Mexico's Maquiladora trade and the industrial flight hypothesis

Abstract

The negotiating and ratification process of the North American Free Trade Agreement has brought new attention to the environmental problems of the U.S.-Mexico border. Particularly, much of the discussion has centered on whether the maquiladoras have had a large impact in creating the environmental problems along the border. The Integrated Environmental Border Plan under the Bush Administration and the parallel negotiations under the Clinton Administration are evidence of the political importance of the border environmental problems. The possible impacts of NAFTA on the border environment is an issue widely discussed among scholars (Gilbreath 1992, Mumme 1993, Trevino and Fernandez 1992). The purpose to the present work is to look back at the precursor of the NAFTA, the maquila industry. We will show that pollution abatement avoidance in the U.S. has contributed to the growth of the maquila industry. Industrial flight to Mexico occurs as pollution abatement costs rise in the U.S. In addition, our results indicate that firms may move to Mexico to increase their capital intensity. This result appears to contradict the conventional wisdom that firms move to Mexico to take advantage of inexpensive labor. The paper proceeds as follows. In the next section, brief reviews of the industrial flight and the pollution haven hypotheses in the maquiladora industry are presented. In Section III we present a model to test the industrial flight hypothesis. Section IV presents a description of the data and test results. The final section contains some conclusions and suggestions for additional research.