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Mr. Peña Nieto, you don’t have to answer to the Coca-Cola Company

4 November 2013

Much as it might pain me as a knee-jerk lefty to say this, the Peña Nieto administration has done an excellent job in getting through the new tax bill.  A few particulars I don’t care for… with the 16 percent value added tax (IVA, for its initials in Spanish) being applied to pet food, Yaquí ‘s food bowl is gonna include 16 percent table scraps… and there is still too much dependence on PEMEX income, overall, it’s a much more progressive taxation system than we expected.

Making the headlines outside Mexico (and inside too… just easier to write about)… are the junk food tax and the mining royalties.  A snarky and not very informative article in today’s New York Times by David Toscana (“Mexico’s Soda Pop Tax“) suggests that the revenue raised is just going to be stolen by “corrupt” officials anyway, so why bother taxing something that everybody buys anyway…

The government stands to collect $1 billion every year from the soft-drink tax. It isn’t a huge fortune, but as we hear the hiss of a bottle being opened and we gaze down at our still broadening waistlines, we will wonder whether another politician is using our tax money to buy real estate in Florida, Texas or California.

So here’s an idea: now that we’ve taxed soda, let’s tax corruption. According to the Mexican employers’ association, the cost of corruption is 9 percent of our economic output ($1.2 trillion).

Cute… but one could ask why the U.S. doesn’t tax “campaign contributions” and other forms of legal corruption. And the assumption that because people have been drinking fizzy, sugary drinks in lieu of other sorts of beverages for several decades now (although Coca-Cola has been bottled in Mexico since the 1920s, it was mostly sold in areas with a concentration of U.S. workers… i.e., the oil camps… until after the Second World War), it’s not as if Mexican consumers haven’t changed their buying habits before,or that consumers anywhere don’t change their habits in response to costs (think tobacco products). And what does it really matter? If consumers pay more for soft drinks and junk food, the state earns more money… if only a fraction of consumers cut back their spending, the state SAVES money. As reported in The Guardian (“Mexico to tackle obesity with taxes on junk food and sugary drinks“:

… the government has taken the long view – that the potential economic harm from reduced junk food and soft drink sales now is insignificant compared with the damage in 10 years time if obesity continues at the current rate. The healthcare burden of diabetes and heart disease in Mexico is already huge and increasing. Some 9.2% of children in Mexico now have diabetes.the government has taken the long view – that the potential economic harm from reduced junk food and soft drink sales now is insignificant compared with the damage in 10 years time if obesity continues at the current rate. The healthcare burden of diabetes and heart disease in Mexico is already huge and increasing. Some 9.2% of children in Mexico now have diabetes.

Actually, the best thing about the Toscana article was the cartoon (by Dan Woodger) showing a soda-pop can driving out of Mexico with bags of cash. Not exactly what the New York Times, or Toscana meant to suggest, but the toscanaart-articleLargefact that the foreign-owned soft drink companies are extracting huge profits from this country’s consumers, and not to their benefit. Assuming Mexican consumers don’t change their habits… and it’s Mexican taxpayers who have to pick up the tab for the results of the soft-drink habit, why should the profits be driving back across the border in the first place?

Which does seem to be what the resistance to this particular feature of the tax bill was all about.  Jarritos, Peñafiel, and Pascual and other national firms have always offered drinks in more traditionally Mexican flavors (tamarind, jamaica, etc.) and may be better positioned to adjust their formulas to meet consumer demands and tax regulations.  As are snack companies like Bimbo.  But, then, those are Mexican companies, not foreign multinationals.

The Wall Street Journal reported that out of concern for the landmark bill, Coca-Cola CEO Muhtar Kent recently called President Peña Nieto and Finance

Mister, you're going to have to answer to the Coca-Cola Company

Mister, you’re going to have to answer to the Coca-Cola Company

Minister Luis Videgaray, but Videgaray told him that Mexico would make decisions in its own interest. Galván Ochoa believes that Kent’s worries have more to do with Mexico setting a precedent for other countries to follow than the impact that it may have on Coca-Cola in Mexico.

Meanwhile, Daniel Servitje, Bimbo’s Managing Director, said that the company is studying ways to tweak their recipes of popular snacks, such as Gansito, which contains 392 calories per 100 grams, reported the Mexican daily Reforma. The proposed law will impose a 5% excise tax on products with 275 calories or more per 100 grams.

(Forbes, 28 October 2013)

I am pleasantly surprised that Luis Videgaray seems to be in the mold of the “old” PRI at its best, telling foreign companies that Mexicans make the rules for Mexico, and the impact on the business affairs of even the Coca-Cola Company are irrelevant.  Much the same message is being given to foreign mining concessionaires.  Although a much higher royalty on mining — up to 7.5% on profits, plus 0.5% on revenue from precious metals — has been in the works since last April, it is only when it finally reached the Senate that the Canadian firms (and most mining companies in Mexico are Canadian) began making threats:

Last Monday, while the bill was being finalized in the Senate, Reuters quoted  Rosalind Wilson, president of the Canadian Chamber of Commerce’s mining task force, as saying “What I’m hearing is not what I’d like to hear.”

… Wilson, whose group represents about 60 firms that dominate Mexico’s mining sector, said she was still holding out hope that lawmakers would reconsider and lower the planned royalty rate.

Mining companies threatened to cut investment in Mexico after the government proposed the royalty, arguing that lower metal prices, rising running costs and higher taxes reduce the country’s investment allure.

It’s not “allure” that gets metals out of the ground, and I’m not sure how seriously to take threats by people like Brad Cook of Endeavour Mining who, on the one hand, purrs over the mineral resources of “This place [that] has been mined for 450 years yet this little treasure box has been hiding less than 25 metres below ground,” and in the same Economist article is quoted as saying that if the royalty went into effect (and now it has), his company would be taking operations elsewhere. Um… yeah, there are other places in the world with various ores, and it may even be true that profits will be lower, but if people want the resources, they’re going to mine them. Seeing the traditional royalty (and the source of the term) was the twenty percent of all minerals owed to … royalty… specifically, the King of Spain, they should be thankful they’re getting off cheap. And, in the good old days of colonialism, they didn’t get to write off depreciation on their equipment, which they still get to do.

… AND, less talked about, but extremely progressive is a more equitable income tax, which eliminates some annoying minor taxes (like the one on bank deposits) which still has a very low top margin of 35 percent.

As I said, being a knee-jerk lefty, I’m supposed to look at the PRI and at the Peña Nieto administration with a jaundiced eye. Certainly, I question increased “defense spending” (up 300 percent) and “reforms” in education and energy policy that are a step backwards towards the neo-liberalism that plunged Mexico into a position of dependence on the U.S. and Canada. One can’t help think that both the strength of the left (despite it’s tendency to form a circular firing squad), as well as the traditional nationalist wing of the PRI… and perhaps a “soft response” to U.S. spying on Mexican officials, all played a part in the government for once doing things right.

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2 Comments leave one →
  1. 4 November 2013 6:20 am

    An excellent, informative column about a really positive development in Mexico. Muchas, muchas gracias, Richard! I am sharing this

  2. roberb7 permalink
    4 November 2013 8:19 am

    I agree with Esther, this was an excellent article.
    I’m appalled by the amount of obesity here in Guanajuato; it’s especially noticeable in the summer, when there are fewer students around. So, I took notice of the full-page ad debate in La Journada; even saw a video ad, paid for by the soft drink industry, that portrayed sugar cane cutters as hostages. This was cowardly; the demand for sugar cane isn’t going to go away for a long time.
    I took an unscientific survey of friends and acquaintances about the tax, and the result was 100% for it.

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