In Mexico, US industry finds uncertainty

For more than a decade, they have been the factory setup of choice for American corporations seeking out cheap labor and proximity to the mammoth US market.

Known as maquiladoras, they are industrial plants south of the US-Mexico border which use local workers to assemble a broad array of products from TV sets to vacuum cleaners.

Lured by average wages of $5.30 per day - about one-tenth the US minimum wage - businesses have set up some 3,500 maquiladoras along the border. Employing some 1 million workers, these factories have, in many ways, become the foremost symbol of global commerce - and a target for American labor groups who decry the departure of more jobs abroad.

As such, a recent dispute over a Mexican plan to nearly double taxes on maquiladoras - potentially devastating the system - has been closely watched by the international business community. On Friday, US and Mexican authorities came to a compromise that details how Mexico will tax the Mexican affiliates of US companies for three years. But it leaves longer term tax questions unanswered, which could significantly stall crucial, long-term investment.

"We have an agreement at long last that is clear and gives Mexico a better share of income tax without taxing US companies out of business," says Humberto Inzunza, director of the Tijuana, Mexico-based CNIME (Consejo Nacional de la Industria Maquiladora de Exportacion), the main industry association. "But this is going to make things uncertain for those who want to start new companies. We need to have a fiscal vision that stretches longer than three years."

Mexico throws a curve ball

Late last year, Mexico threw industries into turmoil by an initiative to impose a tax on US companies that use maquiladoras. The new tax would have raised rates to as high as 75 percent, and in the eyes of many, would have destroyed the maquiladora movement.

Now, the new agreement will substantially increase the amount of tax that Mexico collects from the Mexican maquiladora companies themselves. It lowers the threshold for the taxable income of the Mexican companies.

While Inzunza and many maquiladora owners express concern about what will happen after the new deal expires in 2002, others say the accord is good in that it provides a permanent framework for resolving this issue.

"In a very real sense, we have solved the M2K [Mexico, year 2000] problem," says John McLees, leading tax adviser to the National Maquiladora Trade Association. "This is a good agreement for Mexico, the maquiladora movement, and the US government because it removes the prospect of unacceptable taxation on the US companies and creates a framework for discussing how the Mexican companies should be taxed in the future."

For years, imported components have been brought into Mexico for assembly in various factories ranging from General Electric to General Dynamics. No Mexican import duties are levied on the temporarily imported goods, so long as the product is exported. Maquiladora operators must post a bond to guarantee that components and materials are reexported within six months.

But since such standards were set up, maquiladoras have become more sophisticated, generated more products, and required more infrastructure to support them. In recent years, Mexican authorities have said they want to recover some of the costs of such infrastructure, such as roads, plumbing, and security, as well as the maintenance of large industrial parks that line the border.

"Certainly we feel we can and should charge more taxes on such a significant sector," said Mexican Trade Secretary Herminio Blanco, before the agreement.

Behind only oil and tourism in generating foreign income, maquiladoras brought Mexico about $40 billion this year, says Ed Butler, a professor at the University of California at Riverside. Indeed, about 50 new factories open each month.

How it all began

Dating back to around 1965, the idea for maquiladoras (translation: "assemblers") was to replace Mexican jobs lost when the "braceros" were phased out. That program had allowed Mexicans to work temporarily in the US.

But since the maquiladora program began taking off in the late 1980s, the sheer size of many operations has reached as many as 10,000 employees, stealing significant numbers of American jobs in such industries as auto parts, while keeping prices low on many consumer goods.

In moving from being a low-cost labor provider to a genuine worldwide competitor in key industries, Mexico is flaunting its new economic strength, many observers say, by tightening the screws on the maquiladoras.

"The Mexican government is so anxious to find revenues that they see this fat cow and just have to milk it," says Dale Robinson, who runs a San Diego-based company which has helped set up maquiladoras since 1985.

"They are clearly trying to find new sources of revenue and realized maquiladoras are a big, fat target," adds Richard Sinkin, director of InterAmerican Holdings Company, another San Diego-based firm that helps set up and manage maquiladoras.

He and others complain that recent changes in Mexican law have chipped away at the benefits that make maquiladoras appealing. Seven years ago, for instance, Mexico altered laws exempting foreign nationals living in Mexico from paying taxes. There have also been changes in transfer-pricing agreements that benefit Mexico at the expense of US companies.

As a result, many US-based maquiladora operators have threatened to move to China or Taiwan, or even other Latin American countries. Others say the new agreement, while averting a larger tax, is more evidence that Mexican taxation proposals will only be modified but never quite go away.

Still, most seem to feel the new agreement, while not a perfect solution, is a step in the right direction. "Lots of plans have been on hold until they cleared this matter," says Mr. Robinson. "How fast things get moving again depends on whether or not Mexico stops its constant attempts to see what they can do to get more money out of maquiladoras."

(c) Copyright 1999. The Christian Science Publishing Society