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Why could maquiladoras produce lower-priced goods for U.S. companies?

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North American Free Trade Agreement (From left) Mexican Pres. Carlos Salinas de Gortari, U.S. Pres. George H.W. Bush, and Canadian Prime Minister Brian Mulroney meeting to initial the North American Free Trade Agreement in San Antonio, Texas, October 7, 1992.

Maquiladoras allow U.S. companies to produce lower-priced goods primarily by taking advantage of significantly lower labour costs in Mexico.1

These manufacturing plants operate under an arrangement that permits the duty-free import of components for assembly. Furthermore, plant owners are only required to pay duty on the "value added"—the difference between the finished product's value and the total cost of the imported components. This system, which expanded significantly following the implementation of the North American Free Trade Agreement (NAFTA) in 1994, provided a framework for American companies to reduce production expenses, though it also sparked debate regarding the displacement of jobs for American workers.12