NAFTA's Impact on Border Region Pact Offers Hope as Post-Cold-War Defense Spending Falls

Article excerpt

THE United States-Mexican border is about to be affected by a sharp economic jolt with or without the North American Free Trade Agreement (NAFTA). In the border states, US federal power since World War II is most visible in US military spending, principally in aerospace, military bases, and shipyards. In the 1980s more than 25 percent of domestic contractor and salary budgets of the Department of Defense (DOD) were centered in the four states bordering Mexico. With the end of the cold war and the corresponding closure of military bases and reduction in procurement from military contractors, the US-Mexican border states will be affected sharply.

Five decades of military spending in the US border states have covered over the two principal weaknesses of the US-Mexican border economy. The first is an underfunded public infrastructure, especially on the Mexican side, in areas such as public health, housing, transportation, water supplies, sewage treatment, environmental controls, and education. The second, which is partly responsible for the underfunded infrastructure, is the lack of viable tax policies for the border region.

The inadequate infrastructure can easily be seen by a day's trip to any border town - and it's not necessary to cross the border to get the point. The inadequacies of the tax system, however, are invisible to the field observer. On the US side, no border tax is earmarked for infrastructure at either the state or federal level. Those parties using the border for trade and investment do not pay for the border services and resources they consume.

Consider a maquiladora assembly plant in Cuidad Juarez. This plant, consumes infrastructure and services on the US side in El Paso, Texas. The plant assembles a television set (more likely in Tijuana, Mexico than in El Paso) made principally with components manufactured in the Far East. The assembled product crosses the border, paying duty only on the value added by assembly labor. There is no duty on the value added by the infrastructure of the border communities. Worse, the real market value of the assembled product is taxed in the state where the wholesale profits are booked, typically not one of the four US border states. In this way the Industrial Belt, from Minnesota to Connecticut, receives value-added from border infrastructure without paying tax contributions toward the maintenance or upgrading of that infrastructure. This structural problem was one that the border states could overlook when their economies were bolstered by defense spending.

The tax problem on Mexico's side of the border is entirely different. The Mexican government runs by a strictly centralistic fiscal, administrative, and political system. As a result, all taxes flow to Mexico City and are redistributed at the state and municipal level. At the local level there are a few pennies of property taxes but no state or municipal income taxes. As a result, Mexican states are fiscal agents of federal budgets and priorities.

In 1993, some 2,000 maquiladoras employ roughly 500,000 assembly workers. They would be a great boon to the border economy if they paid taxes based on some meaningful measure of the productivity of the plant, such as true profitability, and if their tax contributions were to remain in the border region and not disappear in the black fiscal hole that is Mexico City.

If NAFTA is implemented, the maquiladoras will argue that their tax-exempt status should be grandfathered. It would be in the best interest of the border region to have maquiladoras pay real taxes on profits. (They currently only pay a tiny housing tax calculated as a percentage of the wage bill.) In this way the maquiladoras would cease being economic placebos for the border region.

NAFTA, however, is silent on such seemingly secondary matters of corporate and regional tax policy. …