Since New Tax Law Raised VAT To 16 Percent, More Mexicans Cross The Border With The US - To Shop

MEXICO CITY -- It is a tale of two cities that became one. Separated by a mere 23 miles and a border, San Diego and Tijuana have merged into one common metropolitan area. Residents from both towns roam around it to their heart’s content, be it San Diegans enjoying the entertainment offerings of their sister city or Tijuanans flying out of the better-connected San Diego International Airport.

It has been a pretty symbiotic relationship for decades, but barely two months ago the balance was tipped toward one side of the border. Ever since Mexico’s new tax policy, promoted by President Enrique Peña Nieto’s administration as part of its reform package, was enforced on Jan.1, 2014, the residents of Tijuana have been ditching their local shops for the malls of San Diego.

The same has been happening in all Mexican states that border with the U.S. Until January, the states of Baja California -- where Tijuana is located -- Sonora, Coahuila, Nuevo León and Tamaulipas had a reduced value-added tax in order to make their products more competitive with the American side. But since the law was changed, their 11 percent VAT turned into 16 percent, the same as the rest of the country.

Mexicans then began a temporary exodus in search of cheaper daily shopping. People who used to cross the border only occasionally now go three or four times a week, cramming security posts at several points along the border. Where the wait to enter the U.S. was just minutes, now it is hours.

The real issue, however, might be different. Consumers have complained that businesses have taken advantage of the tax law and have raised their prices accordingly. The national Obdusman Office conducted an investigation in February and found that several national grocery chains had increased the prices of items that, by law, are not subjected to tax. Milk, eggs, oil, tortillas, ham and beans are never taxed and therefore should not have become more expensive, but the investigation found that such items had indeed increased in price.

According to studies by local consumer associations, prices have gone up 30 percent in comparison with December. “This January is being particularly tough,” said Jorge Escalante, president of the Coparmex Tijuana union. “We predicted consumer spending would drop 20 percent and over 20,000 jobs would be lost with the new law -- and it looks like we are on our way there.”

Not only consumer spending has dropped, but inflation has spiked: The Mexican Central Bank said it 4.48 percent in January. It is the goal of the institution to keep it between 2 percent and 4 percent in 2014.

These first consequences of the new tax law come at the same time when Economy Minister Luis Videgaray announced that it was not in the plans of the government to raise taxes again until 2018.