Despite a constantly changing picture, NAFTA has made Mexico attractive to industry, without question. While there were only 2,100 maquiladora plants before the trade agreement was enacted in 1994, now there are about 3,300 such twin plants employing nearly 1.2 million workers.

Gale Thompson has seen it all. The vice president for business development at the Offshore Group in Tucson, Ariz., has witnessed the growth of foreign manufacturing at maquiladoras since 1972.

“I have seen it grow,” Thompson said. “After NAFTA was approved, I saw two things: a decrease in duties and an increase in paperwork.

“NAFTA has reduced duties on many products. In some cases, NAFTA-built products have become duty-free.”

The reduction in duties is not over. Depending on the products, duties are falling by as much as 10 percent a year. In the first five years of NAFTA, duties on some products fell 20 percent a year. Other products are seeing a 10 percent reduction per year for 10 years, while yet other products are on a 15-year schedule of duty reductions.

“NAFTA has accelerated the process” of shifting production to Mexico, Thompson said. “It encourages more confidence in Mexico. And more and more companies in Mexico are seeking to have their suppliers in Mexico.”

Beyond NAFTA

The feeling at the United States-Mexico Chamber of Commerce is that Mexico has become more attractive to industry, not only because of NAFTA, but also because of steps taken in the spirit of NAFTA and free trade.

“Mexico has become a free trader in the world,” said Charles Cervantes, a legal advisor for the chamber’s development of programs and projects.

“The big umbrella of the notion of NAFTA as a free-trade zone has spun off actions by the government of Mexico,” Cervantes said. “The government has undertaken a tremendous privatization task for banks, airlines, airports, seaports and the mining industry. That has attracted large amounts of capital and investment into Mexico.”

Challenges to progress

Some obstacles exist, however, for Mexico to reach its potential in industry. The main one is high domestic interest rates in Mexico.

“Mexico is lacking decent interest rates for debt capital,” Cervantes said. “It’s 25 to 30 percent for short-term loans.” 

He said some foreign banks in Mexico are beginning to assist with providing lower interest rates.

Another hurdle is looming due to scheduled rule changes within NAFTA itself. These involve the maquiladora industry, and a historical perspective is necessary.  

Before NAFTA was enacted in 1994, Mexico operated a program in which U.S. product components could enter Mexico duty-free. The final product could also enter Mexico duty-free, and the U.S. duty was calculated on the finished value, minus the U.S. components, said Mark Earley, director of administration for Collectron, a Mexico shelter company based in Nogales, Ariz., and Nogales, Sonora, in Mexico.

This program continues, said Earley, who works for a company that introduces foreign companies to Mexico in shelters, which are operations in which the foreign company has no legal presence in Mexico.

When NAFTA began, a seven-year program was initiated to continue the low-duty scenario in Mexico. Goods produced in Mexico that qualify under NAFTA could enter the United States usually with no duty. Some products would pay a low preferential rate to the United States, but no duties were paid to Mexico, Earley said.

But the rules change Nov. 1, 2000. Within the three NAFTA countries — the United States, Mexico and Canada — components enter and leave without duties for NAFTA-qualifying products.

Products built with non-North American components must pay a duty to Mexico when leaving Mexico for the United States or Canada. But products with non-North American parts can leave for non-North American markets without duties. That allows Mexico to continue attracting non-North American investments that take advantage of Mexico’s low wage scales.   The end of the seven-year window of low duties for all foreign companies is adding urgency to the last year of opportunity under NAFTA.

“The situation to other countries outside of NAFTA will be hard if they want to trade with the three countries,” said Diego Munguia Camou, director of Mexico’s Sonora Economic Development Council.

Still, the trade agreement provides numerous benefits for U.S. firms.

“NAFTA has been good. It has created a lot of interest in Mexico. Most people didn’t know about a lot of the advantages,” Earley said.

“It all comes down to a cost decision. There is a little more overhead because the maquiladoras can be thousands of miles away from the corporate offices. But, by far, Mexico is the choice because of its proximity to the United States. At this time, the equation is in the favor of Mexico.”