NAFTA, yesterday and today

Manufacturing in MexicoHere we are, nearly three decades later talking about the North American Free Trade Agreement (NAFTA) once again, proposing renegotiation to make it more favorable to U.S. manufacturing. There were a lot of doubts about NAFTA back in 1990 and 1991—many uncertainties about how this deal would play out in a country we didn’t know much about back then.

The other day while cleaning out some old files (paper, not computer files, which gives you an idea of how old these are), I came across some articles and editorials I’d saved. (I think clipping good editorials and articles is a journalist’s “hoarding” problem.) One article in the Wall Street Journal, dated October 4, 1990, written by then manufacturing guru Peter F. Drucker, was titled, "Mexico’s Ugly Duckling—the Maquiladora." The maquiladora is a “twin plant” that companies set up, with one facility located on the Mexican border in the United States and another in Mexico. Drucker noted in his article that Mexico was the United States’ third largest trading partner after Canada and Japan. My, how things have changed!

Drucker provides a brief history of Mexico’s nationalist government starting in the 1860s, when the goal of President Benito Juarez was “to keep out the gringos by building a nation of self-contained Indian peasant farmers.” That didn’t work out so well, so European bankers and industrialists were brought in. (That explains why I met so many people living in Mexico City with Germanic last names!)

The currently fraught relations with Mexico and possible redo of NAFTA will have repercussions on both sides of the border, and they could be problematic for some U.S.-based plastics processors. Read “ U.S.-Mexico breakup would hurt injection molders and suppliers on both sides of the border ” to find out how.

The maquiladora, said Drucker, was Mexico’s “one economic success.” While Mexico restricted ownership or banned outright ownership of Mexican industries by foreigners, they came up with a novel idea. The maquiladora would allow parts to flow across the border into Mexico duty-free, become finished goods, then be exported to the United States, “subject to American duty only on the value added in Mexico,” a VAT or value added tax.

Drucker noted the dramatic evolution of Mexican industries thanks to the maquiladora phenomenon, starting out with simple assembly of parts and products by mostly unskilled, low-wage employees across the border using older equipment. It became an amazing success story, yet, as Drucker pointed out, the “maquiladora has been treated as Mexico’s ugly duckling rather than its swan. That it is unpopular in Mexico City is understandable. It flagrantly contradicts everything the Mexican intellectual holds sacred: A belief in statism and a deeply ingrained suspicion of the yanqui.”

At the time Drucker wrote this article, Mexico hadn’t yet realized what was to come thanks to the maquiladoras that opened a door between the United States and Mexico. It also provided Mexico with a way to attract foreign investment. At first, the maquiladoras were allowed to produce only for the U.S. market, Drucker explained, and “needed to develop its home market,”

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