Section 936 and the Case for Reinvesting in Puerto Rico’s Manufacturing Base
The repeal of Section 936 remains one of the most consequential economic policy decisions of the last three decades. It hollowed out Puerto Rico’s manufacturing base, precipitated a fifteen-year economic crisis on the island, and — critically for U.S. supply chain security — pushed critical manufacturing offshore to Mexico, Ireland, Latin America, and China.
Understanding this history is essential to understanding the opportunity Puerto Rico presents to institutional capital today.
What Section 936 Was
Section 936 of the U.S. Internal Revenue Code, enacted in the 1970s, provided federal tax credits to U.S. corporations operating in Puerto Rico. It was designed to encourage industrial investment on the island, and it worked. By the mid-1990s, Puerto Rico had become one of the world’s most concentrated centers of pharmaceutical manufacturing, biomedical devices, and precision industrial production.
The incentive was phased out beginning in 1996 and fully eliminated by 2006.
The Consequences
In their landmark National Bureau of Economic Research paper, “U.S. Multinationals in Puerto Rico and the Repeal of Section 936 Tax Exemption for U.S. Corporations,” economics professor Zadia Feliciano of Queens College and co-author Andrew Green analyzed the effects of the phase-out on Puerto Rico’s manufacturing sector — measuring the impact on establishments, value added, employment, and wages.
Their findings quantified what the island already knew:
- Manufacturing employment declined sharply
- Multinational corporations relocated production offshore
- Wages compressed
- The island entered what would become a decade-and-a-half of negative economic growth
The consequences extended beyond Puerto Rico. Critical U.S. supply chains — pharmaceutical ingredients, medical devices, protective equipment — moved to foreign jurisdictions where the U.S. government has neither regulatory oversight nor security guarantees.
Why This Matters Now
The Food and Drug Administration has repeatedly expressed concern about U.S. dependence on foreign medical supply chains — particularly on China. Recent geopolitical shifts have accelerated the reshoring conversation across pharmaceutical manufacturing, semiconductors, and defense-critical industries.
Puerto Rico is uniquely positioned to answer that call.
The infrastructure remains in place:
- 49 FDA-approved pharmaceutical plants currently operating on the island
- 25% of all U.S. pharmaceutical exports are produced in Puerto Rico — more than any state
- Cold-chain logistics infrastructure already built out for high-value pharmaceutical exports
- A workforce experienced in regulated manufacturing — decades of institutional knowledge that cannot be quickly rebuilt elsewhere
For institutional capital thinking about industrial reshoring, Puerto Rico offers something no other jurisdiction can: existing FDA-registered facilities, an experienced labor force, and U.S. jurisdiction — with the potential for renewed federal incentive frameworks.
The Forward Case
The manufacturing tax framework that supported Puerto Rico’s rise has been replaced in part by newer instruments — Act 60, Opportunity Zones, and various targeted incentives. But none has fully restored the strategic advantage Section 936 provided.
For allocators, developers, and policymakers, the question is no longer whether critical manufacturing should return to U.S. soil. That consensus has largely formed. The question is where.
Puerto Rico’s answer: infrastructure is already here, workforce is already trained, regulatory jurisdiction is already U.S.
The learning curve for a company evaluating pharmaceutical production in Puerto Rico is dramatically shorter than for any other U.S. region.
AG&T’s Perspective
At AG&T, we have advised on Caribbean development for nearly three decades — through the pre-936 boom, the post-repeal contraction, the 2017 hurricanes, and the current recovery. We have watched capital allocation cycles play out in real time.
Our conviction is straightforward: Puerto Rico’s manufacturing base is a strategic U.S. asset that has been consistently undervalued. As institutional capital rethinks supply chain resilience, ESG alignment, and long-term industrial strategy, the island’s mature manufacturing ecosystem deserves renewed attention.
The next generation of U.S. industrial policy will be shaped by decisions made in the next five to ten years. Puerto Rico should be central to that conversation.
AG&T is a Caribbean real estate capital advisor founded in 1998. Principal-led, AG&T has been involved in over 55 development projects across Puerto Rico, Sint Maarten, Costa Rica, the Dominican Republic, and other Caribbean markets — connecting institutional capital with regional opportunity. Contact us to discuss Caribbean manufacturing, hospitality, and infrastructure investment.
