Twin Plants Essay

Submitted By jpicerno
Words: 754
Pages: 4

The scenario of a company owning two plants, one in the United States and one in Mexico is a very real and growing structure for the manufacturing of products. This stems back to 1965 when the Mexican and United States governments established the Border Industrialization Program, creating a number of tax incentives for collaborative manufacturing initiatives between the two countries. Under the program raw materials and equipment could be imported from the U.S. into Mexico without tariffs to be used to set up manufacturing plants (Heathcote). Components manufactured in the Mexican plants would then be exported back to “twin plants” in the United States, where they would be assembled into final products. The Border Industrialization Program, later called the Maquiladoras Program, was extremely popular and has been one of the principal causes of rapid industrialization and urbanization along the Mexican-U.S. border over the last 30 years. The program created special shelters along its northern frontier where foreign owned manufacturers could base their operations, paying minimal taxes and utility costs, import materials from the U.S., assemble a product, and export it back north only paying tariffs on the value added. Today, in all of Mexico, 2,500+ maquiladoras employ over one million workers, mostly in the border states, and wages (anywhere from $3 to 9$ a day, generally) and opportunities are probably better in northern Mexico than most places in the country (Kourous).

This system of twin plants creates some interesting discussions on productivity. Productivity is commonly defined as the ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labor and capital, are being used in an economy to produce a given level of output. One of the most common measures of productivity is Gross Domestic Product (GDP) per hour worked. This measure captures the use of labor inputs better than just output per employee. One significant challenge of this measurement is quantifying capital investment. As the United States has a substantial competitive advantage over Mexico in capital invested into automation, production equipment and the United States to produce a product within its borders than it would be for Mexico to produce that same product. Mexico’s production is much more manual which creates a significant difference in the GDP of the two countries in this commonly used measurement.

In looking at the production of a product for home country sales utilizing GDP as an input into the productivity measurement of producing that product, GDP has minimal use when comparing productivity across two nations for domestic sales. Some of those issues that cause this lack of comparability would be GDP does not take into account the capital investment differences, the purchasing power of a Mexican buyer versus a US buyer, total cost of production, reduced taxes including tariffs, and other economic factors of the country. To elaborate on that point, if Mexico can produce a widget through a highly manual process compared to the US, so that…