MCALLEN, RGV – Mexican President-elect Andrés Manuel López Obrador’s plan to cut the value-added tax (IVA) rate from 16 percent to eight percent and create a new economic zone near the Mexico-United States border could lead to an economic resurgence in the region.
This is the view of international trade and economic development leaders interviewed by the Rio Grande Guardian.
Carlos Urzúa, the prospective finance secretary in Mexico’s next government, said the new free zone would extend around 30 kilometers south from the border between the two countries, taking in cities such as Reynosa, Matamoros, Nuevo Laredo, Ciudad Juárez, Mexicali and Tijuana.
López Obrador hopes that by introducing the free zone he will be able to boost the economy of Mexican states bordering the United States and thus slow down northward migration. He made it a key plank of his economic policy during the recent presidential campaign.
“Mexico’s main instrument to tax consumption is through the Value Added Tax or IVA. The current rate of 16 percent is set by the federal government and applied to most goods. In the past northern states had a reduced IVA of 11 percent. This differential rate ended in 2014,” said Salvador Contreras, associate professor in the department of economics and finance at UT-Rio Grande Valley, referencing a policy decision of the current Mexican president, Enrique Peña Nieto.
“One reason for reducing the IVA along the border is that Mexican consumers in cities like Reynosa can choose to pay a consumption tax of 16 percent or take a short drive north and pay half that rate on the U.S. side. The IVA puts Mexican merchants at a disadvantage when an alternative is so readily available.”
Contreras said López Obrador is rumored to be planning a reduction of the IVA for the border region to eight percent.
“If this is what indeed takes place, it will amount to a consumption tax cut for Mexicans along the border, within 19 miles of the border. This will make fronterizos a bit wealthier,” Contreras said.
“The aim of such a plan is to discourage Mexicans from spending their hard earned pesos on American soil and encouraging Americans to take their dollars on shopping expeditions to Mexico. The effect would be positive to border states like Tamaulipas.”
McAllen EDC Perspective
Keith Patridge, president and CEO of the McAllen Economic Development Corporation, said some analysts may not have taken much notice of López Obrador’s proposals for the northern border during the campaign because a lot of promises are made at such times. However, Patridge said López Obrador’s key advisors are continuing to talk about the free zone.
“We feel there is real potential to see this border economic zone become a reality,” Patridge said. “There are really three elements to it: reduce the IVA tax by around 40 percent, which would equalize the sales tax rate with the U.S. So, you would be looking at making it more competitive for the border region. Second, López Obrador would eliminate tariffs on the importation of goods to factories. Third, he would double the minimum wage for the border region.”
Patridge said this last proposal would not adversely affect the competitiveness of maquiladoras because they traditionally pay more than the minimum wage anyway.
Historically, McAllen EDC has worked to bring more maquiladoras to Reynosa in the knowledge that plant managers and engineers involved in such plants usually live on the U.S. side of the border. The Federal Reserve Bank of Dallas has noted that McAllen benefits from the maquiladora industry more than any other U.S. city on the border.
Patridge pointed out that in recent years McAllen EDC has been battling the interior of Mexico to land more maquiladoras.
“All of a sudden, this (López Obrador proposal) puts the border region in a competitive situation with other parts of Mexico that we have been struggling to compete with these last few years. So, we are optimistic. If he comes through with his border plan, that will be a good thing for us.”
Patridge reiterated that a new economic zone improves the competitive advantage on the Mexican side of the border.
“Being on the border, you have the opportunity to use the best of both sides. Mexico has some 47 trade agreements. The U.S. has 12. It gives companies the flexibility to select where they build a component or product based upon where the customer would like to have them make it, the cost situation, the currency valuation,” Patridge said.
“The border region gives a manufacturing company flexibility. However, because of the equalization of the sales tax, under Peña Nieto, we lost some of the advantages we had from an economic situation.”
LIVE at Bob’s
The economic policies of a López Obrador presidency were discussed in depth at a recent Rio Grande Guardian LIVE at Bob’s show, hosted by Bob’s Steak & Chop House in Edinburg.
One of the panelists, customs broker Adrian Gonzalez, was upbeat about López Obrador’s economic policy for the border region.
“I believe there is still some concern in the business community in Mexico, actually a lot of concern. The fear that we have is that López Obrador is going to go to a nationalist and protectionist stance; that he is going to raise trade barriers. That would be non-beneficial for Mexico,” Gonzalez said.
“Having said that, I do feel very positive about what he can do for the border region. He wants to decrease the IVA from 16 to eight percent. That would be great for the border region. He wants to reduce social corporate tax, from around 35 percent to 20 or 30 percent. I have heard different accounts. That would be awesome also for the region. So, I can say I am very optimistic about what is going to happen with a López Obrador presidency – if he follows through with these promises. It could really be a boon for the border region.”
Gonzalez said he is “actually optimistic” about a López Obrador presidency. He said he knows some people are concerned about the policies of López Obrador but so were many with the proposals of Donald Trump.
“I was devastated (when Trump won). I thought it was going to be bad for everybody but then we saw the economy going up. I do not agree with him on the trade part or the immigration stance but we have seen it has not been so bad,” Gonzalez said.
Gonzalez said the first thing López Obrador needs to do as president is ratify the North American Free Trade Agreement, if that has not happened by the time he is sworn into office on December 1.
“Right now, Mexico is in a very good position with regard to what is happening between the U.S. and China. He (López Obrador) needs to take advantage of that and let companies know everything is settled between Mexico and the United States, that they can continue manufacturing in Mexico.”
The LIVE at Bob’s show was titled, “What Does a López Obrador Presidency Mean for the Border Region.” Another speaker at the luncheon was South Texas College economics professor Kevin Peek. As far as the border region is concerned, a López Obrador presidency will be a mixed bag, Peek predicted.
“AMLO is a man of his word. If you look at his word, those are his policies. In terms of economics, what does that mean for our region? It is really a mixed basket. Some of the macro-economic policies that are going to be implemented by this administration definitely will benefit Mexico, perhaps not so much our region.”
Peek went on to list one of those key macro-economic policies.
“Mexico is considering doing what they should have done a long time ago, which is begin to refine their own oil, as opposed to the energy reform that was proposed under Peña Nieto, which did little more than enrich foreign investors. They are going to refurbish six existing refineries. They are going to invest in creating more refineries. As it stands, Mexico imports 600,000 barrels a day from the United States of refined gas. Once Mexico begins to refine its owns gas, what does that mean for the economy of Texas? That is going to have an adverse effect on our economy, there is no question about it,” Peek said.
Other speakers at the LIVE at Bob’s show were author and journalist Blanca Gomez and UT-Rio Grande Valley politics professor Arturo Lopez-Levy.
Editor’s Note: The main image accompanying the above news story shows Mexico’s president-elect, Andrés Manuel López Obrador. The photo was taken by Raúl Pérez.