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Earl Anthony Wayne is a former U.S. ambassador to Mexico and Argentina, and public policy fellow at the Woodrow Wilson International Center in Washington, D.C.  

Christopher Wilson is the deputy director of the Wilson Center’s Mexico Institute.

(The following article first appeared in The San Diego Union-Tribune on Jan. 13 and is being republished in Pulse News Mexico with specific prior permission.)

Mexican President Andrés Manuel López Obrador (AMLO) was in Tijuana and Ciudad Juárez over the weekend of Jan. 12 to announce a set of new economic rules he had promised in his election campaign designed to stimulate growth and create jobs in some 43 communities along the U.S.-Mexico border.

The plan includes reduction in the income tax rate from 30 to 20 percent, halving of the value-added tax (VAT) to 8 percent, increasing the minimum wage to nearly $9 per day, and matching gas and electricity prices with those on the U.S. side of the border.

He is right to say the tax cuts will serve as a stimulus for Mexican border communities. The new policies will also offer potential benefits for U.S. businesses involved in cross-border production networks and who may gain from lower costs for imported goods and higher profits from investments across the border. However, the lower VAT will likely reduce sales of U.S. retail stores along the border.

The $2.5 billion San Diego-Baja manufacturing supply chain could benefit greatly, but that will be balanced by lower sales by stores now servicing Mexican day visitors, who may buy more closer to home. The balance of these effects will play out over 2019.

The stimulus for the border communities will come with a hefty price tag for Mexico’s federal government. The Center for Economic and Budgetary Research, a Mexico City think tank, estimates that the tax changes will cost the government $4.2 billion to $5.3 billion in lost revenue. That is $4 billion that could instead be spent on improving cross-border infrastructure or pressing needs elsewhere in Mexico.

The size of any economic boost for the border region is unclear. Until 2014, border communities paid a lower value-added-tax than the rest of Mexico (11 percent) to better match U.S. sales taxes, so Mexican shoppers would not cross the border to avoid the higher taxes. In 2014, Mexico applied the national VAT rate to the border zone, which resulted in a fall in economic activity and increase of inflation along the border, according to Tijuana’s Colegio de la Frontera Norte.

Thus, cutting the VAT rate to 8 percent will be a boon to retail sales and boost the economy in border cities like Tijuana. Most Mexicans in Tijuana and other border communities also already make more than the minimum wage, but the workers paid less, along with their families, will benefit from the extra income.

Manufacturing companies already tend to pay their workers more than the minimum wage. So many may benefit from lower income tax rates without necessarily paying the cost of higher wages (though the new tax benefits may be muted by existing tax breaks). This should attract jobs and investment to the region and strengthen cross-border supply chains, along with other positive spillovers for U.S. border communities.

At least one report about the migrant caravan that arrived in Tijuana suggests that there may be an existing worker shortage in the CaliBaja region: It reports that Tijuana businesses offered jobs to a good number of Central Americans who arrived in the caravan. Certainly, higher wages could help attract more workers to border communities in need of workers.

From Mexico’s national perspective, however, any positive effects on economic growth will likely be at the margins and will benefit the relatively well-off northern border rather than those areas in dire need in Mexico’s south. In addition to the lost tax revenue cited above, adding a special border region tax code may well amount to an open invitation for tax evasion. Businesses, through legal or illegal means, will attempt to register sales and profits in the low-tax border zone rather than throughout the rest of Mexico, putting a heavy burden on federal tax enforcement capacities.

Finally, the tax changes were made with a presidential decree rather than law. The decree is only in force for 2019-20. While it may be extended, the uncertainty makes new investment in the border region more of a risky proposition than many U.S. and other investors would prefer.

The bottom line is that the new changes will likely bring additional economic activity to Tijuana and other Mexican border communities and offer the prospect of growing cross-border manufacturing, but those benefits will come at a cost. The balance of gains and losses for the border region, for Mexico and for the broader bilateral commercial relationship will not be clear for some time.

Earl Anthony Wayne is a public policy fellow at the Woodrow Wilson Center and career ambassador (ret.) from the U.S. Diplomatic Service, where he served as U.S. ambassador to both Mexico and Argentina, as well as assistant secretary of State for economic and business affairs.

Christopher Wilson is the deputy director of the Wilson Center’s Mexico Institute. A former analyst for the U.S. military and an international trade consultant, he advises the U.S. Congress on all things concerning the southern border and free-trade issues. 

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