By Samuel Peña Guzman
Foreign Investment Coodinator State of Nuevo Leon

A few weeks ago I wrote about the problem posed by illegal vehicles entering Mexico, as well as its complexity and difficulties.

Some governors have taken the stand to support an eventual "regularization" of these illegal vehicles; which is a public policy highly criticized by some sectors. However, there are unfortunately not many options in the negotiation table to be analyzed. Federal Government keeps its position (through the Executive Power) to veto an approval by the Congress; on the other hand, some governors mainly from the states that have been affected the most, have opted for the legalization of these vehicles considering their growing presence. It is true, thousands of illegal vehicles arrive in Mexico every year, causing a problem and bringing critics to the authorities, who do not seem to be able to control the vehicles circulating in our country.

However, in spite of the more than 5 regularization decrees in the last 20 years, the problem stays and vehicles keep on arriving illegally into Mexico. My attention is called to the fact that at no time the problem has been fought from its roots, this is, questioning: Why do Mexican citizens prefer to buy used units in the USA and illegally take them into Mexico for a later regularization? The answer is simple; it is cheaper to buy vehicles in the USA than in Mexico. As long as this fact applies, entrance of illegal vehicles will continue.

In 2004, according to parallel Free Trade Agreements with the USA and Canada, entrance and free import of new foreign vehicles into Mexico was allowed. However, this opening proved to be a real failure, because very few units have been legally imported. The reason is that even if it is less expensive to buy a new car in the USA, upon importing it to Mexico, more than 25% over the vehicle´s cost must be added, making the vehicle more expensive than even in the Mexican market. This percentage represents the very high taxes set by Mexican authorities to buy a new unit. Only Value Added Tax is 15% and Tax on New Cars is 10%, these two items account for the 25%, not to mention expenses for license plates, taxes on car use and customs brokers services. Total cost could be increased up to 30% of total vehicle cost. Therefore, free import of new units into Mexico was a total failure in spite of tariffs exemption. I am sure that if taxes were reduced, costs would also be decreased and this would turn into an incentive for consumers.

On the other hand, it will not be before 2009 when commercial opening allows free import of used units into Mexico. Entrance is allowed nowadays through a regularization decree; vehicles up to 10 years old can be imported. We hope a new tax is not set before 2009, otherwise, commercial opening will prove a failure again.

The problem is complex; automotive dealers are an important source of jobs in Mexico. The position of Mexican Auto Motors Dealers Association is quite legitimate, because eventual regularization not only affects car dealers, but also leads into illegality and could send the wrong message to the population.

Legalizing the current illegality of these vehicles is but giving an aspirin to fight a cancer, because entrance of illegal vehicles will continue as long as it is cheaper to buy used vehicles in the United States than in Mexico.

Even if legalizing those vehicles brings a significant income to government treasury, this would not solve the problem in depth, because as long as taxes are high to purchase both new and used cars, illegal vehicles will keep on entering Mexico. I think that legalizing illegal cars is not the right message to be sent to the population, mainly to those of us who bought our cars in Mexico and pay our taxes and insurance and run the risk of circulating together with illegal cars in our streets that not only do not have the proper documents but most do not have a liability insurance.

I fully understand those persons that buy these units; however, I think that in order to legalize what is illegal, said regularization should go together with a decrease in taxes, fighting the root problem which is the main reason why these vehicles come into Mexico. Otherwise, said regularization will be as the previous ones and in a few years authorities will be forced to legalize illegality again and the problem will therefore be a never ending tale.

Hector Samuel Peña LL.M, MPA Currently works as a Foreign Investment Coordinator for the State Government of Nuevo León, he has LLM Masters in Law from American University, Washington, College of Law, and a Masters in Public Administration from the George Washington University and has advised foreign companies who are expanding operations in to Mexico. He is also a professor at the State University of Nuevo Leon in Monterrey, Mexico and a Member of the Consejo Mexicano de Asuntos Internacionales COMEXI.
The point of view is strictly from the author and does not represent the vision on any of the author institutions relationships.

He can be reached at: samuel.pena@mexicoglobal.com