New Free Trade Zone to be created in Mexico-US border

Overview

As part of his December 1 inaugural address, the new President of Mexico, Andres Manuel Lopez Obrador, announced his intention to create “the largest free trade zone in the world.”  This free trade zone (Border FTZ) would be along the 3,180-km northern Mexican border and would stretch 25 km into Mexico.  President Lopez Obrador stated his expectation that the Border FTZ would be effective as of January 1, 2019.

The new President first publicly expressed this plan in his July 17, 2018 letter to President Trump. In that letter and in his inaugural address, the new President spoke of the Border FTZ as a mechanism to ensure similar economic conditions for businesses operating along both sides of the border.  President Lopez Obrador has repeated his view of the envisioned Border FTZ as “the last curtain of development” to retain, through jobs and well-being, those Mexicans who seek more economic opportunity.

The December 1 announcement affirms the primary characteristics of the Border FTZ:

• The Mexican income tax rate would decrease immediately to 20% in the Border FTZ, compared to 30% in the rest of the country.
• The VAT rate would decrease to 8% in the Border FTZ, compared to 16% in the rest of the country.
• Gasoline, natural gas, and electricity would cost less in the Border FTZ than in the rest of Mexico.
• The minimum wage in the free trade zone would double from approximately MXN89 to MXN 176 per day.

The takeaway

Multinational groups doing business in Mexico, particular with active operations along the Mexico United States border should consider the potential business impacts of the Border FTZ, including income tax, VAT, pricing, the effect on operating margin, and profit sharing.