Since the North American Free Trade Agreement (NAFTA) took effect in January 1994, trade volumes across the continent have jumped. So have the number of options U.S. companies can consider when going across the southern and northern borders.

The United States and Canada previously had a trade agreement dating back to the 1980s, but the addition of Mexico, which already had operated an aggressive foreign industrial investment program since the 1960s called maquiladoras, or twin plants, added significantly to the choices for locating manufacturing facilities.

Thanks to the maquiladora concept and NAFTA itself, Mexico in recent years has surpassed Japan to become the No. 2 trading partner with the United States.

The maquiladora concept has a fairly simple premise. Companies foreign to Mexico can locate the labor-intensive subassembly segments of their industrial production in Mexico and can ship materials and components to the plant or plants on an inbound basis, without paying duties.

The only duties paid are on the value added by the manufacturing performed in Mexico. With the protections added by NAFTA for intellectual property and against the possibility that the Mexican government can nationalize industries, maquiladora manufacturing accelerated in Mexico as never before, now employing about 1 million workers in a range of industries, led by automotive and electronic.

In the first years of NAFTA, Mexico gained a large percentage of the textile industries that had operated both in the United States and the Caribbean, but lately much of those low-skilled jobs have moved to China because of lower employment and other costs there.

In the meantime, though, job skills have grown in Mexico to the point that higher technologies now are being manufactured there in areas ranging from computer products to aerospace to software development.

In some pockets of Mexico, a country with an

estimated population of 103 million, wage levels are rising, especially in northern industrial centers like Monterrey.

Mexico, therefore, is marketing itself more on skills and proximity to the U.S. market than on costs, including labor.

Many Options

For Manufacturers

Within and outside of the maquiladora framework, foreign manufacturers have options on how to establish operations in Mexico. Contract manufacturing, shelters, industrial parks and greenfield locations are all possible.

Contract manufacturing simply is outsourcing the manufacturing of products or components to a Mexican company.

Shelters, a concept unique to Mexico, occur when foreign companies move manufacturing equipment to Mexico. The shelter company, some of which are based in the United States, hires and pays the workers, leases or owns the building and arranges for the permits, utilities and transportation services.

In a shelter, the foreign company has lower risks because it has no legal presence in Mexico. This is a popular way for U.S. companies to enter Mexico. After several years, the companies can decide whether to graduate to their own stand-alone operations in Mexico in an industrial park or a greenfield site, or to stay with the shelter concept.

Mexico’s industrial parks are as modern as any in the world, offering security, safety (with firefighting units) and all utilities and telecommunications. Some have housing nearby for workers.

The Mexican Association of Industrial Parks is the largest trade association coordinating marketing and operating standards for member parks in Mexico.

Other options companies consider when moving to Mexico is whether to locate along the border — as many do — or in the interior. Some of the large industrial border cities are Tijuana, Nogales, Ciudad Juarez, Nuevo Laredo, Reynosa and Matamoros. A large percentage of the maquiladoras operate along the border because of lower transportation costs into and out of the United States.

A second tier of northern Mexico industrial centers stretches across the country. They are popular choices because of their educated workforces. Those include Guaymas, Hermosillo, Ciudad Chihuahua, Torreon, Saltillo and Monterrey.

Highly developed industrial centers in Mexico’s interior include Mexico City and the state of Mexico surrounding the Federal District, Queretaro, San Luis Potosi, Guanajuato and Guadalajara. Guadalajara, Mexico’s second-largest city, has attracted a large amount of computer industry investment and is known as Mexico’s Silicon Valley.

In the south, the most industrialized area is in the state of Yucatan and its capital city of Merida. Interior locations continue to open up as toll roads are built and the recently privatized rail system improves.

Another factor driving more industry into Mexico’s interior is the high land costs in northern Mexico, especially along the U.S. border and in Monterrey.

Since NAFTA, Mexico has signed more than 30 trade agreements with other countries. This includes the 15 nations in the European Union. Mexico also is negotiating a trade agreement with Japan.

Economic incentives in Mexico are offered mainly by states and cities and are fairly consistent. These incentives include job training, reduced taxes and, for projects with large job numbers, help with land purchases.

Exchange Makes

Canada More Attractive

The auto industry is the leading sector in Canada that trades with the United States. Much of Canada’s auto industry is located near the Detroit-Windsor (Ontario) area.

Canada has become more attractive in recent years because the U.S.-Canada dollar exchange has slipped to the point where one Canadian dollar is worth 70 U.S. cents.

Canadian taxes and government policy restrictions keep costs high. Nevertheless, Canada remains the No. 1 trading partner with the United States.

The biggest export industries attracting investment in Canada, after the automotive sector, are furniture, oil and gas, mining and natural resources, including building materials.

Technology industries active in Canada include telecommunications equipment.

Naturally, nearly all of Canada’s population of 32.2 million, is crowded close to the U.S. northern border.

That means it is not highly advantageous to locate manufacturing in Canada just to sell to the Canadian market because it already is nearby.

If nothing else, NAFTA has tied the economies of Mexico and Canada

closer to the U.S. economic cycle.

Manufacturing investments in Mexico and Canada go up and down with U.S. economic growth and recessions.

David Hendricks is a business columnist for the San Antonio Express-News.