Slowdown In explaining the decline in maquiladora
    production and employment

    Adversely Affects beginning in the last quarter of 2000, government,
    academic, and industry

    Maquiladoras sources generally emphasized the role of the downturn in the
    U. S. economy. Of the 23 industry association representatives we
    interviewed

    whose membership had experienced a decline in production or employment,
    about three- quarters cited the recent downturn in the U. S. economy as a
    major factor. As noted earlier in this report, maquiladora

    production is often linked to U. S. manufacturing through
    productionsharing arrangements. In fact, about 98 percent of maquiladora
    production is destined for the U. S. market. Thus, it is not surprising
    that the maquiladoras are very sensitive to fluctuations in U. S.
    manufacturing and demand. Our analysis of economic data supports the
    conclusion of experts and interviewees, demonstrating that historically
    maquiladora employment typically grows when the overall U. S. economy
    expands and is negatively influenced when the U. S. economy slows down
    (see app. II for a discussion of the effect of the economic downturn in
    the United States on employment

    for various maquiladora industrial sectors). Moreover, maquiladora
    employment has been even more sensitive to changes in U. S. manufacturing
    production, particularly in sectors such as textiles and autos, and a
    sharp drop in U. S. manufacturing has characterized the

    present U. S. economic slowdown.

    As figure 10 illustrates, maquiladora employment shows a correlation with
    U. S. economic performance over the past two decades. On average,
    maquiladoras added almost 118,000 employees annually from 1995 to 2000. 16
    During this period, U. S. annual economic growth averaged 3.6

    percent. However, in 2001, as U. S. economic growth slowed to 1.4 percent,
    the maquiladoras lost nearly 229,000 jobs.

    Figure 10: Annual Growth Rates of U. S. Gross Domestic Product and
    Maquiladora Employment, 1980- 2002

    16 Maquiladoras reached their peak employment level of 1.3 million
    employees in October 2000.

    Moreover, although the Mexican economy as a whole is very closely linked
    to that of the United States, the maquiladoras appear to have been
    affected by the U. S. economic slowdown more severely than the Mexican
    economy

    overall. While Mexico*s economy contracted .2 percent in 2001, it resumed
    growth at .7 percent in 2002. However, the maquiladora sector declined
    both years 9.2 percent and 8.3 percent, respectively. 17 Of the industry
    associations indicating that their membership had experienced a decline in
    employment or production, about half reported that the maquiladoras had
    been more negatively affected by the U. S. economic downturn than had
    other businesses in Mexico.

    Mexico Faces Increased Among the 23 industry associations that indicated a
    decline in their

    Global Competition in the memberships* employment or production, mounting
    foreign competition in

    U. S. Market the U. S. market was the most frequently offered explanation
    for the decline

    of the maquiladoras over the past 2 years. Over one- half of the
    representatives of industry associations referred specifically to the role
    of China in the maquiladoras* decline. One maquiladora spokesman, for
    example, suggested that China*s entrance into the World Trade Organization
    (WTO) 18 has made that country a more attractive choice for foreign direct
    investment, while foreign investment in Mexico*s maquiladoras has
    decreased.

    Among the major suppliers of imports to the United States, Mexico ranked
    second and China third in 2002. As figure 11 illustrates, both Mexico and
    China experienced significant growth in exports to the United States from

    1995 to 2002. However, between 2000 and 2002, U. S. imports from Mexico
    grew at a slower pace than those from China. As a result, the gap between
    Mexico and China narrowed in China*s favor. 17 The figure for 2002 is
    preliminary, based on data available through September.

    18 China formally joined the WTO in December 2001.

    Figure 11: Value of U. S. Imports from Mexico and China, 1995* 2002

    As appendix III details, Mexico recently lost market share in 47 out of
    152 major U. S. import categories. At the same time, China gained U. S.
    market share in 35 of those 47 import categories, including toys,
    furniture, electrical household appliances, television and video equipment
    and parts, and apparel and textiles. Some of these industries represent
    significant

    sectors of maquiladora production. Recent International Trade Commission
    (ITC) staff research suggests that while Mexico does face increased
    competition from China in the U. S. market, some sectors are more
    threatened than others. 19 According to the 19 Ralph Watkins, U. S.
    International Trade Commission, *Mexico Versus China: Factors

    Affecting Export and Investment Competition,* Industry Trade and
    Technology Review,

    USITC, pub. 3534, July 2002, p. 11ff.

    ITC staff research, a growing share of some textiles and apparel products
    sold in the United States are being produced in China rather than Mexico.
    In contrast, this staff research notes that within the machinery sector,
    the

    data did not indicate a shift in competitiveness away from Mexico towards
    China. Mixed results are apparent in the electronic products sector.
    Mexico lost U. S. market share to China in the telephone and telegraph
    equipment segment in both 2001 and 2002, and Mexico*s gain in the computer
    hardware segment in 2001 was more than offset by a sharp loss to China in

    2002. The ITC staff research noted above concludes that China has
    competitive advantages over Mexico in terms of labor costs, electricity
    costs, and diversity of component suppliers. In this context, it is worth
    noting that wages along the U. S.- Mexico border, where the maquiladoras
    are concentrated, tend to be higher than in other areas of Mexico. 20 More
    recent ITC staff research indicates that the cost of water for industrial
    uses

    (important in the textiles industry) and corporate income tax rates are
    lower in China. On the other hand, the ITC staff research suggests that
    Mexico*s comparative advantages include lower transportation costs,
    shorter transit time, and lower international communication costs. Mexico
    also provides greater protection for intellectual property, more
    transparency in regulation and administration, and a network of free-
    trade agreements with third countries.

    Several industry representatives noted that Mexico also faces increased
    competition from countries in Central America or the Caribbean. One
    industry spokesperson noted that the U. S. decision in May 2000 to grant
    NAFTA- parity access to Caribbean Basin Initiative (CBI) countries had
    eroded Mexico*s ability to compete in the U. S. apparel market,
    particularly because a number of Central American and Caribbean countries
    have

    lower labor costs than Mexico. According to a Mexican economic research
    group, manufacturing wages in Mexico are almost 67 percent higher than in
    the Dominican Republic and about 92 percent higher than in Honduras. 21 20
    Average wages in Mexico*s six border states are higher than in other
    regions of Mexico except the central area around Mexico City.

    21 Actual figures: Mexico: $2. 5/ hour; Dominican Republic: $1.5/ hour;
    Honduras: $1.3/ hour. Source: *Perspectives of the Maquiladora Industry in
    the Mexican Economy* (Perspectivas de la Industria Maquiladora en La
    Economia Mexicana), Center for Analysis and Economic Projections of Mexico
    (Centro de Analisis y Proyecciones Economicas de Mexico), December 9,
    2002.

    The heightened global competition from China and CBI countries is part of
    a larger phenomenon in which the benefits enjoyed by maquiladoras and
    other Mexican producers have eroded as U. S. trade preferences or
    liberalization accorded to other countries have expanded. The recent
    experience of the Mexican textiles and apparel industry, one of the major
    maquiladora sectors, illustrates this point. In 1994, NAFTA gave Mexico
    preferential access for its textiles and apparel. Other countries* exports
    to the United States and Canada generally did not receive similar
    advantages. 22 U. S. imports of Mexican textile and apparel products grew
    rapidly, with Mexico*s share of total U. S. imports in this sector
    doubling from 7 percent in 1994 to 14 percent in 2000 (see fig. 12).
    Mexico surpassed both China and the Caribbean Basin countries to become
    the largest supplier to the U. S. market. However, under the Trade and
    Development Act of 2000, the United States allowed textile and apparel
    products from Caribbean Basin countries that met certain requirements to
    receive

    preferential access to the U. S. market. This legislation also stipulated
    that to benefit from the special treatment, CBI- based apparel operations
    must use U. S.- made inputs, and, according to a Mexican textile industry
    association, operations have shifted from using Mexican textiles. In
    addition, under the WTO Agreement on Textiles and Clothing, all quotas on
    textile and apparel products are being phased out by 2005. For some
    products quotas have already been removed. Despite the recent U. S.
    recession and a decline of total U. S. imports of textiles and apparel by
    5

    percent between 2000 and 2002, U. S. imports of textiles and apparel from
    China rose 12 percent, making China again the largest foreign supplier to
    the U. S. market. Figure 12 shows these changing patterns of U. S. imports
    in textiles and apparel from Mexico, China, and CBI countries.

    22 U. S. nonreciprocal trade programs, such as the Generalized System of
    Preferences for developing countries and CBI for Caribbean and Central
    American trade partners, generally excluded textile and apparel from
    special preferences. Canada is an exception, also receiving benefits
    through NAFTA.

    Figure 12: U. S. Imports of Textiles and Apparel from Mexico, China, and
    Caribbean Basin Countries, 1990* 2002

    Note: Caribbean Basin Countries are those eligible for the Caribbean Basin
    Trade Partnership Act preferential access. These countries are Antigua and
    Barbuda, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Costa
    Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala,
    Guyana, Haiti, Honduras, Jamaica, Montserrat, Netherlands Antilles,
    Nicaragua, Panama, St. Kitts and

    Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Trinidad and
    Tobago.

    Industry Representatives Many industry representatives whom we contacted
    also called attention to

    Blame Strong Peso for Loss the role of the strengthening Mexican currency
    in eroding the

    of Competitiveness maquiladoras* competitiveness. Historically, growth
    periods in the

    maquiladoras have been associated with devaluations of the peso. For
    example, after the peso was devalued in 1984, there was a 3- year surge in
    U. S. automotive industry investments in maquiladora plants. Similarly,
    according to a study by the El Paso Branch of the Federal Bank of Dallas,

    the peso devaluation in December 1994 played a key role in spurring the
    expansion of Mexico*s maquiladoras during the second half of the past

    decade. 23 However, beginning in the last quarter of 1998, the Mexican
    peso consistently appreciated against the dollar in real terms, a trend
    that continued while the maquiladoras experienced their greatest
    employment decline, from the end of 2000 to the beginning of 2002 (see
    app. II for the

    relative dependence of maquiladora employment on the real peso exchange
    rate). As the peso appreciated in real terms, maquiladora operating
    expenses increased. Moreover, this real appreciation of the Mexican peso
    took place as the currencies of some of Mexico*s East Asian competitors
    were depreciating against the dollar. For example, figure 13 compares the
    performance of the Chinese yuan to the Mexican peso, in real terms,
    between 1995 and 2002. Unlike the peso, the yuan has actually depreciated
    since early 1998.

    23 William C. Gruben, Federal Reserve Bank of Dallas, *Was NAFTA Behind
    Mexico*s High Maquiladora Growth?* Economic and Financial Review, Third
    Quarter 2001.

    Figure 13: Real Dollar Exchange Rate of Mexican Peso and Chinese Yuan,
    1995* 2002

    Changes in Mexican Tax Among industry groups whose members had experienced
    losses in

    Policies Raise Investor employment or production, about two- thirds of
    those we interviewed

    Uncertainty indicated that uncertainty resulting from Mexican government
    tax policies

    was a major factor in the maquiladoras* decline. These groups noted that
    such uncertainty had caused some firms to withdraw from, or downsize,
    their operations in Mexico and had also discouraged new foreign direct
    investment in Mexico. In particular, industry representatives said that
    frequent changes to the fiscal regime had increased the tax burden and
    administrative costs to maquiladoras. They were also concerned that the
    frequent changes reduced the maquiladoras* ability to develop long- term
    investment plans.

    In addition to the duty- free treatment on import of parts, components,
    and other inputs, maquiladora plants enjoyed, at least until the mid-
    1990s, a virtual freedom from taxation. Though legally subject to income
    taxes, in practice, the companies paid only a small assets tax, a flat
    minimum of 2 percent of the value of the maquiladora*s assets. Moreover,
    the maquiladoras were permitted to use the cost of wages to offset their
    tax on assets. This virtually eliminated taxes for some maquiladoras.
    According to experts, the twin benefits of duty- free import and minimal
    taxation were primary incentives for foreign firms to establish
    manufacturing operations

    in Mexico. The tax regime applicable to maquiladoras remained constant for
    almost 30 years but began to evolve rapidly in the 1990s. The most
    significant of these tax changes, the treatment of what are known as
    *permanent

    establishments* is frequently noted by industry groups and others as a
    cause of investor uncertainty about the industry. A permanent
    establishment typically is a branch of a company from one country that is
    doing business in another *host* country, and which may be

    taxed in that host country. According to U. S. Treasury officials,
    permanent establishment is a concept found in virtually all double
    taxation treaties. Mexico adopted the permanent establishment concept as
    part of its income tax law in 1981. According to U. S. Treasury officials
    and Mexican tax experts GAO consulted, Mexico essentially exempted
    maquiladoras from

    the tax that could be imposed on permanent establishments until 1998.
    However, starting in 1998, Mexico began seeking to treat the foreign
    parent companies of maquildoras as having permanent establishments in
    Mexico for tax purposes. By treating the maquiladoras as permanent
    establishments, the Mexican government could subject the foreign parent
    companies to taxation, potentially allowing Mexico to increase the
    revenues it collects from maquiladora operations.

    The right of the Mexican government to tax maquiladoras as permanent
    establishments was affirmed in the U. S.- Mexico tax treaty of 1992.
    However, U. S. companies with maquiladora operations in Mexico were
    concerned that Mexico*s application of permanent establishment to their
    maquiladora operations would subject them to double taxation. This could
    occur if Mexico imposed a broad definition of how permanent establishments
    could be taxed that the U. S. Treasury would not accept, because it would
    prevent the U. S. parent company from getting a full credit

    in the United States from the taxes actually paid in Mexico. Resolution of
    potential problems, such as double taxation, associated with the treatment

    of maquiladoras as permanent establishments has necessitated a series of
    additional bilateral agreements between the United States and Mexico. It
    took several years and several different iterations to finally resolve
    such practical problems, and this caused a prolonged period of uncertainty
    for maquiladoras. Other changes in Mexico*s tax regime have contributed to
    the climate of investor uncertainty. In 2002, for example, Mexico limited
    the ability of businesses, including maquiladoras, to take a tax credit on
    salaries. According to industry representatives, this provision could have
    significantly increased the tax burden on some maquiladoras. However,
    according to Mexican officials, this tax provision has subsequently been

    ruled unconstitutional. NAFTA Phased Out Some The phasing out of
    maquiladora benefits as part of NAFTA was also cited by Maquiladora
    Benefits

    industry associations as a major factor in the decrease in maquiladora
    production and employment. When NAFTA was signed in 1993, it envisioned
    fundamental changes to the maquiladora model. The most significant of
    these changes was embodied in Article 303 of NAFTA, which eliminated duty
    drawback (or refunds of duties) 24 for inputs of non- NAFTA origin as of
    January 1, 2001, if the final products incorporating these inputs

    are to be subsequently exported to another NAFTA country. For various
    reasons, notwithstanding the 7- year grace period provided, the
    maquiladoras did not develop a network of domestic suppliers in Mexico. As
    a result, implementation of Article 303 has adversely affected the
    competitiveness of maquiladoras that rely on non- NAFTA suppliers for
    inputs and resulted in closure of some maquiladora firms.

    According to officials with the Office of the U. S. Trade Representative,
    some aspects of the Maquiladora program were not consistent with NAFTA*s
    trade objectives. For example, the duty drawback provisions of the
    Maquiladora program were in conflict with NAFTA*s rules of origin
    requirements. Under NAFTA*s rules of origin, goods traded among NAFTA
    partners are allowed duty- free status only when the goods comprise a
    minimum percentage of North American content. However, the Maquiladora
    program provided duty drawbacks for inputs imported to Mexico from any
    source, including non- NAFTA countries, undermining the duty- free
    benefits that North American products were to receive in Mexico as a
    result of NAFTA. Second, such drawback programs represented an

    24 *Duty drawback* refers broadly to the refund, waiver, or reduction of
    customs duties owed on imported goods, on condition that the goods are
    subsequently exported.

    advantage for exporters versus firms involved in production for the
    domestic market, since the latter would not receive an equivalent duty
    drawback. In negotiating NAFTA, the United States hoped to reverse this
    advantage, which led to the development in Mexico of an economic system
    with separate production tracks for exports and for goods destined for
    domestic consumption. In fact, U. S. officials explained that they
    envisioned the gradual phasing- out of maquiladoras with the
    implementation of NAFTA, as duty- free treatment would apply to all trade
    among NAFTA member countries.

    The rationale behind Article 303 was to encourage firms to develop North
    American suppliers for critical inputs by providing an incentive for
    maquiladoras to shift sourcing of components or inputs to North America,
    including Mexico. The development of a network of North American

    suppliers would mean that more value would be added during the production
    process in Mexico, the United States, and Canada. The elimination of duty
    drawback would necessitate significant changes in the sourcing of
    maquiladora inputs, particularly for maquiladora operations of some
    Japanese and other Asian companies that were heavily dependent on

    certain inputs from the Far East. The implementation of Article 303 was
    therefore scheduled for January 1, 2001, 7 years after NAFTA*s entry into
    force, to allow the maquiladoras to relocate their supply chain to North
    America. However, a network of Mexican domestic suppliers for the
    maquiladoras largely failed to materialize during this period. Maquiladora
    observers have suggested several explanations, principally the scarcity of
    credit in Mexico to support entrepreneurial activity and the lack of an

    entrepreneurial culture among Mexican businesses. Under NAFTA, Mexico
    could have chosen to counter the loss of duty drawback following
    implementation of Article 303 by reducing or eliminating its most favored
    nation duties on key inputs. U. S. officials note that Canada eliminated
    hundreds of its most favored nation duties before Article 303 took effect.
    Instead, in order to cushion the impact of NAFTA Article 303, Mexico
    instituted a measure known as the sectoral promotion program with targeted
    and reversible tariff reductions. 25

    Since Article 303 was implemented, maquiladoras that depend on inputs from
    outside North America have seen their competitiveness erode. Some
    maquiladoras have reported production cost increases of up to 20 percent

    25 See discussion of the sectoral promotion program (PROSEC) below.

    due to the implementation of Article 303. Japanese, Korean, and Taiwanese
    companies involved in maquiladora production have been particularly
    affected by the implementation of Article 303 and have led the way in
    relocating from Mexico to other countries. Industry associations we
    contacted, representing maquiladoras in the Tijuana area, where Asianowned
    maquiladoras are concentrated, as well as an association representing
    Japanese business in Mexico, attributed the departure of maquiladora firms
    from Mexico, at least in part, to the implementation of Article 303.

    Maquiladora Downturn Significant challenges continue to confront Mexico*s
    maquiladoras,

    Spurs Some Positive although recent industry and government action and the
    prospect of future

    Mexican reforms may bolster prospects for maquiladoras* recovery. The
    Changes, but

    downturn during the past 2 years has accelerated ongoing industry
    Fundamental

    evolution and has been a catalyst for several industry and government
    Challenges to Future

    changes to improve the competitiveness of the sector. However,
    maquiladoras still face fundamental challenges. For the most part, meeting
    Viability Remain

    these challenges depends on further action by the government of Mexico,
    but some of the challenges are related to U. S. policies that are likely
    to put additional pressure on maquiladoras.

    Maquiladoras Face Serious The factors described in the previous section as
    having a role in the

    Challenges and Questions maquiladora*s recent decline still confront the
    industry. As a result, some

    about Viability Mexican government officials have stressed the need to
    move beyond the

    current *maquiladora model* to attract a new generation of more
    technologically advanced operations that would allow Mexico to remain
    competitive. Given the continuous evolution of maquiladora operations,
    Mexico*s maquiladora industry is now a complex sector with substantial
    diversity. One academic expert concludes that as firms become involved in
    more

    sophisticated, capital- intensive operations, they are less likely to
    close and move their plants because of cyclical downturns such as the one
    maquiladoras faced after 2000. Some Mexican maquiladoras are now
    recognized as having sophisticated production and management methods.
    According to industry experts, such maquiladoras are better positioned to
    weather the maquiladora downturn and deal with continuing challenges.

    Nevertheless, researchers point out that the transition to more advanced

    production practices is quite uneven. 26 Many maquiladoras remain oriented
    toward lower- skill activities that involve few Mexican inputs besides
    labor. The downturn of the last several years has resulted in a shake- out
    involving

    some losers, notably among this type of operations. Downturn Catalyst for
    One positive aspect of the recent maquiladora downturn is that it has
    Industry and Government

    spurred some actions by industry and the government of Mexico to restore
    Efforts to Improve

    Mexican competitiveness. In the face of increased global competition,
    Competitiveness

    maquiladoras are seeking to capitalize on Mexico*s unique competitive
    advantages, particularly those associated with that country*s proximity to
    the United States and its growing network of free trade agreements. For

    example, noting the recent establishment of plants in Juarez by several
    computer manufacturing firms, one industry analyst explained that Mexico*s
    quick time- to- market location is essential for the success of both new
    products as well as repairs in the computer value chain. Similarly, a
    senior industry expert noted that the growth of automotive maquiladoras,
    in northern and central Mexico, underscores the competitive advantages
    resulting from the efficient combination of U. S. and Mexican inputs.
    According to this source, notwithstanding the arrival of new competitors,
    the Mexican automotive industry is poised to take advantage of the full
    opening of the regional North American automotive market that will occur
    in 2004. Mexico also stands to benefit as a direct and indirect automotive
    sector exporter to the United States and other countries with which Mexico
    has signed trade agreements.

    Some industry sources reported unexpected benefits associated with the
    recent losses experienced by the maquiladoras. According to industry
    representatives in Juarez, the rapid pace of maquiladora growth had put
    intense pressure on local infrastructure during the late 1990s. Local
    authorities simply could not keep up with the demand for health,
    education, and other services associated with the dramatic increases in
    population growth that accompanied the expansion of maquiladoras. They

    viewed the slowdown of the past 2 years as a welcome respite. In addition,
    a number of industry representatives noted that the downturn has resulted
    in significant drops in employee turnover and in the associated hiring and
    training costs. Prior to the downturn, they said, maquiladoras in 26 James
    Gerber and Jorge Carrillo, *Are Tijuana*s and Mexicali*s Maquiladora
    Plants Competitive?* San Diego Dialogue, July 2002.

    some border cities reported very high employee turnover rates because the
    rapid growth in maquiladora establishments allowed workers to continuously
    find new jobs in other plants. One expert suggested that such turnover in
    some border cities had reached 80 percent at the height of the

    maquiladora boom. Consequently, employers had significant hiring and
    training costs and were forced to keep some positions overstaffed to
    compensate for the turnover. This could have more fundamental implications
    for the ability of some maquiladoras to build a highly skilled workforce,
    since it is not feasible to invest in significant training for workers
    whose expected tenure with a firm is only a few months. Industry sources
    told us that the turnover rates had dropped sharply since the downturn,
    and some maquiladoras report that this has had a positive effect on
    administrative costs as well as the cost of training new employees.

    Finally, industry sources stressed the importance of Mexican government
    action for the development of a favorable business environment that can
    respond quickly to changing market forces faced by maquiladoras. In
    response to industry pressure, the Mexican government recently undertook

    several measures in support of the maquiladoras, primarily aimed at easing
    irritants.

     On May 12, 2003, the Mexican government issued a decree modifying
    certain aspects of the Maquiladora program. 27 The reforms are aimed
    primarily at simplifying regulations that apply to companies that provide
    support and logistic services to maquiladoras, and to enhance legal
    certainty for Mexican exporters, including maquiladoras. An important
    provision of the new decree will be streamlined customs requirements for
    companies with several subsidiaries operating under the Maquiladora
    program. This would allow such companies greater flexibility in the
    transfer of finished or semi- finished products from one subsidiary to
    another. The decree also contains provisions that would reduce
    administrative costs and procedures. For example, a maquiladoras will only
    have to submit a single report on an annual basis, which can be submitted
    electronically. Based on initial industry

    reaction, it is unclear whether the new decree will satisfy critics
    seeking greater legal certainty and improved incentives for maquiladoras.

    27 Decree for the Development and Operation of the Maquiladora Export
    Industry (Decreto que reforma el diverso para el fomento y operacion de la
    industria maquildora de exportacion), Official Daily Gazette (Diario
    Oficial), May12, 2003, Section 1, page 107.

     In response to the recent crisis in the maquiladora industry, Mexico has
    greatly expanded its sectoral promotion program (PROSEC). First launched
    in November 2000, PROSEC was intended to reduce the impact of NAFTA
    Article 303 (which became effective January 1, 2001) by providing that
    duty rates on imported inputs from non- NAFTA suppliers of either 0 or 5
    percent. Initially, maquiladora industry

    representatives complained that PROSEC was too restrictive because it
    applied to very few imported inputs. However, throughout 2001 and 2002,
    the list of products eligible for tariff reduction under PROSEC was
    progressively expanded to include more than 16,000 products from 22
    industry sectors, including electronics and textiles and apparel.

     In September 2002, the Mexican government provided additional support to
    the maquiladoras through a program called the Information Technology
    Agreement (ITA) Plus. 28 ITA Plus immediately removed tariffs from inputs,
    parts, and components used in the electronic and high- technology sectors,
    regardless of the country of origin. It also provided for the gradual
    removal of tariffs from semifinished and finished products in those
    sectors. According to Mexican officials, in addition to lowering tariffs
    on electronic and high technology inputs,

    ITA Plus may help to reduce the administrative burden on the maquiladoras.

     The Presidential Council for Competitiveness was created in July 2002 to
    promote investment, increase employment, and accelerate Mexico*s economic
    growth. A cooperative effort between government and

    business that is chaired by the Minister of Economy, the council*s
    activities include the creation of fiscal stimulus packages for export
    factories in twelve different sectors of the economy, including
    maquiladoras as part of the in- bond industry. One objective of the
    council is the development of manufacturing clusters, which will deepen
    the supply chain in Mexico. In support of the work of the council, the
    Secretariat of the Economy has agreed to fund, through the National
    Council of the Maquiladora Export Industry (CNIME), a comprehensive study
    on the maquiladora industry.

    28 The Information Technology Agreement (ITA) was negotiated under the
    auspices of the WTO and concluded in 1996, eliminating tariffs on
    information technology products by the participating members. Mexico has
    not joined the WTO ITA, but chose to unilaterally eliminate tariffs on
    certain information technology products in its ITA Plus initiative.
    However, because Mexico did not commit to these tariff cuts in the WTO, it
    may change them at any time.

     Recent agreements between the United States and Mexico have largely
    resolved the threat of double taxation of U. S. firms that was raised by
    Mexico*s efforts to define maquiladora parent companies as permanent

    establishments, discussed above. As a result of a Second Additional
    Protocol to the U. S.- Mexico tax treaty, signed in 2002, the United
    States will be able to provide a foreign tax credit to U. S. firms that
    have paid income taxes to Mexico with respect to their maquiladora
    operations. Mexico has also independently announced that it will make no
    changes

    to existing agreements on permanent establishment until 2007. These steps
    by the Mexican government seem to reflect wider recognition by officials
    in Mexico City of the maquiladoras* importance to Mexico. Industry
    representatives complained that the Mexican government was slow to respond
    to the challenges faced by the maquiladoras. According to these
    representatives, the Mexican government initially took *a wait and

    see* approach to the maquiladoras decline, in the belief that labor-
    intensive maquiladora operations leaving Mexico would be readily replaced
    by better paid, more profitable industries. As job losses continued in the
    first three months of 2002, maquiladora representatives pressured the
    government to implement remedial measures.

    Future Challenges Remain, Notwithstanding the initiatives discussed above,
    government, industry and

    Involve Difficult Reforms academic sources suggest that meeting remaining
    challenges to the future

    success of the maquiladoras will, in some cases, require fundamental
    Mexican reforms in several areas, including energy, infrastructure and
    labor. However, the initiatives Mexico is pursuing in these areas may be
    difficult to bring about.

    Some Consider Energy Reform Government officials and industry
    representatives stated that there is an

    Vital to Mexico*s urgent need for energy reform in Mexico. Energy sector
    reform is Competitiveness

    important to the maquiladora industries because they require reliable and
    competitive energy prices to compete with suppliers in other nations. The
    ITC, for example, has noted that electricity and industrial water costs
    are two areas in which Mexico is less competitive than China. The Fox
    administration maintains that without energy reform, Mexico may experience
    a power crisis as early as 2004, and it introduced an energy reform bill
    in August 2002. The legislation stalled in the Mexican Congress, however,
    because some legislators opposed aspects of reform dealing with

    privatization that would entail amending the Mexican constitution.

    Upgrading and Modernizing Maquiladora and other Mexican industry
    associations cite improving

    Mexican Infrastructure Is Mexico*s infrastructure as critical to advancing
    Mexico*s competitiveness.

    Critical According to a report by the Mexican Government Commission for
    Border

    Affairs, the six Mexican states that border the United States share the
    advantage of an adequate basic infrastructure, with a road network
    variously described as good, fluid, or satisfactory. However, even in this
    region, about 32 percent of the Mexican federal highways are in poor
    condition. Another study found that critical problems persist in Mexico*s
    road infrastructure, notably, limited public or private investment in

    highways in recent years. Some maquiladora representatives we spoke with
    cited infrastructure shortcomings as a disincentive for potential
    investors in maquiladoras. Need for Mexican Labor Reform

    According to Mexican labor officials, as part of its platform to modernize
    Acknowledged

    Mexico and improve its international competitiveness, the government has
    sought to reform the labor code. Maquiladora representatives stated that
    improvements in labor productivity depend on reform of labor regulations
    to provide increased flexibility to employers. The Fox administration has
    responded to this need for labor reform by developing a labor reform
    package that represents a compromise between labor groups, business, and
    government. Key elements of the reform package include the use of secret
    ballots in union elections, the allowance of more than one union to
    represent worker interests, expanded employer flexibility to hire workers

    on a trial basis, and a strengthened binding arbitration process. This
    reform package was not passed by the Mexican Congress before congressional
    elections were held in July 2003, in part because it lacked consensus
    support within the Mexican labor movement.

    Worker Skills in Mexico Must Be A consultant for the maquiladora industry
    cites worsening shortages of

    Improved trained labor in most cities where maquiladoras are concentrated
    as among

    the challenges confronting the industry that the government must address.
    One academic study 29 of the maquiladoras* viability found that to develop
    more technology- intensive operations, Mexico needs a large number of

    highly educated workers. However, according to the Commission on Border
    Affairs, the data indicate a low level of educational attainment in the
    economically active population along the border, with over one- third of
    adults having completed only primary education or less. The search for

    29 John Sargent and Linda Matthews, The University of Texas- Pan American,
    Center of Economic Studies, Boom or Bust: Is it the End of Mexico*s
    Maquiladoras? Working Paper #2002- 6, August 2002.

    better educated workers has led a number of companies to establish
    assembly plants in cities further from the border, with better reputations
    for good public secondary education and trade schools. 30

    U. S. Policies May Exert Action by Mexico is key to the maquiladoras*
    future viability, particularly

    Additional Pressure on since U. S. approaches to trade liberalization and
    homeland security may

    Maquiladoras put additional pressure on maquiladora operations. Industry

    representatives noted that present U. S. policies in these areas could
    undermine current benefits and reduce future competitiveness.

    U. S. Trade Liberalization Could Regarding U. S. trade policy, the future
    development of the maquiladora

    Affect Maquiladora Development industry in Mexico may also be affected by
    further changes in competitors* access to the U. S. market. The United
    States is engaged in trade

    negotiations in several venues, including the Doha Round among the 146
    members of the WTO, the Free Trade Agreement of the Americas (FTAA)
    involving 34 nations of the Western Hemisphere, and the U. S.- Central
    America Free Trade Agreement. These negotiations may reduce barriers to
    non- NAFTA countries* products to levels similar to those enjoyed by NAFTA
    participants, Mexico, and Canada. For example, in the WTO, the United
    States has proposed to eliminate all industrial tariffs by 2015, and in
    the FTAA, the United States has proposed to phase out textile and apparel
    tariffs within 5 years after the agreement is implemented, if its
    hemispheric partners reciprocate. As we concluded in a 2001 report, 31
    expansion of trade benefits to wider numbers of competitors, while
    benefiting U. S. consumers and other trade partners, dilutes the benefits
    of prior trade preferences. Some business association representatives that
    we interviewed expressed concern that future U. S. trade agreements would

    erode benefits provided to Mexican suppliers in the U. S. market under
    NAFTA. Representatives for one industry association expressed hope that
    the United States would use negotiations such as the FTAA to strengthen
    regional competitiveness relative to global competitors such as China.

    30 For a discussion of the trend for new maquiladora investments to be
    located in the interior of Mexico see Ruben Mata, U. S. International
    Trade Commission, *Recent Developments in Mexico*s Assembly Industry,*
    Production Sharing: Use of U. S. Components and Materials in Foreign
    Assembly Operations, 1994- 1997, USITC, pub. 3146, Dec. 1998, pp. 2- 10ff.
    31 U. S. General Accounting Office, International Trade: Comparison of U.
    S. and European Union Preference Programs, GAO- 01- 647 (Washington, D.
    C.: June, 2001).

    U. S. Homeland Security Maquiladora industry experts also expressed
    concern that U. S. security

    Measures Could Slow CrossBorder measures instituted at ports of entry
    after September 11, 2001, could erode

    Movement of Goods and the Mexican maquiladora industry*s advantage of
    proximity to U. S. Personnel

    markets. Of particular concern are U. S. government measures that require
    advance notice for transborder shipments of goods and additional
    information on the entry into and departure from the United States of
    every foreign citizen. 32 Companies that use just- in- time operations, an
    important

    element in some maquiladora operations, could be especially hurt by
    requirements related to advance notice for shipments, because they could
    not ship goods immediately on receiving an order. 33 Firms that rely on
    regular and efficient movement of workers and service operations across
    the border could be especially affected by the information requirements
    for Mexican workers who cross the border frequently. For example, at one
    major border crossing in downtown El Paso, less than a mile from
    Interstate 10, significant congestion would result if U. S. authorities
    had to screen traffic bound for Mexico to obtain information from every
    departing alien. Successful implementation of these new requirements will
    require

    close coordination of U. S. and Mexican national and local officials as
    well as adaptation of the private industry to the new requirements.
    Conclusion Both the United States and Mexico have an interest in the
    future of maquiladoras given their central role in U. S.- Mexico trade and
    the border

    economy. Partly driven by maquiladoras, Mexico has assumed a more
    prominent place among U. S. trade partners in recent years, becoming the
    United States* second leading trading partner, after Canada. Moreover,
    production and employment linkages have developed between 32 Two measures
    regarding advance notification of cargo shipments are cause for industry

    concern: (1) an informal U. S. Customs proposal that would require trucks
    to declare the contents of their cargo 4 hours before they enter the
    United States and 24 hours before they enter Mexico, which falls under the
    Advance Electronic Information provision of the Trade Act of 2002 and has
    not yet gone into effect and (2) a U. S. customs measure known as the 24-
    hour rule, effective since December 2, 2002, which requires ships
    traveling to U. S. seaports to declare the contents of their cargo 24
    hours before they depart from a foreign port * 19 CFR 4.7( b)( 2).
    Regarding entry of foreign citizens, at issue is an Immigration and
    Naturalization Service mandate that is part of Section 110 of the Illegal
    Immigration Reform and Immigrant Responsibility Act of 1996.

    33 Customs officials noted that they are keenly aware of the importance of
    *Just in Time* delivery and have taken that into account in any programs
    proposed for cargo clearance. Customs also intends to offer a program
    known as Free and Secure Trade to speed the clearance of known shippers,
    importers and carriers, and assist in moving traffic borderwide.

    maquiladoras and producers throughout the United States and are based on
    the high volume of U. S.- generated components used in maquiladora
    operations. Businesses in communities on the U. S. side of the border
    provide services to the maquiladoras, such as customs brokerage and
    commercial transportation. Retail sales to Mexican citizens in U. S.
    border communities contribute substantially to U. S. business and tax
    receipts. The decline in Mexico*s maquiladora production and employment
    has already taken its toll on cross- border trade and trade- related
    employment in certain U. S. border communities. Maquiladoras have become
    an even more important element of the Mexican economy, particularly over
    the decade of

    the 1990s, when maquiladora growth propelled Mexico into the ranks of the
    world*s leading exporters and generated 900,000 new jobs. Employment
    created by maquiladoras on the Mexican side of the border has become a
    mainstay of economic activity in that country. The decline over the past 2
    years has served as a catalyst for further transformation of the industry,
    as well as Mexican industry and government efforts to restore
    competitiveness. The challenges still confronting maquiladoras and the
    pressure from U. S. trade and homeland security policies lend urgency to
    Mexican efforts to create an environment where cross- border links between
    U. S. and Mexican firms and communities can continue to prosper.

    Agency Comments and We provided a draft of this report for comment to five
    U. S. government

    Our Response agencies: Department of State, the Office of the U. S. Trade
    Representative,

    U. S. Customs and Border Protection (formerly U. S. Customs), Department
    of the Treasury, and the U. S. International Trade Commission. We also
    asked for comments from three Mexican government agencies: the Ministry of
    the Economy (Secretaria de Economia) the Ministry of the Treasury
    (Secretaria de Hacienda), and the National Institute of Statistics,
    Geography and Information Technology (Instituto Nacional de Estadistica,
    Geografia e Informatica). We received informal written comments from all
    of these U. S. and Mexican government agencies, except Mexico*s Ministry
    of Economy. In addition, the Department of State provided formal written
    comments, which are reprinted in appendix VII.

    In general, all of the agency comments were technical or editorial in
    nature, which we incorporated as appropriate in the text of our report. In
    addition, U. S. ITC staff had more extensive comments related to our
    decision to

    exclude firms operation under the so- called PITEX program from the
    general scope our work, noting that PITEX firms are important in certain
    sectors, such as autos, and account for a substantial share of Mexico*s
    total exports to the United States. While we recognize that firms
    operating under

    PITEX are an important element in U. S- Mexico production- sharing
    operations, as are maquiladoras, we limited our report to the Maquiladora
    program for several reasons. First, our requesters specifically expressed
    an interest in the maquiladora industry and the effects of the recent
    decline of the maquiladoras along the U. S.- Mexico border. Unlike
    maquiladoras, which are still concentrated along the border, firms
    operating under the PITEX program are spread throughout Mexico. Secondly,
    the data the government of Mexico collects on maquiladoras are
    significantly more extensive and are not altogether comparable to the data
    collected on PITEX firms. Thus, there would have been problems in
    comparing the two

    types of operations. Finally, the data available on PITEX firms suggest
    that they have experienced trends in recent years not unlike those
    observed among maquiladoras. Including data on PITEX firms would not have
    significantly altered our message.

    We are sending copies of this report to other interested members of
    Congress, the Secretary of State, the Secretary of the Treasury, the U. S.
    Trade Representative, the Secretary of the Department of Homeland
    Security, the Commissioner of Customs, and the Chairman of the U. S.
    International Trade Commission. We will also make copies available to
    others upon request. In addition, the report will be available at no
    charge on the GAO Web site at http:// www. gao. gov.

    If you, or your staff, have any questions about this report, please
    contact me on (202) 512- 4347. Other GAO contacts and staff
    acknowledgments are listed in appendix VIII.

    Loren Yager Director, International Affairs and Trade

    Appendi xes Structure of Employment Growth in the U. S. Mexico

    Appendi x I

    Border Area This appendix examines U. S. employment changes along the U.
    S.- Mexico border and explores whether employment in the border areas of
    the United States has been disproportionately affected by the recent
    slowdown in U. S. economic activity and the associated decline in cross-
    border trade between the United States and Mexico. For the purpose of this
    analysis, the U. S. border with Mexico is defined as the metropolitan
    statistical areas (MSA)

    closest to the U. S.- Mexico border, comprising the MSAs for San Diego,
    California; Tucson, Arizona; Las Cruces, New Mexico; and El Paso,
    Brownsville, Laredo, and McAllen, Texas. 1

    U. S. employment in the border area increased by approximately 591,000
    jobs between 1990 and 2002, largely owing to the overall national trend in
    employment growth. For example, according to our analysis, 60 percent of
    the jobs gained were due to the growth of the national economy. However,
    230,000 of those jobs could be linked to local factors, that is, factors

    associated with the area*s attractiveness for employment creation. Most of
    the new jobs were added from 1995 to 2002. However, the ways in which each
    border subregion benefited from the employment growth vary considerably.

    U. S. Border U. S. employment in the U. S.- Mexico border area grew by 35
    percent

    Employment Outpaced between 1990 and 2002, gaining 591,000 jobs. The
    services sector was the

    largest employer and accounted for approximately 48 percent of the job
    Nation*s since 1995

    growth (282,000 jobs) during this period. Other sectors with notable
    employment growth were retail trade (93,000 jobs); finance, insurance, and
    real estate (20, 000 jobs); transportation and public utilities (31,000
    jobs); and government (128,000 jobs). As figure 14 shows, total nonfarm

    employment growth rates in the border region were generally similar to
    those observed for the United States from 1993 to 1995. However,
    employment growth in the border MSAs exceeded employment growth at

    1 The U. S. border with Mexico is defined by the states of California,
    Arizona, New Mexico, and Texas. However, a meaningful description of the
    border would require the exclusion of large portions of each of these
    states. Many analysts define the border in terms of the contiguous
    counties that have direct geographical links with Mexico. According to
    this definition, the U. S.- Mexico border consists of the counties of San
    Diego and Imperial in California; the counties of Yuma, Pima, Santa Cruz,
    and Cochise in Arizona; the counties of Hidalgo, Luna, and Dona Ana in New
    Mexico; and the counties of El Paso, Hudspeth,

    Culberson, Jeff Davis, Presidio, Brewster, Terrell, Val Verde, Kinney,
    Maverick, Dimmitt, Webb, Zapata, Starr, Hidalgo, and Cameron in Texas.

    the national level after 1995. 2 Furthermore, growth of nonfarm employment
    in the border area continued even after the U. S. economic slowdown began
    in 2001. Laredo and McAllen grew fastest, followed by Brownsville, Tucson,
    Las Cruces, and San Diego. Figure 14: Nonfarm Annual Employment Growth in
    the United States and in U. S. Metropolitan Statistical Areas at the U. S.
    Mexico

    Border, 1991- 2002

    Some border industries experienced a decline in employment in 2001 and
    2002, particularly manufacturing (down 6 percent), transportation and
    public utilities (down 4 percent), and wholesale trade (down 3 percent)
    (see table1). As table 1 shows, declines in manufacturing were relatively
    more severe in Texas (down an average of 18 percent), while declines in
    wholesale trade and transportation and public utilities were more

    2 Given that NAFTA was implemented in 1994, the graph suggests that NAFTA
    had an employment- stimulating effect in the border counties.

    pronounced in Arizona (down 9 and 11 percent, respectively). A closer look
    at Texas further shows that the manufacturing, transportation, and public
    utilities sectors declined after 2000 in all four Texas border MSAs.

    Table 1: Employment Growth of the United States and U. S. Metropolitan
    Statistical Areas at the U. S. Mexico Border by Industry: 1990* 2002 and
    2000* 2002

    Finance, Construction Transportation

    insurance, Total & Manufac & public Wholesale

    Retail & real

    nonfarm mining turing

    utilities trade trade estate Services Government

    United 2000- States 2002 -1% -1% -9% -4% -4% 0% 2% 2% 3%

    1990- 2002 20% 22% -12% 17% 8% 19% 16% 47% 16%

    US- Mexico 2000- Border 2002 4% 5% -6% -4% -3% 7% 6% 5% 8%

    1990- 2002 35% 48% -7% 43% 13% 27% 21% 65% 37%

    San Diego, 2000- CA 2002 5% 9% -1% -1% -1% 8% 4% 6% 8%

    1990- 2002 30% 46% -5% 40% 14% 22% 14% 59% 26%

    Tucson, 2000- AZ 2002 2% -1% -4% -11% -9% 3% 7% 0% 9%

    1990- 2002 42% 43% 21% 14% 32% 24% 35% 60% 49%

    Las Cruces, 2000- NM 2002 5% 0% 3% -5% 8% 6% 0% 8% 6%

    1990- 2002 37% 50% -8% 31% 56% 35% 25% 111% 14%

    Brownsville, 2000- TX 2002 2% 7% -19% -4% 7% 6% 0% 5% 6%

    1990- 2002 47% 96% -14% 66% 22% 38% 5% 93% 53%

    El Paso, TX 2000- 2002 -1% -2% -17% -10% -9% 4% 12% 1% 8%

    1990- 2002 22% 46% -24% 31% -4% 26% 35% 43% 38%

    Laredo, TX 2000- 2002 6% -6% -22% -5% -10% 14% 11% 10% 13%

    1990- 2002 62% 3% -22% 82% 12% 45% 63% 106% 81%

    (Continued From Previous Page)

    Finance, Construc Transportation

    insurance, Total tion & Manufac & public Wholesale

    Retail & real

    nonfarm mining turing

    utilities trade trade estate Services Government

    McAllen, TX 2000- 2002 9% 4% -18% 0% 0% 9% 11% 19% 12%

    1990- 2002 69% 92% -25% 120% 11% 55% 56% 165% 71% Source: GAO calculations
    using U. S. Department of Labor, Bureau of Labor Statistics data.

    Analysis of Employment To analyze the factors at the national and local
    levels that contributed to

    Trends the employment trends described above, we employed a methodology

    known as shift- share analysis that decomposes employment growth (or
    decline) in a region over a given time period into three components: the
    national growth effect, the industry- mix effect, and the local
    (competitive) effect.

    1. National growth effect. The national growth effect is that part of a
    regional change in total employment ascribed to the national growth rate
    of total employment. It assumes that the region*s employment growth
    matches the overall national rate. The national growth component is the
    change that would be expected given that the local area is part of a
    changing national economy. 3 Our analysis shows that from 1990 through
    2002, the border counties

    gained 339,100 jobs due to economic trends at the national level (see
    table 2). However, the actual gain occurred prior to the year 2000 as an
    estimated 15,800 jobs were lost due to the national trend in 2001 and

    2002. The border area*s biggest employer, the service sector, had the
    highest national growth component (97,300 jobs), followed by the
    government (71, 200 jobs), and retail trade sectors (65,900 jobs). Our
    analysis incorporating possible differences among the border subregions
    shows that from 1990 through 2002, nonfarm employment growth in San Diego
    accounted for nearly 50 percent of the increase in employment due to
    employment expansion at the national level.

    3 For example, during the time period 1990* 2000, nonfarm employment in
    the United States grew by 20 percent (i. e., from 109.4 million to 130.8
    million). Therefore, the national growth component of any region within
    the United States during this period would be 20 percent of the the
    region*s 1990 employment.

    2. Industry- mix effect. An industry- mix effect is the amount of change
    that a region would have experienced had each of its industries grown at
    their industry national rates, less the national growth effect. This
    component identifies the share of local job growth that can be attributed
    to the region*s mix of industries and seeks to address

    whether employment growth in an area outpaced the nation owing to a
    concentration of faster growing industries. For the period 1990 to 2002,
    the border area gained 21, 200 jobs owing to a concentration of faster
    growing sectors there than in the nation as a whole. This gain in total
    employment was achieved primarily with employment gains in the services
    (114,400 jobs) and construction and mining (4,200 jobs), and it occurred
    despite employment losses totaling

    95,200 jobs from other sectors, notably manufacturing (69,800 jobs),
    government (10, 500 jobs), and wholesale trade (8,500 jobs). Moreover, 47
    percent of the employment growth due to the industry- mix effect

    occurred between 2001 and 2002. In subregions, the industrial mix
    component for all sectors decreased total nonfarm employment during 1990*
    2002 only in El Paso, Texas. 3. Local (competitive) effect. A local
    (competitive) effect seeks to isolate the extent to which factors unique
    to the local area have caused growth

    or decline in regional employment. The effect is defined as the employment
    change that remains after the national and industrial mix components have
    been accounted for, and it is therefore the purely regional aspect of the
    region*s employment growth. If a region*s competitive share is positive,
    the region is considered to have local advantage in promoting employment
    growth. This advantage could result from such factors as local businesses
    having superior technology, management, location, market access or the
    local labor force*s having higher productivity, lower wages, or both. A
    negative competitive share component could be caused by local shortcomings
    in any or all of these

    aspects. Local conditions appear to have been a significant factor in the
    increase in U. S. border employment, particularly since 1995. Across all
    sectors, the competitive share component* employment growth attributable
    to local conditions* totals to a net addition of 230,000 jobs. This
    indicates that the border area was competitive in securing additional
    employment from 1990 through 2002. As figure 15 shows, nearly all of these
    employment gains were realized in the years since 1995. Furthermore, 43
    percent of border area employment gains owing to

    local factors were achieved between 2001 and 2002. The top three sectors
    in competitive share gains in employment from 1990 through 2002 were
    services (70,600 jobs), government (67,200 jobs), and manufacturing (37,
    500 jobs). However, for the 2000* 2002 period, the transportation and
    public utilities sector showed a reduction in jobs (approximately 300
    jobs) owing to local factors. In addition, factors

    unique to the local area caused employment declines in certain subregions
    and sectors during 1990* 2002, notably, in Laredo, Texas, in construction
    and mining; El Paso, Texas, in wholesale trade and services; Brownsville,
    Texas, in finance, insurance, and real estate; Tucson, Arizona, in
    transportation and public utilities; and Las Cruces, New Mexico, in
    government employment. Furthermore, subregions in Texas generally lost
    their local edge in securing manufacturing

    employment from 1990 through 2002 and this loss was more pronounced in
    2001 and 2002. Similarly, owing to local factors from 2001 to 2002,
    Tucson, Las Cruces, and El Paso lost jobs in transportation and public
    utilities; Tucson, El Paso, and Laredo lost employment in wholesale trade;
    and El Paso lost service employment; and Brownsville and Las Cruces lost
    employment in the finance, real estate, and insurance sector.

    Figure 15: Employment Gains (Losses) in Nonfarm Employment in Metropolitan
    Statistical Areas at the U. S. Mexico Border Due to National, Industry-
    mix, and Local Effects

    Table 2: Components of Employment Changes by Sectors in U. S. Metropolitan
    Statistical Areas at the U. S. Mexico Border, 1990* 2002

    Employment in thousands

    Transpor Finance, Construc tation and

    insurance, Total tion & Manufac public Wholesale Retail

    and real nonfarm mining turing

    utilities Trade trade trade estate Services Government Local effect

    US- Mexico 2001Border 2002 98. 1 7.5 10. 8 (0.3) 31. 1 0.9 29. 4 3.6 23. 3
    25. 1 1990

    2002 230. 5 21. 6 37. 5 17.1 35. 4 4.3 29. 0 5.3 70. 6 67. 4 San Diego,
    2001CA 2002 67. 0 6.9 10. 7 1.6 19. 5 1.3 17. 8 1.4 16. 1 10. 8 1990

    2002 91. 2 14. 0 10. 4 8.2 12. 6 3.0 8.5 (0.5) 29. 8 16. 6 Tucson, AZ
    20012002 6.3 0.1 2.0 (0.9) 1.8 (0.6) 2.2 0.7 (2. 2) 4.8 1990 2002 42. 3
    2.2 9.7 (0.8) 4.6 1.6 2.4 2.1 7.6 16. 9 Las Cruces,

    2001NM 2002 2.7 0.0 0.4 (0.0) 0.7 0.2 0.6 (0.0) 1.0 0.6

    1990 2002 6.8 0.4 0.1 0.2 1.7 0.4 1.3 0.1 4.7 (0.4)

    Brownsville, 2001TX 2002 2.6 0.4 (1.2) 0.0 2.0 0.5 1.4 (0.1) 0.9 0.7

    1990 2002 18. 6 1.5 (0.2) 1.4 3.7 0.5 3.0 (0.3) 6.7 5.9

    El Paso, TX 20012002 0.5 (0. 2) (2.9) (1.0) 1.5 (0.6) 2.1 1.0 (0. 7) 2.9

    1990 2002 7.6 1.4 (5.1) 1.3 1.2 (1.5) 2.6 1.5 (1. 6) 9.0

    Laredo, TX 20012002 4.3 (0. 2) (0.2) (0.2) 1.9 (0.2) 2.0 0.2 1.1 1.6

    1990 2002 16. 5 (1. 0) (0.2) 3.9 2.9 0.1 2.8 0.9 4.1 5.9

    McAllen, TX 20012002 14. 7 0.5 (1.1) 0.2 3.6 0.3 3.2 0.5 7.1 3.8

    1990 2002 47. 5 3.2 (1.7) 2.9 8.8 0.2 8.4 1.5 19. 3 13. 6

    (Continued From Previous Page)

    Employment in thousands

    Transpor Finance, Construc

    tation and insurance, Total tion &

    Manufac public Wholesale Retail

    and real nonfarm mining turing

    utilities Trade trade trade estate Services Government

    Industrial- mix effect

    US- Mexico 20012002 Border 10. 0 (0. 6) (20.6) (3.1) (1.5) (3.0) 2.4 3.4
    17. 2 15. 2 19902002

    21. 2 4.2 (69.8) (1.8) (12.6) (8.5) (1.8) (2.8) 114. 4 (10.5) San Diego,

    20012002 CA 5.1 (0. 3) (11.7) (1.5) (0.8) (1.7) 1.3 2.2 10. 1 7.2

    19902002 16. 5 1.4 (38.9) (0.9) (6.8) (4.8) (1.1) (1.8) 68. 4 (4.9)

    Tucson, AZ 20012002 2.3 (0. 1) (3.0) (0.3) (0.2) (0.4) 0.4 0.5 2.9 2.6

    19902002 7.5 1.1 (8.9) (0.2) (1.8) (1.0) (0.3) (0.4) 19. 7 (1.9)

    Las Cruces, 20012002 NM 0.7 (0. 0) (0.3) (0.1) (0.0) (0.0) 0.1 0.1 0.4 0.6

    19902002 0.6 0.2 (0.9) (0.0) (0.3) (0.1) (0.0) (0.1) 2.3 (0.6)

    Brownsville, 20012002 TX 0.5 (0. 0) (1.1) (0.2) (0.1) (0.1) 0.1 0.1 0.8
    0.9

    19902002 0.0 0.2 (3.8) (0.1) (0.6) (0.4) (0.1) (0.1) 5.1 (0.6)

    El Paso, TX 20012002 (0.1) (0. 0) (3.3) (0.4) (0.2) (0.4) 0.3 0.3 1.6 2.0

    19902002 (4.6) 0.6 (12.8) (0.3) (1.6) (1.3) (0.2) (0.2) 11. 0 (1.4)

    Laredo, TX 20012002 0.4 (0. 0) (0.2) (0.4) (0.1) (0.1) 0.1 0.1 0.4 0.5

    19902002 1.0 0.3 (0.5) (0.2) (0.4) (0.3) (0.0) (0.1) 2.2 (0.3)

    McAllen, TX 20012002 1.2 (0. 0) (1.1) (0.2) (0.1) (0.2) 0.2 0.2 1.0 1.4

    19902002 0.2 0.4 (3.9) (0.1) (1.0) (0.7) (0.1) (0.1) 5.7 (0.9)

    National effect

    US- Mexico 20012002 Border (15.8) (0. 9) (1.6) (0.7) (3.6) (0.6) (2.9)
    (0.8) (4. 9) (3.2)

    19902002 339. 1 17. 5 40. 0 15.4 80. 5 14. 7 65. 9 17.1 97. 3 71. 2

    (Continued From Previous Page)

    Employment in thousands

    Transpor Finance, Construc

    tation and insurance, Total tion &

    Manufac public Wholesale Retail

    and real nonfarm mining turing

    utilities Trade trade trade estate Services Government

    San Diego, 20012002 CA (8.6) (0. 5) (0.9) (0.4) (1.9) (0.4) (1.6) (0.5)
    (2. 9) (1.5)

    19902002 182. 8 8.7 21. 7 7.2 42. 4 7.9 34. 5 11.0 58. 0 33. 8 Tucson, AZ
    20012002

    (2.5) (0. 2) (0.2) (0.1) (0.5) (0.1) (0.4) (0.1) (0. 8) (0.5) 19902002 54.
    5 3.8 4.8 2.3 12. 2 1.8 10. 4 2.2 16. 9 12. 3 Las Cruces,

    20012002 NM (0.4) (0. 0) (0.0) (0.0) (0.1) (0.0) (0.1) (0.0) (0. 1) (0.1)

    19902002 8.9 0.5 0.5 0.3 1.9 0.2 1.7 0.4 1.9 3.4

    Brownsville, 20012002 TX (0.8) (0. 0) (0.1) (0.0) (0.2) (0.0) (0.2) (0.0)
    (0. 2) (0.2)

    19902002 16. 8 0.5 2.3 0.8 4.3 0.7 3.6 0.6 4.4 3.9

    El Paso, TX 20012002 (1.8) (0. 1) (0.2) (0.1) (0.4) (0.1) (0.3) (0.1) (0.
    4) (0.4)

    19902002 42. 8 1.9 8.1 2.3 10. 2 2.3 8.0 1.6 9.4 9.2

    Laredo, TX 20012002 (0.5) (0. 0) (0.0) (0.1) (0.1) (0.0) (0.1) (0.0) (0.
    1) (0.1)

    19902002 10. 5 0.8 0.3 1.7 3.0 0.5 2.4 0.4 1.9 2.4

    McAllen, TX 20012002 (1.1) (0. 1) (0.1) (0.0) (0.3) (0.0) (0.3) (0.0) (0.
    3) (0.3)

    19902002 22. 7 1.3 2.3 0.8 6.5 1.2 5.3 0.8 4.8 6.2

    Total employment change

    US- Mexico 20012002 Border 92. 3 6.0 (11.4) (4.1) 26. 0 (2.7) 28. 8 6.2
    35. 6 37. 1 19902002

    590. 8 43. 4 7.7 30.7 103.4 10. 4 93. 1 19.6 282. 3 128. 1 San Diego,
    20012002 CA 63. 4 6.0 (1.9) (0.3) 16. 8 (0.7) 17. 5 3.1 23. 3 16. 4
    19902002 290. 5 24. 1 (6.8) 14.5 48. 2 6.2 42. 0 8.7 156. 2 45. 6

    (Continued From Previous Page)

    Employment in thousands

    Transpor Finance, Construc

    tation and insurance, Total tion &

    Manufac public Wholesale Retail

    and real nonfarm mining turing

    utilities Trade trade trade estate Services Government

    Tucson, AZ 2001- 2002 6.1 (0. 2) (1.3) (1.3) 1.1 (1.0) 2.1 1.0 (0. 1) 6.9

    1990- 2002 104. 4 7.1 5.6 1.3 14. 9 2.4 12. 5 4.0 44. 2 27. 3 Las Cruces,

    2001- NM 2002 3.0 0.0 0.1 (0.1) 0.6 0.1 0.6 (0.0) 1.3 1.1

    1990- 2002 16. 3 1.1 (0.3) 0.5 3.3 0.5 2.9 0.4 8.9 2.4

    Brownsville, 2001- TX 2002 2.3 0.3 (2.4) (0.2) 1.7 0.3 1.4 0.0 1.5 1.4

    1990- 2002 35. 5 2.2 (1.7) 2.1 7.3 0.8 6.5 0.2 16. 2 9.2

    El Paso, TX 2001- 2002 (1.4) (0. 3) (6.4) (1.6) 0.9 (1.1) 2.0 1.2 0.4 4.4

    1990- 2002 45. 8 3.9 (9.8) 3.3 9.9 (0.5) 10. 4 2.9 18. 8 16. 8 Laredo, TX
    2001-

    2002 4.2 (0. 2) (0.4) (0.6) 1.7 (0.3) 2.0 0.3 1.4 2.0 1990- 2002 27. 9 0.1
    (0.4) 5.4 5.5 0.3 5.2 1.2 8.2 7.9

    McAllen, TX 2001- 2002 14. 7 0.4 (2.2) (0.0) 3.2 (0.0) 3.2 0.6 7.8 4.9

    1990- 2002 70. 4 4.9 (3.3) . 14. 3 0.7 13. 6 2.2 29. 8 18. 9 Source: GAO
    analysis using U. S. Department of Labor, Bureau of Labor Statistics data

    Note: Numbers in parentheses indicate employment losses.

    Effect of U. S. Economic Conditions on

    Appendi x II

    Employment in Mexican Maquiladoras Our statistical analysis shows that the
    key factors cited in our semistructured interviews as responsible for the
    maquiladora downturn* namely, the U. S. general economic slowdown,
    particularly in U. S. manufacturing, and the real peso- dollar exchange
    rate* are significant

    determinants of maquiladora employment. We found a strong relationship
    between maquiladora employment and U. S. economic conditions. This
    relationship is stronger than that between maquiladora employment and the
    real peso- dollar exchange rate, but considerably weaker than that between
    maquiladora employment and changes in U. S. manufacturing shipments. We
    also found that maquiladora sectors are more sensitive to changes in U. S.
    manufacturing shipments than to broader U. S. economic conditions.

    A major reason for the rapid growth of the maquiladora industry has been
    its direct tie to the U. S. economy, particularly to U. S. manufacturing.
    As a result, the maquiladoras are partly independent of Mexico*s internal
    economic trends. This independence from the Mexican economy has made the
    industry a stabilizing force when the Mexican economy heads into
    recession. 1 However, the direct tie to U. S. manufacturing also makes the
    industry predisposed to U. S. business cycles. As mentioned previously in
    the main body of this report, the number of maquiladoras and the
    employment they generate has declined from a peak reached in 2000. 2 This
    decline has been attributed to several factors. The most important of
    these factors is the downturn in the U. S. economy. An additional factor
    that has been alleged to contribute to the apparent decline has been cost
    increases due to increases in the inflation adjusted value of the peso
    relative to the dollar, i. e., the real exchange rate of the peso. 3 This
    appendix investigates the relationship

    1 For example, in 1995, when Mexico's GDP fell by 6 percent, employment in
    the maquiladora industry grew by more than 9 percent. During 1998, when
    export earnings by the oil industry were off significantly, the
    maquiladora industry became the largest source of foreign

    revenue. See, Gerber, J, "Whither the Maquiladora? A Look at the Growth
    Prospects for the Industry After 2001," Comercio Exterior, Bancomext. 9:
    3, 1999.

    2 In comparison to 2000 figures, latest statistics (November 2002) show
    452 fewer maquiladora companies consisting of 310 garment maquiladoras, 56
    electronic and electric accessory maquiladoras, 69 furniture assembly
    maquiladoras, and approximately 17 companies in the rest of manufacturing.

    3 The real exchange rate reflects the relative price of goods. It is the
    nominal exchange rate adjusted for differences in inflation rates between
    trading partners.

    between maquiladora employment in Mexico and U. S. economic performance
    and the real peso exchange rate. 4

    To determine the link between maquiladora employment and U. S. economic
    conditions, we assembled data on maquiladora employment in total and by
    main sectors as well as data on U. S. GDP on a quarterly basis from
    January 1980 to December 2002. We then converted all of these data to
    their natural logarithms and performed a regression of maquiladora
    employment on the real peso- dollar exchange rate and the real U. S. GDP.
    5 The results of the regression are presented in table 3.

    4 Maquiladoras are particularly sensitive to movements of real exchange
    rates since they generate their revenues in dollars by exporting their
    output to the United States while incurring production costs (labor and
    other local inputs) in pesos. An appreciation of the real exchange rate of
    the peso makes goods made in the United States cheaper relative to their
    cost in Mexico. For example, in 2002, Mexico had an average annual rate of
    inflation in

    consumer prices of 5.7- percent, while the United States had an average
    inflation rate of 2.4- percent. Consequently, the peso lost purchasing
    power inside Mexico at a rate of 5.7 percent, but if its exchange rate
    were not allowed to adjust, its loss of purchasing power in the United
    States would be 2.4 percent. As a result, the goods purchased in the
    United States would be 3.3 (5.7 percent minus 2.4 percent) percent cheaper
    relative to their cost in

    Mexico. The peso- dollar exchange rate has, in effect, appreciated in real
    terms even if the nominal exchange rate does not change. An appreciation
    of real exchange rate of the peso, therefore, makes maquiladoras less
    competitive in the U. S. market.

    5 The regression equations we estimated are represented by the following
    relationship:

    lnX j = + lnY + ln +

    Where X j is Maquiladora employment, Y is U. S. Gross Domestic Product, is
    the exchange rate of the dollar relative to the peso, and , , are positive
    constants to be estimated. J represents the maquiladora sectors and ln
    indicates natural logarithms.

    Table 3: Summary of Regression of Maquiladora Employment and U. S. GDP and
    Real Peso Exchange Rates

    U. S. GDP in billions of Real

    chained pesos per Constant 1996 dollars

    dollar R- square

    Total maquiladora employment -19.76 3.68 0.17 0.99

    0.46 0.05 0.05

    Textile products -29.50 4.64 -0.31 0.97

    0.90 0.09 0.10

    Footwear & leather products -12.98 2.32 0.70 0.80

    1.15 0.12 0.12

    Furniture products -33.03 4.77 0.47 0.94

    1.28 0.13 0.14

    Transportation equipment -33.77 4.94 0.87 0.93

    1.40 0.15 0.15

    Electronics -12.15 2.73 0.11 0.98

    0.41 .04 .04

    Electrical & electronic machinery -4.71 1.74 0.22 0.96

    0.37 0.04 0.04

    Electrical & electronic materials & accessories -17.04 3.24 0.06 0.98

    0.52 0.06 0.06

    Other manufacturing -18.82 3.56 0.15 0.99

    0.40 0.04 0.04

    Source: GAO analysis of Bank of Mexico (Banco De Mexico) data on
    maquiladora employment, U. S. Department of Commerce, Bureau of Economics
    data on GDP, and U. S. Department of Agriculture, Economic Research
    Service data on exchange rates Note: Numbers in italics are standard
    errors. All estimated coefficients were significant at 99 percent of
    confidence.

    As table 3 shows, maquiladora employment is very sensitive to U. S.
    economic growth and the exchange rate. Our results show that a 1 percent
    rise (or fall) in U. S. GDP increases (decreases) total maquiladora
    employment by 3.68 percent, while a 1 percent rise in the real peso
    exchange rate decreases maquiladora employment by 0.17 percent. 6
    Maquiladora employment is consequently more responsive to changes in 6 It
    should be noted that other factors not explicitly captured in our
    estimates may also affect

    maquiladora employment.

    the U. S. economy than to changes in the real exchange rate of the peso. 7
    In addition, maquiladora employment in the automotive sector is most
    responsive to change in U. S. GDP, while maquiladora employment in
    electrical apparatus and machinery is least responsive. The automotive
    sector is also the most responsive to real exchange rate variations, while
    the electrical materials sector is least responsive.

    To investigate the stability of our estimates, we divided our sample into
    three separate time periods: 1980 to1985, 1986 to1993, and 1994 to 2002.
    Respectively, these three periods correspond roughly to the periods before
    and after the implementation of Mexican economic policy reform and after
    the implementation of NAFTA. Our analysis of the effect of U. S. GDP and
    the real peso- dollar exchange rate on total maquiladora employment during
    these three periods is shown in table 4. As the table shows, the

    responsiveness of maquiladora employment to U. S. economic conditions and
    the real peso exchange rate is fairly consistent with our results in table
    3. However, the strongest maquiladora employment responsiveness to U. S.
    GDP growth occurred in the pre- NAFTA reform period (1986 to 1993). The
    post- NAFTA period (1994 to 2002) has a lower response coefficient for GDP

    and a higher response coefficient for exchange rates. It should be noted
    that the peso depreciated considerably in December 1994, after the onset
    of the *peso crisis.*

    7 It should be noted that the peso- dollar exchange rate has been more
    volatile then U. S. GDP during this period.

    Table 4: Summary of Regression of Maquiladora Employment and U. S. GDP and
    Real Peso Exchange Rates for Three Subperiods

    U. S. GDP in billions of chained 1996 Real pesos Constant

    dollars per dollar R- square

    1980- 85 -18.34 3.51 0.14 0.97

    1.32 0.16 0.05

    1986- 1993 -25.58 4.38 0.02 a 0.97

    4.01 0.43 0.12

    1994- 2002 -16.75 3.31 0.34 0.92

    1.95 0.20 0.11

    Source: GAO analysis. a All coefficients were significant at least at 95
    percent of confidence, except the coefficient for pesodollar

    exchange rate (1986- 1993). Note: Numbers in italics are standard errors.

    We also looked into whether the U. S. manufacturing sector has a unique
    effect that cannot be captured by overall U. S. GDP. To do so, we obtained
    data on U. S. manufacturing shipments and performed a set of regressions
    similar to those we performed using GDP. The results of our analysis
    appear in table 5.

    Tabl e 5: Summary of Regression of Maquiladora Employment and U. S.
    Manufacturing Shipments and Real Peso Exchange Rates U. S. manufacturing
    shipments in

    Real pesos Constant

    1996 dollars per dollar R- square

    Total maquiladora employment -72.36 6.73 0.48 0.78

    5.17 0.40 0.21

    Textile products -103.44 9.07 0.22 a 0.89

    4.73 0.37 0.19

    Footwear & leather products -42.45 3.97 0.73 0.52

    5.42 0.42 0.22

    Furniture products -95.34 8.27 0.78 0.65

    8.67 0.68 0.35

    Transportation equipment -94.21 8.23 1.21 0.60

    9.47 0.74 0.38

    Electronics -54.51 5.20 0.35 0.85

    3.19 0.25 0.13

    Electrical & electronic machinery -31.81 3.35 0.43 0.86

    1.95 0.15 0.08

    Electrical & electronic materials & accessories -66.96 6.21 0.32 0.83

    4.04 0.32 0.16

    Other manufacturing -70.33 6.55 0.47 0.79

    4.80 0.38 0.19

    Source: GAO analysis. a Coefficient was not significant at 95 percent. All
    other coefficient estimates are significant with at least

    a 95 percent level of confidence. Note: Numbers in italics are standard
    errors.

    As can be seen from table 5, a 1 percent change in U. S. manufacturing
    shipments induces an employment growth in maquiladoras of approximately
    6.7 percent. Overall, the table shows, the maquiladora

    employment*s response to changes in U. S. manufacturing shipments is
    larger than its response to changes in U. S. GDP. We also found that
    certain maquiladora sectors, such as textile products, furniture and
    transportation equipment, are particularly sensitive to changes in U. S.
    manufacturing shipments.

    Mexico- China Competition in the U. S. Market

    Appendi x III

    for Imports Although U. S. imports from Mexico ($ 130.8 billion) 1
    exceeded those from China ($ 109.2 billion) in 2001, these figures
    represented a decline of 3.2 percent for Mexico and an increase of 1.9
    percent for China. In 2002, both countries experienced growth, but U. S.
    imports from China grew faster than U. S. imports from Mexico. This
    development, coming at a time of decreased maquiladora employment and
    increased plant closings, has led to speculation that Mexico is losing
    ground because of China*s production cost advantages.

    To highlight the competition between Mexico and China, we selected U. S.
    imports items from Mexico in 1995 and 2002, with a value of more than $100
    million in 2002. We also obtained information on U. S. imports from China
    that matched the categories of the imports from Mexico. We then selected
    U. S. imports for which the share from Mexico had declined between 1995
    and 2002 and matched them with imports for which the share from China had
    increased between 1995 and 2002.

    In 2002, the United States imported from Mexico 152 categories of items
    valued at more than $100 million each. The total value of these items was
    $123.1 billion, while the total value of the same categories of items from
    China was $88.2 billion. From 1995 to 2002, the share of U. S. imports
    from Mexico decreased for 47 of the 152 categories. For these 47
    categories, in 2002, the total value of imports from Mexico was $25.5
    billion and the value of imports from China was $23.4 billion. China*s
    share of U. S. imports increased for 35 of the 47 categories. The total
    value of these 35 items was $20 billion for Mexico and $23 billion for
    China.

    Table 6 shows the top 25 U. S. import categories in which imports from
    China increased, while imports from Mexico declined between 1995 and 2002.
    As the table shows, Mexico and China appear to be in direct competition
    for several import categories. Although a direct causal link is difficult
    to establish, China seems to have gained U. S. market shares at the same
    time that Mexico has lost them in some import categories, such as toys,
    furniture, electrical household appliances, television and video

    equipment and parts, and apparel and textiles. Maquiladoras are 1 The
    figures used in the analysis presented in this appendix are from the U. S.
    International Trade Commission. They differ somewhat from figures cited
    earlier in this report for U. S. imports from Mexico, which were provided
    by the Mexican National Institute of Statistics,

    Geography and Information Technology (Instituto Nacional de Estadistica,
    Geografia e Informatica).

    concentrated in the categories where China appears to have gained U. S.
    market shares.

    Table 6: Top 25 U. S. Imports from China for Which China's Share of U. S.
    Imports Grew, while Mexico's Share Declined between 1995 and 2002

    Dollars in million

    Mexico China Value of Share in

    Share in Value of Share in

    Share in U. S. U. S. total U. S. total

    U. S. U. S. total U. S. total imports in imports

    imports imports in imports

    imports Item

    2002 1995 2002

    2002 1995

    2002

    Toys, puzzles, scale models $180 4.5% 2.2% $6, 927 73.3% 84. 3% Furniture
    and parts thereof 595 6.9% 4.7% 4,932 12.2% 38. 7% Articles and equipment
    for general physical exercise, etc. 176 5.4% 4.8% 2,011 28.7% 55. 3%

    Electrical transformers, power supplies for adp machines or units 1,625
    25.4% 24. 8% 1,553 10.8% 23. 7%

    Electromechanical domestic appliances 408 24.8% 20. 6% 1,062 35.8% 53. 5%
    Television receivers, including video monitors and video projectors 4,797
    65.6% 47. 5% 860 2.6% 8.5%

    Made- up articles of textile materials 340 29.6% 19. 1% 839 33.9% 47. 1%
    Articles of jewelry and parts thereof 158 2.9% 2.6% 524 1.0% 8.6% Parts
    for television, radio, and radar apparatus 1,021 34.7% 24. 3% 523 3.6% 12.
    5% Stoves, ranges, grates, cookers, barbecues, braziers, and similar
    nonelectric domestic

    appliances 325 42.5% 26. 8% 467 7.1% 38. 5% Exports of articles imported
    for repairs etc.; imports of articles exported and returned 3,870 11.6%
    11. 5% 371 1.0% 1.1%

    Articles of stationary, of paper or paperboard 116 20.6% 16. 5% 349 33.1%
    49. 6% Electric filament or discharge lamps and parts thereof 244 18.0%
    16. 0% 341 7.0% 22. 4%

    Unrecorded media 266 12.5% 9.5% 333 10.3% 11. 9% Brassieres, girdles,
    corsets, braces, suspenders, garters, and similar articles 201 18.8% 11.
    8% 309 5.2% 18. 2%

    Garments of textile fabrics, made- up of fabrics of felt or nonwovens 233
    46.9% 28. 1% 252 18.7% 30. 4%

    Trailers and semitrailers; other vehicles, not mechanically propelled; and
    parts thereof 113 40.7% 14. 7% 165 8.4% 21. 4%

    Articles of aluminum 180 22.3% 22. 3% 162 7.0% 20. 1%

    (Continued From Previous Page)

    Dollars in million

    Mexico China Value of Share in

    Share in Value of Share in

    Share in U. S. U. S. total U. S. total

    U. S. U. S. total U. S. total

    imports in imports imports

    imports in imports imports

    Item 2002 1995

    2002 2002

    1995 2002

    Women's or girls' slips, petticoats, briefs, panties, nightdresses,
    pajamas, negligees, bathrobes, and similar articles 196 9.0% 9.0% 149 4.4%
    6.8%

    Centrifuges; filtering or purifying machinery and apparatus 449 19.7% 15.
    5% 136 1.7% 4.7% Petroleum oils and oils from bituminous minerals (other
    than crude) 569 2.4% 2.1% 96 0.0% 0.4%

    Safety glass, consisting of toughened (tempered) or laminated glass 279
    41.6% 41. 0% 84 0.6% 12. 3%

    Orthopedic appliances; splints etc.; artificial parts of the body; hearing
    aids and other appliances 143 13.0% 5.2% 82 2.0% 3.0%

    Sanitary fixture including ceramic sinks, washbasins and pedestals, baths,
    bidets, water closet bowls and flush tanks, urinals 210 51.4% 44. 4% 71
    0.0% 15. 0% Measuring or checking instruments, parts and accessories
    thereof 141 8.7% 7.8% 39 0.3% 2.2% Source: GAO calculation using U. S.
    International Trade Commission data.

    Appendi x IV

    U. S.* Mexico Trade, by U. S. Port, 1999* 2002 Trade with Mexico through
    U. S.- Mexico border crossings dropped in 2001 and remained flat in 2002.
    Whereas, total trade through the 4 major land border ports fell by 5
    percent in 2001, U. S. exports to Mexico through these ports fell by 10
    percent. The port of Nogales, Arizona, experienced the sharpest decrease
    in trade, with total trade declining by 9 percent in 2001 and 13 percent
    in 2002. Table 7 provides information on U. S. imports,

    exports, and total trade with Mexico by border crossing. The four border
    crossings examined* Laredo, El Paso, San Diego, and Nogales* are Customs
    districts that represent 33 individual ports of entry along the U. S.
    Mexico border.

    Tabl e 7: Trade Flows through Major U. S.- Mexico Land Border Crossings U.
    S. dollars in millions Percent change 1999 2000 2001 2002 1999- 2000 2000-
    2001 2001- 2002 Exports Total All Ports 692,821 780,419 731, 026 693,257
    11% -7% -5%

    Laredo, TX 45, 351 57, 659 52, 081 48, 937 21 -11 -6 El Paso, TX 13, 171
    18, 045 16, 299 16, 476 27 -11 1 San Diego, CA 10, 760 12, 662 12, 342 12,
    873 15 -3 4 Nogales, AZ 5,631 7,325 6,217 5,366 23 -18 -16

    Border subtotal 74, 913 95, 691 86, 939 83, 652 22 -10 -4 Imports Total
    all ports 1,024,766 1, 216,888 1,141, 959 1, 163,549 16% -7% 2%

    Laredo, TX 51, 611 63, 298 62, 877 65, 351 18 -1 4 El Paso, TX 21, 007 24,
    333 24, 151 24, 938 14 -1 3 San Diego, CA 19, 077 22, 263 21, 303 23, 013
    14 -5 7 Nogales, AZ 10, 516 13, 050 12, 477 11, 112 19 -5 -12

    Border subtotal 102,211 122,944 120, 808 124,414 17 -2 3

    Trade (exports+ imports)

    Total all ports 1,717,587 1, 997,307 1,872, 985 1, 856,806 14% -7% -1%

    Laredo, TX 96, 962 120,957 114, 958 114,288 20 -5 -1 El Paso, TX 34, 178
    42, 378 40, 450 41, 414 19 -5 2 San Diego, CA 29, 837 34, 925 33, 645 35,
    886 15 -4 6 Nogales, AZ 16, 147 20, 375 18, 694 16, 478 21 -9 -13

    Border subtotal 177,124 218,635 207, 747 208,066 19 -5 0

    Source: U. S. Department of Commerce, Bureau of the Census, official trade
    statistics. Note: Values for imports are general imports at customs value,
    and values for exports are total exports at Free- Alongside- Ship (FAS)
    value.

    Appendi x V

    Maquiladora Employment Statistics After growing rapidly throughout the
    1990s, Mexican national maquiladora employment peaked in October 2000 and
    declined sharply through March 2002. However, the rise and decline in
    maquiladora employment varied by state and city. As table 8 shows, the
    city of Tijuana experienced both the greatest percentage increase in
    maquiladora employment (233 percent from 1990 through October 2000) and
    the greatest decline (30 percent through December 2002). For each state or
    city, table 8 shows the number of jobs in 1990, followed by the number of
    jobs at the peak of employment (usually around October 2000) and at the
    lowest point, or trough, following the peak. The table also includes the
    changes in employment in absolute and percentage terms. The rise and
    decline of maquiladora employment also varied by industry. Table 9 shows
    employment changes for three key industries* electronics, autos and parts,
    and textiles and apparel* along

    with details on the rise, peak, and trough for the top five border region
    cities in terms of maquiladora employment.

    Table 8: Maquiladora Employment by State and City, 1990* 2002 Percent
    Percent

    Percent Change change Change change change Date in jobs:

    in jobs: Duration:

    in jobs: in jobs:

    in jobs: Industry/ Jobs1990 Jobs at

    of 1990 to

    1990 to Jobs at

    Dateof peak to peak to

    peak to Jobs in trough area peak peak

    peak peak trough trough

    trough trough

    trough 12/ 02 to 12/ 02 All Industries

    National 1 year, 6 446, 436 1,347,803 Oct- 00 901,367 202% 1,060, 173 Mar-
    02 months -287, 630 -21% 1, 084,911 2%

    Border 1 year, 5 states 402, 432 1,045,410 Oct- 00 642,978 160 829, 954
    Feb- 02 months -215, 456 -21 834,216 1

    Baja 1 year, 7 California 87, 657 293,248 Oct- 00 205,591 235 215, 837
    Apr- 02 months -77,411 -26 218,887 1

    Coahuila 1 year, 3 30, 952 116,428 Oct- 00 85,477 276 102, 683 Dec- 01
    months -13,745 -12 116,258 13

    Chihuahua 2 years, 1 163, 953 336,995 Oct- 00 173,042 106 253, 722 Oct- 02
    month -83,273 -25 262,558 3

    Sonora 2 years, 2 38, 924 111,591 Nov- 00 72,667 187 70, 525 Dec- 02
    months -41,066 -37 70, 525 0

    Tamaulipas 1 year, 4 80, 947 187,581 Oct- 00 106,634 132 161, 139 Jan- 02
    months -26,442 -14 165,988 3

    Nuevo 1 year, 7 Leon 13, 868 72, 878 Sep- 00 59,010 426 50, 423 Mar- 02
    months -22,455 -31 52, 181 3

    Border 1 year, 11 cities 342, 555 839,200 Oct- 00 496,645 145 665, 637
    Aug- 02 months -173, 563 -21 667,046 0

    Juarez 2 years, 3 122, 231 264,241 Oct- 00 142,010 116 192, 485 Dec- 02
    months -71,756 -27 192,485 0

    Tijuana 2 years, 3 59, 870 199,428 Oct- 00 139,558 233 140, 069 Dec- 02
    months -59,359 -30 140,069 0

    Matamoros 1 year, 4 38, 360 69, 989 Oct- 00 31,629 82 52, 396 Jan- 02
    months -17,593 -25 55, 183 5

    Reynosa 23, 541 68, 199 Sep- 00 44,658 190 64, 877 Dec- 00 4 months -3,
    322 -5 69, 389 7 Mexicali

    1 year, 7 20, 729 65, 494 Oct- 00 44,765 216 49, 056 Apr- 02 months
    -16,438 -25 55, 191 13

    Share of border states in national 90% 78% 77%

    Share of border cities in national 77% 62% 61%

    (Continued From Previous Page)

    Percent Percent Percent Change change Change change change Date

    in jobs: in jobs:

    Duration: in jobs:

    in jobs: in jobs:

    Industry/ Jobs1990 Jobs at

    of 1990 to

    1990 to Jobs at

    Dateof peak to peak to

    peak to Jobs in trough area peak

    peak peak

    peak trough trough trough

    trough trough 12/ 02

    to 12/ 02

    Share of 5 border cities (above) in the overall

    border 77% 80% 77% Source: National Institute of Statistics, Geography and
    Information Technology (Instituto Nacional de Estadistica, Geografia e
    Informatica).

    Note: The *share of border states in national* is the percentage share
    that maquiladora employment in border states makes up of national
    maquiladora employment in Mexico. The *share of border cities in national*
    is the percentage share that maquiladora employment in the 41 Mexican
    border municipalities makes up of national maquiladora employment. The
    *share of 5 border cities in the overall border* is the percentage share
    that the five border cities listed in the table make up of total
    maquiladora employment in the 41 border municipalities that comprise the
    border region.

    Table 9: Maquiladora Employment by City and Industry, 1990* 2002 Percent

    Percent Percent Change change Change change change Jobs in jobs: in jobs:

    Duration: in jobs:

    in jobs: in Jobs: Industry/ Jobs at

    Date of 1990 to

    1990 to Jobs at Date of

    peak to peak to

    peak to Jobs in trough area 1990

    peak peak peak

    peak trough trough trough

    trough trough 10/ 02

    to 10/ 02 Electronics

    National 166,501 468,254 Sep- 00 301,753 181% 320,282 Apr- 02 1 year, 8
    -147, 972 -32% 326, 229 2% months Border

    142,330 360,857 Oct- 00 218,527 154 248,163 Oct- 02 2 years, -112, 694 -31
    248, 163 0 cities 1 month Juarez 48, 647 111,023 Oct- 00 62,376 128 68,908
    Aug- 02 1 year,

    -42,115 -38 71, 100 3 11 months

    Tijuana 27, 598 97, 551 Oct- 00 69,953 253 61,971 Apr- 02 1 year, 7
    -35,580 -36 64, 566 4 months Matamoros 17, 806 32, 052 Oct- 00 14,246 80
    18,486 Feb- 02 1 year, 5

    -13,566 -42% 19, 177 4 months Reynosa 13, 809 31, 073 Sep- 00 17,264 125
    28,299 Jan- 01 5 months -2,774 -9% 29, 049 3

    Mexicali 8,257 32, 963 Sep- 00 24,706 299 21,656 Jun- 02 1 year, -11,307
    -34% 23, 270 7 10 months

    Share of border cities in national 85% 77% 76%

    (Continued From Previous Page)

    Percent Percent Percent Change change Change change change Jobs in jobs:

    in jobs: Duration:

    in jobs: in jobs:

    in Jobs: Industry/ Jobs1990 at

    Date of 1990 to

    1990 to Jobs at Date of

    peak to peak to

    peak to Jobs in trough

    area peak peak peak

    peak trough trough trough

    trough trough 10/ 02

    to 10/ 02

    Share of 5 cities (above) in border 82% 84% 83%

    Autoparts and other transportation National 104,487 250,635 Oct- 00
    146,148 140 218,289 Oct- 01 1 year, 1 -32,346 -13 233, 747 7 month Border

    77, 200 188,572 Jan- 01 111,372 144 164,599 Oct- 01 10 -23,973 -13 171,
    289 4 cities months Juarez 39, 272 98, 821 Oct- 00 59,549 152 82,798 Oct-
    02 2 years, -16,023 -16 82, 798 0

    1 month Tijuana 1,021 6,701 Jan- 01 5,680 556 3,647 Dec- 01 1 year -3,054
    -46 4,826 32 Matamoros 14, 086 21, 376 Apr- 01 7,290 52 15,543 Oct- 01 7
    months -5,833 -27 21, 073 36 Reynosa* 4,753 14, 624 Sep- 00 9,871 208
    13,470 Dec- 01 1 year, 4

    -1154 -8 14, 450 7 months Mexicali 3,010 7,247 Dec- 00 4,237 141 6,063
    May- 01 6 months -1,184 -16 7,353 21

    Share of border cities in national 74% 75% 73%

    Share of 5 cities (above) in border 80% 79% 76%

    Textiles and Apparel

    National 42, 464 294,855 Jul- 00 252,391 594 224,230 Mar- 02 1 year, 9
    -70,625 -24 240, 315 7 months Border

    20, 891 47, 493 May- 01 26,602 127 34,908 Apr- 02 1 year -12,585 -26 35,
    217 1 Cities Juarez 8,634 10, 649 Jul- 97 2,015 23 4,592 Apr- 02 4 years,
    -6,057 -57 4,857 6

    9 months Tijuana 2,483 9,875 May- 01 7,392 298 6,782 Apr- 02 1 year -3,093
    -31 7,394 9 Matamoros 368 2,537 Sep- 99 2,169 589 1,662 Jan- 02 2 years,
    -875 -34 1,675 1

    5 months Reynosa 925 3,141 Oct- 99 2,216 240 2,089 Jul- 02 2 years, -1,052
    -33 2,267 9 10 months

    Mexicali 2,454 2,758 Nov- 97 304 12 1,429 Mar- 02 4 years, -1,329 -48
    1,562 9 4 months

    (Continued From Previous Page)

    Percent Percent Percent Change change Change change change Jobs in jobs:

    in jobs: Duration:

    in jobs: in jobs:

    in Jobs: Industry/ Jobs at

    Date of 1990 to

    1990 to Jobs at Date of

    peak to peak to

    peak to Jobs in trough

    area 1990 peak peak

    peak peak trough trough

    trough trough

    trough 10/ 02 to 10/ 02

    Share of 49% 16% 15% border cities in national

    Share of 5 71% 61% 50% cities (above) in border

    Source: National Institute of Statistics, Geography and Information
    Technology (Instituto Nacional de Estadistica, Geografia e Informatica).
    Notes: Data on the border region broken down by industrial sector were
    only available through October 2002.

    Data listed for textile and apparel jobs in Matamoros in 1990 are for
    1994. Data were not available for prior years for that city and industry.
    The *share of border cities in national* is the percentage share that
    maquiladora employment in the 41

    Mexican border municipalities makes up of national maquiladora employment.
    The *share of 5 border cities in the overall border* is the percentage
    share that the 5 border cities listed in the table make up of total
    maquiladora employment in the 41 border municipalities that comprise the
    border region.

    Appendi x VI

    Objectives, Scope, and Methodology Our work focused on employment and
    production trends on the U. S. Mexico border and recent trends in the
    maquiladora industry. We also analyzed data on overall U. S.- Mexico trade
    and compared trends along the border with developments in the broader U.
    S. and Mexican economies. To complete our objectives, we conducted
    interviews with government

    officials in the U. S. and Mexico, as well as semistructured interviews
    with 29 industry associations. Between November 2002 and February 2003, we
    conducted site visits in three areas of the border with a considerable
    maquiladora presence: McAllen, Texas* Reynosa, Tamaulipas; El Paso,

    Texas* Juarez, Chihuahua; and San Diego, California* Tijuana, Baja
    California. Our selection criteria consisted of two characteristics
    integral to the maquiladora industry: (1) the number of maquiladora
    employees and (2) the number of maquiladora plants.

    In addition to conducting site visits in selected border areas, we met
    with U. S. officials and traveled to Mexico City to meet with Mexican
    government officials. In the United States, we met with officials from the
    Department of State, Office of the U. S. Trade Representative,
    International Trade Commission, Environmental Protection Agency,
    Immigration and Naturalization Service, Department of Labor, Department of
    Transportation, Department of the Treasury, and U. S. Customs. In Mexico,
    we met with officials from the Ministry of Economy; Ministry of Labor;
    National Institute of Statistics, Geography and Information Technology;
    Ministry of Treasury; Ministry of Government; and Ministry of

    Environment. We obtained, reviewed, and analyzed data from maquiladora
    industry experts, nongovernmental organizations, and Mexican and U. S.
    government agencies. We also met with academics at educational
    institutions in Mexico and the

    United States, including San Diego State University; the University of
    California, Los Angeles; University of California, San Diego; University
    of Texas at El Paso; Colegio de la Frontera, Tijuana; Universidad Nacional
    Autonoma de Mexico; and Universidad Autonoma Metropolitana de Xochimilco.
    In addition, we met with numerous representatives of industry and
    nongovernmental organizations as well as other maquiladora experts.

    To understand how communities along the U. S.- Mexico border are
    integrated and the role that maquiladoras play in U. S.- Mexico
    interdependence (objective 1), we interviewed experts on the maquiladora
    industry, academics, and representatives of nongovernmental organizations.
    We reviewed extensive documentation and academic research provided by
    these sources, analyzing economic, social, and

    political linkages between border communities and the influence of the
    maquiladora industry in the border region. We identified similarities and
    differences between border communities with regard to social and economic
    integration.

    To review the status and trends in trade, employment, and output
    (objective 2), we obtained original official data on employment and trade
    from both U. S. and Mexican government agencies. We analyzed the data to
    identify trends in employment and production in the U. S.- Mexico border

    area. We compared our analysis of trends along the border with
    developments in the broader U. S. and Mexican economies. For example, for
    the United States, we conducted a shift- share analysis that decomposes
    employment growth (or decline) in a region over a given time period into
    three components: the national growth effect, the industry mix effect, and
    the local (competitive) effect. To assess the quality and reliability of
    the data, we conducted in- person meetings with government officials of
    the National Institute of Statistics, Geography and Information Technology
    in Mexico City to discuss the methodology for collecting the data and any
    known limitations or biases. For instance, statistics on maquiladora

    employment and production are affected when companies leave the program.
    Although establishments and employees are no longer considered part of the
    maquiladora sector and statistics correctly show a decline in maquiladora
    employment, the firms and employees may still remain in operation outside
    of the program. We also analyzed the data sources for internal
    consistency, as well as external consistency with other sources of
    information, such as our structured interviews. Although both U. S. and
    Mexican statistics have some limitations, we consider the data
    sufficiently

    reliable to present general trends and magnitudes in production,
    employment and trade. To identify the factors that have affected
    employment and production in the maquiladora industry (objective 3), we
    analyzed economic data and conducted semistructured interviews.
    Specifically, to determine the link between maquiladora employment and U.
    S. economic conditions, we assembled data on maquiladora employment in
    total and by main sectors as well as quarterly U. S. GDP data from January
    1980 to December 2002. We then converted all of these data to their
    natural logarithms and performed a

    regression of maquiladora employment on U. S. real GDP, U. S.
    manufacturing shipments and the real peso- dollar exchange rate. The
    semistructured interviews were conducted in person and by telephone with
    29 representatives of business associations, consisting of organizations

    representing principal industrial sectors involved in maquiladora
    operations, and maquiladora associations at the local and national level.

    Of these 29 organizations, 23 reported their members experienced a decline
    in employment and/ or production. We asked these 23 organizations to
    discuss the major reasons for the maquiladoras* recent decline. We relied
    on business associations to identify the factors affecting employment and
    production in the maquiladora industry, because of the direct experiences
    of their membership with plant closures, changes in employment levels, and
    other company changes. We also relied on associations to comment generally
    on issues facing the industry, such as increased competition, and for
    information on overall industry trends. In selecting potential interview
    participants from maquiladora and other business associations, to ensure
    representation throughout the industry, we considered three criteria:
    geographic location, industry sector, and country of origin or region of
    representation.

    Of the 29 associations interviewed, 17 were maquiladora associations and
    12 were industry- specific associations. The maquiladora associations were
    primarily identified through the membership list for Mexico's National
    Council of the Maquiladora Export Industry (Consejo Nacional de la
    Industria Maquiladora de Exportacion -- CNIME) that has a membership
    including 22 maquiladora associations located across Mexico. We contacted
    all 22 members and the national association, and we completed

    interviews with the national association and 14 local member associations.
    We completed additional interviews with two maquiladora associations that
    were not members of CNIME, but were included to broaden representation of
    country of origin/ region of representation (i. e., Japan and

    the United States). Of the 12 industry- specific associations, we sought
    interviews with associations representing major industrial sectors,
    specifically targeting the electronics, automotive, and apparel sectors. 1
    Of the 29 associations, Mexico, the United States, and Japan were the
    country of origins/ regions of representation included.

    1 We identified major industry sectors with information presented in
    MEXICONOW on the 100 largest maquiladora firms. Although the service
    industry was one of the largest, it represents a very diverse group of
    operations with too little in common to allow the identification of
    factors of the recent industry downturn that would be applicable to all of
    the industry*s members. Therefore, we sought to interview participants
    that represented the electronics, automotive, and apparel sectors.

    We developed 14 questions for the semistructured interview guide, based on
    previous research. Six questions were closed ended, and eight were open
    ended. Participants* responses to the open- ended items were
    contentanalyzed by two trained coders, and intercoder reliability values
    were computed. Reliability values ranged from 58 percent to 100 percent.
    The coding category scheme was modified until 100 percent agreement was
    reached between the two coders. The results will not be generalizable
    outside our sample; however, we believe we have included associations in a
    way that is as balanced and inclusive as possible within the number of

    interviews we were able to conduct. To identify the implications of recent
    developments in the maquiladora industry for the border region and U. S.-
    Mexico trade (objective 4), we analyzed documents and interviews citing
    factors that might influence the recovery of maquiladora production. We
    also analyzed the debate about the viability of the industry and some
    initiatives to identify and address its recovery. The information on
    foreign laws in this report does not reflect our independent legal
    analysis, but is based on interviews and secondary sources.

    We performed our work from July 2002 through July 2003 in accordance with
    generally accepted government auditing standards.

    Appendi x VII Comments from the Department of State

    Appendi x VIII

    GAO Contacts and Staff Acknowledgments GAO Contacts Kim Frankena (202)
    512- 8124 Juan Gobel (213) 830- 1031 Acknowledgments In addition to those
    listed above, Joel Aldape, Bronwyn Bruton, Gezahegne

    Bekele, Francisco Enriquez, Reid Lowe, Alison Martin, and Timothy Wedding
    made key contributions to this report.

    (320147)

    Report to Congressional Requesters

    July 2003 INTERNATIONAL TRADE Mexico*s Maquiladora Decline Affects U. S.-
    Mexico Border Communities and Trade; Recovery Depends in Part on Mexico*s
    Actions

    03- 891

    Contents Letter 1

    Results in Brief 2 Background 3 Maquiladoras Contribute to Integration
    along the Diverse

    U. S.- Mexico Border 7 After Rapid Growth, Maquiladoras and Border Region
    Experienced Declines Beginning in 2000 14

    Cyclical and Structural Factors Cited in Maquiladora Decline 23
    Maquiladora Downturn Spurs Some Positive Changes, but

    Fundamental Challenges to Future Viability Remain 36 Agency Comments and
    Our Response 44

    Appendixes

    Appendix I: Structure of Employment Growth in the U. S.- Mexico Border
    Area 46 U. S. Border Employment Outpaced Nation*s since 1995 46

    Appendix II: Effect of U. S. Economic Conditions on Employment in Mexican
    Maquiladoras 57

    Appendix III: Mexico- China Competition in the U. S. Market for Imports 63

    Appendix IV: U. S.* Mexico Trade, by U. S. Port, 1999* 2002 66

    Appendix V: Maquiladora Employment Statistics 67

    Appendix VI: Objectives, Scope, and Methodology 72

    Appendix VII: Comments from the Department of State 76

    Appendix VIII: GAO Contacts and Staff Acknowledgments 78 GAO Contacts 78
    Acknowledgments 78

    Tables Table 1: Employment Growth of the United States and U. S.
    Metropolitan Statistical Areas at the U. S. Mexico Border by

    Industry: 1990* 2002 and 2000* 2002 48 Table 2: Components of Employment
    Changes by Sectors in U. S.

    Metropolitan Statistical Areas at the U. S. Mexico Border, 1990* 2002 53
    Table 3: Summary of Regression of Maquiladora Employment and U. S. GDP and
    Real Peso Exchange Rates 59

    Table 4: Summary of Regression of Maquiladora Employment and U. S. GDP and
    Real Peso Exchange Rates for Three Subperiods 61 Table 5: Summary of
    Regression of Maquiladora Employment and U. S. Manufacturing Shipments and
    Real Peso Exchange

    Rates 62 Table 6: Top 25 U. S. Imports from China for Which China's Share
    of

    U. S. Imports Grew, while Mexico's Share Declined between 1995 and 2002 64
    Table 7: Trade Flows through Major U. S.- Mexico Land Border

    Crossings 66 Table 8: Maquiladora Employment by State and City, 1990* 2002
    68 Table 9: Maquiladora Employment by City and Industry, 1990* 2002 69

    Figures Figure 1: Map of U. S.- Mexico Border Twin Cities 4 Figure 2:
    Maquiladoras* Share of Mexico*s Trade 1990- 2002 9

    Figure 3: Map of Mexico Showing Share of Maquiladora Establishments, by
    State 11 Figure 4: Growth in Maquiladora and Total Mexican Manufacturing
    Production, 1993* 2002 15

    Figure 5: Maquiladora Textile and Apparel Employment, Nonborder and Border
    Regions, 1990* 2001 17 Figure 6: Maquiladora Employment and
    Establishments, 1990- 2002 18

    Figure 7: Mexican Maquiladora Employment in the Border Region by
    Industrial Sector, January 1997* October 2002 19 Figure 8: Mexican
    Maquiladora Employment, by Border City,

    January 1990 - December 2002 20 Figure 9: Growth of Manufacturing
    Production in Mexican Border

    States, 1993* 2002 22 Figure 10: Annual Growth Rates of U. S. Gross
    Domestic Product

    and Maquiladora Employment, 1980- 2002 25 Figure 11: Value of U. S.
    Imports from Mexico and China, 1995* 2002 27

    Figure 12: U. S. Imports of Textiles and Apparel from Mexico, China, and
    Caribbean Basin Countries, 1990* 2002 30 Figure 13: Real Dollar Exchange
    Rate of Mexican Peso and Chinese

    Yuan, 1995* 2002 32 Figure 14: Nonfarm Annual Employment Growth in the
    United

    States and in U. S. Metropolitan Statistical Areas at the U. S.- Mexico
    Border, 1991- 2002 47

    Figure 15: Employment Gains (Losses) in Nonfarm Employment in Metropolitan
    Statistical Areas at the U. S. Mexico Border Due to National, Industry-
    mix, and Local Effects 52

    Abbreviations

    BIP Border Industrialization Program CBI Caribbean Basin Initiative CNIME
    Mexico's National Council of the Maquiladora Export Industry

    (Consejo Nacional de la Industria Maquiladora de Exportacion) FAS Free-
    Alongside- Ship GDP Gross Domestic Product ITA Information Technology
    Agreement ITC International Trade Commission MSA Metropolitan Statistical
    Area MEDC McAllen Economic Development Corporation NAFTA North America
    Free Trade Agreement PROSEC Sectoral Promotion Program (Programa de
    Promocion

    Sectoral) USTR Office of the U. S. Trade Representative WTO World Trade
    Organization

    This is a work of the U. S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
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    separately.

    a

    GAO United States General Accounting Office

    After growing rapidly during the 1990s, Mexican maquiladoras experienced a
    sharp decline after October 2000. By early 2002, employment in the
    maquiladora sector had contracted by 21 percent and production had
    contracted by about 30 percent. The decline was particularly severe for
    certain industries, such as electronics, and certain Mexican cities, such
    as Tijuana. The downturn was felt on the U. S. side of the border as well,
    as U. S. exports through U. S.- Mexico land border ports fell and U. S.
    employment in manufacturing and certain other trade- related sectors
    declined.

    The cyclical downturn in the U. S. economy has been a principal factor in
    the decrease in maquiladora production and employment since 2000. Other
    factors include increased global competition, particularly from China,
    Central America, and the Caribbean; appreciation of the peso; changes in
    Mexico*s tax regime for maquiladoras; and the loss of certain tariff
    benefits as a result of the North American Free Trade Agreement.

    Maquiladoras face a challenging business environment, and recent
    difficulties have raised questions about their future viability.
    Maquiladoras involved in modern, complex manufacturing appear poised to
    meet the industry*s challenges. Still, experts agree that additional
    fundamental reforms by Mexico are necessary to restore maquiladoras*
    competitiveness. U. S. trade and homeland security policies present
    further challenges for maquiladoras.

    Maquiladora Component of U. S.- Mexico Trade, 2001

    Mexico*s maquiladoras have evolved into the largest component of U. S.*
    Mexico trade. Maquiladoras import raw materials and components for
    processing or assembly by Mexican labor and reexport the resulting
    products, primarily to the United States. Most maquiladoras are U. S.
    owned, and

    maquiladoras import most of their components from U. S. suppliers.
    Maquiladoras have also been an engine of growth for the U. S.* Mexico
    border. However, the recent decline of maquiladora operations has raised
    concerns about the impact on U. S. suppliers

    and on the economy of border communities. Because of these concerns, GAO
    was asked to analyze (1) changes in maquiladora employment and production,
    (2) factors related to the maquiladoras* decline, and (3) implications of
    recent developments for maquiladoras* viability. www. gao. gov/ cgi- bin/
    getrpt? GAO- 03- 891. To view the full product, including the scope

    and methodology, click on the link above. For more information, contact
    Loren Yager at (202) 512- 4347. Highlights of GAO- 03- 891, a report to

    congressional requesters

    July 2003

    INTERNATIONAL TRADE

    Mexico*s Maquiladora Decline Affects U. S.- Mexico Border Communities and
    Trade; Recovery Depends in Part on Mexico*s Actions

    Page i GAO- 03- 891 International Trade

    Contents

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    Contents

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    Page 1 GAO- 03- 891 International Trade United States General Accounting
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    Appendix I

    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix I Structure of Employment Growth in the U. S. Mexico Border Area

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    Appendix II

    Appendix II Effect of U. S. Economic Conditions on Employment in Mexican
    Maquiladoras

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    Appendix II Effect of U. S. Economic Conditions on Employment in Mexican
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    Appendix II Effect of U. S. Economic Conditions on Employment in Mexican
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    Appendix II Effect of U. S. Economic Conditions on Employment in Mexican
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    Appendix II Effect of U. S. Economic Conditions on Employment in Mexican
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    Appendix III

    Appendix III Mexico- China Competition in the U. S. Market for Imports

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    Appendix III Mexico- China Competition in the U. S. Market for Imports

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    Appendix IV

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    Appendix V

    Appendix V Maquiladora Employment Statistics

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    Appendix V Maquiladora Employment Statistics

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    Appendix V Maquiladora Employment Statistics

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    Appendix V Maquiladora Employment Statistics

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    Appendix VI

    Appendix VI Objectives, Scope, and Methodology

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    Appendix VII

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    Appendix VIII

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