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U.S. Companies Jump from Mexico to Taiwan for Cheaper Labor

Globilization creates a race to the bottom for everyone around the world.
Mexican Workers Pay for Success
With Labor Costs Rising, Factories Depart for Asia
By Mary Jordan
Washington Post Foreign Service
Thursday, June 20, 2002; Page A01

TIJUANA, Mexico -- Cesiah Ruiz Brena came to Tijuana in 1989, deliriously happy to get a job at a new Japanese factory. Her work space was grand, the lights were bright and the pay was unimaginably good: $100 a week to start.

But after 13 years during which her wages rose to $200 a week, Ruiz Brena lost her job on June 1. Her Canon inkjet printer factory shut down. She and her co-workers shared a cake, snapped photos of one another and said goodbye. The factory, they were told, was moving to Thailand and Vietnam, where wages are as low as $15 a week -- less than what she earns in a day.

All along the Mexican border with the United States, once-busy factories are closing. Since the end of 2000, tearful farewell parties have been held for 250,000 factory workers in Mexico. Some of the same jobs that left North Carolina textile plants and Ohio auto-parts assembly lines for Mexico in the 1980s are now moving to Asia. The reason is the same: cheaper labor.

The loss of jobs here in part reflects the slowdown in the U.S. economy. But many of the plant closings are just the globalized economy at work. Factories came to take advantage of low wages; now that success has driven wages up, they are moving on. Mexico is left with a bittersweet legacy: higher wages, but fewer jobs.

More than 500 foreign-owned assembly-line factories in Mexico, called maquiladoras, have closed in the past two years, in part because wages have doubled in the past 10 years and are no longer considered low in the world economy. An entry-level factory worker in Tijuana earns $1.50 to $2 an hour, compared with 25 cents an hour in parts of China.

International companies once wary of China are increasingly inclined to invest there. Those include a golf-club manufacturer that laid off 1,500 employees in Tijuana and an electronics factory in Guadalajara that left 4,000 workers jobless when it moved. Suddenly Mexican workers feel that China is their fiercest competitor, sucking their jobs east.

"It's a reality of globalization," said a Mexican economist, Rogelio Ramirez de la O. As he surveys companies in Mexico, he said, they increasingly talk of moving to China. "This is not going to turn around automatically. It's a structural adjustment in the world economy."

The factory closures are a jolt to an industry that until 2001 had never known a year in which it did not grow. Started in the mid-1960s, the maquiladora industry had been expanding steadily, with double-digit annual growth after passage of the North American Free Trade Agreement (NAFTA) in 1994. The pact meant that designer jeans could be sewn and television sets assembled here cheaply, then shipped tax-free to the United States, the world's largest consumer of goods.

From 120 export factories in 1970, the industry swelled to more than 3,700 in 2000. In Tijuana, a border city of 1.5 million residents just south of San Diego, one new industrial park after another opened over the last 15 years. Today, sprawling factories making electronics, auto parts and medical supplies ring the city. The maquiladora industry produces half of Mexico's $143 billion annual exports of manufactured goods.

But in responding to the new reality of overseas competition, the industry is trying to shift from labor-intensive assembly, in which China and other Asian countries now have the edge, toward higher-skilled, higher-tech manufacturing. As a result, the number of factories has receded to about 3,200.

"It's similar to the reinventing that had to be done in the United States" in the 1980s, said Ramirez de la O.

But, he said, Mexico is ill-prepared for the transition. The government has been lax about monitoring wage increases and supporting worker education and training programs, preferring to believe that the factory problems will disappear with the U.S. recession. "That has clouded their eyes to the problems," he said.

Wages in Mexico have risen faster than inflation, and at a faster rate than those in the United States and Asia. Rolando Gonzalez, president of the National Maquiladora Association, said that is not all bad. Fatter salaries mean better housing and better living conditions for workers, he said, and Asian competition is forcing an improvement in workers' skills.

In what many see as a harbinger, Pratt & Whitney just opened an aircraft parts repair factory here, locating its high-tech operation in what was once a low-tech Styrofoam packing plant.

"Times are changing," said Tijuana's mayor, Jose de Jesus Gonzalez Reyes. "Companies used to come here for our low-cost labor. That is not our best selling point anymore."

The mayor said a natural evolution is taking place: Over time workers do better, more difficult work and, therefore, earn more money. Now, rather than promoting Tijuana as a hub of cheap labor, Gonzalez said, the city is focusing on its location in the back yard of the United States.

"This is our new strategy, selling the Tijuana-San Diego region," he said.

It is cheaper to truck most goods from Mexico to the United States than to ship them from Asia. But the wage differential between China and Mexico is so great that the bottom line usually tips to production in China.

Still, for some large items that are the most costly to transport, such as automobiles, Mexico has an advantage. Toyota recently announced plans to open a new pickup truckbed factory here.

Tijuana has a long history of reinventing itself to respond to economic changes. In the 1980s, the city took advantage of a pre-NAFTA free trade zone to create what many called the "perfume capital of the world." Companies imported perfumes from Europe, then took advantage of free trade benefits to sell them duty-free to large U.S. retailers.

When NAFTA provided tax-free incentives for maquiladoras, Tijuana substituted crates of electronics components for perfume bottles and became one of the world's leading television-set assembly sites. So many Sony, JVC, Panasonic and Hitachi sets are assembled here -- more than 15 million a year -- that some call the city "TVjuana."

But Asian manufacturers have made steady inroads into Tijuana's television territory. "If we don't want to lose the title of TV capital, we need to get into plasma and high-definition TV," said Humberto Inzunza Fonseca, Tijuana's director of economic development. "We are in the process of changing again."

Narrowing the salary gap between Mexico and the United States is a goal of the Mexican government. Most U.S. factory jobs pay six to 10 times more than similar jobs in Mexico. The Mexican government hopes that rising wages at home will eventually slow illegal immigration to the United States and keep more of the country's most ambitious and entrepreneurial workers at home.

Wages are not the only reason 35,000 Tijuana factory workers have lost their jobs since January 2001, according to Daniel Romero, head of the Tijuana maquiladora association. A new tax on imported raw materials is hurting competitiveness, as is an unusually strong peso. Changing government regulations and uncertainty over what legislation the Mexican Congress will pass have further soured investors.

In Canon's case, global competition has dropped the price of each printer Ruiz Brena and other Tijuana workers assembled from $300 to $100 in recent years. That put enormous pressure on the company to lower costs, making Asia more attractive.

A silence now hangs over the 250,000-square-foot plant that once hummed with 1,400 workers. It is an empty cavern in which a handful of employees are closing up shop.

"It is a big loss," Ruiz Brena said. "I felt like it was home to me."

Some of the newly jobless workers are returning to their dead-end villages. Some are thinking about crossing into the United States. But many more are waiting for Tijuana to remake itself again.

"I'm staying in Tijuana because there's nothing in the south of Mexico," Ruiz Brena said. "Here it's difficult, but there it's worse."

2002 The Washington Post Company