Maquiladora Downturn: Structural Change Or Cyclical Factors?

Abstract

Mexicos maquiladora industry is currently the focus of much attention in the media, in corporate boardrooms, and among Mexican government officials. After watching the maquiladora industry sustain its biggest ever employment decline in recent years, many observers now question the industrys future in Mexico. The 2001 U.S. economic recession took a heavy toll on Mexicos maquiladora industry, although the size of the industrys contraction during the recent recessionalmost 260,000 jobssuggests there are more factors at work than the mild business cycle. The advantages of operating plants in Mexico, such as low wages and tax incentives, are now offered by a number of developing countries. At the same time, location has become less important for many products, as innovations in transportation and technology lower shipping costs. This paper attempts to estimate how much of the current maquiladora downturn is due to the business cycle and how much is due to structural changes. We use the Branson-Love methodology to estimate structural and cyclical impacts on the maquiladora employment downturn. Results suggest that the 2001 U.S. recession and rising real wages in Mexico account for much of the maquiladora downturn. Historically, these are the two most important factors during maquiladora growth, but new factors such as Chinas membership in the World Trade Organization, the Caribbean initiative and implementation of NAFTA Article 303 have changed corporate options for plant location or affected the cost structure in Mexico. Although our statistical results strongly suggest a recovery in maquiladora employment, potentially important qualifications are discussed as well.