Written by C.P.A. (Mexico) Mauricio Monroy, MMC
2018 has been probably one of the most spectacular years in Mexico’s business and political history of the last decades. There have been crucial milestones such as the enforcement of NAFTA in 1981, the 1982 nationalization of banks (privatized back in 1990), major devaluations in 1976, 1982 and 1985, major structural changes in the 80s and 2014, but none of these events like the combination of recent events in Mexico and the US, Mexico’s principal trading partner by far, combination of events that history is still to label.
When Mexico faced significant changes like the ones referred to above, the US economy and its political environment as far as Mexico was concerned, were, let’s say, normal, without major events affecting the overall efficient and mutually beneficial business environment. This drastically changed this year upon the renegotiation of NAFTA that, so far, has concluded in an agreement on bilateral trade (“free” word out). This agreement is still to be published but, most importantly, subject to the eventual incorporation as a third partner to achieve the same trilateral nature of the agreement like NAFTA is, which, by the way, is still in force.
Legal opinions circulate in the US that a bilateral deal with Mexico to replace NAFTA is not legally feasible. Canada should be part of the agreement as US Congress approved NAFTA. As we write this article, negotiations with Canada are still going through and expected to be completed soon.
The principal provisions agreed between Mexico and the US of general interest, again, the formal agreement is still to be published, may be summarized as follows:
- New guidelines of intellectual property protection and treatment of digital products.
- New rules of origin, rules for the automotive sector of special interest by increasing regional rule of origin for automobiles from 62.5% to 75%. Further, to require between 40% and 45% of labor to come from employees that make at least US$16 per hour.
- First-ever articles to improve air quality, prevent and reduce marine litter, support sustainable forest management, and ensure appropriate procedures for environmental impact assessments.
A full text of the provisions agreed, may be found in the following links.
So far, we have sufficient news to justify the title of this article, but furthermore, Mexican President Elect Andres Manuel Lopez Obrador, known for his acronym AMLO, who will take office next December 1, has labeled his upcoming administration as “Mexico’s 4th transformation”, understandably preceded by the Independence from Spain in the early XIX century, the Reform in the second half of the XIX century and the Revolution in the early XX century.
Since his campaign, President Elect AMLO published a government plan for his administration, which was labeled as “Nation Project” (Proyecto de Nación). The Project includes spectacular plans for infrastructure with the completion of a much needed new Mexico City airport, a Mayan high-speed train in beautiful southeastern Mexico, internet coverage throughout the country and opening of 100 new public universities, to name a few.
But of very special interest for business is a program for the regional development of the US-Mexico border region. Such program contemplates a reduction of the value-added tax (sales or use tax) from 16% to 8% to make the region competitive with the US side of the border that has an average sales tax of about 8%. Also, the plan includes a reduction of the corporate income tax rate in such region to 20% to compete with the recently enforced corporate rate in the US of 21%. Indeed, formal bill proposals to the new congress that took office last September 1 from different parties have already been filed. One of them considers a 24% rate instead of the 20%, and conditions the eligibility to tax payers’ productivity and salary policy rather than a geographic criteria, i.e. “border region”. This 24% proposal comes from a minority party while the 20% is from the majority party, but discussion and voting is still to see.
Furthermore, free trade zone status will be granted to the border region which will allow the duty-free and VAT free importation of goods in such region as used to be decades ago.
Under the premise that the reduction of taxes should be shared with people, the minimum wage in the border region will be doubled.
Although some general guidelines are included in the proposals, for example the definition of what should be understood as “border region”, abundant rules are expected to be enacted for eligibility to the special rates if Congress approves them.
All provisions of the border region will become effective on January 1, 2019 if approved by Congress.
Unquestionably, other developments in world trade will have an impact in Mexico such as President Trump’s tariff policy. Such policy will trigger inflation in the US. Impact on demand of goods both imported and domestic. Such inflationary economy will have ramifications in Mexico being the US its largest trading partner. An attitude towards market diversification is already in progress, as noted in the increasing number in Mexico of contacts with companies of countries other than the US, including China. This latter, will be a timely move to bring Mexico and China together and, once that the dust clears, will allow to seize the opportunity of a more diversified market in the Northern trans-pacific region.