INTELLIGENCE MEMORANDUM MEXICO'S BORDER INDUSTRIALIZATION PROGRAM

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Confidential 25X1
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Mexico's Border industrialization Program
Confidential
ER IM 72-91
June 1972
Copy No. 81
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WARNING
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GROUP I
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downgrad;ng and
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1972
INTELLIGENCE MEMORANDUM
MEXICO'S BORDER INDUSTRIALIZATION PROGRAM
Introduction
1. The Mexican border industrialization program (BIP), under which
foreign-owned companies are offered import duty exemptions and other
inducements to establish plants along the US-Mexican border, has brought
substantial economic gains. Initiated in 1966 in an effort to reduce high
unemployment levels in the border area, the program has become an
important factor in Mexican export expansion and diversification.
Nevertheless, the program faces certain internal and external threats that
could seriously limit its future success. This memorandum reviews the
program's history, examines its economic impact, and assesses its
medium-term prospects.
Background
2. The economic health of Mexico's northern border area was
seriously jeopardized by termination of the US bracero program (Public
Law 78) in 1965. At the program's height in the early 1960s, some 177,000
Mexican citizens annually crossed the border to obtain seasonal farm work
in the United States. Their remittances of some $40 million annually
significantly benefited economic activity in the area. The remittances also
contributed substantially to retail sales on the US side of the border, where
Mexican citizens of the border area spend 50%-60% of their incomes.
Following the program's termination, increased unemployment sharply
depressed economic activity in the northern provinces, adversely affecting
the US border cities as well. The Mexican government, already faced with
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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a political challenge from the opposition National Action Party in the area,
felt that strong corrective action was necessary. To this end, it launched
the border industrialization program in 1966.
Genesis of BIP
3. BIP was the brainchild of the then-incumbent Secretary of
Industry and Commerce, Octaviano Campos Sales. Campos conceived the
idea during a 1965 trip to the Far East, where he observed US-owned plants
assembling US-made components for re-export to the United States. These
plants had been established after the mid-1950s to take advantage of low
foreign wages in performing certain labor-intensive manufacturing processes
on products destined for the US market. Such operations are encouraged
by US import duty exemptions provided under sections 807.00 and 806.30
of the Tariff Structure of the United States (TSUS). Section 807.00 subjects
re-imports of US manufactures exported for assembly or further processing
to duty only on the value added abroad, provided that the originally
exported goods have not lost their physical identity. Although implemented
beginning in 1954, following a US Customs Court decision, this section
was not formally enacted until 1963. Section 806.30, enacted in 1956,
extends the exemption to metal articles exported for processing and return
regardless of changes in their physical identity, provided they are subjected
to further processing upon return.
4. The principal statutory basis for the BIP is provided in two
June 1966 resolutions by the Mexican government. These resolutions
extended the main advantages already accruing to foreign-owned firms
located in small duty-free zones in a few northwestern border cities -
mainly Tijuana, Mexicali, Nogales, and Aqua Prieta - to a new 12-mile-wide
zone along the full length of the US-Mexican border. In both the older
duty-free zones and the extended zone, manufacturing and processing
operations are exempt from Mexican import duties on material inputs and
equipment and from legislation setting minimum shares of material inputs
that must be of Mexican origin. Additionally, the firms establishing these
operations are exempt from "Mexicanization" legislation requiring varying
degrees of Mexican ownership and are accorded all privileges normally
granted domestic-owned companies. Firms established in either type of zone
are prohibited from selling duty-free materials and finished products in
Mexico generally, but those previously established in the duty-free zones
are permitted to sell finished products within their zone.
BIP in Operation
5. The BIP was received enthusiastically by businessmen and public
officials on both sides of the border. As the various Mexican cities competed
for factories, industrial parks were established and semi-official
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development-promotion groups intensified their efforts. Chambers of
Commerce in US border cities also were early and enthusiastic supporters
of the program. Sparked by these promotional efforts, the number of border
industry factories jumped from 25 in October 1966 to 333 in
December 1971, while employment increased nearly a hundredfold - from
400 to almost 40,000 (see Figure 1). Abcut one-fifth of the new plants
Border Industry Employees and Factories in Mexico .. .
100,000 10.000
Cnployees
Oat Aug Feb An AI Jun ce
1966 1967 1968 1969 1970 1971
51 744 5.72
are located in the original duty-free zones, the remainder being set up in
the extended zone. The majority of plants are located in the "twin city"
population centers, such as Ciudad Juarez/El Paso, Nogales/Nogales, and
Tijuana/San Diego (see Figure 2). The ten largest centers contain some 80%
of the northern Mexican population. Owing to the program's success in
attracting new factories, the Mexican government in March 1971 extended
the 12-mile zone to Mexico's coasts and the border with Central America -
so far, without attracting any new industrial facilities. It also granted border
industry privileges to factories in the interior under certain circumstances.
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1 Tijuana, Baja California Norte-San Diego, California
2 Mexicali, Baja California Norte-Calexico, California
3 Nogales, Sonora - Nogales, Arizona
4 Agua Prieto, Sonora - Douglas, Arizona
5 Ciudad Juarez, Chihuahua - El Paso, Texas
8 Ciudad Acuna, Coahuila - Del Rio, Texas
7 Piedras Negras, Coahuila - Eagle Pass, Texas
8 Nuevo Laredo, Tamaulipas - Laredo, Texas
9 Reynosa, Tamaulipas - M`Allen, Texas
10 Matamoros, Tamaulipas - Brownsville, Texas
Major Population Centers Along the US-Mexican Border ...
Of the 333 plants with border industry status in December 1971, seven
are located in the inland cities of Guadalajara, Monterrey, Torreon, San
Luis Potosi, and Sabinas (see Table 1).
6. In addition to effective promotional efforts, the major factors
accounting for the program's success have been Mexico's political and
economic advantages compared with many other foreign countries and its
low wages compared with the United States. Mexico is politically stable,
has a large and easily trained labor force, and - most important - enjoys
marked management, supply, and transportation advantages for re-export
operations to the United States compared with more distant countries.
Although wage rates in northern Mexico are among the country's highest,
they are only about one-fourth of those for comparable manufacturing
operations in the United States and two-thirds of those in Japan. Me:dcan
wage rates are much higher than those in smaller Far Eastern countries
with comparable political stability and trainable labor forces, such as Hong
Kong and Taiwan, but the Far East's low-wage advantages are largely offset
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Mexico: Plants with Border Industry Status
December 1971
Number of
Plants
Estimated
Employment
Northern Border Zone
326
38,100
Mexicali
67
8,800
Tijuana
86
6,000
Ciudad Juarez
37
5,000
Nogales
35
4,600
Matamoros
33
4,500
Nuevo Laredo
18
3,600
Piedras Negras
6
1,500
Agua Prieta
15
1,500
Tecate
14
1,000
Ciudad Acuna
2
800
Reynosa
3
300
San Luis Rio
Colorado
3
200
Ensenada
6
200
Rio Bravo
1
100
Guadalajara
2
1,200
Monterrey
2
200
Torreon
1
100
San Luis Potosi
1
100
Sabinas
1
100
Total
333
339800
by the benefits of Mexico's proximity. Comparison of wage rates (including
fringe benefits) for comparable operations by employees in consumer
electronics production for selected countries in 1969 is shown in the
following tabulation:
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Average Hourly Earnings
US $ ?/
Mexico
0.53
United
States
2.31
Japan
0.82
Hong Kong
0.20
Taiwan
0.13
a. Based on responses by US companies to a
US Tariff Commission questionnaire reported
in Tariff Commission Publication 339, Eco-
nomic Factors Affecting the Use of Items
807.00' and 806.30 of the Tariff Schedules of
the United States, September 1970, UNCLASSI-
FIED.
Because of a more rapid growth in hourly earnings in Far Eastern countries
since 1969 and because of the recent currency realignment, the gap between
Mexican wage rates and those in the smaller Far Eastern countries has
narrowed slightly and Mexico's wage advantage over Japan has increased.
7. Some 85% of the BIP plants are US-owned, the remainder being
owned by Mexican citizens. About 40% produce electrical or electronic
products and 27?%o produce clothing and other tentile products.
Metalworking plants make up about 9%, furniture and wood products
factories 6%, and plants producing a variety of processed foods, leather
goods, and plastic products (mostly toys) 18%. Although these plants
apparently are increasing their sales to third-country markets, the United
States still is the focal point of their operations.
8. Almost all the US-owned BIP factories were established to
perform highly labor-intensive operations that do not change the basic form
of the US material or components involved. As a result, a very large share
of RIP sales under US exemptions, particularly those provided in
TSUS 807.00, qualifies for duty-free entry. The value of duty-free exports
to the United States-has remained consistently at almost two-thirds of total
BIP sales under these exemptions, compared with about 55% for similar
plants in Hong Kong and 25% in Taiwan. In 1970, Mexico accounted for
more than one-half of US duty-free imports of this type from less developed
countries,(1) exceeding by almost 50% the combined total from Hong Kong
1. Developed countries also take advantage of exemptions provided under
TSUS 807.00 and 806.30 and, in aggregate, accounted for 40% of US duty-free imports
of this type in 1970. Their use of these exemptions is totally different in nature, however.
Most of the products involved are their own manufactures, c:,ntaining only small amounts
of US components which are used mainly because they are competitively priced items
involving advanced technology. As a result, only 14% of the value of developed countries'
sales under these exemptions qualified for duty-free entry in 1970.
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and Taiwan - the second and third ranking countries. Mexico's share has
been steadily rising, and it almost certainly accounted for an even larger
portion in 1971.
Benefits from the Program
9. The BIP has brought substantial economic gains to the Mexican
economy. Border industry exports have been a major dynamic element in
the country's otherwise lackluster export performance in recent years.
Although no adequate measure of total BIP exports is available, a rough
estimate of their growth can be derived from the rapid rise in border
industry sales to the United States invoking TSUS 807.00 and 806.30.
These sales rose from $19 million in 1967 to an estimated $375 million
in 1971 (see Table 2) and helped to boost the share of manufactured goods
from one-fourth to about 45% of total Mexican exports - by far the largest
share in Latin America. In fact, the best estimates -of total BIP output
in 1971 approximate $500 million, most of which was sold in the United
States. Of course, the contribution of the BIP to economic activity in
Mexico is far below this figure. Mexico's 1971 BIP exports to the United
States under the duty exemptions were produced from a minimum of $250
million in materials and components imported from the United States,
leaving about $125 million for value added in Mexico. The estimated total
value of $500 million in BIP output in 1971 probably required about $325
million in foreign supplies, nearly all from the United States. Nevertheless,
even on a net basis, Mexico's earnings from the BIP have helped significantly
to slow the worsening in its trade balance in recent years.
10. Border industry firms have also contributed greatly to increased
income and employment in the northern border area. The program has been
less successful, however, in alleviating the specific unemployment problems
it originally aimed at. About 85% of the new jobs are filled by women,
mostly new labor force entrants, whereas many of the farm workers left
unemployed by termination of the bracero program have benefited only
indirectly, if at all. Moreover, the program's publicity appears to have
induced a substantial movement of workers into the border area from other
parts of Mexico. Consequently, although many new jobs have been created,
unemployment rates in the area probably have not declined much.
11. The United States also has benefited significantly from the
program. US border cities have gained from expanded investment and
increased employment in office, warehousing, and component-producing
facilities to support border industry operations. They have also benefited
from increased retail sales resulting from the higher incomes of Mexican
citizens in the northern border area. Although the movement of US factories
across the border may have cost some US jobs, some of these factories
would have closed down even in the absence of the BIP because of their
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Table 2
Mexico: Increasing BI? Role in Foreign Trade
Million US $
1971
1967
1968
1969
Esti-
1970 mated
Exports 1,133
1,272
1,428
1,399-1,430
Manufactured
goods a/
292
337
450
510 620
Border
industry b/
19
73
145
220 375
Other goods
841
935
978
889 810
Imports 1,748
1,960
2,070
2,456 2,410
Of
which:
Border
industry b/
12
50
98
138 250
Trad
e balance
-615
-688
-650
-1,057 -980
a. Including goods not classified in Mexican sta-
tistics, nearly all of which are manufactures; ex-
cluding raw sugar, which in Mexican statistics is
included under manufactured goods.
b. Including only border industry exports to and
imports from the United States as derived from US
data on trade flows under TSUS 807.00 and 806.30.
inability to compete with imports. Others would have been forced to move
to more distant countries where the ratio of their purchases of US-produced
materials to sales would have been significantly lower. To the extent that
the program has permitted US firms to compet? more effectively with
imported goods produced by firms not using US materials, the United States
has enjoyed additional indirect trade balance gains as weil.
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Potential Threats to the Program
12. The BIP directly conflicts with basic principles of Mexican
economic policy: that Mexican industry should be Mexican-owned, that it
should use Mexican-produced material inputs, and that the border areas
should be integrated economically with the rest of the country. Although
these principles have often been bent for practical reasons, such deviations
have usually been temporary and there is no doubt that the government
still has reservations about the BIP. President Echeverria recently emphasized
that the government was supporting the program "for the time being,
temporarily," and Industry and Commerce Secretary Torres Manzo called
it "a necessary evil." Although pragmatic considerations thus far have
brought a broadening of the program, there have been hints that the BIP
eventually may be constrained by Mexican regulations requiring use of
domestically-produced material inputs and increased Mexican ownership.
Such regulations, if they were as stringent as for other types of Mexican
industry, could sharply reduce the competitive e i e Mexico has over other
countries as a location for re-export operations for the US market and thus
limit Mexican gains from the program.
13. Rising wage rates also could narrow Mexico's competitive edge
in hiring re-export operations for the US market, although so far they have
not done so. The new 1972-73 minimum wage scales average 18.3% above
those for 1969, and wage costs have been boosted further by a 5% payroll
tax adopted in 1971 for financing the National Housing Fund. These
increases, although greater than in many Caribbean countries, are below
those in Hong Kong and Taiwan during the period. Increased unionization
is a source of potential difficulties; more than half the border industry
factories are now unionized. So far there have been few labor conflicts
in the northern border area, but labor militancy reportedly has been a major
factor limiting border industry growth in a few cities such as Reynosa and
Nuevo Laredo.
14. Perhaps the most immediate threat to the program is external,
however. Organized labor groups in the United States long have opposed
the import duty exemptions provided by TSUS 807.00 and 806.30. Spurred
by recently increased unemployment, they are now lobbying vigorously for
their elimination. The Hartke-Burke bill, currently being considered by the
US Congress, would repeal these exemptions. The Mexican border industries
are a prime target of US organized labor not only because they are by
far the largest foreign beneficiaries of TSU 807.00 but also because of the
labor-intensive nature of their operations. Labor spokesmen point to the
transfer of more than 100,000 job opportunities abroad as the overall impact
of US duty exemptions, but they are most concerned about the processing
and assembling operations in the less developed countries.
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Outlook and Conclusions
15. Barring a major change in Mexican BIP policy or repeal of US
import duty exemptions, border industry investment, employment, and
foreign sales seem likely to continue expanding rapidly. Should BIP sales
come to dominate Mexican exports to the United States in the next two
or three years, Mexico's concern about its vulnerability to US restrictions
would increase. But, as border industry plants become more firmly
established and increased efficiency enhances their competitiveness in other
foreign markets, their orientation to re-export operations for the US market
could decline somewhat. To the extent that third-country markets are
developed, BIP plants would also be able to shift from US-produced mate-;al
inputs to lower-cost supplies. At the same time, investment in BIP plants
by Mexican and other non-US firms probably will increase, in part because
of the recent world currency realignment. For example, the yen revaluation
has helped to stimulate Japanese interest in the BIP, and Japanese
businessmen are expected to establish several factories in the border zone
during 1972 to produce for the US and other Western Hemisphere markets.
16. Because of Mexico's large and growing dependence on the border
industries, the government seems unlikely to jeopardize the program by
applying "Mexicanization" or other restrictions to the border industry plants
or by unduly increasing minimum wages in the next several years. Indeed,
despite government officials' publicly expressed misgivings about the
program, the March 1971 extension of the border area seems to indicate
growing official recognition of BIP's contribution to the Mexican economy.
Thus, although a few new restrictions probably are inevitable, strong -
albeit tacit - official support seems likely over the next several years.
17. Repeal of US import duty exemptions would greatly set back,
although not destroy, the BIP. Because of the rise in duty-paid costs of
their products in the US market (see Figure 3), a number of US-based
firms would suspend their processing and assembling operations in Mexico.
About one-third of the present BIP plants could be so affected.(2) Producers
in the clothing, leather, and electronics industries would be particularly
vulnerable because they face the most severe competition from imports less
dependent on US-produced materials and components. In fact, because the
value added in BIP clothing and leather plants is relatively small and US
duty rates on their products are high, the rise in dutypaid costs on these
exports to the United States would be so marked as to force almost a
total shut-down ir, operations of this type. Overall, repeal of US duty
exemptions would mean a loss to Mexico of an estimated 115-130 border
2. The basis for this estimate and others in paragraphs 17 and 18 is discussed in
greater detail in the Appendix.
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Figure 3
Increases in Cost of US Imports from Mexican Border
Industries that Would Result from the Repeal of
US Tariff Section 807.00* ...
Wearing Apparel
Toys '' 8.3%
R.
Semi-conductors E 4.7%
Television Receivers E 3.6%
Ceramic Products 1.4%
Average, All Products 7.3%
*Estimated at 1972 Kennedy Round Import duly rates. Data apply to estimated increases In duty-paid
cost of the final product In the US market, The rise in the costs of using US materials in Border
Industrialization Program operations would be considerably higher.
813746 8.72
industry factories employing some 8,000-10,000 Mexican citizens and
accounting for $65 million to $85 million in gross export earnings. About
one-fourth to one-third of these plants might move to the Far East or the
Caribbean area to obtain greater labor-cost savings, while the remainder
would return to the United States or simply close down.
18. With repeal, benefits now accruing to the United States from the
BIP would also decrease sharply. Retail sales in US border cities would
suffer as a result of red-aced employment on both sides of the border.
Moreover, decline in employment in office, warehousing, and
component-producing facilities in the United States would offset most -
if not all - of the gains deriving from the return of some BIP operations.
Because many of the border industry plants remaining in operation would
have little incentive to use US materials, they almost certainly would shift
to lower-cost supply sources, Such replacement, together with losses from
the transfer or closing of other BIP plants, would reduce the current level
of US material sales to Mexico by an estimated $50 million in the first
transitional year and by $125 million to $165 million in subsequent years.
Because the United States nevertheless would continue to be the major
market for BIP sales, repeal of the import duty exemptions in fact would
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worsen the US trade balance with Mexico, perhaps by $70 million annually.
Increased sales to Far Eastern or Caribbean countries, where some BIP plants
would be re-established, could be expected to make up only a small fraction
of this loss.
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APPENDIX
Effects of Repeal of TSUS 807.00
and 806.30 on Border Industry Operations
Materials used i-i measuring the impact of repeal of TSUS 807.00 and
806.30 include (a) detailed data on 1970 BIP exports to and imports from
the United States under TSUS 807.00 and 806.30 as compiled by the US
Department of Commerce; (b) analysis of US firms' responses to
questionnaires distributed by the US Tariff Commission, as reported in US
Tariff Commission Publication 339, Economic Factors Affecting the Use
of Items 807.00 and 806.30 of the Tariff Schedules of the United States,
September 1970; and (c) various Embassy reports on BIP operations. In
case of repeal, we estimate that after the first transitional year the following
reductions would occur in operating BIP plants, BIP e*r ployment, Mexican
purchases of US materials and components, and Mexican exports to the
United States, by product line:
Number
of
nts
Pl
Number of
Employees
Purchase of
US Materials
(Million US $)
Exports to the
United States
(Million US $)
Product
a
Electrical and
electronic
products
15-25
1,100-2,500
80-100
25-35
Clothing, tex-
tile, and
leather
products
95-100
6,600-7,000
25-35
40-50
Toys
0
0
20-30
0
Other prod-
ucts
5
300-500
Negl.
Ne 1.
g
Total
reductions 115-130 8,000-10,000 125-165 65-85
Electrical and Electronics Products
Most of the 130 to 135 BIP electrical and electronic products plants
assemble components and final products for use or sale by their parent
US firms in the US market. Their principal products include
semi-conductors, electronic memories, television receivers and parts, and
office machines and parts. Many of the BIP plants producing electronic
components are integral parts of US production lines and are tied to use
of parent company materials. Since the labor-cost advantages of BIP
operations generally exceed the relatively small duties saved by the
exemptions on these products, most would continue operation following
repeal. A few - perhaps ten -- small plants that are not subsidiaries of
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US firms and could not absorb a 5% duty on re-exports of materials and
compoi'ents to the United States probably would be forced to close,
however. Possibly an atAitional -:en or so large plants - subsidiaries of US
firms that also have plants in the Far East - probably would be closed
and their operations transferred there.
Plants assembling television receivers and office machines and parts,
which account for an estimated one-half of 1971 BIP purchases of electrical
and electronic materials from the United States, probably mould gradually
eliminate these purchases following repeal. These plants presently buy
US-made materials, although non-US materials of comparable quality are
readily available at lower prices and they are generally free to buy them.
Overall, repeal of the exemptions would reduce the number of LIP plants
producing electrical and electronic products by an estimated 15 to 25, cut
BIP employment by some 1,100 to 2,500 workers, and reduce annual BIP
imports from and exports to the United States by an estimated $80 million
to $100 million and $25 million to $35 million, respectively.
Clothing, Textiles, and Leather Products
About half of the 90 or so BIP clothing and textile plants and all
of the ten or so leather products plants are small assemblers of low-priced
articles for sale through large US chains in direct competition with US
imports from Far Eastern countries not using TSUS 807.00 exemptions.
The other half of the clothing plants are affiliated with large US producers
of high-quality lingerie and other goods that do not face significant Far
Eastern competition. Application of the 34% duty on re-exports of US
textile materials and the 12% to 18% duties on leather materials would
make continued operation by all these BIP plants wholly unprofitable. While
possibly as many as 40 clothing plants -- mainly those associated with the
large US firms - might shift operations back to the United States and
perhaps 20 might transfer to the Far East or Caribbean area, the remaining
clothing and all of the leather plants probably would simply close down.
Transfer and closure of these plants would reduce BIP employment by at
least 6,600, imports of US materials by $30 million or so annually, and
exports to the United States by some $45 million annually.
Toys
Nearly all the BIP toy plants assemble final articles from materials
purchased from independent US producers for sale in the US market by
one large US firm (Mattel). Generally, the labor cost advantage of BIP
operations exceeds the margin of duty saved, and the plants probably would
remain in operation following repeal. Because of the flexibility of material
supply and the ready availability of non-US materials of comparable quality
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 Approved For Release 2008/03/03: CIA-RDP85T00875RO01700030091-6
CONFIDENTIAL
at lower prices, however, it is estimated that the 18% rise in the cost of
using US materials following repeal would result in a complete shift to
non-US materials. Therefore, the impact of repeal on the toy plants would
reduce BIP purchases of US materials by ar. estimated $25 million or so
annually while leaving toy exports to the Jniicd States unchanged.
Other Products
The adverse impact of repeal on the remaining 90-odd BIP plants would
be generally small. -Mostly small metal, ceramic, wood-working, and
food-processing operations, they account for a total of only about 15%
of BIP exports to the United States under the exemptions. Although the
value added by these plants is relatively small, their labor-cost savings from
BIP operations nevertheless generally exceed the margin of duty saved, and
their operations would in most cases remain unchanged following repeal.
The 20-odd furniture and wood products plants in this group would face
an 8% duty on re-exports to the United States, however, and thus perhaps
about five would close, reducing BIP employment by 300 to 500 workers
but having a negligible effect on BIP imports from and exports to the United
State3 under the exemptions.
CONFIDENTIAL is
Approved For Release 2008/03/03: CIA-RDP85T00875RO01700030091-6