oversight

International Trade: Mexico's Maquiladora Decline Affects U.S.-Mexico Border Communities and Trade; Recovery Depends in Part on Mexico's Actions

Published by the Government Accountability Office on 2003-07-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

            United States General Accounting Office

GAO         Report to Congressional Requesters




July 2003
            INTERNATIONAL
            TRADE
            Mexico’s Maquiladora
            Decline Affects U.S.-
            Mexico Border
            Communities and
            Trade; Recovery
            Depends in Part on
            Mexico’s Actions




03-891
            a
                                                July 2003


                                                INTERNATIONAL TRADE

                                                Mexico’s Maquiladora Decline Affects
Highlights of GAO-03-891, a report to           U.S.-Mexico Border Communities and
congressional requesters
                                                Trade; Recovery Depends in Part on
                                                Mexico’s Actions


Mexico’s maquiladoras have                      After growing rapidly during the 1990s, Mexican maquiladoras experienced a
evolved into the largest component              sharp decline after October 2000. By early 2002, employment in the
of U.S.–Mexico trade. Maquiladoras              maquiladora sector had contracted by 21 percent and production had
import raw materials and                        contracted by about 30 percent. The decline was particularly severe for
components for processing or                    certain industries, such as electronics, and certain Mexican cities, such as
assembly by Mexican labor and
                                                Tijuana. The downturn was felt on the U.S. side of the border as well, as
reexport the resulting products,
primarily to the United States. Most            U.S. exports through U.S.-Mexico land border ports fell and U.S.
maquiladoras are U.S. owned, and                employment in manufacturing and certain other trade-related sectors
maquiladoras import most of their               declined.
components from U.S. suppliers.
Maquiladoras have also been an                  The cyclical downturn in the U.S. economy has been a principal factor in the
engine of growth for the U.S.–                  decrease in maquiladora production and employment since 2000. Other
Mexico border. However, the                     factors include increased global competition, particularly from China,
recent decline of maquiladora                   Central America, and the Caribbean; appreciation of the peso; changes in
operations has raised concerns                  Mexico’s tax regime for maquiladoras; and the loss of certain tariff benefits
about the impact on U.S. suppliers              as a result of the North American Free Trade Agreement.
and on the economy of border
communities.
                                                Maquiladoras face a challenging business environment, and recent
Because of these concerns, GAO                  difficulties have raised questions about their future viability. Maquiladoras
was asked to analyze (1) changes in             involved in modern, complex manufacturing appear poised to meet the
maquiladora employment and                      industry’s challenges. Still, experts agree that additional fundamental
production, (2) factors related to              reforms by Mexico are necessary to restore maquiladoras’ competitiveness.
the maquiladoras’ decline, and (3)              U.S. trade and homeland security policies present further challenges for
implications of recent                          maquiladoras.
developments for maquiladoras’
viability.                                      Maquiladora Component of U.S.-Mexico Trade, 2001




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and methodology, click on the link above.
For more information, contact Loren Yager at
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Contents



Letter                                                                                                     1
                              Results in Brief                                                             2
                              Background                                                                   3
                              Maquiladoras Contribute to Integration along the Diverse
                                U.S.-Mexico Border                                                         7
                              After Rapid Growth, Maquiladoras and Border Region Experienced
                                Declines Beginning in 2000                                                14
                              Cyclical and Structural Factors Cited in Maquiladora Decline                23
                              Maquiladora Downturn Spurs Some Positive Changes, but
                                Fundamental Challenges to Future Viability Remain                         36
                              Agency Comments and Our Response                                            44


Appendixes
               Appendix I:    Structure of Employment Growth in the U.S.-Mexico Border
                              Area                                                                        46
                              U.S. Border Employment Outpaced Nation’s since 1995                         46
               Appendix II:   Effect of U.S. Economic Conditions on Employment in
                              Mexican Maquiladoras                                                        57
              Appendix III:   Mexico-China Competition in the U.S. Market for Imports                     63
              Appendix IV:    U.S.–Mexico Trade, by U.S. Port, 1999–2002                                  66
               Appendix V:    Maquiladora Employment Statistics                                           67
              Appendix VI:    Objectives, Scope, and Methodology                                          72
             Appendix VII:    Comments from the Department of State                                       76
             Appendix VIII:   GAO Contacts and Staff Acknowledgments                                      78
                              GAO Contacts                                                                78
                              Acknowledgments                                                             78


Tables                        Table 1: Employment Growth of the United States and U.S.
                                       Metropolitan Statistical Areas at the U.S. Mexico Border by
                                       Industry: 1990–2002 and 2000–2002                                  48
                              Table 2: Components of Employment Changes by Sectors in U.S.
                                       Metropolitan Statistical Areas at the U.S. Mexico Border,
                                       1990–2002                                                          53
                              Table 3: Summary of Regression of Maquiladora Employment and
                                       U.S. GDP and Real Peso Exchange Rates                              59




                              Page i                                           GAO-03-891 International Trade
          Contents




          Table 4: Summary of Regression of Maquiladora Employment and
                   U.S. GDP and Real Peso Exchange Rates for Three
                   Subperiods                                                        61
          Table 5: Summary of Regression of Maquiladora Employment and
                   U.S. Manufacturing Shipments and Real Peso Exchange
                   Rates                                                             62
          Table 6: Top 25 U.S. Imports from China for Which China's Share of
                   U.S. Imports Grew, while Mexico's Share Declined
                   between 1995 and 2002                                             64
          Table 7: Trade Flows through Major U.S.-Mexico Land Border
                   Crossings                                                         66
          Table 8: Maquiladora Employment by State and City, 1990–2002               68
          Table 9: Maquiladora Employment by City and Industry,
                   1990–2002                                                         69


Figures   Figure 1: Map of U.S.-Mexico Border Twin Cities                             4
          Figure 2: Maquiladoras’ Share of Mexico’s Trade 1990-2002                   9
          Figure 3: Map of Mexico Showing Share of Maquiladora
                     Establishments, by State                                        11
          Figure 4: Growth in Maquiladora and Total Mexican Manufacturing
                     Production, 1993–2002                                           15
          Figure 5: Maquiladora Textile and Apparel Employment,
                     Nonborder and Border Regions, 1990–2001                         17
          Figure 6: Maquiladora Employment and Establishments,
                     1990-2002                                                       18
          Figure 7: Mexican Maquiladora Employment in the Border Region
                     by Industrial Sector, January 1997–October 2002                 19
          Figure 8: Mexican Maquiladora Employment, by Border City,
                     January 1990 - December 2002                                    20
          Figure 9: Growth of Manufacturing Production in Mexican Border
                     States, 1993–2002                                               22
          Figure 10: Annual Growth Rates of U.S. Gross Domestic Product
                     and Maquiladora Employment, 1980-2002                           25
          Figure 11: Value of U.S. Imports from Mexico and China,
                     1995–2002                                                       27
          Figure 12: U.S. Imports of Textiles and Apparel from Mexico, China,
                     and Caribbean Basin Countries, 1990–2002                        30
          Figure 13: Real Dollar Exchange Rate of Mexican Peso and Chinese
                     Yuan, 1995–2002                                                 32
          Figure 14: Nonfarm Annual Employment Growth in the United
                     States and in U.S. Metropolitan Statistical Areas at the
                     U.S.-Mexico Border, 1991-2002                                   47



          Page ii                                         GAO-03-891 International Trade
Contents




Figure 15: Employment Gains (Losses) in Nonfarm Employment in
           Metropolitan Statistical Areas at the U.S. Mexico Border
           Due to National, Industry-mix, and Local Effects                            52




Abbreviations

BIP          Border Industrialization Program
CBI          Caribbean Basin Initiative
CNIME        Mexico's National Council of the Maquiladora Export Industry
             (Consejo Nacional de la Industria Maquiladora de Exportación)
FAS          Free-Alongside-Ship
GDP          Gross Domestic Product
ITA          Information Technology Agreement
ITC          International Trade Commission
MSA          Metropolitan Statistical Area
MEDC         McAllen Economic Development Corporation
NAFTA        North America Free Trade Agreement
PROSEC       Sectoral Promotion Program (Programa de Promoción
             Sectoral)
USTR         Office of the U.S. Trade Representative
WTO          World Trade Organization

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Page iii                                                  GAO-03-891 International Trade
A
United States General Accounting Office
Washington, D.C. 20548



                                    July 25, 2003                                                                 Leter




                                    The Honorable Max Baucus
                                    Ranking Minority Member
                                    Committee on Finance
                                    United States Senate

                                    The Honorable Jeff Bingaman
                                    The Honorable Kay Bailey Hutchison
                                    United States Senate

                                    Mexico’s Maquiladora program, which was established in 1965 to attract
                                    investment and create jobs along the U.S.-Mexico border, has evolved into
                                    the largest and most dynamic component of U.S.-Mexico trade. U.S.
                                    companies own the vast majority of maquiladora plants, and maquiladoras
                                    import about 80 percent of their components from U.S. suppliers. With
                                    double-digit growth rates in output and employment until its peak in the
                                    last quarter of 2000, maquiladora-based production has been one of the
                                    engines of regional employment and income growth for the U.S.–Mexico
                                    border. However, over the past 2 years, the level of employment and
                                    production in maquiladora operations has declined sharply. This decline
                                    has led a number of observers to express concern about the future viability
                                    of maquiladoras. Some observers in the United States are also concerned
                                    that the decline of Mexico’s maquiladoras could adversely affect U.S.
                                    companies that supply these plants and could hurt the economy of border
                                    communities.

                                    In response to your concern about the significance of these developments,
                                    this report analyzes (1) the ways in which the communities along the U.S.-
                                    Mexico border are integrated and how maquiladoras have contributed to
                                    U.S.-Mexico interdependence; (2) recent changes in maquiladora
                                    production, employment, and cross-border trade; (3) factors that have
                                    affected employment and production in the maquiladora sector; and (4)
                                    factors that could affect the maquiladora industry’s future viability.

                                    To address these objectives, we met with U.S. and Mexican government
                                    officials in Washington, D.C., and Mexico City. We contacted business and
                                    nonprofit sector representatives, academicians, and other experts on the
                                    maquiladora industry in the United States and Mexico, and we reviewed
                                    extensive documentation and academic research provided by these
                                    sources. We obtained and analyzed official data on employment and trade
                                    trends from both U.S. and Mexican government agencies. We also



                                    Page 1                                           GAO-03-891 International Trade
                   conducted a series of semistructured interviews with 29 representatives of
                   business associations consisting of maquiladora-specific and principal
                   industry sector organizations at the local and national levels. We relied on
                   business associations because, as representatives of the maquiladoras, they
                   could comment on issues facing their members, such as increased
                   competition, and could explain the reasons for plant closures, changes in
                   employment levels, and other changes within the industry. We conducted
                   site visits in three major border “twin cities”: San Diego, California–Tijuana,
                   Baja California; El Paso, Texas–Juarez, Chihuahua; and McAllen, Texas–
                   Reynosa, Tamaulipas.



Results in Brief   A variety of social and economic factors link U.S. and Mexican border
                   communities, and maquiladoras play a significant role in this
                   interdependence. Trade figures indicate that the four U.S. border states
                   account for about 62 percent of U.S. exports to Mexico, while 70 percent of
                   these exports were destined for Mexican border states. Border
                   communities are also drawn together socially by family and educational
                   ties and economically by twin-plant production and retail commerce.
                   Residents in the twin cities cross the border about one million times every
                   day to work, shop, attend classes, visit family, and participate in other
                   activities. The maquiladora sector, which relies heavily on imports from the
                   United States and represents the principal industrial activity on the
                   Mexican side of the border, drives cross-border economic integration as
                   well as the increasing U.S.-Mexico interdependence. However, the border is
                   a diverse region, and the extent of interdependence between communities
                   along the border varies widely.

                   After growing rapidly during the 1990s, Mexican maquiladoras experienced
                   a sharp decline in production and employment after October 2000. In early
                   2002, employment in the maquiladora sector had contracted about 20
                   percent, losing nearly 290,000 jobs, and production had contracted about
                   30 percent. The decline was particularly severe in certain industries and
                   cities. For example, maquiladora employment in the Mexican electronics
                   industry declined 31 percent between 2000 and 2002, and Tijuana, a city
                   with significant maquiladora electronics manufacturing, experienced a 30
                   percent decline in maquiladora employment. In addition, overall
                   manufacturing production in the Mexican border region began declining in
                   2000. The downturn was felt on the U.S. side as well. For example in 2001,
                   the value of U.S. exports through U.S.-Mexico land border ports fell by 10
                   percent. Similarly, employment on the U.S. side of the border declined in
                   manufacturing and certain other trade-related sectors. Despite these



                   Page 2                                             GAO-03-891 International Trade
             contractions, overall U.S. border employment grew in most U.S. border
             metropolitan statistical areas.

             According to government researchers, academicians, and industry
             representatives, both cyclical and structural factors have contributed to the
             decline in Mexico’s maquiladora employment and production since 2000.
             Representatives of industry groups emphasized, and our economic analysis
             confirms, that the cyclical downturn in the U.S. economy has been a
             primary factor in the decline of the maquiladoras. However, industry
             sources and other experts noted that Mexico’s maquiladoras also face
             increased global competition in the U.S. market, particularly from China,
             Central America and the Caribbean. The real appreciation of the peso
             relative to the dollar and key competitors’ currencies has heightened such
             pressure. Additionally, industry representatives indicated that Mexican
             government policies such as changing the tax regime applied to
             maquiladoras have created a climate of uncertainty for investors.
             Meanwhile, owing to commitments undertaken under the North America
             Free Trade Agreement (NAFTA), Mexico has now phased out some benefits
             to the maquiladora sector.

             Factors affecting the recovery of Mexico’s maquiladoras include recent
             industry and government actions and the prospect of future Mexican
             reforms. The recent decline of the maquiladoras has added impetus to the
             ongoing evolution in the industry toward more sophisticated
             manufacturing and prompted the Mexican government to take several
             steps in support of the maquiladoras. For example, the Mexican
             government has greatly expanded the number of components that can be
             imported by maquiladoras and other firms with little or no duty
             assessments. However, government, industry, and other experts agree that
             additional fundamental reforms by Mexico, in areas such as energy and
             labor practices, are still necessary to restore the country’s attractiveness as
             a business and investment location. Though difficult, tackling such reforms
             is made more urgent by U.S. trade and homeland security policies that are
             likely to present further challenges for maquiladora operations.



Background   Mexico’s Maquiladora program has been a central feature of the U.S.-
             Mexico border. The U.S.-Mexico border stretches nearly 2,000 miles, from
             the Pacific Ocean in California to the Gulf of Mexico in Texas. Four U.S.
             states (Arizona, California, New Mexico, and Texas) and six Mexican states
             (Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora, and
             Tamaulipas) make up the border. Texas contains the longest section of the



             Page 3                                             GAO-03-891 International Trade
                                          U.S. border with Mexico, with several large and numerous small border
                                          crossings across the Rio Grande. Compared with Texas, California’s border
                                          with Mexico is relatively short, but it includes San Diego–Tijuana, the
                                          single busiest U.S.-Mexico border crossing. Arizona’s principal border
                                          crossing with the Mexican state of Sonora at Nogales plays a significant
                                          role in agricultural trade. The relatively small border crossings between
                                          New Mexico and Mexico reflect the sparsely populated areas in that region
                                          of the border. Figure 1 shows the U.S.-Mexico border, including all U.S. and
                                          Mexican border states, some Mexican border cities with varying
                                          concentrations of maquiladora plants, and some ports of entry on the U.S.
                                          side of the border.



Figure 1: Map of U.S.-Mexico Border Twin Cities




                                          During the 1990s, the population along the border experienced significant
                                          growth. On the U.S. side, the population increased by 21 percent,
                                          considerably more than the overall U.S. population, which grew by 13.2
                                          percent. Some cities on the U.S. border experienced significant increases in
                                          population, such as Yuma, Arizona, and McAllen, Texas—respectively, the



                                          Page 4                                           GAO-03-891 International Trade
third and fourth fastest growing metropolitan areas in the United States.
Population on the Mexican side of the border increased even more rapidly,
growing by 32 percent between 1990 and 2000. The majority of the border’s
residents live in communities along the border that are composed of twin
cities—a city on each side of the border—such as San Diego–Tijuana and
El Paso–Juarez. The San Diego–Tijuana area alone has a combined
population of about 4 million, and the El Paso–Juarez area has a population
of 1.9 million.

The Maquiladora1 program was first established by the government of
Mexico in 1965 as part of the Border Industrialization Program (BIP) and
maquiladoras have been a driving force in the development of the U.S.-
Mexico border region. Under the BIP, Mexico encouraged foreign
corporations to establish operations along the northern border to provide
employment opportunities for Mexican workers displaced after the
termination of a temporary cross-border work arrangement known as the
Bracero Program.2 Also known as “in-bond” plants,3 maquiladoras were
allowed to import temporarily, on a duty–free basis, raw materials and
components for processing or assembly by Mexican labor and to re-export
the resulting products, primarily to the United States.

The maquiladoras have undergone a dynamic evolution over the last four
decades. In the mid-1960s, maquiladoras consisted primarily of basic
assembly operations taking advantage of Mexico’s low labor costs. By the
1980s, U.S. multinationals representing various industrial sectors
established maquiladora plants along the U.S.-Mexico border. Japanese and
European companies also established maquiladora plants in Mexico to
compete in the U.S. market. Since the 1980s, some firms moved from low-
skilled assembly work to more advanced manufacturing operations.
Researchers from Mexico’s Colegio de la Frontera and San Diego State

1
 Maquiladora is a term derived from the Spanish word maquilar, which is the service a
miller provides when he grinds wheat into flour. Similarly, a maquiladora provides
assembly services without necessarily taking ownership of the goods being assembled.
2
 The Bracero Program allowed Mexican citizens to work on a temporary basis in the United
States between 1942 and 1964. It was initially designed to address labor shortages in the U.S.
agricultural and railroad industries during World War II.
3
 When the BIP was established, companies with assembly plants in Mexico would deposit a
bond with the Mexican Department of Commerce and Industry (Secretaría de Comercio y
Fomento Industrial) for the value of the duty on imported components and machinery. The
bond would be returned when the finished products assembled using the imported
components were exported.




Page 5                                                       GAO-03-891 International Trade
University note that the number of “technical workers” employed by
maquiladoras increased significantly from the early 1980s to the 1990s.
Some maquiladoras now employ workers in development and design as
well as manufacturing. For example, Delphi Automotive in Juarez, the
largest private employer among maquiladoras in Mexico, now has a
sophisticated research and development center that employs hundreds of
highly skilled workers and engineers.

Over the years, as maquiladoras evolved and expanded, the term
maquiladora has come to be used loosely to refer to almost any subsidiary
plant of a foreign company involved in export from Mexico, particularly
those located along the U.S. border. However, the Maquiladora program
continues to be quite distinct from other efforts initiated by the Mexican
government to encourage exports.4 Firms must register with the
government of Mexico to be considered maquiladoras and, once registered,
are eligible for several key benefits, such as preferential tariffs on inputs
and machinery, and simplified Mexican customs procedures. In this report,
we define maquiladoras as those firms officially participating in Mexico’s
Maquiladora program.

In addition to the Maquiladora program, the U.S.-Mexico trade relationship
has also been influenced by other important developments such as NAFTA.
NAFTA was concluded between the United States, Mexico and Canada in
1992 and entered into force on January 1, 1994. This agreement provided,
among its other provisions, for the elimination of tariffs and other barriers
to U.S.-Mexico bilateral trade by 2008. It also required Mexico to change
certain provisions of the Maquiladora program, such as elimination of duty-


4
 Among the most important of these programs is PITEX (Program for Temporary
Importation to Manufactured Exports), established in 1990 as another government of
Mexico program that allows companies to import components duty-free. PITEX requires
companies to export a minimum of 30 percent of their total annual sales. Companies
operating under PITEX are more commonly located in the interior of Mexico and typically
use more Mexican components than do maquiladoras, which are primarily located in
Mexico’s northern border region. The type of employment and production data the Mexican
government collects on maquiladoras is not available for PITEX firms. The U.S.
International Trade Commission (ITC) issues an annual report on production-sharing trade,
including between the United States and Mexico, as part of its Industry, Trade, and
Technology Review series. In that report, the ITC considers trade under the Maquiladora
program and the PITEX program as production-sharing trade. For comparison of Mexico’s
imports and exports under the Maquiladora Program and PITEX by Harmonized Tariff
chapters, see Ralph Watkins, U.S. International Trade Commission, “Production-Sharing
Update: Developments in 2001,” Industry Trade and Technology Review, USITC, pub. 3534,
July 2002, appendix C.




Page 6                                                    GAO-03-891 International Trade
                            free benefits for imports of components from non-NAFTA countries. U.S.-
                            Mexico trade has expanded sharply since NAFTA’s inception. Much of this
                            trade involves “production sharing,” whereby final goods are produced
                            with parts, labor, and manufacturing facilities from the United States and
                            Mexico. Because it enables firms to increase specialization, take advantage
                            of low labor costs in Mexico, and attain other efficiencies, production
                            sharing is a key benefit to U.S. companies under the Maquiladora program.



Maquiladoras                A variety of social and economic factors create strong linkages between
                            communities on both sides of the U.S.-Mexico border, and maquiladoras
Contribute to               play a critical part in this interdependence. Residents in the twin cities
Integration along the       cross the border about one million times every day to work, shop, attend
                            classes, visit family, and participate in other activities. Maquiladoras have
Diverse U.S.-Mexico         increased trade between the United States and Mexico and have helped to
Border                      develop the economies of several border regions. While communities along
                            the U.S.-Mexico border share certain traits, each region is distinct.



Multiple Social and         A wide range of social ties—educational, political, cultural, and familial—
Economic Ties Fuel          contribute to integration along the U.S.-Mexico border. For example,
                            certain U.S. universities in border cities offer combined degrees or
Integration at the Border
                            exchange programs with their counterparts on the Mexican side. In some
                            schools, such as the University of Texas at El Paso and the University of
                            Texas–Pan American, Mexican nationals cross the border regularly to
                            attend classes. Political interaction and cooperation between local
                            authorities of twin cities enhance integration. Cultural and family ties also
                            contribute significantly to integration at the border. The U.S. counties with
                            the highest concentration of Hispanics are located along the southwest
                            border, and by far most of the Hispanics in southern border states are of
                            Mexican descent.

                            Trade and retail sales contribute to economic interdependence at the
                            border. Approximately $200 billion in trade went through the U.S.-Mexico
                            border in 2002. Much of U.S.-Mexico trade occurs between border states.
                            For example, 62 percent of U.S. exports to Mexico originated in Texas,
                            California, Arizona, and New Mexico; of this, 70 percent was destined for
                            Mexican border states. Research by the Federal Reserve Bank of Dallas
                            indicates that trade between the United States and Mexico has positive
                            effects on border communities, because U.S. border cities typically provide




                            Page 7                                            GAO-03-891 International Trade
                           a variety of services such as transportation and customs brokerage.5 Retail
                           sales to Mexican nationals also contribute significantly to the economies of
                           cities on the U.S. side of the border. According to one estimate, retailers in
                           Texas annually make an estimated $15 billion in sales to Mexican shoppers.
                           In McAllen, Texas, 35 percent, or about $700 million worth, of retail sales
                           are made to Mexican nationals. Residents from Tijuana make 1.5 million
                           trips per month into the San Diego area, mainly to shop. In El Paso, Juarez
                           residents account for more than 20 percent of retail sales. On the other
                           hand, because of the high cost of pharmaceuticals in the United States, a
                           growing number of U.S. residents regularly cross the border into Mexico to
                           purchase prescription drugs.



Maquiladoras Drive U.S.–   Maquiladoras import most inputs from the United States and export most
Mexico Trade and Border    of what they produce back to the United States. Growth in U.S.–Mexico
                           trade and economic interdependence at the border during the last decade
Integration
                           can be explained to a great degree by the participation of maquiladoras in
                           supplying a strong U.S. market during the 1990s. Mexican exports
                           increased by about 340 percent between 1993 and 2001, in large part
                           because maquiladora-related exports increased by over 400 percent during
                           this time, according to a report by the Mexican Commission on Northern
                           Border Affairs.6 By 2001, maquiladoras accounted for 41 percent of total
                           Mexican trade with all countries – 34 percent of Mexico’s imports and 48
                           percent of its exports (see fig. 2). Trade with the United States makes up a
                           significant share of maquiladora trade. In 2001, 79 percent of maquiladora
                           imports of components and parts for production were from the United
                           States and 98 percent of their exported products were destined for the U.S.
                           market. Maquiladora trade between the United States and Mexico totaled
                           about $121 billion in 2001, with maquiladora exports ($75 billion)
                           accounting for more than half of Mexico’s total exports to the United
                           States.7 Border cities are typically seen as the primary beneficiaries of
                           growing U.S.-Mexico trade. However, states such as Florida, Tennessee,


                           5
                            Lucinda Vargas, Federal Reserve Bank of Dallas, “The Binational Importance of the
                           Maquiladora Industry”, Southwest Economy, Issue 6, November/December, 1999.
                           6
                            Northern Border Regional Development Program, 2001-2006 (Programa de Desarrollo
                           Regional, Frontera Norte 2001-2006), Commission on Northern Border Affairs (Comisión
                           para Asuntos de la Frontera Norte).
                           7
                            Exports from PITEX assembly plants ($46 million), accounted for another one-third of
                           Mexican exports to the United States.




                           Page 8                                                    GAO-03-891 International Trade
                                         and Ohio, which doubled their exports to Mexico during the second half of
                                         1990s, have also benefited from growing U.S.-Mexico trade.



Figure 2: Maquiladoras’ Share of Mexico’s Trade 1990-2002




                                         Furthermore, maquiladoras are directly connected to U.S. companies
                                         through ownership and production ties. The list of Mexico’s top 100
                                         maquiladora employers includes such U.S. firms as Delphi, RCA, Ford
                                         Motor Company, Tyco, General Electric, General Instruments, Johnson &
                                         Johnson, and ITT. All told, 79 percent of the top 100 maquiladora employers
                                         are from the United States. Maquiladoras are important to the United States
                                         because they are a strategic means by which U.S. companies stay
                                         competitive in the global marketplace. By offering lower production costs,
                                         maquiladoras enable U.S. companies to produce goods more cheaply in
                                         Mexico than in the United States. In essence, maquiladoras and U.S.
                                         companies are part of a greater production-sharing model, which is an
                                         important part of overall North American production. Moreover, more than



                                         Page 9                                           GAO-03-891 International Trade
26,000 U.S.-based companies, located mainly in the Midwest, supply
maquiladoras with raw materials and components.

The Mexican border region has benefited in terms of job creation from the
dominant presence of maquiladoras on the Mexican side of the border.
Overall, 77 percent of all maquiladora establishments are located in the six
Mexican border states shown in figure 3. Also, about 83 percent of
maquiladora employment was located in border states. During most of the
1990s, maquiladoras represented more than half of the industrial activity in
the states of Chihuahua and Tamaulipas. During the same time period, the
maquiladoras represented nearly three quarters of industrial production in
the state of Baja California, which contained almost one third of Mexico’s
maquiladora firms.

Cities on the U.S. side of the border have benefited from the large flow of
trade created by maquiladoras. Between 1990 and 2002, more than half a
million jobs were added to the U.S. border region, including jobs in
services, retail trade, finance, and transportation, and after 1995,
employment growth in the U.S. border region exceeded the U.S. national
average (see app. I for details). The employment gains are particularly
notable, because the border region historically has had high rates of
unemployment. Some studies have outlined the effect of overall border
economic trends on local border communities. For example, researchers
estimated that in one Texas border community, in 2001, services and
supplies purchased by maquiladoras amounted to $136 million and a total
of 32,577 jobs were sustained by maquiladoras and related manufacturing
activity.




Page 10                                          GAO-03-891 International Trade
Figure 3: Map of Mexico Showing Share of Maquiladora Establishments, by State




                                         The same researchers estimated that 15 percent of maquiladora workers’
                                         salaries was spent in the region on goods and services. In one Arizona
                                         border community, researchers surveyed maquiladora workers and found
                                         that workers who crossed the border to shop made an average of 5.5 trips a
                                         month and spent about $35 on each trip. Almost one third of retail sales in



                                         Page 11                                          GAO-03-891 International Trade
                              the same Arizona community are attributed to Mexican nationals,
                              according to local sources.

                              Despite their role in generating employment in Mexico, the maquiladoras’
                              benefit to the country remains a subject of some debate. Some express
                              reservations about the maquiladoras’ ability to generate economic
                              development for Mexico, since these plants have generally been unable to
                              establish a network of domestic inputs providers or create significant
                              linkages to the internal Mexican economy. In April 2002, for example, the
                              former Mexican Foreign Minister noted that without proactive Mexican
                              government policy to set up domestic suppliers, the benefits of the
                              maquiladora industry would never extend beyond the border. In addition,
                              critics in the environmental and labor movements on both sides of the
                              border also assail these plants.8 Some environmental groups claim that
                              maquiladoras are responsible for the growing pollution problem in the
                              border region. Similarly, some labor organizations criticize the
                              maquiladoras for the low wages paid to workers and for allegedly poor
                              working conditions.



Border Has Distinct Regions   Although communities along the U.S.-Mexico border share certain traits,
with Varying Degrees of       they are also quite distinct. The level of integration between cross-border
                              twin cities depends on location, population, economic profile, and cross-
Integration                   border political cooperation. We observed some of these differences during
                              fieldwork in three border areas: McAllen–Reynosa, El Paso–Ciudad Juarez,
                              and San Diego–Tijuana.

                              McAllen–Reynosa. McAllen and Reynosa are economically interdependent.
                              Both are medium-size cities, McAllen with a population of about 569,000,
                              and Reynosa with about 420,000, and there are no other sizeable urban
                              areas nearby on either side of the border. Officials at the McAllen
                              Economic Development Corporation (MEDC) capitalized on the
                              interdependence between McAllen and Reynosa and incorporated it into
                              their economic strategy for the region starting in 1988. At that time,
                              McAllen had high unemployment and Reynosa’s economy was based on


                              8
                               We have prepared several reports on environmental and labor issues related to
                              maquiladoras. See U.S.-Mexico Trade: Assessment of Mexico’s Environmental Controls for
                              New Companies, GAO/GGD-92-113 (Washington, D.C.: Aug. 3, 1992) and U.S.-Mexico Trade:
                              The Work Environment at Eight U.S.-Owned Maquiladora Auto Parts Plants, GAO/GGD-
                              94-22 (Washington, D.C.: Nov. 1, 1993).




                              Page 12                                                 GAO-03-891 International Trade
subsistence farming. Working with political leaders in McAllen and
Reynosa, MEDC developed a strategy based on promoting industrial
development in Reynosa, recognizing that if companies opened
maquiladoras there, McAllen would benefit by providing inputs and
offering management, engineering, warehousing, trucking, legal, and
accounting services. In the 14 years since its establishment, MEDC has
recruited 178 companies to the area, in diverse manufacturing sectors, such
as electronics, auto parts, and telecommunications.

El Paso–Ciudad Juarez. Although El Paso and Ciudad Juarez are also
closely integrated, such ties have developed differently than in McAllen–
Reynosa. Ciudad Juarez is a larger metropolitan area, with a population of
1.2 million, and it is home to more maquiladora employees than any other
Mexican city. On the U.S. side, El Paso and the neighboring communities in
southern New Mexico are much smaller. El Paso’s economy has been
shaped by economic activity in Ciudad Juarez, especially that of providing
services to maquiladoras. In addition, Juarez residents contribute to El
Paso’s economy by purchasing items ranging from cars to clothing and
services such as financial and health services. In 2001, there were
approximately 46 million northbound crossings via the three international
bridges that connect the two cities. However, business leaders and other
observers whom we met in the El Paso–Juarez area frequently noted that
integration and economic dependence between El Paso and Juarez
occurred spontaneously, rather than by design. The development of
maquiladoras on the Mexican side occurred much earlier than in Reynosa
and was largely attributed to individual efforts by entrepreneurs in Juarez
and El Paso that began in the 1960s, rather than to a collective vision.
However, in recent years, in Santa Teresa, a nearby border community in
southern New Mexico, developers created a strategic plan to build an
industrial park as a supplier base, with warehouse and distribution
facilities, to service maquiladoras. The Santa Teresa port of entry opened
11 years ago. Developers envisioned that this border crossing would serve
as an alternate point of entry to El Paso for cross border trade.

San Diego–Tijuana. The dynamics of integration between San Diego and
Tijuana are notably different from other cross-border twin cities. In this
area, economic dependence is more one-sided. Unlike El Paso or McAllen,
San Diego is a large metropolitan area in its own right, with a population of
close to 3 million. Many of the major economic activities in San Diego,
including defense and space manufacturing, biosciences, and tourism, are
not directly connected to Tijuana. While Hispanics account for at least 50
percent of the population in most U.S. counties along the Southwest



Page 13                                           GAO-03-891 International Trade
                            border, they account for only about 27 percent of the population in San
                            Diego County, suggesting lower levels of family ties or connections to
                            Mexico. In contrast, Tijuana, with a population of about 1.2 million, is
                            heavily dependent on maquiladoras, and the city is closely tied to the U.S.
                            market. In addition to U.S. companies, Tijuana has also been the preferred
                            location for Japanese and Korean maquiladora investments, which have
                            made this area the world’s leading producer of color televisions. More than
                            600 maquiladora plants, employing approximately 150,000 people are
                            located in Tijuana. Moreover people in Tijuana are more likely to cross the
                            border to shop or do business in San Diego than vice versa; in fact, it is
                            estimated that two out of three residents of San Diego have never been to
                            Tijuana. In contrast, Tijuana residents spend between 3 to 5 billion dollars
                            in purchases in the San Diego region, mostly in the communities adjacent
                            to the border. In addition, 7 percent of economically active people in
                            Tijuana work in San Diego, earning an estimated $650 million a year in
                            wages and salary income.



After Rapid Growth,         Maquiladora production and employment grew rapidly throughout the
                            1990s but declined sharply after October 2000. Within the diverse
Maquiladoras and            maquiladora sector, the decline was particularly steep in certain industries
Border Region               and in some border cities. Overall, Mexican manufacturing production in
                            the border region also declined and cross-border trade flows fell. At the
Experienced Declines        same time, U.S. border employment in manufacturing and certain other
Beginning in 2000           trade-related sectors contracted. Nevertheless, the U.S. border region
                            continued to experience stronger employment growth than did the United
                            States as a whole.



Maquiladoras Grew Rapidly   During the 1990s, maquiladoras proved to be one of the more dynamic
in the 1990s, with Growth   components of Mexican manufacturing. Maquiladora production increased
                            by 197 percent from January 1993 until its peak in October 2000, while
Varied by Region and
                            overall manufacturing production in Mexico increased by only 58 percent
Industry                    in the same time period (see fig. 4). During that time period, maquiladora
                            employment tripled, adding more than 900,000 jobs to the Mexican
                            economy. In 2000, maquiladoras accounted for about 4 percent of total
                            employment and about 20 percent of manufacturing employment in
                            Mexico.




                            Page 14                                          GAO-03-891 International Trade
Figure 4: Growth in Maquiladora and Total Mexican Manufacturing Production, 1993–2002




                                         Note: Certain statistics on Mexican industrial production were not available for years prior to 1993.


                                         With respect to employment, most major Mexican border cities and
                                         industrial sectors experienced growth in maquiladora employment over the
                                         decade, although some grew faster than others. For example, Tijuana and
                                         Mexicali tripled their maquiladora employment, and the electronics
                                         industry more than doubled its maquiladora employment in the border
                                         region. The electronics industry, which was already the largest maquiladora
                                         employer, added more than 200,000 jobs in the border region during the
                                         1990s. For the Mexican border region as a whole, maquiladora employment
                                         rose 145 percent—from 342,555 in January 1990 to 839,200 in October 2000
                                         (see app. V, table 8, for more information). While maquiladoras have
                                         typically been concentrated in the border region, maquiladora employment
                                         growth throughout the rest of Mexico was actually higher than in the



                                         Page 15                                                             GAO-03-891 International Trade
border region during the 1990s. Growth in the nonborder region was
particularly strong in the textile and apparel sector, in which employment
rose in the nonborder region from about 22,000 in 1990 to about 224,000
jobs in 2001 (fig. 5). As a result of the stronger growth in the nonborder
region, the share of textile and apparel maquiladora employment in the
border region fell from 49 percent in 1990 to 17 percent in 2001.9 Much of
the investment in the apparel sector occurred in anticipation of duty-free
treatment for most U.S. imports of apparel from Mexico under NAFTA in
1999.10




9
 Data on textiles and apparel in the border region were available annually only through 2001.
The National Institute of Statistics, Geography and Information Technology (Instituto
Nacional de Estadística, Geografía e Informática) provided us data broken down by industry
and region through October 2002.
10
 For information about investment in Mexico’s textile and apparel sector in 1999, see Larry
Brookhart and Ralph Watkins, U.S. International Trade Commission, “Production-Sharing
Update: Developments in 1999,” Industry Trade and Technology Review, USITC, pub. 3335,
July 2000, p. 15.




Page 16                                                     GAO-03-891 International Trade
                               Figure 5: Maquiladora Textile and Apparel Employment, Nonborder and Border
                               Regions, 1990–2001




Maquiladora Decline Started    After growing since the program’s inception over 35 years ago, particularly
in 2000, Unevenly Affecting    in the 1990s, Mexican maquiladora production and employment began to
                               decline sharply in late 2000. Maquiladora production declined about 30
Industries and Border Cities   percent from late 2000 to early 2002. At the same time, maquiladora
                               employment contracted about 20 percent, losing nearly 290,000 jobs
                               nationally, about 174,000 of which were located in the border region.11
                               Similarly, the number of maquiladora establishments (factories) in
                               operation began to decline as well (see fig. 6). Nevertheless, even with the


                               11
                                Mexico’s National Institute of Statistics, Geography and Information Technology (Instituto
                               Nacional de Estadística, Geografía e Informática) defines the border region as the 41
                               municipalities located along the U.S.-Mexico border.




                               Page 17                                                    GAO-03-891 International Trade
                                        pronounced declines, the overall numbers of maquiladora employees
                                        remain at levels similar to those in 1998–1999.



Figure 6: Maquiladora Employment and Establishments, 1990-2002




                                        While the Mexican maquiladora downturn was evident both nationally and
                                        in the border region, certain industries experienced larger declines (see fig.
                                        7). For instance, in the border region, the electronics industry experienced
                                        one of the steepest and largest maquiladora employment declines of any
                                        industrial sector, contracting by 31 percent and losing more than 112,000
                                        jobs in the 2-year period between October 2000 and October 2002.12 In
                                        contrast, the automobile and auto parts industry experienced a less severe


                                        12
                                         Nationally in Mexico, the electronics and electrical components sector declined by 32
                                        percent from September 2000 through April 2002.




                                        Page 18                                                    GAO-03-891 International Trade
                                         maquiladora employment decline of 13 percent (about 24,000 jobs) in less
                                         than a year, before resuming some growth in November 2001. Textiles and
                                         apparel also experienced a steep employment decline, falling by 26 percent
                                         and losing more than 12,000 jobs. Nationally, the textile and apparel
                                         industry lost more than 70,000 jobs. In all other border industrial sectors
                                         combined, maquiladora employment declined by about 16 percent over a
                                         little more than a year but has grown by about 4 percent since January
                                         2002.



Figure 7: Mexican Maquiladora Employment in the Border Region by Industrial Sector, January 1997–October 2002




                                         Note: Data broken down by industrial sector in the border region were available only through October
                                         2002.


                                         As figure 8 illustrates, the decline in maquiladora employment also affected
                                         cities in the Mexican border region differently. The two largest border


                                         Page 19                                                          GAO-03-891 International Trade
                                        cities, Juarez and Tijuana, both experienced significant declines in
                                        maquiladora employment, accounting for over half of the total jobs lost in
                                        the border region. After peaking in October 2000, by December 2002,
                                        maquiladora employment had fallen 27 percent in Juarez and 30 percent in
                                        Tijuana. The smaller city of Nogales, Sonora, experienced one of the
                                        sharpest percentage changes in maquiladora employment in the border
                                        region, declining by 44 percent. In contrast, the city of Reynosa
                                        experienced a decline of only about 5 percent between September and
                                        December 2000, and its maquiladora employment has since rebounded,
                                        with 7 percent growth since January 2001. Reynosa’s decline in electronics
                                        and auto parts employment was much less severe than other cities.



Figure 8: Mexican Maquiladora Employment, by Border City, January 1990 - December 2002




                                        Page 20                                          GAO-03-891 International Trade
Mexican Border             The decline in Mexico’s maquiladora production contributed to a decline in
Experienced Overall        overall manufacturing production in Mexico’s border region.13 Figure 9
                           shows the growth of manufacturing production for three Mexican border
Decline in Manufacturing   states: Baja California, Coahuila, and Sonora. Baja California, the state with
and Cross-Border Trade     the largest share of maquiladoras, grew more rapidly than the other border
                           states but also experienced the largest decline in overall manufacturing
                           production after October 2000. Similarly, manufacturing production in
                           Coahuila, Nuevo Leon (not shown), and Sonora also experienced
                           downturns beginning in late 2000 and early 2001.14




                           13
                            Overall manufacturing production consists of manufacturing by both maquiladora and
                           nonmaquiladora manufacturing companies. The growth in both maquiladora production and
                           total manufacturing production in Mexico is shown in figure 3.
                           14
                            Data on manufacturing production were not available for the Mexican border states of
                           Chihuahua and Tamaulipas.




                           Page 21                                                  GAO-03-891 International Trade
Figure 9: Growth of Manufacturing Production in Mexican Border States, 1993–2002




                                         During the maquiladora decline, exports, imports, and overall trade
                                         through U.S.-Mexico land border ports also dropped. The value of cross-
                                         border trade dropped 5 percent in 2001 and remained flat in 2002, owing in
                                         large part to the 10 percent decline in U.S. exports to Mexico through these
                                         ports. Although each of the four major land border ports experienced some
                                         decline, Nogales experienced the greatest decline, losing about 20 percent
                                         of its value between 2000 and 2002 (see app. IV, table 7, for levels of U.S.
                                         trade with Mexico through the four main land border points).
                                         Maquiladoras, which accounted for 40 percent of U.S. exports to Mexico
                                         and 54 percent of Mexican exports to the United States in 2001, contributed
                                         to this decline.




                                         Page 22                                          GAO-03-891 International Trade
U.S. Border Employment in   The decline in Mexico’s maquiladoras was also felt on the U.S. side, as
Manufacturing and           manufacturing employment in border municipalities declined by 6 percent
                            overall from 2000 through 2002.15 Other U.S. sectors related to trade also
Transportation Services     experienced declines in employment at the border. U.S. border
Fell, but Overall           employment in transportation and public utilities, which includes trucking
Employment Growth           and warehousing, was down 4 percent, and employment in wholesale trade
Continued                   was down 3 percent overall. Similar to the maquiladora employment
                            declines in Mexico, employment declines on the U.S. side of the border also
                            varied by region. For example, manufacturing employment declined by 18
                            percent overall in Texas’ border cities, and employment declines in
                            wholesale trade and transportation and in public utilities were more
                            pronounced in Arizona. (App. I provides a detailed analysis of employment
                            trends in the U.S. border region.)

                            Despite the contractions in manufacturing and certain other trade-related
                            sectors, other sectors in the U.S. border region grew. As a result, total
                            nonagriculture-related employment in the border area grew by 4 percent
                            even after the U.S. economic slowdown began in 2000 and national
                            employment contracted 1 percent through 2002. Some border metropolitan
                            areas maintained even stronger employment growth. For example, the
                            McAllen area grew by 9 percent between 2000 and 2002, while Laredo grew
                            by 6 percent, and San Diego and Las Cruces grew by 5 percent each over
                            the same period. On the other hand, El Paso’s overall nonfarm employment
                            fell, primarily because its mix of industries is weighted towards sectors
                            that have been shrinking (see app. I for details).



Cyclical and Structural     The decline in maquiladora production and employment since the last
                            quarter of 2000 is attributable to both cyclical and structural factors.
Factors Cited in            Government researchers, academicians, economic studies, and industry
Maquiladora Decline         representatives agree that the cyclical downturn in the U.S. economy has
                            been a primary factor in the decline. However, industry sources and other
                            experts emphasized that the maquiladoras have also been adversely
                            affected by structural factors, such as increased competition in the U.S.
                            market, particularly from China, Central America and the Caribbean, and
                            by the strength of the Mexican peso, which has further eroded the


                            15
                             The U.S. border municipalities for which appropriate employment data through 2002 were
                            available are San Diego, California; Yuma, Arizona; Las Cruces, New Mexico; and
                            Brownsville, El Paso, Laredo, and McAllen, Texas.




                            Page 23                                                  GAO-03-891 International Trade
                         maquiladoras’ competitiveness. Changing Mexican tax policies have also
                         contributed to the maquiladora decline by creating a climate of uncertainty
                         for foreign investors. Meanwhile, owing to commitments undertaken under
                         NAFTA, Mexico has phased out some of the key benefits of the
                         Maquiladora program.

                         It is clear from our research that all of these factors were at work before
                         and during the recent maquiladora downturn, and that each was changing
                         in a direction adverse for maquiladora production and employment.
                         However, the sheer number of simultaneous changes over a relatively brief
                         period makes it difficult to isolate or quantify the impact of individual
                         factors. Although many government, academic, and industry sources
                         generally refer to the cyclical downturn in the U.S. economy as a principal
                         factor in the decrease in maquiladora employment and production since
                         the last quarter of 2000, there is no such agreement on the relative
                         importance of other factors associated with the decline of the
                         maquiladoras. Therefore, the order in which we present these other factors
                         is generally based on the results of our semistructured interviews with
                         industry associations (see app. VI).



U.S. Economic Slowdown   In explaining the decline in maquiladora production and employment
Adversely Affects        beginning in the last quarter of 2000, government, academic, and industry
                         sources generally emphasized the role of the downturn in the U.S.
Maquiladoras
                         economy. Of the 23 industry association representatives we interviewed
                         whose membership had experienced a decline in production or
                         employment, about three-quarters cited the recent downturn in the U.S.
                         economy as a major factor. As noted earlier in this report, maquiladora
                         production is often linked to U.S. manufacturing through production-
                         sharing arrangements. In fact, about 98 percent of maquiladora production
                         is destined for the U.S. market. Thus, it is not surprising that the
                         maquiladoras are very sensitive to fluctuations in U.S. manufacturing and
                         demand. Our analysis of economic data supports the conclusion of experts
                         and interviewees, demonstrating that historically maquiladora employment
                         typically grows when the overall U.S. economy expands and is negatively
                         influenced when the U.S. economy slows down (see app. II for a discussion
                         of the effect of the economic downturn in the United States on employment
                         for various maquiladora industrial sectors). Moreover, maquiladora
                         employment has been even more sensitive to changes in U.S.
                         manufacturing production, particularly in sectors such as textiles and
                         autos, and a sharp drop in U.S. manufacturing has characterized the
                         present U.S. economic slowdown.



                         Page 24                                          GAO-03-891 International Trade
                                        As figure 10 illustrates, maquiladora employment shows a correlation with
                                        U.S. economic performance over the past two decades. On average,
                                        maquiladoras added almost 118,000 employees annually from 1995 to
                                        2000.16 During this period, U.S. annual economic growth averaged 3.6
                                        percent. However, in 2001, as U.S. economic growth slowed to 1.4 percent,
                                        the maquiladoras lost nearly 229,000 jobs.



Figure 10: Annual Growth Rates of U.S. Gross Domestic Product and Maquiladora Employment, 1980-2002




                                        16
                                         Maquiladoras reached their peak employment level of 1.3 million employees in October
                                        2000.




                                        Page 25                                                  GAO-03-891 International Trade
                            Moreover, although the Mexican economy as a whole is very closely linked
                            to that of the United States, the maquiladoras appear to have been affected
                            by the U.S. economic slowdown more severely than the Mexican economy
                            overall. While Mexico’s economy contracted .2 percent in 2001, it resumed
                            growth at .7 percent in 2002. However, the maquiladora sector declined
                            both years 9.2 percent and 8.3 percent, respectively.17 Of the industry
                            associations indicating that their membership had experienced a decline in
                            employment or production, about half reported that the maquiladoras had
                            been more negatively affected by the U.S. economic downturn than had
                            other businesses in Mexico.



Mexico Faces Increased      Among the 23 industry associations that indicated a decline in their
Global Competition in the   memberships’ employment or production, mounting foreign competition in
                            the U.S. market was the most frequently offered explanation for the decline
U.S. Market
                            of the maquiladoras over the past 2 years. Over one-half of the
                            representatives of industry associations referred specifically to the role of
                            China in the maquiladoras’ decline. One maquiladora spokesman, for
                            example, suggested that China’s entrance into the World Trade
                            Organization (WTO)18 has made that country a more attractive choice for
                            foreign direct investment, while foreign investment in Mexico’s
                            maquiladoras has decreased.

                            Among the major suppliers of imports to the United States, Mexico ranked
                            second and China third in 2002. As figure 11 illustrates, both Mexico and
                            China experienced significant growth in exports to the United States from
                            1995 to 2002. However, between 2000 and 2002, U.S. imports from Mexico
                            grew at a slower pace than those from China. As a result, the gap between
                            Mexico and China narrowed in China’s favor.




                            17
                                 The figure for 2002 is preliminary, based on data available through September.
                            18
                                 China formally joined the WTO in December 2001.




                            Page 26                                                        GAO-03-891 International Trade
Figure 11: Value of U.S. Imports from Mexico and China, 1995–2002




As appendix III details, Mexico recently lost market share in 47 out of 152
major U.S. import categories. At the same time, China gained U.S. market
share in 35 of those 47 import categories, including toys, furniture,
electrical household appliances, television and video equipment and parts,
and apparel and textiles. Some of these industries represent significant
sectors of maquiladora production.

Recent International Trade Commission (ITC) staff research suggests that
while Mexico does face increased competition from China in the U.S.
market, some sectors are more threatened than others.19 According to the


19
   Ralph Watkins, U. S. International Trade Commission, “Mexico Versus China: Factors
Affecting Export and Investment Competition,” Industry Trade and Technology Review,
USITC, pub. 3534, July 2002, p. 11ff.




Page 27                                                  GAO-03-891 International Trade
ITC staff research, a growing share of some textiles and apparel products
sold in the United States are being produced in China rather than Mexico.
In contrast, this staff research notes that within the machinery sector, the
data did not indicate a shift in competitiveness away from Mexico towards
China. Mixed results are apparent in the electronic products sector. Mexico
lost U.S. market share to China in the telephone and telegraph equipment
segment in both 2001 and 2002, and Mexico’s gain in the computer
hardware segment in 2001 was more than offset by a sharp loss to China in
2002.

The ITC staff research noted above concludes that China has competitive
advantages over Mexico in terms of labor costs, electricity costs, and
diversity of component suppliers. In this context, it is worth noting that
wages along the U.S.-Mexico border, where the maquiladoras are
concentrated, tend to be higher than in other areas of Mexico.20 More
recent ITC staff research indicates that the cost of water for industrial uses
(important in the textiles industry) and corporate income tax rates are
lower in China. On the other hand, the ITC staff research suggests that
Mexico’s comparative advantages include lower transportation costs,
shorter transit time, and lower international communication costs. Mexico
also provides greater protection for intellectual property, more
transparency in regulation and administration, and a network of free-trade
agreements with third countries.

Several industry representatives noted that Mexico also faces increased
competition from countries in Central America or the Caribbean. One
industry spokesperson noted that the U.S. decision in May 2000 to grant
NAFTA-parity access to Caribbean Basin Initiative (CBI) countries had
eroded Mexico’s ability to compete in the U.S. apparel market, particularly
because a number of Central American and Caribbean countries have
lower labor costs than Mexico. According to a Mexican economic research
group, manufacturing wages in Mexico are almost 67 percent higher than in
the Dominican Republic and about 92 percent higher than in Honduras.21


20
 Average wages in Mexico’s six border states are higher than in other regions of Mexico
except the central area around Mexico City.
21
 Actual figures: Mexico: $2.5/hour; Dominican Republic: $1.5/hour; Honduras: $1.3/hour.
Source: “Perspectives of the Maquiladora Industry in the Mexican Economy” (Perspectivas
de la Industria Maquiladora en La Economía Mexicana), Center for Analysis and Economic
Projections of Mexico (Centro de Análisis y Proyecciones Económicas de México),
December 9, 2002.




Page 28                                                    GAO-03-891 International Trade
The heightened global competition from China and CBI countries is part of
a larger phenomenon in which the benefits enjoyed by maquiladoras and
other Mexican producers have eroded as U.S. trade preferences or
liberalization accorded to other countries have expanded. The recent
experience of the Mexican textiles and apparel industry, one of the major
maquiladora sectors, illustrates this point. In 1994, NAFTA gave Mexico
preferential access for its textiles and apparel. Other countries’ exports to
the United States and Canada generally did not receive similar
advantages.22 U.S. imports of Mexican textile and apparel products grew
rapidly, with Mexico’s share of total U.S. imports in this sector doubling
from 7 percent in 1994 to 14 percent in 2000 (see fig. 12). Mexico surpassed
both China and the Caribbean Basin countries to become the largest
supplier to the U.S. market. However, under the Trade and Development
Act of 2000, the United States allowed textile and apparel products from
Caribbean Basin countries that met certain requirements to receive
preferential access to the U.S. market. This legislation also stipulated that
to benefit from the special treatment, CBI-based apparel operations must
use U.S.-made inputs, and, according to a Mexican textile industry
association, operations have shifted from using Mexican textiles. In
addition, under the WTO Agreement on Textiles and Clothing, all quotas on
textile and apparel products are being phased out by 2005. For some
products quotas have already been removed. Despite the recent U.S.
recession and a decline of total U.S. imports of textiles and apparel by 5
percent between 2000 and 2002, U.S. imports of textiles and apparel from
China rose 12 percent, making China again the largest foreign supplier to
the U.S. market. Figure 12 shows these changing patterns of U.S. imports in
textiles and apparel from Mexico, China, and CBI countries.




22
 U.S. nonreciprocal trade programs, such as the Generalized System of Preferences for
developing countries and CBI for Caribbean and Central American trade partners, generally
excluded textile and apparel from special preferences. Canada is an exception, also
receiving benefits through NAFTA.




Page 29                                                   GAO-03-891 International Trade
                             Figure 12: U.S. Imports of Textiles and Apparel from Mexico, China, and Caribbean
                             Basin Countries, 1990–2002




                             Note: Caribbean Basin Countries are those eligible for the Caribbean Basin Trade Partnership Act
                             preferential access. These countries are Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize,
                             British Virgin Islands, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala,
                             Guyana, Haiti, Honduras, Jamaica, Montserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts and
                             Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Trinidad and Tobago.




Industry Representatives     Many industry representatives whom we contacted also called attention to
Blame Strong Peso for Loss   the role of the strengthening Mexican currency in eroding the
                             maquiladoras’ competitiveness. Historically, growth periods in the
of Competitiveness           maquiladoras have been associated with devaluations of the peso. For
                             example, after the peso was devalued in 1984, there was a 3-year surge in
                             U.S. automotive industry investments in maquiladora plants. Similarly,
                             according to a study by the El Paso Branch of the Federal Bank of Dallas,
                             the peso devaluation in December 1994 played a key role in spurring the
                             expansion of Mexico’s maquiladoras during the second half of the past



                             Page 30                                                          GAO-03-891 International Trade
decade.23 However, beginning in the last quarter of 1998, the Mexican peso
consistently appreciated against the dollar in real terms, a trend that
continued while the maquiladoras experienced their greatest employment
decline, from the end of 2000 to the beginning of 2002 (see app. II for the
relative dependence of maquiladora employment on the real peso exchange
rate). As the peso appreciated in real terms, maquiladora operating
expenses increased.

Moreover, this real appreciation of the Mexican peso took place as the
currencies of some of Mexico’s East Asian competitors were depreciating
against the dollar. For example, figure 13 compares the performance of the
Chinese yuan to the Mexican peso, in real terms, between 1995 and 2002.
Unlike the peso, the yuan has actually depreciated since early 1998.




23
 William C. Gruben, Federal Reserve Bank of Dallas, “Was NAFTA Behind Mexico’s High
Maquiladora Growth?” Economic and Financial Review, Third Quarter 2001.




Page 31                                                 GAO-03-891 International Trade
Figure 13: Real Dollar Exchange Rate of Mexican Peso and Chinese Yuan, 1995–2002




Changes in Mexican Tax                  Among industry groups whose members had experienced losses in
Policies Raise Investor                 employment or production, about two-thirds of those we interviewed
                                        indicated that uncertainty resulting from Mexican government tax policies
Uncertainty
                                        was a major factor in the maquiladoras’ decline. These groups noted that
                                        such uncertainty had caused some firms to withdraw from, or downsize,
                                        their operations in Mexico and had also discouraged new foreign direct
                                        investment in Mexico. In particular, industry representatives said that
                                        frequent changes to the fiscal regime had increased the tax burden and
                                        administrative costs to maquiladoras. They were also concerned that the
                                        frequent changes reduced the maquiladoras’ ability to develop long-term
                                        investment plans.




                                        Page 32                                         GAO-03-891 International Trade
In addition to the duty-free treatment on import of parts, components, and
other inputs, maquiladora plants enjoyed, at least until the mid-1990s, a
virtual freedom from taxation. Though legally subject to income taxes, in
practice, the companies paid only a small assets tax, a flat minimum of 2
percent of the value of the maquiladora’s assets. Moreover, the
maquiladoras were permitted to use the cost of wages to offset their tax on
assets. This virtually eliminated taxes for some maquiladoras. According to
experts, the twin benefits of duty-free import and minimal taxation were
primary incentives for foreign firms to establish manufacturing operations
in Mexico.

The tax regime applicable to maquiladoras remained constant for almost 30
years but began to evolve rapidly in the 1990s. The most significant of these
tax changes, the treatment of what are known as “permanent
establishments” is frequently noted by industry groups and others as a
cause of investor uncertainty about the industry.

A permanent establishment typically is a branch of a company from one
country that is doing business in another “host” country, and which may be
taxed in that host country. According to U.S. Treasury officials, permanent
establishment is a concept found in virtually all double taxation treaties.
Mexico adopted the permanent establishment concept as part of its income
tax law in 1981. According to U.S. Treasury officials and Mexican tax
experts GAO consulted, Mexico essentially exempted maquiladoras from
the tax that could be imposed on permanent establishments until 1998.
However, starting in 1998, Mexico began seeking to treat the foreign parent
companies of maquildoras as having permanent establishments in Mexico
for tax purposes. By treating the maquiladoras as permanent
establishments, the Mexican government could subject the foreign parent
companies to taxation, potentially allowing Mexico to increase the
revenues it collects from maquiladora operations.

The right of the Mexican government to tax maquiladoras as permanent
establishments was affirmed in the U.S.-Mexico tax treaty of 1992.
However, U.S. companies with maquiladora operations in Mexico were
concerned that Mexico’s application of permanent establishment to their
maquiladora operations would subject them to double taxation. This could
occur if Mexico imposed a broad definition of how permanent
establishments could be taxed that the U.S. Treasury would not accept,
because it would prevent the U.S. parent company from getting a full credit
in the United States from the taxes actually paid in Mexico. Resolution of
potential problems, such as double taxation, associated with the treatment



Page 33                                           GAO-03-891 International Trade
                        of maquiladoras as permanent establishments has necessitated a series of
                        additional bilateral agreements between the United States and Mexico. It
                        took several years and several different iterations to finally resolve such
                        practical problems, and this caused a prolonged period of uncertainty for
                        maquiladoras. Other changes in Mexico’s tax regime have contributed to
                        the climate of investor uncertainty. In 2002, for example, Mexico limited the
                        ability of businesses, including maquiladoras, to take a tax credit on
                        salaries. According to industry representatives, this provision could have
                        significantly increased the tax burden on some maquiladoras. However,
                        according to Mexican officials, this tax provision has subsequently been
                        ruled unconstitutional.



NAFTA Phased Out Some   The phasing out of maquiladora benefits as part of NAFTA was also cited by
Maquiladora Benefits    industry associations as a major factor in the decrease in maquiladora
                        production and employment. When NAFTA was signed in 1993, it
                        envisioned fundamental changes to the maquiladora model. The most
                        significant of these changes was embodied in Article 303 of NAFTA, which
                        eliminated duty drawback (or refunds of duties)24 for inputs of non-NAFTA
                        origin as of January 1, 2001, if the final products incorporating these inputs
                        are to be subsequently exported to another NAFTA country. For various
                        reasons, notwithstanding the 7-year grace period provided, the
                        maquiladoras did not develop a network of domestic suppliers in Mexico.
                        As a result, implementation of Article 303 has adversely affected the
                        competitiveness of maquiladoras that rely on non-NAFTA suppliers for
                        inputs and resulted in closure of some maquiladora firms.

                        According to officials with the Office of the U.S. Trade Representative,
                        some aspects of the Maquiladora program were not consistent with
                        NAFTA’s trade objectives. For example, the duty drawback provisions of
                        the Maquiladora program were in conflict with NAFTA’s rules of origin
                        requirements. Under NAFTA’s rules of origin, goods traded among NAFTA
                        partners are allowed duty-free status only when the goods comprise a
                        minimum percentage of North American content. However, the
                        Maquiladora program provided duty drawbacks for inputs imported to
                        Mexico from any source, including non-NAFTA countries, undermining the
                        duty-free benefits that North American products were to receive in Mexico
                        as a result of NAFTA. Second, such drawback programs represented an

                        24
                         “Duty drawback” refers broadly to the refund, waiver, or reduction of customs duties owed
                        on imported goods, on condition that the goods are subsequently exported.




                        Page 34                                                   GAO-03-891 International Trade
advantage for exporters versus firms involved in production for the
domestic market, since the latter would not receive an equivalent duty
drawback. In negotiating NAFTA, the United States hoped to reverse this
advantage, which led to the development in Mexico of an economic system
with separate production tracks for exports and for goods destined for
domestic consumption. In fact, U.S. officials explained that they envisioned
the gradual phasing-out of maquiladoras with the implementation of
NAFTA, as duty-free treatment would apply to all trade among NAFTA
member countries.

The rationale behind Article 303 was to encourage firms to develop North
American suppliers for critical inputs by providing an incentive for
maquiladoras to shift sourcing of components or inputs to North America,
including Mexico. The development of a network of North American
suppliers would mean that more value would be added during the
production process in Mexico, the United States, and Canada.The
elimination of duty drawback would necessitate significant changes in the
sourcing of maquiladora inputs, particularly for maquiladora operations of
some Japanese and other Asian companies that were heavily dependent on
certain inputs from the Far East. The implementation of Article 303 was
therefore scheduled for January 1, 2001, 7 years after NAFTA’s entry into
force, to allow the maquiladoras to relocate their supply chain to North
America. However, a network of Mexican domestic suppliers for the
maquiladoras largely failed to materialize during this period. Maquiladora
observers have suggested several explanations, principally the scarcity of
credit in Mexico to support entrepreneurial activity and the lack of an
entrepreneurial culture among Mexican businesses.

Under NAFTA, Mexico could have chosen to counter the loss of duty
drawback following implementation of Article 303 by reducing or
eliminating its most favored nation duties on key inputs. U.S. officials note
that Canada eliminated hundreds of its most favored nation duties before
Article 303 took effect. Instead, in order to cushion the impact of NAFTA
Article 303, Mexico instituted a measure known as the sectoral promotion
program with targeted and reversible tariff reductions.25

Since Article 303 was implemented, maquiladoras that depend on inputs
from outside North America have seen their competitiveness erode. Some
maquiladoras have reported production cost increases of up to 20 percent


25
     See discussion of the sectoral promotion program (PROSEC) below.




Page 35                                                    GAO-03-891 International Trade
                            due to the implementation of Article 303. Japanese, Korean, and Taiwanese
                            companies involved in maquiladora production have been particularly
                            affected by the implementation of Article 303 and have led the way in
                            relocating from Mexico to other countries. Industry associations we
                            contacted, representing maquiladoras in the Tijuana area, where Asian-
                            owned maquiladoras are concentrated, as well as an association
                            representing Japanese business in Mexico, attributed the departure of
                            maquiladora firms from Mexico, at least in part, to the implementation of
                            Article 303.



Maquiladora Downturn        Significant challenges continue to confront Mexico’s maquiladoras,
                            although recent industry and government action and the prospect of future
Spurs Some Positive         Mexican reforms may bolster prospects for maquiladoras’ recovery. The
Changes, but                downturn during the past 2 years has accelerated ongoing industry
                            evolution and has been a catalyst for several industry and government
Fundamental                 changes to improve the competitiveness of the sector. However,
Challenges to Future        maquiladoras still face fundamental challenges. For the most part, meeting
Viability Remain            these challenges depends on further action by the government of Mexico,
                            but some of the challenges are related to U.S. policies that are likely to put
                            additional pressure on maquiladoras.



Maquiladoras Face Serious   The factors described in the previous section as having a role in the
Challenges and Questions    maquiladora’s recent decline still confront the industry. As a result, some
                            Mexican government officials have stressed the need to move beyond the
about Viability
                            current “maquiladora model” to attract a new generation of more
                            technologically advanced operations that would allow Mexico to remain
                            competitive.

                            Given the continuous evolution of maquiladora operations, Mexico’s
                            maquiladora industry is now a complex sector with substantial diversity.
                            One academic expert concludes that as firms become involved in more
                            sophisticated, capital-intensive operations, they are less likely to close and
                            move their plants because of cyclical downturns such as the one
                            maquiladoras faced after 2000. Some Mexican maquiladoras are now
                            recognized as having sophisticated production and management methods.
                            According to industry experts, such maquiladoras are better positioned to
                            weather the maquiladora downturn and deal with continuing challenges.
                            Nevertheless, researchers point out that the transition to more advanced




                            Page 36                                            GAO-03-891 International Trade
                          production practices is quite uneven.26 Many maquiladoras remain oriented
                          toward lower-skill activities that involve few Mexican inputs besides labor.
                          The downturn of the last several years has resulted in a shake-out involving
                          some losers, notably among this type of operations.



Downturn Catalyst for     One positive aspect of the recent maquiladora downturn is that it has
Industry and Government   spurred some actions by industry and the government of Mexico to restore
                          Mexican competitiveness. In the face of increased global competition,
Efforts to Improve
                          maquiladoras are seeking to capitalize on Mexico’s unique competitive
Competitiveness           advantages, particularly those associated with that country’s proximity to
                          the United States and its growing network of free trade agreements. For
                          example, noting the recent establishment of plants in Juarez by several
                          computer manufacturing firms, one industry analyst explained that
                          Mexico’s quick time-to-market location is essential for the success of both
                          new products as well as repairs in the computer value chain. Similarly, a
                          senior industry expert noted that the growth of automotive maquiladoras,
                          in northern and central Mexico, underscores the competitive advantages
                          resulting from the efficient combination of U.S. and Mexican inputs.
                          According to this source, notwithstanding the arrival of new competitors,
                          the Mexican automotive industry is poised to take advantage of the full
                          opening of the regional North American automotive market that will occur
                          in 2004. Mexico also stands to benefit as a direct and indirect automotive
                          sector exporter to the United States and other countries with which Mexico
                          has signed trade agreements.

                          Some industry sources reported unexpected benefits associated with the
                          recent losses experienced by the maquiladoras. According to industry
                          representatives in Juarez, the rapid pace of maquiladora growth had put
                          intense pressure on local infrastructure during the late 1990s. Local
                          authorities simply could not keep up with the demand for health,
                          education, and other services associated with the dramatic increases in
                          population growth that accompanied the expansion of maquiladoras. They
                          viewed the slowdown of the past 2 years as a welcome respite.

                          In addition, a number of industry representatives noted that the downturn
                          has resulted in significant drops in employee turnover and in the associated
                          hiring and training costs. Prior to the downturn, they said, maquiladoras in

                          26
                           James Gerber and Jorge Carrillo, “Are Tijuana’s and Mexicali’s Maquiladora Plants
                          Competitive?” San Diego Dialogue, July 2002.




                          Page 37                                                 GAO-03-891 International Trade
some border cities reported very high employee turnover rates because the
rapid growth in maquiladora establishments allowed workers to
continuously find new jobs in other plants. One expert suggested that such
turnover in some border cities had reached 80 percent at the height of the
maquiladora boom. Consequently, employers had significant hiring and
training costs and were forced to keep some positions overstaffed to
compensate for the turnover. This could have more fundamental
implications for the ability of some maquiladoras to build a highly skilled
workforce, since it is not feasible to invest in significant training for
workers whose expected tenure with a firm is only a few months. Industry
sources told us that the turnover rates had dropped sharply since the
downturn, and some maquiladoras report that this has had a positive effect
on administrative costs as well as the cost of training new employees.

Finally, industry sources stressed the importance of Mexican government
action for the development of a favorable business environment that can
respond quickly to changing market forces faced by maquiladoras. In
response to industry pressure, the Mexican government recently undertook
several measures in support of the maquiladoras, primarily aimed at easing
irritants.

• On May 12, 2003, the Mexican government issued a decree modifying
  certain aspects of the Maquiladora program.27 The reforms are aimed
  primarily at simplifying regulations that apply to companies that provide
  support and logistic services to maquiladoras, and to enhance legal
  certainty for Mexican exporters, including maquiladoras. An important
  provision of the new decree will be streamlined customs requirements
  for companies with several subsidiaries operating under the
  Maquiladora program. This would allow such companies greater
  flexibility in the transfer of finished or semi-finished products from one
  subsidiary to another. The decree also contains provisions that would
  reduce administrative costs and procedures. For example, a
  maquiladoras will only have to submit a single report on an annual basis,
  which can be submitted electronically. Based on initial industry
  reaction, it is unclear whether the new decree will satisfy critics seeking
  greater legal certainty and improved incentives for maquiladoras.



27
 Decree for the Development and Operation of the Maquiladora Export Industry (Decreto
que reforma el diverso para el fomento y operación de la industria maquildora de
exportación), Official Daily Gazette (Diario Oficial), May12, 2003, Section 1, page 107.




Page 38                                                   GAO-03-891 International Trade
• In response to the recent crisis in the maquiladora industry, Mexico has
  greatly expanded its sectoral promotion program (PROSEC). First
  launched in November 2000, PROSEC was intended to reduce the
  impact of NAFTA Article 303 (which became effective January 1, 2001)
  by providing that duty rates on imported inputs from non-NAFTA
  suppliers of either 0 or 5 percent. Initially, maquiladora industry
  representatives complained that PROSEC was too restrictive because it
  applied to very few imported inputs. However, throughout 2001 and
  2002, the list of products eligible for tariff reduction under PROSEC was
  progressively expanded to include more than 16,000 products from 22
  industry sectors, including electronics and textiles and apparel.

• In September 2002, the Mexican government provided additional
  support to the maquiladoras through a program called the Information
  Technology Agreement (ITA) Plus.28 ITA Plus immediately removed
  tariffs from inputs, parts, and components used in the electronic and
  high-technology sectors, regardless of the country of origin. It also
  provided for the gradual removal of tariffs from semifinished and
  finished products in those sectors. According to Mexican officials, in
  addition to lowering tariffs on electronic and high technology inputs,
  ITA Plus may help to reduce the administrative burden on the
  maquiladoras.

• The Presidential Council for Competitiveness was created in July 2002
  to promote investment, increase employment, and accelerate Mexico’s
  economic growth. A cooperative effort between government and
  business that is chaired by the Minister of Economy, the council’s
  activities include the creation of fiscal stimulus packages for export
  factories in twelve different sectors of the economy, including
  maquiladoras as part of the in-bond industry. One objective of the
  council is the development of manufacturing clusters, which will deepen
  the supply chain in Mexico. In support of the work of the council, the
  Secretariat of the Economy has agreed to fund, through the National
  Council of the Maquiladora Export Industry (CNIME), a comprehensive
  study on the maquiladora industry.


28
 The Information Technology Agreement (ITA) was negotiated under the auspices of the
WTO and concluded in 1996, eliminating tariffs on information technology products by the
participating members. Mexico has not joined the WTO ITA, but chose to unilaterally
eliminate tariffs on certain information technology products in its ITA Plus initiative.
However, because Mexico did not commit to these tariff cuts in the WTO, it may change
them at any time.




Page 39                                                   GAO-03-891 International Trade
                              • Recent agreements between the United States and Mexico have largely
                                resolved the threat of double taxation of U.S. firms that was raised by
                                Mexico’s efforts to define maquiladora parent companies as permanent
                                establishments, discussed above. As a result of a Second Additional
                                Protocol to the U.S.-Mexico tax treaty, signed in 2002, the United States
                                will be able to provide a foreign tax credit to U.S. firms that have paid
                                income taxes to Mexico with respect to their maquiladora operations.
                                Mexico has also independently announced that it will make no changes
                                to existing agreements on permanent establishment until 2007.

                              These steps by the Mexican government seem to reflect wider recognition
                              by officials in Mexico City of the maquiladoras’ importance to Mexico.
                              Industry representatives complained that the Mexican government was
                              slow to respond to the challenges faced by the maquiladoras. According to
                              these representatives, the Mexican government initially took “a wait and
                              see” approach to the maquiladoras decline, in the belief that labor-intensive
                              maquiladora operations leaving Mexico would be readily replaced by better
                              paid, more profitable industries. As job losses continued in the first three
                              months of 2002, maquiladora representatives pressured the government to
                              implement remedial measures.



Future Challenges Remain,     Notwithstanding the initiatives discussed above, government, industry and
Involve Difficult Reforms     academic sources suggest that meeting remaining challenges to the future
                              success of the maquiladoras will, in some cases, require fundamental
                              Mexican reforms in several areas, including energy, infrastructure and
                              labor. However, the initiatives Mexico is pursuing in these areas may be
                              difficult to bring about.

Some Consider Energy Reform   Government officials and industry representatives stated that there is an
Vital to Mexico’s             urgent need for energy reform in Mexico. Energy sector reform is
Competitiveness               important to the maquiladora industries because they require reliable and
                              competitive energy prices to compete with suppliers in other nations. The
                              ITC, for example, has noted that electricity and industrial water costs are
                              two areas in which Mexico is less competitive than China. The Fox
                              administration maintains that without energy reform, Mexico may
                              experience a power crisis as early as 2004, and it introduced an energy
                              reform bill in August 2002. The legislation stalled in the Mexican Congress,
                              however, because some legislators opposed aspects of reform dealing with
                              privatization that would entail amending the Mexican constitution.




                              Page 40                                           GAO-03-891 International Trade
Upgrading and Modernizing         Maquiladora and other Mexican industry associations cite improving
Mexican Infrastructure Is         Mexico’s infrastructure as critical to advancing Mexico’s competitiveness.
Critical                          According to a report by the Mexican Government Commission for Border
                                  Affairs, the six Mexican states that border the United States share the
                                  advantage of an adequate basic infrastructure, with a road network
                                  variously described as good, fluid, or satisfactory. However, even in this
                                  region, about 32 percent of the Mexican federal highways are in poor
                                  condition. Another study found that critical problems persist in Mexico’s
                                  road infrastructure, notably, limited public or private investment in
                                  highways in recent years. Some maquiladora representatives we spoke
                                  with cited infrastructure shortcomings as a disincentive for potential
                                  investors in maquiladoras.

Need for Mexican Labor Reform     According to Mexican labor officials, as part of its platform to modernize
Acknowledged                      Mexico and improve its international competitiveness, the government has
                                  sought to reform the labor code. Maquiladora representatives stated that
                                  improvements in labor productivity depend on reform of labor regulations
                                  to provide increased flexibility to employers. The Fox administration has
                                  responded to this need for labor reform by developing a labor reform
                                  package that represents a compromise between labor groups, business,
                                  and government. Key elements of the reform package include the use of
                                  secret ballots in union elections, the allowance of more than one union to
                                  represent worker interests, expanded employer flexibility to hire workers
                                  on a trial basis, and a strengthened binding arbitration process. This reform
                                  package was not passed by the Mexican Congress before congressional
                                  elections were held in July 2003, in part because it lacked consensus
                                  support within the Mexican labor movement.

Worker Skills in Mexico Must Be   A consultant for the maquiladora industry cites worsening shortages of
Improved                          trained labor in most cities where maquiladoras are concentrated as among
                                  the challenges confronting the industry that the government must address.
                                  One academic study29 of the maquiladoras’ viability found that to develop
                                  more technology-intensive operations, Mexico needs a large number of
                                  highly educated workers. However, according to the Commission on
                                  Border Affairs, the data indicate a low level of educational attainment in
                                  the economically active population along the border, with over one-third of
                                  adults having completed only primary education or less. The search for


                                  29
                                   John Sargent and Linda Matthews, The University of Texas-Pan American, Center of
                                  Economic Studies, Boom or Bust: Is it the End of Mexico’s Maquiladoras? Working Paper
                                  #2002-6, August 2002.




                                  Page 41                                                 GAO-03-891 International Trade
                                  better educated workers has led a number of companies to establish
                                  assembly plants in cities further from the border, with better reputations
                                  for good public secondary education and trade schools.30



U.S. Policies May Exert           Action by Mexico is key to the maquiladoras’ future viability, particularly
Additional Pressure on            since U.S. approaches to trade liberalization and homeland security may
                                  put additional pressure on maquiladora operations. Industry
Maquiladoras
                                  representatives noted that present U.S. policies in these areas could
                                  undermine current benefits and reduce future competitiveness.

U.S. Trade Liberalization Could   Regarding U.S. trade policy, the future development of the maquiladora
Affect Maquiladora Development    industry in Mexico may also be affected by further changes in competitors’
                                  access to the U.S. market. The United States is engaged in trade
                                  negotiations in several venues, including the Doha Round among the 146
                                  members of the WTO, the Free Trade Agreement of the Americas (FTAA)
                                  involving 34 nations of the Western Hemisphere, and the U.S.-Central
                                  America Free Trade Agreement. These negotiations may reduce barriers to
                                  non-NAFTA countries’ products to levels similar to those enjoyed by
                                  NAFTA participants, Mexico, and Canada. For example, in the WTO, the
                                  United States has proposed to eliminate all industrial tariffs by 2015, and in
                                  the FTAA, the United States has proposed to phase out textile and apparel
                                  tariffs within 5 years after the agreement is implemented, if its hemispheric
                                  partners reciprocate. As we concluded in a 2001 report,31 expansion of
                                  trade benefits to wider numbers of competitors, while benefiting U.S.
                                  consumers and other trade partners, dilutes the benefits of prior trade
                                  preferences. Some business association representatives that we
                                  interviewed expressed concern that future U.S. trade agreements would
                                  erode benefits provided to Mexican suppliers in the U.S. market under
                                  NAFTA. Representatives for one industry association expressed hope that
                                  the United States would use negotiations such as the FTAA to strengthen
                                  regional competitiveness relative to global competitors such as China.




                                  30
                                   For a discussion of the trend for new maquiladora investments to be located in the interior
                                  of Mexico see Rubén Mata, U.S. International Trade Commission, “Recent Developments in
                                  Mexico’s Assembly Industry,” Production Sharing: Use of U.S. Components and Materials
                                  in Foreign Assembly Operations, 1994-1997, USITC, pub. 3146, Dec. 1998, pp. 2-10ff.
                                  31
                                   U.S. General Accounting Office, International Trade: Comparison of U.S. and European
                                  Union Preference Programs, GAO-01-647 (Washington, D.C.: June, 2001).




                                  Page 42                                                     GAO-03-891 International Trade
U.S. Homeland Security         Maquiladora industry experts also expressed concern that U.S. security
Measures Could Slow Cross-     measures instituted at ports of entry after September 11, 2001, could erode
Border Movement of Goods and   the Mexican maquiladora industry’s advantage of proximity to U.S.
Personnel                      markets. Of particular concern are U.S. government measures that require
                               advance notice for transborder shipments of goods and additional
                               information on the entry into and departure from the United States of every
                               foreign citizen.32 Companies that use just-in-time operations, an important
                               element in some maquiladora operations, could be especially hurt by
                               requirements related to advance notice for shipments, because they could
                               not ship goods immediately on receiving an order.33 Firms that rely on
                               regular and efficient movement of workers and service operations across
                               the border could be especially affected by the information requirements for
                               Mexican workers who cross the border frequently. For example, at one
                               major border crossing in downtown El Paso, less than a mile from
                               Interstate 10, significant congestion would result if U.S. authorities had to
                               screen traffic bound for Mexico to obtain information from every departing
                               alien. Successful implementation of these new requirements will require
                               close coordination of U.S. and Mexican national and local officials as well
                               as adaptation of the private industry to the new requirements.



Conclusion                     Both the United States and Mexico have an interest in the future of
                               maquiladoras given their central role in U.S.-Mexico trade and the border
                               economy. Partly driven by maquiladoras, Mexico has assumed a more
                               prominent place among U.S. trade partners in recent years, becoming the
                               United States’ second leading trading partner, after Canada. Moreover,
                               production and employment linkages have developed between


                               32
                                Two measures regarding advance notification of cargo shipments are cause for industry
                               concern: (1) an informal U.S. Customs proposal that would require trucks to declare the
                               contents of their cargo 4 hours before they enter the United States and 24 hours before they
                               enter Mexico, which falls under the Advance Electronic Information provision of the Trade
                               Act of 2002 and has not yet gone into effect and (2) a U.S. customs measure known as the
                               24-hour rule, effective since December 2, 2002, which requires ships traveling to U.S.
                               seaports to declare the contents of their cargo 24 hours before they depart from a foreign
                               port – 19 CFR 4.7(b)(2). Regarding entry of foreign citizens, at issue is an Immigration and
                               Naturalization Service mandate that is part of Section 110 of the Illegal Immigration Reform
                               and Immigrant Responsibility Act of 1996.
                               33
                                Customs officials noted that they are keenly aware of the importance of “Just in Time”
                               delivery and have taken that into account in any programs proposed for cargo clearance.
                               Customs also intends to offer a program known as Free and Secure Trade to speed the
                               clearance of known shippers, importers and carriers, and assist in moving traffic border-
                               wide.




                               Page 43                                                     GAO-03-891 International Trade
                      maquiladoras and producers throughout the United States and are based on
                      the high volume of U.S.-generated components used in maquiladora
                      operations. Businesses in communities on the U.S. side of the border
                      provide services to the maquiladoras, such as customs brokerage and
                      commercial transportation. Retail sales to Mexican citizens in U.S. border
                      communities contribute substantially to U.S. business and tax receipts. The
                      decline in Mexico’s maquiladora production and employment has already
                      taken its toll on cross-border trade and trade-related employment in certain
                      U.S. border communities. Maquiladoras have become an even more
                      important element of the Mexican economy, particularly over the decade of
                      the 1990s, when maquiladora growth propelled Mexico into the ranks of the
                      world’s leading exporters and generated 900,000 new jobs. Employment
                      created by maquiladoras on the Mexican side of the border has become a
                      mainstay of economic activity in that country. The decline over the past 2
                      years has served as a catalyst for further transformation of the industry, as
                      well as Mexican industry and government efforts to restore
                      competitiveness. The challenges still confronting maquiladoras and the
                      pressure from U.S. trade and homeland security policies lend urgency to
                      Mexican efforts to create an environment where cross-border links
                      between U.S. and Mexican firms and communities can continue to prosper.



Agency Comments and   We provided a draft of this report for comment to five U.S. government
                      agencies: Department of State, the Office of the U.S. Trade Representative,
Our Response          U.S. Customs and Border Protection (formerly U.S. Customs), Department
                      of the Treasury, and the U.S. International Trade Commission. We also
                      asked for comments from three Mexican government agencies: the
                      Ministry of the Economy (Secretaría de Economía) the Ministry of the
                      Treasury (Secretaría de Hacienda), and the National Institute of Statistics,
                      Geography and Information Technology (Instituto Nacional de Estadística,
                      Geografía e Informática). We received informal written comments from all
                      of these U.S. and Mexican government agencies, except Mexico’s Ministry
                      of Economy. In addition, the Department of State provided formal written
                      comments, which are reprinted in appendix VII.

                      In general, all of the agency comments were technical or editorial in nature,
                      which we incorporated as appropriate in the text of our report. In addition,
                      U.S. ITC staff had more extensive comments related to our decision to
                      exclude firms operation under the so-called PITEX program from the
                      general scope our work, noting that PITEX firms are important in certain
                      sectors, such as autos, and account for a substantial share of Mexico’s total
                      exports to the United States. While we recognize that firms operating under



                      Page 44                                           GAO-03-891 International Trade
PITEX are an important element in U.S-Mexico production-sharing
operations, as are maquiladoras, we limited our report to the Maquiladora
program for several reasons. First, our requesters specifically expressed an
interest in the maquiladora industry and the effects of the recent decline of
the maquiladoras along the U.S.-Mexico border. Unlike maquiladoras,
which are still concentrated along the border, firms operating under the
PITEX program are spread throughout Mexico. Secondly, the data the
government of Mexico collects on maquiladoras are significantly more
extensive and are not altogether comparable to the data collected on
PITEX firms. Thus, there would have been problems in comparing the two
types of operations. Finally, the data available on PITEX firms suggest that
they have experienced trends in recent years not unlike those observed
among maquiladoras. Including data on PITEX firms would not have
significantly altered our message.


We are sending copies of this report to other interested members of
Congress, the Secretary of State, the Secretary of the Treasury, the U.S.
Trade Representative, the Secretary of the Department of Homeland
Security, the Commissioner of Customs, and the Chairman of the U.S.
International Trade Commission. We will also make copies available to
others upon request. In addition, the report will be available at no charge
on the GAO Web site at http://www.gao.gov.

If you, or your staff, have any questions about this report, please contact
me on (202) 512-4347. Other GAO contacts and staff acknowledgments are
listed in appendix VIII.




Loren Yager
Director, International Affairs and Trade




Page 45                                           GAO-03-891 International Trade
Appendix I

Structure of Employment Growth in the U.S.-                                                                         Appendx
                                                                                                                          ies




Mexico Border Area                                                                                                   Append
                                                                                                                          x
                                                                                                                          Ii




                      This appendix examines U.S. employment changes along the U.S.-Mexico
                      border and explores whether employment in the border areas of the United
                      States has been disproportionately affected by the recent slowdown in U.S.
                      economic activity and the associated decline in cross-border trade between
                      the United States and Mexico. For the purpose of this analysis, the U.S.
                      border with Mexico is defined as the metropolitan statistical areas (MSA)
                      closest to the U.S.-Mexico border, comprising the MSAs for San Diego,
                      California; Tucson, Arizona; Las Cruces, New Mexico; and El Paso,
                      Brownsville, Laredo, and McAllen, Texas.1

                      U.S. employment in the border area increased by approximately 591,000
                      jobs between 1990 and 2002, largely owing to the overall national trend in
                      employment growth. For example, according to our analysis, 60 percent of
                      the jobs gained were due to the growth of the national economy. However,
                      230,000 of those jobs could be linked to local factors, that is, factors
                      associated with the area’s attractiveness for employment creation. Most of
                      the new jobs were added from 1995 to 2002. However, the ways in which
                      each border subregion benefited from the employment growth vary
                      considerably.



U.S. Border           U.S. employment in the U.S.-Mexico border area grew by 35 percent
                      between 1990 and 2002, gaining 591,000 jobs. The services sector was the
Employment Outpaced   largest employer and accounted for approximately 48 percent of the job
Nation’s since 1995   growth (282,000 jobs) during this period. Other sectors with notable
                      employment growth were retail trade (93,000 jobs); finance, insurance, and
                      real estate (20,000 jobs); transportation and public utilities (31,000 jobs);
                      and government (128,000 jobs). As figure 14 shows, total nonfarm
                      employment growth rates in the border region were generally similar to
                      those observed for the United States from 1993 to 1995. However,
                      employment growth in the border MSAs exceeded employment growth at



                      1
                       The U.S. border with Mexico is defined by the states of California, Arizona, New Mexico,
                      and Texas. However, a meaningful description of the border would require the exclusion of
                      large portions of each of these states. Many analysts define the border in terms of the
                      contiguous counties that have direct geographical links with Mexico. According to this
                      definition, the U.S.-Mexico border consists of the counties of San Diego and Imperial in
                      California; the counties of Yuma, Pima, Santa Cruz, and Cochise in Arizona; the counties of
                      Hidalgo, Luna, and Dona Ana in New Mexico; and the counties of El Paso, Hudspeth,
                      Culberson, Jeff Davis, Presidio, Brewster, Terrell, Val Verde, Kinney, Maverick, Dimmitt,
                      Webb, Zapata, Starr, Hidalgo, and Cameron in Texas.




                      Page 46                                                    GAO-03-891 International Trade
                                          Appendix I
                                          Structure of Employment Growth in the U.S.-
                                          Mexico Border Area




                                          the national level after 1995.2 Furthermore, growth of nonfarm employment
                                          in the border area continued even after the U.S. economic slowdown began
                                          in 2001. Laredo and McAllen grew fastest, followed by Brownsville, Tucson,
                                          Las Cruces, and San Diego.



Figure 14: Nonfarm Annual Employment Growth in the United States and in U.S. Metropolitan Statistical Areas at the U.S.-
Mexico Border, 1991-2002




                                          Some border industries experienced a decline in employment in 2001 and
                                          2002, particularly manufacturing (down 6 percent), transportation and
                                          public utilities (down 4 percent), and wholesale trade (down 3 percent)
                                          (see table1). As table 1 shows, declines in manufacturing were relatively
                                          more severe in Texas (down an average of 18 percent), while declines in
                                          wholesale trade and transportation and public utilities were more


                                          2
                                           Given that NAFTA was implemented in 1994, the graph suggests that NAFTA had an
                                          employment-stimulating effect in the border counties.




                                          Page 47                                                 GAO-03-891 International Trade
                                           Appendix I
                                           Structure of Employment Growth in the U.S.-
                                           Mexico Border Area




                                           pronounced in Arizona (down 9 and 11 percent, respectively). A closer look
                                           at Texas further shows that the manufacturing, transportation, and public
                                           utilities sectors declined after 2000 in all four Texas border MSAs.



Table 1: Employment Growth of the United States and U.S. Metropolitan Statistical Areas at the U.S. Mexico Border by Industry:
1990–2002 and 2000–2002

                                                                                       Finance,
                                  Construc-          Transportation                  insurance,
                          Total      tion & Manufac-       & public Wholesale Retail      & real
                       nonfarm      mining    turing        utilities   trade trade      estate Services          Government
United         2000-
States          2002       -1%          -1%          -9%            -4%          -4%     0%       2%         2%            3%
               1990-
                2002       20%         22%       -12%              17%           8%      19%     16%        47%           16%
US-Mexico      2000-
Border          2002        4%          5%           -6%            -4%          -3%     7%       6%         5%            8%
               1990-
                2002       35%         48%           -7%           43%          13%      27%     21%        65%           37%
San Diego,     2000-
CA              2002        5%          9%           -1%            -1%          -1%     8%       4%         6%            8%
               1990-
                2002       30%         46%           -5%           40%          14%      22%     14%        59%           26%
Tucson,        2000-
AZ              2002        2%          -1%          -4%           -11%          -9%     3%       7%         0%            9%
               1990-
                2002       42%         43%           21%           14%          32%      24%     35%        60%           49%
Las Cruces,    2000-
NM              2002        5%          0%           3%             -5%          8%      6%       0%         8%            6%
               1990-
                2002       37%         50%           -8%           31%          56%      35%     25%      111%            14%
Brownsville,   2000-
TX              2002        2%          7%       -19%               -4%          7%      6%       0%         5%            6%
               1990-
                2002       47%         96%       -14%              66%          22%      38%      5%        93%           53%
El Paso, TX    2000-
                2002       -1%          -2%      -17%              -10%          -9%     4%      12%         1%            8%
               1990-
                2002       22%         46%       -24%              31%           -4%     26%     35%        43%           38%
Laredo, TX     2000-
                2002        6%          -6%      -22%               -5%        -10%      14%     11%        10%           13%
               1990-
                2002       62%          3%       -22%              82%          12%      45%     63%      106%            81%




                                           Page 48                                               GAO-03-891 International Trade
                                                                    Appendix I
                                                                    Structure of Employment Growth in the U.S.-
                                                                    Mexico Border Area




(Continued From Previous Page)
                                                                                                           Finance,
                                                      Construc-          Transportation                  insurance,
                                    Total                tion & Manufac-       & public Wholesale Retail      & real
                                 nonfarm                mining    turing        utilities   trade trade      estate Services                        Government
McAllen, TX          2000-
                      2002                9%                     4%           -18%             0%            0%      9%          11%         19%             12%
                     1990-
                      2002              69%                    92%            -25%           120%           11%     55%          56%        165%             71%
Source: GAO calculations using U.S. Department of Labor, Bureau of Labor Statistics data.




Analysis of Employment                                              To analyze the factors at the national and local levels that contributed to
Trends                                                              the employment trends described above, we employed a methodology
                                                                    known as shift-share analysis that decomposes employment growth (or
                                                                    decline) in a region over a given time period into three components: the
                                                                    national growth effect, the industry-mix effect, and the local (competitive)
                                                                    effect.

                                                                    1. National growth effect. The national growth effect is that part of a
                                                                       regional change in total employment ascribed to the national growth
                                                                       rate of total employment. It assumes that the region’s employment
                                                                       growth matches the overall national rate. The national growth
                                                                       component is the change that would be expected given that the local
                                                                       area is part of a changing national economy.3

                                                                           Our analysis shows that from 1990 through 2002, the border counties
                                                                           gained 339,100 jobs due to economic trends at the national level (see
                                                                           table 2). However, the actual gain occurred prior to the year 2000 as an
                                                                           estimated 15,800 jobs were lost due to the national trend in 2001 and
                                                                           2002. The border area’s biggest employer, the service sector, had the
                                                                           highest national growth component (97,300 jobs), followed by the
                                                                           government (71,200 jobs), and retail trade sectors (65,900 jobs). Our
                                                                           analysis incorporating possible differences among the border
                                                                           subregions shows that from 1990 through 2002, nonfarm employment
                                                                           growth in San Diego accounted for nearly 50 percent of the increase in
                                                                           employment due to employment expansion at the national level.


                                                                    3
                                                                     For example, during the time period 1990–2000, nonfarm employment in the United States
                                                                    grew by 20 percent (i.e., from 109.4 million to 130.8 million). Therefore, the national growth
                                                                    component of any region within the United States during this period would be 20 percent of
                                                                    the the region’s 1990 employment.




                                                                    Page 49                                                      GAO-03-891 International Trade
Appendix I
Structure of Employment Growth in the U.S.-
Mexico Border Area




2. Industry-mix effect. An industry-mix effect is the amount of change
   that a region would have experienced had each of its industries grown
   at their industry national rates, less the national growth effect. This
   component identifies the share of local job growth that can be
   attributed to the region’s mix of industries and seeks to address
   whether employment growth in an area outpaced the nation owing to a
   concentration of faster growing industries.

    For the period 1990 to 2002, the border area gained 21,200 jobs owing to
    a concentration of faster growing sectors there than in the nation as a
    whole. This gain in total employment was achieved primarily with
    employment gains in the services (114,400 jobs) and construction and
    mining (4,200 jobs), and it occurred despite employment losses totaling
    95,200 jobs from other sectors, notably manufacturing (69,800 jobs),
    government (10,500 jobs), and wholesale trade (8,500 jobs). Moreover,
    47 percent of the employment growth due to the industry-mix effect
    occurred between 2001 and 2002. In subregions, the industrial mix
    component for all sectors decreased total nonfarm employment during
    1990–2002 only in El Paso, Texas.

3. Local (competitive) effect. A local (competitive) effect seeks to isolate
   the extent to which factors unique to the local area have caused growth
   or decline in regional employment. The effect is defined as the
   employment change that remains after the national and industrial mix
   components have been accounted for, and it is therefore the purely
   regional aspect of the region’s employment growth. If a region’s
   competitive share is positive, the region is considered to have local
   advantage in promoting employment growth. This advantage could
   result from such factors as local businesses having superior technology,
   management, location, market access or the local labor force’s having
   higher productivity, lower wages, or both. A negative competitive share
   component could be caused by local shortcomings in any or all of these
   aspects.

    Local conditions appear to have been a significant factor in the increase
    in U.S. border employment, particularly since 1995. Across all sectors,
    the competitive share component—employment growth attributable to
    local conditions—totals to a net addition of 230,000 jobs. This indicates
    that the border area was competitive in securing additional
    employment from 1990 through 2002. As figure 15 shows, nearly all of
    these employment gains were realized in the years since 1995.
    Furthermore, 43 percent of border area employment gains owing to



Page 50                                           GAO-03-891 International Trade
Appendix I
Structure of Employment Growth in the U.S.-
Mexico Border Area




    local factors were achieved between 2001 and 2002. The top three
    sectors in competitive share gains in employment from 1990 through
    2002 were services (70,600 jobs), government (67,200 jobs), and
    manufacturing (37,500 jobs). However, for the 2000–2002 period, the
    transportation and public utilities sector showed a reduction in jobs
    (approximately 300 jobs) owing to local factors. In addition, factors
    unique to the local area caused employment declines in certain
    subregions and sectors during 1990–2002, notably, in Laredo, Texas, in
    construction and mining; El Paso, Texas, in wholesale trade and
    services; Brownsville, Texas, in finance, insurance, and real estate;
    Tucson, Arizona, in transportation and public utilities; and Las Cruces,
    New Mexico, in government employment. Furthermore, subregions in
    Texas generally lost their local edge in securing manufacturing
    employment from 1990 through 2002 and this loss was more
    pronounced in 2001 and 2002. Similarly, owing to local factors from
    2001 to 2002, Tucson, Las Cruces, and El Paso lost jobs in
    transportation and public utilities; Tucson, El Paso, and Laredo lost
    employment in wholesale trade; and El Paso lost service employment;
    and Brownsville and Las Cruces lost employment in the finance, real
    estate, and insurance sector.




Page 51                                           GAO-03-891 International Trade
                                         Appendix I
                                         Structure of Employment Growth in the U.S.-
                                         Mexico Border Area




Figure 15: Employment Gains (Losses) in Nonfarm Employment in Metropolitan Statistical Areas at the U.S. Mexico Border Due
to National, Industry-mix, and Local Effects




                                         Page 52                                              GAO-03-891 International Trade
                                             Appendix I
                                             Structure of Employment Growth in the U.S.-
                                             Mexico Border Area




Table 2: Components of Employment Changes by Sectors in U.S. Metropolitan Statistical Areas at the U.S. Mexico Border, 1990–
2002

Employment in thousands
                                                    Transpor-                            Finance,
                                Construc-          tation and                          insurance,
                          Total    tion & Manufac-      public        Wholesale Retail    and real
                       nonfarm    mining    turing    utilities Trade     trade trade       estate Services Government
Local effect
US-Mexico      2001-
Border          2002       98.1       7.5         10.8        (0.3)   31.1          0.9    29.4     3.6      23.3          25.1
               1990-
                2002      230.5      21.6         37.5        17.1    35.4          4.3    29.0     5.3      70.6          67.4
San Diego,     2001-
CA              2002       67.0       6.9         10.7         1.6    19.5          1.3    17.8     1.4      16.1          10.8
               1990-
                2002       91.2      14.0         10.4         8.2    12.6          3.0     8.5   (0.5)      29.8          16.6
Tucson, AZ     2001-
                2002        6.3       0.1          2.0        (0.9)    1.8         (0.6)    2.2     0.7      (2.2)           4.8
               1990-
                2002       42.3       2.2          9.7        (0.8)    4.6          1.6     2.4     2.1       7.6          16.9
Las Cruces,    2001-
NM              2002        2.7       0.0          0.4        (0.0)    0.7          0.2     0.6   (0.0)       1.0            0.6
               1990-
                2002        6.8       0.4          0.1         0.2     1.7          0.4     1.3     0.1       4.7          (0.4)
Brownsville,   2001-
TX              2002        2.6       0.4         (1.2)        0.0     2.0          0.5     1.4   (0.1)       0.9            0.7
               1990-
                2002       18.6       1.5         (0.2)        1.4     3.7          0.5     3.0   (0.3)       6.7            5.9
El Paso, TX    2001-
                2002        0.5      (0.2)        (2.9)       (1.0)    1.5         (0.6)    2.1     1.0      (0.7)           2.9
               1990-
                2002        7.6       1.4         (5.1)        1.3     1.2         (1.5)    2.6     1.5      (1.6)           9.0
Laredo, TX     2001-
                2002        4.3      (0.2)        (0.2)       (0.2)    1.9         (0.2)    2.0     0.2       1.1            1.6
               1990-
                2002       16.5      (1.0)        (0.2)        3.9     2.9          0.1     2.8     0.9       4.1            5.9
McAllen, TX    2001-
                2002       14.7       0.5         (1.1)        0.2     3.6          0.3     3.2     0.5       7.1            3.8
               1990-
                2002       47.5       3.2         (1.7)        2.9     8.8          0.2     8.4     1.5      19.3          13.6




                                             Page 53                                              GAO-03-891 International Trade
                                                Appendix I
                                                Structure of Employment Growth in the U.S.-
                                                Mexico Border Area




(Continued From Previous Page)
Employment in thousands
                                                       Transpor-                            Finance,
                                   Construc-          tation and                          insurance,
                             Total    tion & Manufac-      public        Wholesale Retail    and real
                          nonfarm    mining    turing    utilities Trade     trade trade       estate Services Government
Industrial-mix effect
US-Mexico         2001-
Border             2002      10.0       (0.6)      (20.6)        (3.1)   (1.5)        (3.0)    2.4      3.4      17.2          15.2
                  1990-
                   2002      21.2        4.2       (69.8)        (1.8) (12.6)         (8.5)   (1.8)   (2.8)     114.4         (10.5)
San Diego,        2001-
CA                 2002       5.1       (0.3)      (11.7)        (1.5)   (0.8)        (1.7)    1.3      2.2      10.1            7.2
                  1990-
                   2002      16.5        1.4       (38.9)        (0.9)   (6.8)        (4.8)   (1.1)   (1.8)      68.4          (4.9)
Tucson, AZ        2001-
                   2002       2.3       (0.1)        (3.0)       (0.3)   (0.2)        (0.4)    0.4      0.5       2.9            2.6
                  1990-
                   2002       7.5        1.1         (8.9)       (0.2)   (1.8)        (1.0)   (0.3)   (0.4)      19.7          (1.9)
Las Cruces,       2001-
NM                 2002       0.7       (0.0)        (0.3)       (0.1)   (0.0)        (0.0)    0.1      0.1       0.4            0.6
                  1990-
                   2002       0.6        0.2         (0.9)       (0.0)   (0.3)        (0.1)   (0.0)   (0.1)       2.3          (0.6)
Brownsville,      2001-
TX                 2002       0.5       (0.0)        (1.1)       (0.2)   (0.1)        (0.1)    0.1      0.1       0.8            0.9
                  1990-
                   2002       0.0        0.2         (3.8)       (0.1)   (0.6)        (0.4)   (0.1)   (0.1)       5.1          (0.6)
El Paso, TX       2001-
                   2002      (0.1)      (0.0)        (3.3)       (0.4)   (0.2)        (0.4)    0.3      0.3       1.6            2.0
                  1990-
                   2002      (4.6)       0.6       (12.8)        (0.3)   (1.6)        (1.3)   (0.2)   (0.2)      11.0          (1.4)
Laredo, TX        2001-
                   2002       0.4       (0.0)        (0.2)       (0.4)   (0.1)        (0.1)    0.1      0.1       0.4            0.5
                  1990-
                   2002       1.0        0.3         (0.5)       (0.2)   (0.4)        (0.3)   (0.0)   (0.1)       2.2          (0.3)
McAllen, TX       2001-
                   2002       1.2       (0.0)        (1.1)       (0.2)   (0.1)        (0.2)    0.2      0.2       1.0            1.4
                  1990-
                   2002       0.2        0.4         (3.9)       (0.1)   (1.0)        (0.7)   (0.1)   (0.1)       5.7          (0.9)
National effect
US-Mexico         2001-
Border             2002     (15.8)      (0.9)        (1.6)       (0.7)   (3.6)        (0.6)   (2.9)   (0.8)      (4.9)         (3.2)
                  1990-
                   2002     339.1       17.5         40.0        15.4    80.5         14.7    65.9    17.1       97.3          71.2




                                                Page 54                                               GAO-03-891 International Trade
                                             Appendix I
                                             Structure of Employment Growth in the U.S.-
                                             Mexico Border Area




(Continued From Previous Page)
Employment in thousands
                                                    Transpor-                            Finance,
                                Construc-          tation and                          insurance,
                          Total    tion & Manufac-      public        Wholesale Retail    and real
                       nonfarm    mining    turing    utilities Trade     trade trade       estate Services Government
San Diego,     2001-
CA              2002      (8.6)      (0.5)        (0.9)       (0.4)   (1.9)        (0.4)   (1.6)   (0.5)      (2.9)         (1.5)
               1990-
                2002      182.8       8.7         21.7         7.2     42.4         7.9    34.5    11.0       58.0          33.8
Tucson, AZ     2001-
                2002      (2.5)      (0.2)        (0.2)       (0.1)   (0.5)        (0.1)   (0.4)   (0.1)      (0.8)         (0.5)
               1990-
                2002       54.5       3.8          4.8         2.3     12.2         1.8    10.4      2.2      16.9          12.3
Las Cruces,    2001-
NM              2002      (0.4)      (0.0)        (0.0)       (0.0)   (0.1)        (0.0)   (0.1)   (0.0)      (0.1)         (0.1)
               1990-
                2002        8.9       0.5          0.5         0.3      1.9         0.2     1.7      0.4       1.9            3.4
Brownsville,   2001-
TX              2002      (0.8)      (0.0)        (0.1)       (0.0)   (0.2)        (0.0)   (0.2)   (0.0)      (0.2)         (0.2)
               1990-
                2002       16.8       0.5          2.3         0.8      4.3         0.7     3.6      0.6       4.4            3.9
El Paso, TX    2001-
                2002      (1.8)      (0.1)        (0.2)       (0.1)   (0.4)        (0.1)   (0.3)   (0.1)      (0.4)         (0.4)
               1990-
                2002       42.8       1.9          8.1         2.3     10.2         2.3     8.0      1.6       9.4            9.2
Laredo, TX     2001-
                2002      (0.5)      (0.0)        (0.0)       (0.1)   (0.1)        (0.0)   (0.1)   (0.0)      (0.1)         (0.1)
               1990-
                2002       10.5       0.8          0.3         1.7      3.0         0.5     2.4      0.4       1.9            2.4
McAllen, TX    2001-
                2002      (1.1)      (0.1)        (0.1)       (0.0)   (0.3)        (0.0)   (0.3)   (0.0)      (0.3)         (0.3)
               1990-
                2002       22.7       1.3          2.3         0.8      6.5         1.2     5.3      0.8       4.8            6.2
Total employment change
US-Mexico      2001-
Border          2002       92.3       6.0       (11.4)        (4.1)    26.0        (2.7)   28.8      6.2      35.6          37.1
               1990-
                2002      590.8      43.4          7.7        30.7    103.4        10.4    93.1    19.6      282.3         128.1
San Diego,     2001-
CA              2002       63.4       6.0         (1.9)       (0.3)    16.8        (0.7)   17.5      3.1      23.3          16.4
               1990-
                2002      290.5      24.1         (6.8)       14.5     48.2         6.2    42.0      8.7     156.2          45.6




                                             Page 55                                               GAO-03-891 International Trade
                                                                    Appendix I
                                                                    Structure of Employment Growth in the U.S.-
                                                                    Mexico Border Area




(Continued From Previous Page)
Employment in thousands
                                                               Transpor-                            Finance,
                                           Construc-          tation and                          insurance,
                                     Total    tion & Manufac-      public        Wholesale Retail    and real
                                  nonfarm    mining    turing    utilities Trade     trade trade       estate Services Government
Tucson, AZ          2001-
                    2002                  6.1             (0.2)            (1.3)       (1.3)    1.1          (1.0)    2.1        1.0      (0.1)           6.9
                    1990-
                    2002               104.4                7.1              5.6        1.3    14.9           2.4    12.5        4.0      44.2          27.3
Las Cruces, 2001-
NM          2002                          3.0               0.0              0.1       (0.1)    0.6           0.1     0.6      (0.0)       1.3            1.1
                    1990-
                    2002                16.3                1.1            (0.3)        0.5     3.3           0.5     2.9        0.4       8.9            2.4
Brownsville, 2001-
TX           2002                         2.3               0.3            (2.4)       (0.2)    1.7           0.3     1.4        0.0       1.5            1.4
                    1990-
                    2002                35.5                2.2            (1.7)        2.1     7.3           0.8     6.5        0.2      16.2            9.2
El Paso, TX 2001-
            2002                        (1.4)             (0.3)            (6.4)       (1.6)    0.9          (1.1)    2.0        1.2       0.4            4.4
                    1990-
                    2002                45.8                3.9            (9.8)        3.3     9.9          (0.5)   10.4        2.9      18.8          16.8
Laredo, TX          2001-
                    2002                  4.2             (0.2)            (0.4)       (0.6)    1.7          (0.3)    2.0        0.3       1.4            2.0
                    1990-
                    2002                27.9                0.1            (0.4)        5.4     5.5           0.3     5.2        1.2       8.2            7.9
McAllen, TX 2001-
            2002                        14.7                0.4            (2.2)       (0.0)    3.2          (0.0)    3.2        0.6       7.8            4.9
                    1990-
                    2002                70.4                4.9            (3.3)           .   14.3           0.7    13.6        2.2      29.8          18.9
Source: GAO analysis using U.S. Department of Labor, Bureau of Labor Statistics data

                                                                    Note: Numbers in parentheses indicate employment losses.




                                                                    Page 56                                                    GAO-03-891 International Trade
Appendix II

Effect of U.S. Economic Conditions on
Employment in Mexican Maquiladoras                                                                             Appendx
                                                                                                                     Ii




               Our statistical analysis shows that the key factors cited in our
               semistructured interviews as responsible for the maquiladora downturn—
               namely, the U.S. general economic slowdown, particularly in U.S.
               manufacturing, and the real peso-dollar exchange rate—are significant
               determinants of maquiladora employment. We found a strong relationship
               between maquiladora employment and U.S. economic conditions. This
               relationship is stronger than that between maquiladora employment and
               the real peso-dollar exchange rate, but considerably weaker than that
               between maquiladora employment and changes in U.S. manufacturing
               shipments. We also found that maquiladora sectors are more sensitive to
               changes in U.S. manufacturing shipments than to broader U.S. economic
               conditions.

               A major reason for the rapid growth of the maquiladora industry has been
               its direct tie to the U.S. economy, particularly to U.S. manufacturing. As a
               result, the maquiladoras are partly independent of Mexico’s internal
               economic trends. This independence from the Mexican economy has made
               the industry a stabilizing force when the Mexican economy heads into
               recession.1 However, the direct tie to U.S. manufacturing also makes the
               industry predisposed to U.S. business cycles. As mentioned previously in
               the main body of this report, the number of maquiladoras and the
               employment they generate has declined from a peak reached in 2000.2 This
               decline has been attributed to several factors. The most important of these
               factors is the downturn in the U.S. economy. An additional factor that has
               been alleged to contribute to the apparent decline has been cost increases
               due to increases in the inflation adjusted value of the peso relative to the
               dollar, i.e., the real exchange rate of the peso.3 This appendix investigates
               the relationship




               1
                For example, in 1995, when Mexico's GDP fell by 6 percent, employment in the maquiladora
               industry grew by more than 9 percent. During 1998, when export earnings by the oil industry
               were off significantly, the maquiladora industry became the largest source of foreign
               revenue. See, Gerber, J, "Whither the Maquiladora? A Look at the Growth Prospects for the
               Industry After 2001," Comercio Exterior, Bancomext. 9:3, 1999.
               2
                In comparison to 2000 figures, latest statistics (November 2002) show 452 fewer
               maquiladora companies consisting of 310 garment maquiladoras, 56 electronic and electric
               accessory maquiladoras, 69 furniture assembly maquiladoras, and approximately 17
               companies in the rest of manufacturing.
               3
                The real exchange rate reflects the relative price of goods. It is the nominal exchange rate
               adjusted for differences in inflation rates between trading partners.




               Page 57                                                      GAO-03-891 International Trade
Appendix II
Effect of U.S. Economic Conditions on
Employment in Mexican Maquiladoras




between maquiladora employment in Mexico and U.S. economic
performance and the real peso exchange rate.4

To determine the link between maquiladora employment and U.S.
economic conditions, we assembled data on maquiladora employment in
total and by main sectors as well as data on U.S. GDP on a quarterly basis
from January 1980 to December 2002. We then converted all of these data
to their natural logarithms and performed a regression of maquiladora
employment on the real peso-dollar exchange rate and the real U.S. GDP.5
The results of the regression are presented in table 3.




4
 Maquiladoras are particularly sensitive to movements of real exchange rates since they
generate their revenues in dollars by exporting their output to the United States while
incurring production costs (labor and other local inputs) in pesos. An appreciation of the
real exchange rate of the peso makes goods made in the United States cheaper relative to
their cost in Mexico. For example, in 2002, Mexico had an average annual rate of inflation in
consumer prices of 5.7-percent, while the United States had an average inflation rate of 2.4-
percent. Consequently, the peso lost purchasing power inside Mexico at a rate of 5.7
percent, but if its exchange rate were not allowed to adjust, its loss of purchasing power in
the United States would be 2.4 percent. As a result, the goods purchased in the United States
would be 3.3 (5.7 percent minus 2.4 percent) percent cheaper relative to their cost in
Mexico. The peso-dollar exchange rate has, in effect, appreciated in real terms even if the
nominal exchange rate does not change. An appreciation of real exchange rate of the peso,
therefore, makes maquiladoras less competitive in the U.S. market.
5
The regression equations we estimated are represented by the following relationship:

lnXj= α+β lnY + γlnΩ + ε

Where Xj is Maquiladora employment, Y is U.S. Gross Domestic Product, Ω is the exchange
rate of the dollar relative to the peso, and α, β, γ are positive constants to be estimated. J
represents the maquiladora sectors and ln indicates natural logarithms.




Page 58                                                      GAO-03-891 International Trade
Appendix II
Effect of U.S. Economic Conditions on
Employment in Mexican Maquiladoras




Table 3: Summary of Regression of Maquiladora Employment and U.S. GDP and
Real Peso Exchange Rates

                                                              U.S. GDP in
                                                                billions of                   Real
                                                                  chained                 pesos per
                                                     Constant 1996 dollars                   dollar            R-square
Total maquiladora employment                             -19.76                  3.68              0.17               0.99
                                                            0.46                 0.05              0.05
Textile products                                         -29.50                  4.64             -0.31               0.97
                                                            0.90                 0.09              0.10
Footwear & leather products                              -12.98                  2.32              0.70               0.80
                                                            1.15                 0.12              0.12
Furniture products                                       -33.03                  4.77              0.47               0.94
                                                            1.28                 0.13              0.14
Transportation equipment                                 -33.77                  4.94              0.87               0.93
                                                            1.40                 0.15              0.15
Electronics                                              -12.15                  2.73              0.11               0.98
                                                            0.41                  .04               .04
  Electrical & electronic
  machinery                                                -4.71                 1.74              0.22               0.96
                                                            0.37                 0.04              0.04
  Electrical & electronic
  materials & accessories                                -17.04                  3.24              0.06               0.98
                                                            0.52                 0.06              0.06
Other manufacturing                                      -18.82                  3.56              0.15               0.99
                                                            0.40                 0.04              0.04
Source: GAO analysis of Bank of Mexico (Banco De México) data on maquiladora employment, U.S. Department of Commerce, Bureau
of Economics data on GDP, and U.S. Department of Agriculture, Economic Research Service data on exchange rates

Note: Numbers in italics are standard errors. All estimated coefficients were significant at 99 percent of
confidence.


As table 3 shows, maquiladora employment is very sensitive to U.S.
economic growth and the exchange rate. Our results show that a 1 percent
rise (or fall) in U.S. GDP increases (decreases) total maquiladora
employment by 3.68 percent, while a 1 percent rise in the real peso
exchange rate decreases maquiladora employment by 0.17 percent.6
Maquiladora employment is consequently more responsive to changes in

6
 It should be noted that other factors not explicitly captured in our estimates may also affect
maquiladora employment.




Page 59                                                                          GAO-03-891 International Trade
Appendix II
Effect of U.S. Economic Conditions on
Employment in Mexican Maquiladoras




the U.S. economy than to changes in the real exchange rate of the peso.7 In
addition, maquiladora employment in the automotive sector is most
responsive to change in U.S. GDP, while maquiladora employment in
electrical apparatus and machinery is least responsive. The automotive
sector is also the most responsive to real exchange rate variations, while
the electrical materials sector is least responsive.

To investigate the stability of our estimates, we divided our sample into
three separate time periods: 1980 to1985, 1986 to1993, and 1994 to 2002.
Respectively, these three periods correspond roughly to the periods before
and after the implementation of Mexican economic policy reform and after
the implementation of NAFTA. Our analysis of the effect of U.S. GDP and
the real peso-dollar exchange rate on total maquiladora employment during
these three periods is shown in table 4. As the table shows, the
responsiveness of maquiladora employment to U.S. economic conditions
and the real peso exchange rate is fairly consistent with our results in table
3. However, the strongest maquiladora employment responsiveness to U.S.
GDP growth occurred in the pre-NAFTA reform period (1986 to 1993). The
post-NAFTA period (1994 to 2002) has a lower response coefficient for GDP
and a higher response coefficient for exchange rates. It should be noted
that the peso depreciated considerably in December 1994, after the onset of
the “peso crisis.”




7
 It should be noted that the peso-dollar exchange rate has been more volatile then U.S. GDP
during this period.




Page 60                                                    GAO-03-891 International Trade
Appendix II
Effect of U.S. Economic Conditions on
Employment in Mexican Maquiladoras




Table 4: Summary of Regression of Maquiladora Employment and U.S. GDP and
Real Peso Exchange Rates for Three Subperiods

                                                     U.S. GDP in
                                                       billions of
                                                    chained 1996 Real pesos
                                   Constant                dollars per dollar                   R-square
1980-85                                -18.34                  3.51            0.14                   0.97
                                          1.32                 0.16            0.05
1986-1993                              -25.58                  4.38           0.02a                   0.97
                                          4.01                 0.43            0.12
1994-2002                              -16.75                  3.31            0.34                   0.92
                                          1.95                 0.20             0.11
Source: GAO analysis.
a
 All coefficients were significant at least at 95 percent of confidence, except the coefficient for peso-
dollar exchange rate (1986-1993).
Note: Numbers in italics are standard errors.


We also looked into whether the U.S. manufacturing sector has a unique
effect that cannot be captured by overall U.S. GDP. To do so, we obtained
data on U.S. manufacturing shipments and performed a set of regressions
similar to those we performed using GDP. The results of our analysis
appear in table 5.




Page 61                                                               GAO-03-891 International Trade
Appendix II
Effect of U.S. Economic Conditions on
Employment in Mexican Maquiladoras




Table 5: Summary of Regression of Maquiladora Employment and U.S.
Manufacturing Shipments and Real Peso Exchange Rates

                                                                 U.S.
                                                        manufacturing
                                                         shipments in          Real pesos
                                        Constant          1996 dollars          per dollar       R-square
Total maquiladora
employment                                  -72.36                    6.73               0.48           0.78
                                               5.17                   0.40               0.21
Textile products                           -103.44                    9.07              0.22a           0.89
                                               4.73                   0.37               0.19
Footwear & leather products                 -42.45                    3.97               0.73           0.52
                                               5.42                   0.42               0.22
Furniture products                          -95.34                    8.27               0.78           0.65
                                               8.67                   0.68               0.35
Transportation equipment                    -94.21                    8.23               1.21           0.60
                                               9.47                   0.74               0.38
Electronics                                 -54.51                    5.20               0.35           0.85
                                               3.19                   0.25               0.13
  Electrical & electronic
  machinery                                 -31.81                    3.35               0.43           0.86
                                               1.95                   0.15               0.08
  Electrical & electronic
  materials & accessories                   -66.96                    6.21               0.32           0.83
                                               4.04                   0.32               0.16
  Other manufacturing                       -70.33                    6.55               0.47           0.79
                                               4.80                   0.38               0.19
Source: GAO analysis.
a
 Coefficient was not significant at 95 percent. All other coefficient estimates are significant with at least
a 95 percent level of confidence.
Note: Numbers in italics are standard errors.


As can be seen from table 5, a 1 percent change in U.S. manufacturing
shipments induces an employment growth in maquiladoras of
approximately 6.7 percent. Overall, the table shows, the maquiladora
employment’s response to changes in U.S. manufacturing shipments is
larger than its response to changes in U.S. GDP. We also found that certain
maquiladora sectors, such as textile products, furniture and transportation
equipment, are particularly sensitive to changes in U.S. manufacturing
shipments.



Page 62                                                                GAO-03-891 International Trade
Appendix III

Mexico-China Competition in the U.S. Market
for Imports                                                                                                   Appendx
                                                                                                                    iI




               Although U.S. imports from Mexico ($130.8 billion)1 exceeded those from
               China ($109.2 billion) in 2001, these figures represented a decline of 3.2
               percent for Mexico and an increase of 1.9 percent for China. In 2002, both
               countries experienced growth, but U.S. imports from China grew faster
               than U.S. imports from Mexico. This development, coming at a time of
               decreased maquiladora employment and increased plant closings, has led
               to speculation that Mexico is losing ground because of China’s production
               cost advantages.

               To highlight the competition between Mexico and China, we selected U.S.
               imports items from Mexico in 1995 and 2002, with a value of more than
               $100 million in 2002. We also obtained information on U.S. imports from
               China that matched the categories of the imports from Mexico. We then
               selected U.S. imports for which the share from Mexico had declined
               between 1995 and 2002 and matched them with imports for which the share
               from China had increased between 1995 and 2002.

               In 2002, the United States imported from Mexico 152 categories of items
               valued at more than $100 million each. The total value of these items was
               $123.1 billion, while the total value of the same categories of items from
               China was $88.2 billion. From 1995 to 2002, the share of U.S. imports from
               Mexico decreased for 47 of the 152 categories. For these 47 categories, in
               2002, the total value of imports from Mexico was $25.5 billion and the value
               of imports from China was $23.4 billion. China’s share of U.S. imports
               increased for 35 of the 47 categories. The total value of these 35 items was
               $20 billion for Mexico and $23 billion for China.

               Table 6 shows the top 25 U.S. import categories in which imports from
               China increased, while imports from Mexico declined between 1995 and
               2002. As the table shows, Mexico and China appear to be in direct
               competition for several import categories. Although a direct causal link is
               difficult to establish, China seems to have gained U.S. market shares at the
               same time that Mexico has lost them in some import categories, such as
               toys, furniture, electrical household appliances, television and video
               equipment and parts, and apparel and textiles. Maquiladoras are



               1
                The figures used in the analysis presented in this appendix are from the U.S. International
               Trade Commission. They differ somewhat from figures cited earlier in this report for U.S.
               imports from Mexico, which were provided by the Mexican National Institute of Statistics,
               Geography and Information Technology (Instituto Nacional de Estadística, Geografía e
               Informática).




               Page 63                                                     GAO-03-891 International Trade
                                                   Appendix III
                                                   Mexico-China Competition in the U.S.
                                                   Market for Imports




                                                   concentrated in the categories where China appears to have gained U.S.
                                                   market shares.



Table 6: Top 25 U.S. Imports from China for Which China's Share of U.S. Imports Grew, while Mexico's Share Declined between
1995 and 2002

Dollars in million
                                                                       Mexico                                       China
                                                            Value of      Share in         Share in      Value of     Share in     Share in
                                                                U.S.     U.S. total       U.S. total         U.S.    U.S. total   U.S. total
                                                          imports in      imports          imports     imports in     imports      imports
Item                                                           2002           1995             2002         2002          1995         2002
Toys, puzzles, scale models                                    $180           4.5%            2.2%        $6,927        73.3%        84.3%
Furniture and parts thereof                                      595          6.9%            4.7%         4,932        12.2%        38.7%
Articles and equipment for general physical
exercise, etc.                                                   176          5.4%            4.8%         2,011        28.7%        55.3%
Electrical transformers, power supplies for adp
machines or units                                              1,625         25.4%           24.8%         1,553        10.8%        23.7%
Electromechanical domestic appliances                            408         24.8%           20.6%         1,062        35.8%        53.5%
Television receivers, including video monitors and
video projectors                                               4,797         65.6%           47.5%           860         2.6%          8.5%
Made-up articles of textile materials                            340         29.6%           19.1%           839        33.9%        47.1%
Articles of jewelry and parts thereof                            158          2.9%            2.6%           524         1.0%          8.6%
Parts for television, radio, and radar apparatus               1,021         34.7%           24.3%           523         3.6%        12.5%
Stoves, ranges, grates, cookers, barbecues,
braziers, and similar nonelectric domestic
appliances                                                       325         42.5%           26.8%           467         7.1%        38.5%
Exports of articles imported for repairs etc.;
imports of articles exported and returned                      3,870         11.6%           11.5%           371         1.0%          1.1%
Articles of stationary, of paper or paperboard                   116         20.6%           16.5%           349        33.1%        49.6%
Electric filament or discharge lamps and parts
thereof                                                          244         18.0%           16.0%           341         7.0%        22.4%
Unrecorded media                                                 266         12.5%            9.5%           333        10.3%        11.9%
Brassieres, girdles, corsets, braces, suspenders,
garters, and similar articles                                    201         18.8%           11.8%           309         5.2%        18.2%
Garments of textile fabrics, made-up of fabrics of
felt or nonwovens                                                233         46.9%           28.1%           252        18.7%        30.4%
Trailers and semitrailers; other vehicles, not
mechanically propelled; and parts thereof                        113         40.7%           14.7%           165         8.4%        21.4%
Articles of aluminum                                             180         22.3%           22.3%           162         7.0%        20.1%




                                                   Page 64                                                    GAO-03-891 International Trade
                                                                   Appendix III
                                                                   Mexico-China Competition in the U.S.
                                                                   Market for Imports




(Continued From Previous Page)
Dollars in million
                                                                                       Mexico                                       China
                                                                            Value of      Share in         Share in      Value of     Share in     Share in
                                                                                U.S.     U.S. total       U.S. total         U.S.    U.S. total   U.S. total
                                                                          imports in      imports          imports     imports in     imports      imports
Item                                                                           2002           1995             2002         2002          1995         2002
Women's or girls' slips, petticoats, briefs, panties,
nightdresses, pajamas, negligees, bathrobes, and
similar articles                                                                 196          9.0%            9.0%           149         4.4%          6.8%
Centrifuges; filtering or purifying machinery and
apparatus                                                                        449         19.7%           15.5%           136         1.7%          4.7%
Petroleum oils and oils from bituminous minerals
(other than crude)                                                               569          2.4%            2.1%            96         0.0%          0.4%
Safety glass, consisting of toughened (tempered)
or laminated glass                                                               279         41.6%           41.0%            84         0.6%        12.3%
Orthopedic appliances; splints etc.; artificial parts
of the body; hearing aids and other appliances                                   143         13.0%            5.2%            82         2.0%          3.0%
Sanitary fixture including ceramic sinks,
washbasins and pedestals, baths, bidets, water
closet bowls and flush tanks, urinals                                            210         51.4%           44.4%            71         0.0%        15.0%
Measuring or checking instruments, parts and
accessories thereof                                                              141          8.7%            7.8%            39         0.3%          2.2%
Source: GAO calculation using U.S. International Trade Commission data.




                                                                   Page 65                                                    GAO-03-891 International Trade
Appendix IV

U.S.–Mexico Trade, by U.S. Port, 1999–2002                                                                                                                                 Appendx
                                                                                                                                                                                 iIV




                                                                     Trade with Mexico through U.S.-Mexico border crossings dropped in 2001
                                                                     and remained flat in 2002. Whereas, total trade through the 4 major land
                                                                     border ports fell by 5 percent in 2001, U.S. exports to Mexico through these
                                                                     ports fell by 10 percent. The port of Nogales, Arizona, experienced the
                                                                     sharpest decrease in trade, with total trade declining by 9 percent in 2001
                                                                     and 13 percent in 2002. Table 7 provides information on U.S. imports,
                                                                     exports, and total trade with Mexico by border crossing. The four border
                                                                     crossings examined—Laredo, El Paso, San Diego, and Nogales—are
                                                                     Customs districts that represent 33 individual ports of entry along the U.S.-
                                                                     Mexico border.



Table 7: Trade Flows through Major U.S.-Mexico Land Border Crossings

                                                        U.S. dollars in millions                                                   Percent change
                                                1999                       2000             2001        2002        1999-2000            2000-2001              2001-2002
Exports
Total All Ports                            692,821                     780,419           731,026     693,257               11%                   -7%                   -5%
Laredo, TX                                   45,351                      57,659           52,081      48,937                 21                   -11                     -6
El Paso, TX                                  13,171                      18,045           16,299      16,476                 27                   -11                      1
San Diego, CA                                10,760                      12,662           12,342      12,873                 15                    -3                      4
Nogales, AZ                                    5,631                      7,325            6,217       5,366                 23                   -18                   -16
Border subtotal                              74,913                      95,691           86,939      83,652                 22                   -10                     -4
Imports
Total all ports                          1,024,766                  1,216,888           1,141,959   1,163,549              16%                   -7%                    2%
Laredo, TX                                   51,611                      63,298           62,877      65,351                 18                    -1                      4
El Paso, TX                                  21,007                      24,333           24,151      24,938                 14                    -1                      3
San Diego, CA                                19,077                      22,263           21,303      23,013                 14                    -5                      7
Nogales, AZ                                  10,516                      13,050           12,477      11,112                 19                    -5                   -12
Border subtotal                            102,211                     122,944           120,808     124,414                 17                    -2                      3
Trade (exports+imports)
Total all ports                          1,717,587                  1,997,307           1,872,985   1,856,806              14%                   -7%                   -1%
Laredo, TX                                   96,962                    120,957           114,958     114,288                 20                    -5                     -1
El Paso, TX                                  34,178                      42,378           40,450      41,414                 19                    -5                      2
San Diego, CA                                29,837                      34,925           33,645      35,886                 15                    -4                      6
Nogales, AZ                                  16,147                      20,375           18,694      16,478                 21                    -9                   -13
Border subtotal                            177,124                     218,635           207,747     208,066                 19                    -5                      0
Source: U.S. Department of Commerce, Bureau of the Census, official trade statistics.

                                                                     Note: Values for imports are general imports at customs value, and values for exports are total exports
                                                                     at Free-Alongside-Ship (FAS) value.




                                                                     Page 66                                                            GAO-03-891 International Trade
Appendix V

Maquiladora Employment Statistics                                                           Append
                                                                                                 x
                                                                                                 i
                                                                                                 V




              After growing rapidly throughout the 1990s, Mexican national maquiladora
              employment peaked in October 2000 and declined sharply through March
              2002. However, the rise and decline in maquiladora employment varied by
              state and city. As table 8 shows, the city of Tijuana experienced both the
              greatest percentage increase in maquiladora employment (233 percent
              from 1990 through October 2000) and the greatest decline (30 percent
              through December 2002). For each state or city, table 8 shows the number
              of jobs in 1990, followed by the number of jobs at the peak of employment
              (usually around October 2000) and at the lowest point, or trough, following
              the peak. The table also includes the changes in employment in absolute
              and percentage terms. The rise and decline of maquiladora employment
              also varied by industry. Table 9 shows employment changes for three key
              industries—electronics, autos and parts, and textiles and apparel—along
              with details on the rise, peak, and trough for the top five border region
              cities in terms of maquiladora employment.




              Page 67                                          GAO-03-891 International Trade
                                           Appendix V
                                           Maquiladora Employment Statistics




Table 8: Maquiladora Employment by State and City, 1990–2002

                                                    Percent                                            Percent            Percent
                                           Change change                                      Change change                change
                                  Date     in jobs: in jobs:                     Duration:    in jobs: in jobs:            in jobs:
Industry/        Jobs-    Jobs at of       1990 to 1990 to     Jobs at Date of   peak to      peak to peak to     Jobs in trough
area              1990      peak peak         peak     peak     trough trough    trough        trough trough        12/02 to 12/02
All Industries
National                                                                         1 year, 6
             446,436 1,347,803 Oct-00      901,367    202%1,060,173 Mar-02       months       -287,630    -21%1,084,911        2%
Border                                                                           1 year, 5
states       402,432 1,045,410 Oct-00      642,978      160 829,954 Feb-02       months       -215,456     -21 834,216           1
Baja                                                                             1 year, 7
California       87,657   293,248 Oct-00   205,591      235 215,837 Apr-02       months        -77,411     -26 218,887           1
Coahuila                                                                         1 year, 3
                 30,952   116,428 Oct-00    85,477      276 102,683 Dec-01       months        -13,745     -12 116,258          13
Chihuahua                                                                        2 years, 1
             163,953      336,995 Oct-00   173,042      106 253,722 Oct-02       month         -83,273     -25 262,558           3
Sonora                                                                           2 years, 2
                 38,924   111,591 Nov-00    72,667      187    70,525 Dec-02     months        -41,066     -37    70,525         0
Tamaulipas                                                                       1 year, 4
                 80,947   187,581 Oct-00   106,634      132 161,139 Jan-02       months        -26,442     -14 165,988           3
Nuevo                                                                            1 year, 7
León             13,868    72,878 Sep-00    59,010      426    50,423 Mar-02     months        -22,455     -31    52,181         3
Border                                                                           1 year, 11
cities       342,555      839,200 Oct-00   496,645      145 665,637 Aug-02       months       -173,563     -21 667,046           0
Juarez                                                                           2 years, 3
             122,231      264,241 Oct-00   142,010      116 192,485 Dec-02       months        -71,756     -27 192,485           0
Tijuana                                                                          2 years, 3
                 59,870   199,428 Oct-00   139,558      233 140,069 Dec-02       months        -59,359     -30 140,069           0
Matamoros                                                                        1 year, 4
                 38,360    69,989 Oct-00    31,629       82    52,396 Jan-02     months        -17,593     -25    55,183         5
Reynosa          23,541    68,199 Sep-00    44,658      190    64,877 Dec-00     4 months       -3,322       -5   69,389         7
Mexicali                                                                         1 year, 7
                 20,729    65,494 Oct-00    44,765      216    49,056 Apr-02     months        -16,438     -25    55,191        13
Share of
border
states in
national           90%       78%                                                                                     77%
Share of
border
cities in
national           77%       62%                                                                                     61%




                                           Page 68                                                  GAO-03-891 International Trade
                                                                       Appendix V
                                                                       Maquiladora Employment Statistics




(Continued From Previous Page)
                                                                              Percent                                                                    Percent            Percent
                                                                     Change change                                                              Change change                change
                                              Date                   in jobs: in jobs:                                            Duration:     in jobs: in jobs:            in jobs:
Industry/               Jobs-         Jobs at of                     1990 to 1990 to                 Jobs at Date of              peak to       peak to peak to     Jobs in trough
area                     1990           peak peak                       peak     peak                 trough trough               trough         trough trough        12/02 to 12/02
Share of 5
border
cities
(above) in
the overall
border                    77%              80%                                                                                                                         77%
Source: National Institute of Statistics, Geography and Information Technology (Instituto Nacional de Estadística, Geografía e Informática).

                                                                       Note: The “share of border states in national” is the percentage share that maquiladora employment in
                                                                       border states makes up of national maquiladora employment in Mexico. The “share of border cities in
                                                                       national” is the percentage share that maquiladora employment in the 41 Mexican border
                                                                       municipalities makes up of national maquiladora employment. The “share of 5 border cities in the
                                                                       overall border” is the percentage share that the five border cities listed in the table make up of total
                                                                       maquiladora employment in the 41 border municipalities that comprise the border region.




Table 9: Maquiladora Employment by City and Industry, 1990–2002

                                                                                  Percent                                                               Percent         Percent
                                                                  Change          change                                                       Change change            change
                                       Jobs                       in jobs:        in jobs:                Duration:                            in jobs: in jobs:       in Jobs:
Industry/              Jobs-             at Date of               1990 to         1990 to Jobs at Date of peak to                              peak to peak to Jobs in   trough
area                    1990           peak peak                     peak            peak trough trough trough                                  trough trough    10/02 to 10/02
Electronics
National            166,501 468,254 Sep-00                        301,753             181% 320,282 Apr-02                        1 year, 8     -147,972    -32% 326,229          2%
                                                                                                                                 months
Border              142,330 360,857 Oct-00                        218,527                154 248,163 Oct-02                      2 years,      -112,694      -31 248,163           0
cities                                                                                                                           1 month
Juarez                48,647 111,023 Oct-00                         62,376               128       68,908 Aug-02                 1 year,        -42,115      -38    71,100         3
                                                                                                                                 11
                                                                                                                                 months
Tijuana               27,598        97,551 Oct-00                   69,953               253       61,971 Apr-02                 1 year, 7      -35,580      -36    64,566         4
                                                                                                                                 months
Matamoros             17,806        32,052 Oct-00                   14,246                 80      18,486 Feb-02                 1 year, 5      -13,566    -42%     19,177         4
                                                                                                                                 months
Reynosa               13,809        31,073 Sep-00                   17,264               125       28,299 Jan-01                 5 months        -2,774      -9%    29,049         3
Mexicali                8,257       32,963 Sep-00                   24,706               299       21,656 Jun-02                 1 year,        -11,307    -34%     23,270         7
                                                                                                                                 10
                                                                                                                                 months
Share of
border
cities in
national                 85%            77%                                                                                                                           76%



                                                                       Page 69                                                                        GAO-03-891 International Trade
                                         Appendix V
                                         Maquiladora Employment Statistics




(Continued From Previous Page)
                                                   Percent                                        Percent         Percent
                                       Change      change                                Change change            change
                        Jobs           in jobs:    in jobs:                Duration:     in jobs: in jobs:       in Jobs:
Industry/     Jobs-       at Date of   1990 to     1990 to Jobs at Date of peak to       peak to peak to Jobs in   trough
area           1990     peak peak         peak        peak trough trough trough           trough trough    10/02 to 10/02
Share of 5
cities
(above) in
border          82%      84%                                                                                  83%
Autoparts and other transportation
National     104,487 250,635 Oct-00    146,148        140 218,289 Oct-01     1 year, 1   -32,346      -13 233,747          7
                                                                             month
Border        77,200 188,572 Jan-01    111,372        144 164,599 Oct-01     10          -23,973      -13 171,289          4
cities                                                                       months
Juarez        39,272   98,821 Oct-00    59,549        152   82,798 Oct-02    2 years,    -16,023      -16   82,798         0
                                                                             1 month
Tijuana        1,021    6,701 Jan-01     5,680        556    3,647 Dec-01    1 year       -3,054      -46    4,826        32
Matamoros     14,086   21,376 Apr-01     7,290         52   15,543 Oct-01    7 months     -5,833      -27   21,073        36
Reynosa*       4,753   14,624 Sep-00     9,871        208   13,470 Dec-01    1 year, 4     -1154       -8   14,450         7
                                                                             months
Mexicali       3,010    7,247 Dec-00     4,237        141    6,063 May-01    6 months     -1,184      -16    7,353        21
Share of
border
cities in
national        74%      75%                                                                                  73%
Share of 5
cities
(above) in
border          80%      79%                                                                                  76%
Textiles and Apparel
National      42,464 294,855 Jul-00    252,391        594 224,230 Mar-02     1 year, 9   -70,625      -24 240,315          7
                                                                             months
Border        20,891   47,493 May-01    26,602        127   34,908 Apr-02    1 year      -12,585      -26   35,217         1
Cities
Juarez         8,634   10,649 Jul-97     2,015         23    4,592 Apr-02    4 years,     -6,057      -57    4,857         6
                                                                             9 months
Tijuana        2,483    9,875 May-01     7,392        298    6,782 Apr-02    1 year       -3,093      -31    7,394         9
Matamoros       368     2,537 Sep-99     2,169        589    1,662 Jan-02    2 years,       -875      -34    1,675         1
                                                                             5 months
Reynosa         925     3,141 Oct-99     2,216        240    2,089 Jul-02    2 years,     -1,052      -33    2,267         9
                                                                             10
                                                                             months
Mexicali       2,454    2,758 Nov-97       304         12    1,429 Mar-02    4 years,     -1,329      -48    1,562         9
                                                                             4 months




                                         Page 70                                               GAO-03-891 International Trade
                                                                       Appendix V
                                                                       Maquiladora Employment Statistics




(Continued From Previous Page)
                                                                                  Percent                                                               Percent         Percent
                                                                  Change          change                                                       Change change            change
                                       Jobs                       in jobs:        in jobs:                Duration:                            in jobs: in jobs:       in Jobs:
Industry/              Jobs-             at Date of               1990 to         1990 to Jobs at Date of peak to                              peak to peak to Jobs in   trough
area                    1990           peak peak                     peak            peak trough trough trough                                  trough trough    10/02 to 10/02
Share of                 49%            16%                                                                                                                         15%
border
cities in
national
Share of 5               71%            61%                                                                                                                         50%
cities
(above) in
border
Source: National Institute of Statistics, Geography and Information Technology (Instituto Nacional de Estadística, Geografía e Informática).

                                                                       Notes: Data on the border region broken down by industrial sector were only available through October
                                                                       2002.
                                                                       Data listed for textile and apparel jobs in Matamoros in 1990 are for 1994. Data were not available for
                                                                       prior years for that city and industry.
                                                                       The “share of border cities in national” is the percentage share that maquiladora employment in the 41
                                                                       Mexican border municipalities makes up of national maquiladora employment. The “share of 5 border
                                                                       cities in the overall border” is the percentage share that the 5 border cities listed in the table make up of
                                                                       total maquiladora employment in the 41 border municipalities that comprise the border region.




                                                                       Page 71                                                                       GAO-03-891 International Trade
Appendix VI

Objectives, Scope, and Methodology                                                           Appendx
                                                                                                   iVI




              Our work focused on employment and production trends on the U.S.-
              Mexico border and recent trends in the maquiladora industry. We also
              analyzed data on overall U.S.-Mexico trade and compared trends along the
              border with developments in the broader U.S. and Mexican economies. To
              complete our objectives, we conducted interviews with government
              officials in the U.S. and Mexico, as well as semistructured interviews with
              29 industry associations. Between November 2002 and February 2003, we
              conducted site visits in three areas of the border with a considerable
              maquiladora presence: McAllen, Texas–Reynosa, Tamaulipas; El Paso,
              Texas–Juarez, Chihuahua; and San Diego, California–Tijuana, Baja
              California. Our selection criteria consisted of two characteristics integral
              to the maquiladora industry: (1) the number of maquiladora employees and
              (2) the number of maquiladora plants.

              In addition to conducting site visits in selected border areas, we met with
              U.S. officials and traveled to Mexico City to meet with Mexican government
              officials. In the United States, we met with officials from the Department of
              State, Office of the U.S. Trade Representative, International Trade
              Commission, Environmental Protection Agency, Immigration and
              Naturalization Service, Department of Labor, Department of
              Transportation, Department of the Treasury, and U.S. Customs. In Mexico,
              we met with officials from the Ministry of Economy; Ministry of Labor;
              National Institute of Statistics, Geography and Information Technology;
              Ministry of Treasury; Ministry of Government; and Ministry of
              Environment. We obtained, reviewed, and analyzed data from maquiladora
              industry experts, nongovernmental organizations, and Mexican and U.S.
              government agencies.

              We also met with academics at educational institutions in Mexico and the
              United States, including San Diego State University; the University of
              California, Los Angeles; University of California, San Diego; University of
              Texas at El Paso; Colegio de la Frontera, Tijuana; Universidad Nacional
              Autónoma de Mexico; and Universidad Autónoma Metropolitana de
              Xochimilco. In addition, we met with numerous representatives of industry
              and nongovernmental organizations as well as other maquiladora experts.

              To understand how communities along the U.S.-Mexico border are
              integrated and the role that maquiladoras play in U.S.-Mexico
              interdependence (objective 1), we interviewed experts on the maquiladora
              industry, academics, and representatives of nongovernmental
              organizations. We reviewed extensive documentation and academic
              research provided by these sources, analyzing economic, social, and



              Page 72                                           GAO-03-891 International Trade
Appendix VI
Objectives, Scope, and Methodology




political linkages between border communities and the influence of the
maquiladora industry in the border region. We identified similarities and
differences between border communities with regard to social and
economic integration.

To review the status and trends in trade, employment, and output
(objective 2), we obtained original official data on employment and trade
from both U.S. and Mexican government agencies. We analyzed the data to
identify trends in employment and production in the U.S.-Mexico border
area. We compared our analysis of trends along the border with
developments in the broader U.S. and Mexican economies. For example,
for the United States, we conducted a shift-share analysis that decomposes
employment growth (or decline) in a region over a given time period into
three components: the national growth effect, the industry mix effect, and
the local (competitive) effect. To assess the quality and reliability of the
data, we conducted in-person meetings with government officials of the
National Institute of Statistics, Geography and Information Technology in
Mexico City to discuss the methodology for collecting the data and any
known limitations or biases. For instance, statistics on maquiladora
employment and production are affected when companies leave the
program. Although establishments and employees are no longer considered
part of the maquiladora sector and statistics correctly show a decline in
maquiladora employment, the firms and employees may still remain in
operation outside of the program. We also analyzed the data sources for
internal consistency, as well as external consistency with other sources of
information, such as our structured interviews. Although both U.S. and
Mexican statistics have some limitations, we consider the data sufficiently
reliable to present general trends and magnitudes in production,
employment and trade.

To identify the factors that have affected employment and production in
the maquiladora industry (objective 3), we analyzed economic data and
conducted semistructured interviews. Specifically, to determine the link
between maquiladora employment and U.S. economic conditions, we
assembled data on maquiladora employment in total and by main sectors as
well as quarterly U.S. GDP data from January 1980 to December 2002. We
then converted all of these data to their natural logarithms and performed a
regression of maquiladora employment on U.S. real GDP, U.S.
manufacturing shipments and the real peso-dollar exchange rate. The
semistructured interviews were conducted in person and by telephone with
29 representatives of business associations, consisting of organizations




Page 73                                          GAO-03-891 International Trade
Appendix VI
Objectives, Scope, and Methodology




representing principal industrial sectors involved in maquiladora
operations, and maquiladora associations at the local and national level.

Of these 29 organizations, 23 reported their members experienced a decline
in employment and/or production. We asked these 23 organizations to
discuss the major reasons for the maquiladoras’ recent decline. We relied
on business associations to identify the factors affecting employment and
production in the maquiladora industry, because of the direct experiences
of their membership with plant closures, changes in employment levels,
and other company changes. We also relied on associations to comment
generally on issues facing the industry, such as increased competition, and
for information on overall industry trends. In selecting potential interview
participants from maquiladora and other business associations, to ensure
representation throughout the industry, we considered three criteria:
geographic location, industry sector, and country of origin or region of
representation.

Of the 29 associations interviewed, 17 were maquiladora associations and
12 were industry-specific associations. The maquiladora associations were
primarily identified through the membership list for Mexico's National
Council of the Maquiladora Export Industry (Consejo Nacional de la
Industria Maquiladora de Exportación -- CNIME) that has a membership
including 22 maquiladora associations located across Mexico. We
contacted all 22 members and the national association, and we completed
interviews with the national association and 14 local member associations.
We completed additional interviews with two maquiladora associations
that were not members of CNIME, but were included to broaden
representation of country of origin/region of representation (i.e., Japan and
the United States). Of the 12 industry-specific associations, we sought
interviews with associations representing major industrial sectors,
specifically targeting the electronics, automotive, and apparel sectors.1 Of
the 29 associations, Mexico, the United States, and Japan were the country
of origins/regions of representation included.




1
 We identified major industry sectors with information presented in MEXICONOW on the
100 largest maquiladora firms. Although the service industry was one of the largest, it
represents a very diverse group of operations with too little in common to allow the
identification of factors of the recent industry downturn that would be applicable to all of
the industry’s members. Therefore, we sought to interview participants that represented the
electronics, automotive, and apparel sectors.




Page 74                                                     GAO-03-891 International Trade
Appendix VI
Objectives, Scope, and Methodology




We developed 14 questions for the semistructured interview guide, based
on previous research. Six questions were closed ended, and eight were
open ended. Participants’ responses to the open-ended items were content-
analyzed by two trained coders, and intercoder reliability values were
computed. Reliability values ranged from 58 percent to 100 percent. The
coding category scheme was modified until 100 percent agreement was
reached between the two coders. The results will not be generalizable
outside our sample; however, we believe we have included associations in a
way that is as balanced and inclusive as possible within the number of
interviews we were able to conduct.

To identify the implications of recent developments in the maquiladora
industry for the border region and U.S.-Mexico trade (objective 4), we
analyzed documents and interviews citing factors that might influence the
recovery of maquiladora production. We also analyzed the debate about the
viability of the industry and some initiatives to identify and address its
recovery. The information on foreign laws in this report does not reflect
our independent legal analysis, but is based on interviews and secondary
sources.

We performed our work from July 2002 through July 2003 in accordance
with generally accepted government auditing standards.




Page 75                                         GAO-03-891 International Trade
Appendix VII

Comments from the Department of State                        Append
                                                                  x
                                                                  iVI




               Page 76          GAO-03-891 International Trade
Appendix VII
Comments from the Department of State




Page 77                                 GAO-03-891 International Trade
Appendix VIII

GAO Contacts and Staff Acknowledgments                                                        Appendx
                                                                                                    iI
                                                                                                    V




GAO Contacts      Kim Frankena (202) 512-8124
                  Juan Gobel (213) 830-1031



Acknowledgments   In addition to those listed above, Joel Aldape, Bronwyn Bruton, Gezahegne
                  Bekele, Francisco Enriquez, Reid Lowe, Alison Martin, and Timothy
                  Wedding made key contributions to this report.




(320147)          Page 78                                        GAO-03-891 International Trade
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