Official US government definitions and history of Maquiladora

1. 1) What is a "Maquiladora"?
A maquiladora is a Mexican corporation operating under a special customs regime which allows
the corporation to temporarily import into Mexico duty-free, raw materials, equipment,
machinery, replacement parts, and other items needed for the assembly or manufacture of
finished goods for subsequent export.(1)
The maquiladora program enables companies to import in-bond and duty-free all the machinery,
tools, equipment, and raw materials necessary to assemble and manufacture products for
export. Companies may reexport the finished or semi-finished
product from Mexico or may sell it in the Mexican market, subject to certain restrictions. Foreign
investors may own 100 percent of the equity in a maquiladora operation, although many
maquiladoras are owned by Mexican companies. The term "maquiladora" originates from the
Spanish word "maquila" which historically refers to the payment millers receive from farmers for
grinding corn into meal, or adding value.(2)
2) What is the History and Background of the Maquiladora Program?
The maquiladora program began in May 1965. There are 21 countries with maquiladora
interests operating in Mexico. The U.S. holds the lion's share with more than 85% of
investments, followed by Japan, Switzerland, Singapore, Holland, Spain and Ireland. 73% of
maquiladoras are located at the northern border with 35% in Baja California Noret, 7% in
Sonora, 12% in Chihuahua, 8% in Coahuila, and 11% in Tamaulipas. (3) Initially, maquiladoras
could only be established in the border areas of Mexico and in the Baja California free trade
zone. The original purpose of the maquiladoras was to provide work for excess labor in the
border areas and to encourage Mexican exports. The maquiladora program was also intended
to lead to the transfer of technology to Mexico. Over time, the maquiladora program evolved so
that maquiladoras could be set up anywhere in Mexico and were allowed to sell a portion of
their production in the Mexican domestic market upon payment of import duties and other taxes
on the imported raw materials used in the processing of the good. U.S. tariff schedule
provisions, known as the "9802" (formerly known as 806/807), greatly assisted the development
of the maquiladora industry.(4) Goods entering the United States under these provisions are
U.S. goods that have been advanced in value abroad. U.S. duties on qualifying goods are only
assessed on the value-added abroad. This program predates the establishment of the
maquiladora program. Finally, encouraged by few restrictions on foreign investment in the
maquiladora industry, foreign companies helped the development of the maquiladora industry in
Mexico.(5)
International competition has forced many U.S. companies to develop the concept of production
sharing to remain competitive with European and Far-East companies. When Mexico
established the maquiladora program in 1965, U.S. corporations began to realize the
advantages of establishing operations in Mexico, a country which offered lower production costs
(including lower labor and transportation costs), closer proximity to the United States, and the
availability of immediate technical assistance from parent companies, thereby producing higher

2. product quality.(6) However, despite these advantages, the program did not really become
popular with U.S. corporations until the mid-late 1980s.
In the first half of 1996, nearly 40 percent of Mexico's exports were generated by the
maquiladora sector. Around 60 percent of the sector is concentrated along the U.S. border. As
of March 1996, there were 2,288 maquiladoras, and 781 (34 percent) were located in the
interior states of Mexico. The border cities of Tijuana, Ciudad Juarez, Matamoros, Mexicali.
Reynosa, Nogales, and Tecate are home to over half the plants and 60 percent of employment
in maquiladoras. Each of Mexico's 31 states has at least one maquiladora. As mentioned
above, foreigners can own up to 100 percent of maquiladora plants. In 1995, 43 percent of the
maquiladoras were owned by Mexican companies, 38 percent by U.S. firms, 14 percent by joint
Mexican-U.S. companies, 2 percent by Japanese, and 3 percent by other. The largest
concentration of maquiladoras is in electronics, textiles, and auto parts and accessories.(7)
3) What are the Key Features of the Maquiladora Program?
The maquiladora industry is governed by the Decree for the Development and Operation of the
Maquiladora Export Industry (the "Maquiladora Decree"), published on December 22, 1989 in
the Mexican government DiarioOficial. The Maquiladora Decree was amended effective January
1, 1994 to comply with certain provisions of NAFTA. In addition to this decree, maquiladoras are
governed by special provisions in the Customs Law and Regulations and General Customs
Rules issued by the Department of Finance and Public Credit (Hacienda), as well as other laws
in Mexico.(8) The key features are
the following:
1) Maquiladora Registration Number: In order to operate as a maquiladora, a Maquiladora
Registration Number must be obtained from the Ministry of the Economy (SECON). Only
individuals who are Mexican citizens or companies incorporated under Mexican law may obtain
a Maquiladora Registration Number.(9)
2) Maquiladora Export Program: In order to obtain a Maquiladora Registration Number, a
company must file a Maquiladora Export Program with the local SECON office where the
maquiladora operation will be established or in Mexico City. The Maquiladora Export Program is
a document containing information about the proposed maquiladora company. It describes the
manufacturing process and the products to be produced and/or service to be performed, the list
of raw materials and machinery/equipment to be temporarily imported into Mexico, stipulates the
amount of labor to be used, and details an export program. Once approved by SECON, the
Maquiladora Registration Number is issued and Mexican Customs is notified so that the
company may begin its operations.(10)
3) Types of Merchandise: The following types of merchandise may be imported temporarily on a
duty-free basis under the maquiladora program: raw materials and auxiliary materials
(containers, packaging materials, labels and brochures necessary for the
manufacturing/assembly of the product); tools, equipment, production, and industrial safety

3. accessories and products necessary for hygiene, sanitation, and for the prevention and control
of environmental contamination of the production plant, work manuals and industrial blueprints,
telecommunication and computer equipment; machinery, apparatus, instruments, and
replacement parts for the production process, laboratory, measuring and testing equipment for
the products and equipment necessary for quality control and for training of personnel and
administration; trailers and containers.(11)
4) Simplified Customs Procedures: Maquiladora imports qualify for expedited customs
procedures. Maquiladora imports are exempted from many of the non-tariff requirements
applicable to products imported on a permanent basis, such as Mexican official standards or
"NOMs." Also, maquiladoras are not subject to the value-added tax on raw materials,
machinery, equipment, and other items imported under the program. Finally, maquiladoras are
allowed to use a consolidated import declaration or "pedimento" and, upon prior authorization
from SECON, are not required to classify the imported items under a specific Mexican Tariff
Schedule number, but may import those items under a special tariff classification applicable to
maquiladora imports.(12)
5) Geographic Location: Until 1972, maquiladoras were restricted to the border states and the
Baja California free trade zone. Under the Old Maquiladora Decree (superseded by the current
Maquiladora Decree in 1989), maquiladoras could not be established in areas of high industrial
concentration. Currently, however, maquiladoras may be established anywhere in Mexico
provided environmental laws and regulations are met.(13)
6) Duration of Approvals: Under the Old Maquiladora Decree, approvals for Maquiladora Export
Programs were valid for two years. Under the current Maquiladora Decree, approvals for
Maquiladora Export Programs are open-ended. Subsequent importations under the program,
however, do require approvals.(14)
7) Length of Temporary Importations: The Maquiladora Decree and General Customs Rules
permits fuels, lubricants, auxiliary materials, and spare parts used in production process to be
imported for up to one year and raw materials, parts, and components to be incorporated into
the finished product for export, as well as containers, packaging materials and trailer boxes for
up to two years. Machinery and equipment is permitted to remain in Mexico for as long as the
Maquiladora Export Program is in effect.(15)
8) Period for Effecting the Initial Temporary Importation: The time period effecting initial
temporary importations listed in the Maquiladora Export Program (which the maquiladora will
make to begin its operations) is one year from the time the maquiladora authorization is granted,
with the possibility for what is usually a one-time extension of three months upon prior
authorization from SECON. In special circumstances, a second three-month extension may be
granted.(16)
9) Subsequent Importations: Subsequent importations necessary for the continued operations of
the maquiladora require authorization from SECON for an extension of its Maquiladora Export

4. Program. Approvals for subsequent importations are valid for one year for raw materials and
two years for machinery and equipment. In other words, importations of these items must be
effected within these time frames or a new authorization will be required. Only those items listed
specifically in the
Maquiladora Export Program or in the request for authorization for subsequent importations may
be imported duty-free under the maquiladora program.(17)
10) Authorization in Dollars and Pesos: Authorizations issued for temporary importations may
be expressed in U.S. dollars as well as in pesos, provided the rate of exchange and the date are
specified.(18)
11) Sales into the Domestic Market: As a result of the NAFTA, maquiladoras are allowed to sell
an increasingly higher proportion of the amount of the prior year's exports into the Mexican
market. As of January 1, 2001, maquilas will be allowed to sell all of their production into the
domestic market. When a maquiladora sells into the domestic market, however, it must pay the
applicable Mexican import duties on imported raw materials used in the production depending
on their specific tariff classification and customs value, as well as any other charges or taxes
that are applicable. Finished products sold in the Mexican domestic market must also satisfy
non-tariff requirements, such as the NOMs, and must be of the same quality as the finished
products produced for export.(19)
12) Transfers Between Maquiladoras: The transfer of merchandise, raw materials, equipment,
and finished products between maquiladoras is permissible under the Maquiladora Decree.
Provided certain requirements are met, such transfers may be treated as exports by the
transferring maquiladora and a temporary importation by the transferee. The transferee then
becomes liable for any applicable import duties and other charges if the transferred
merchandise is subsequently imported into Mexico on a permanent basis.(20)
13) Exportation of Waste and Scrap: Waste and scrap which is not considered hazardous under
Mexican law may be exported to the country of origin, destroyed, or donated to charitable or
educational institutions, provided the applicable Mexican legal requirements are met. With prior
approval from SECON, waste and scrap may also be sold into the Mexican domestic market.
Waste and scrap considered to be hazardous must be exported to the country of origin.(21)
14) Recognition of Specialized Companies: The current Maquiladora Decree recognizes the
existence of specialized maquiladora companies, such as agroindustrial maquiladoras and
companies involved in the exploitation of mineral resources, fishing and forestry, service
maquiladoras, and companies operating as "shelters.(22)
4) How Does One Establish a Maquiladora?
There are three different methods for establishing a maquila operation in Mexico: contract
manufacturing, shelter operation, or subsidiary (stand-alone) maquila corporation.

5. Contract Manufacturing
One way for a foreign company to have goods manufactured in a maquiladora is to enter into a
contract with an existing Mexican manufacturer or contract assembler to manufacture/assemble
the product for the U.S. client.(23)
Under this arrangement, the maquiladora often has full responsibility for the following: shipment
from the border to the Mexican maquiladora facility, customs clearance and paperwork,
materials and production management, quality control of the product, and overall administration
of the Mexican operation.(24)
The foreign company would provide the specifications and requirements for the product. Usually
the Mexican contractor is paid on a per piece basis. The advantage of using this method is that
it involves usually the least risk to the foreign company. The Mexican subcontractor is
completely responsible for all aspects of production and compliance with Customs regulations.
The disadvantages include difficulty in finding a qualified contractor willing to bid on the project,
little control over operations, greater risk of failure to perform by the contractor, and greater cost
due to the compensation owed the Mexican contractor.(25)
Shelter Operations
A second method is to contract with a shelter operator located in Mexico. In this situation, the
Mexican company provides the facilities in Mexico for the manufacturing process and provides
services including inspection, customs, shipping, general administrative services, warehousing,
and personnel management. The foreign company, however, assigns representatives to
manage and run the production process and provide quality control in Mexico. The foreign
company provides the technical knowledge and the Mexican shelter operator supplies its
knowledge of the Mexican corporate structure, the maquila permit, labor hiring and
administration, and Mexican customs procedures.(26) In this type of maquiladora operation, the
shelter operator is usually paid on a clock-hour basis (usually the number of hours worked by
the Mexican employees at agreed upon rates). This compensation is not usually dependent
upon the success in meeting quality control objectives or in meeting production schedules.
Shelter agreements are generally for a fixed number of years, during which time the U.S.
company will learn how to do business in Mexico from the shelter operator and will usually
convert to a stand-alone operation at the end of the contract. The advantages of a shelter
agreement include quicker start-up time for the foreign company and lower start-up expenses.
The disadvantages include the increased cost over a stand- alone operation and less control of
the Mexican maquila operation, which is usually owned by the shelter operator.(27)
Subsidiary or Stand Alone Operations
The third way to establish maquila operations in Mexico is to incorporate a wholly-owned
subsidiary corporation in Mexico. This situation requires the foreign company to obtain a
maquila permit and any other necessary permits, import the raw materials and equipment, hire

6. the personnel, and begin operations. This is the most direct method of setting up a maquila
operation in Mexico.(28)
Foreign companies interested in this type of maquiladora operation should obtain the services of
a Mexican lawyer to set up a Mexican corporation and to assist in the necessary contracts
between the parent company and subsidiary. In order for foreign companies to incorporate in
Mexico, authorization and approval of the corporate name must be obtained from the
Department of Foreign Affairs. In addition, the Charter and By-Laws of the company must be
prepared, notarized before a Mexican notary public, and registered in the Public Registry of
Property and Commerce. The stock certificates must also be publicly recorded. In addition, the
company must obtain a Federal Taxpayer's Registration Number from Hacienda, register with
the National Registry of Foreign Investments, the Institute for the National Housing Fund for
Workers and the Mexican Social Security Institute, and other Mexican agencies.(29)
Once the subsidiary has been incorporated, it must then obtain approval to operate under the
maquiladora program by applying for a Maquiladora Registration Number and approval for its
Maquiladora Export Program from SECON.(30)
When the foreign company submits the formal application to SECON, the agency will return to
the company a letter of conditions, which will be taken directly from the information provided in
the formal application. The company reviews and signs the letter of conditions and returns it to
SECON. SECON will then issue a letter of authorization for the company to begin operations
and an authorization to import the necessary equipment and machinery. The company should
then take the letter of authorization to Mexican Customs to import the necessary equipment and
raw materials.(31)
Major advantages for foreign companies include the greatest amount of control that this
arrangement provides and its cost- effectiveness. Disadvantages include the longer time
required to establish operations and the greater likelihood of making mistakes (often due to the
lack of knowledge of doing business in Mexico).(32)
5) What are the True Labor Costs Involved in Operating a Maquiladora?
Reduced labor cost has always been an incentive for foreign companies to establish
maquiladora operations in Mexico; however, companies must give special consideration to other
important labor matters when deciding whether or not to set up a maquiladora operation. While
wages for maquiladora laborers are often less than $1 an hour, employment in maquiladoras
include many fringe benefits for employees. These jobs are formal sector jobs that make
workers eligible for health, retirement, and housing benefits from the Social Security
Institute.(33)
These benefits, such as the minimum wage, maximum hours and overtime pay, paid holidays,
vacation pay, Christmas bonus, employer housing contributions, profit sharing, paid maternity
leave, social security, retirement savings, and training, mandated under Mexican law must be

7. taken into consideration when calculating the cost of Mexican labor.(34)
6) Where are Maquiladoras Locating in Mexico?
Today, about 66 percent of maquiladoras are located along the U.S.-Mexico border, with most
of the border maquiladoras located in the cities of Tijuana, Ciudad Juarez, Matamoros, Mexicali,
Reynosa, Nogales, and Tecate.(35) Current trends indicate that while big existing plants are
expanding on the border, new maquiladoras are gravitating towards the interior of Mexico. The
border has become saturated with companies and, because the outlook for the maquiladora
industry is high rates of growth, many companies are looking to the interior.(36) The cities of
Monterrey, Torreon, and Gomez Palacio are expected to generate the most maquila growth in
the near future. For example, Monterrey has experienced a 27 percent increase in maquilas in
the past two years and currently has more maquiladoras than border cities Reynosa,
Matamoros, and Nuevo Laredo. Higher real estate costs on the border, less expensive labor,
and less competition for workers in the interior are fueling this movement towards the interior.
Interior maquiladoras also experience lower turnover rates and less absenteeism. Turnover
rates along the border often reach 20 percent a month due to maquila workers quitting and
moving between maquiladora employers.(37)
Interior municipalities often offer incentives to attract maquiladoras, such as an exemption from
the local payroll tax, property tax exemptions, and training costs.(38) Despite these advantages,
however, the majority of today's maquiladoras are still concentrated along the border, as many
firms still prefer the close proximity of border maquiladoras to the United States.
7) Can Maquiladoras Sell Their Production Into the Mexican Domestic Market?
NAFTA stipulates that the level of permitted sales by maquiladoras into the Mexican domestic
market as a percentage of the value of the previous year's exports be incrementally increased
from 1994 to 2000. As of January 1, 2001, however, all restrictions on domestic sales will
disappear. The proportion of the maquiladora's production which may be sold into the domestic
market from 1994 to 2000 is as follows: 55% (1994), 60% (1995), 65% (1996), 70% (1997),
75% (1998), 80% (1999), and 85% (2000). Again, note that these percentages are based on the
value of the previous year's exports. Typically, maquiladoras in their first year of operation may
not sell to the Mexican market; however, it is possible to obtain special permission from SECON
based on anticipated exports for the first year.(39) The current level of taxes and the paperwork
required to obtain authorization to sell maquila products in Mexico, however, discourage most
firms from trying to tap the Mexican market. In 1995, 98 percent of maquiladora production was
exported, although some of the maquiladora exports are later re-imported into Mexico through
normal trade channels.(40)
8) What is the Effect of NAFTA on Maquiladoras?
NAFTA will affect the maquiladora program in two phases. In the first phase (January 1, 1994-
December 31, 2000), the main provisions affecting the maquiladora sector are the phased

8. elimination of import duties on products manufactured or assembled in the maquiladoras upon
importation into the United States or Canada, provided those products satisfy the NAFTA rules
of origin, and the phased increase in permitted sales into the domestic market of Mexico. During
this phase, maquiladoras will continue to benefit from the waiver of Mexican import duties on
raw materials. The maquiladora industry will be most affected by NAFTA in the second phase,
beginning on January 1, 2001. As of that date, all of a maquiladora's production may be sold
into the domestic market of Mexico and there will be restrictions on the duty-relief available on
non-NAFTA originating raw materials used by the maquilas in the manufacture or assembly of
finished products.(41)
NAFTA's provisions on foreign investment and Mexico's foreign investment law of 1994
eliminate virtually all restrictions on foreign investment in the manufacturing sector. Thus,
foreign companies need no longer set up a maquiladora facility to assemble in Mexico.
Regarding the long-term future of the maquiladora program, there are differing opinions as to
the continued existence of the program. After 2001, the industry is due to lose its special tariff
status, but some within the industry are lobbying for a continuation of this status. It is currently
unclear as to whether or not the Mexican government will allow a continuation. Theoretically, the
maquiladora program should end in the year 2001. However, some argue that the continued
implementation of NAFTA will require only minor changes in the maquiladora program, leaving
the basic incentives for the industry intact. The generally accepted wisdom of the industry itself
is that it will either be extended, as is, or continued under a different name or as a new program
to avoid closing factories or losing manufacturing cost benefits. Thus, the future of the
maquiladora program is currently unclear and interested firms should closely follow the
developments in the program over the next few years.
9) Who Should a U.S. Company Contact for More Information about Maquiladoras?
U.S. firms interested in establishing a maquiladora should contact either the local SECON office
in the Mexican state in which they wish to locate or the SECON office in Mexico City at:
Secretaria de Economia (SECON)