The New Year began with several notable developments regarding the Mexican economy’s potential outlook for the medium term, and particularly for the remainder of 2018. At the end of 2017, the peso suffered a significant depreciation against the dollar, which required the Mexican Central bank, Banco de México, to take affirmative measures to prevent an even greater fall in Mexico’s currency.
The “mini-devaluation” likely occurred as a result of the Trump’s administration’s tax plan, which was approved in December by the U.S. Congress and signed into law by President Donald Trump. The plan sought to lower taxes and generate higher consumption on the part of consumers and increased investment by producers. Such new tax law would have the effect, according to the logic of tax reform supporters, of increasing U.S. production and employment, which would raise taxable income and bring in the additional tax revenue required to make up for the lowering tax rates, without the need for the U.S. to seek other sources of revenue. In theory, all of this would have the effect of lowering the U.S. budget deficit.
While U.S. tax plan described above has a certain conceptual logic behind it, the new law caused concern in Mexico that U.S. companies would reduce their spending abroad, particularly given that lower marginal tax rates in the U.S. would make domestic investment more convenient than making investments in other countries.
Similarly, under the new law, U.S. companies were granted preferential tax treatment to repatriate profits held abroad. In this regard, experts estimated that between 2010 and 2017 U.S. companies had generated 40 billion dollars in profits in Mexico. For its part, the Mexican government has reviewed potential measures to avoid a potential decrease in investment or repatriation of profits earned in Mexico to the U.S. by contemplating a reduction in Mexican marginal tax rates. Such a move is not as simple as it sounds, given that the Mexican government is operating on a relatively tight margin under current tax rates and owing to a lack of effective tax collection necessary to meet Mexico’s spending needs.
However, a certain optimism continues to exist that notwithstanding the reduction in U.S. tax rates, U.S. companies will continue to be subject to U.S. state income taxes. These state income taxes could continue to make Mexico a good option for U.S. companies seeking to invest or expand operations in Mexico. In addition, behind all of these considerations, the continued uncertainty regarding the final conclusion of NAFTA negotiations continues to undermine business confidence. The past year of uncertainty has placed the bilateral relationship, along with the productive capacity and strength of both economies, at risk.