Red-Tape Roadblock

— On January 1, 2004, a provision of the North American Free Trade Agreement came into effect that lifted all tariffs on new cars bought in one of the member nations and imported into another. Now, new car dealers in both Tijuana and San Diego wait and wonder whether business will increase or decrease as a result of the new regulations.

"We haven't seen an increase in traffic yet because of it," says Guy Anastasia, general sales manager at South Bay Volkswagen. "We've had a few inquiries, but that is about it so far."

"There has been a lot of interest; I can tell you that," says Robert Carrillo, a sales manager at Fuller Ford in Chula Vista. "But no sales. I really don't know if they are waiting for additional information or what. But I have 10 to 15 people [from Mexico] already waiting and interested in buying their vehicles here."

It used to be that those interested in importing new cars from one side of the border to the other paid enormous fees. Juan José Romano, who has sold new cars at Optima Honda in Tijuana's Zona Rio for 11 years, explains, "If I were a Mexican citizen, and I wanted to buy a brand-new Volkswagen Beetle, say, and bring it down here and register it in Mexico, I would have to pay an import fee, which would be 30 to 50 percent of the value of the car. So you can imagine how it discouraged people from doing that years ago. Nowadays, the law has just changed, and the law says that I can go as a Mexican citizen and buy a car either in the United States or even in Canada and bring it back to Mexico and import the car without paying import fees."

One would think not having to pay the importation fee would draw the new car shoppers in Tijuana to the more numerous dealerships in San Diego, where they can do some comparative shopping. "But there are still some other restrictions," Romano says. "The car has to be made either in the United States or in Canada. The vehicle identification number in each car will tell you where it is made. All cars that are made in the United States, they start with the number one. Cars that are made in Mexico will start with the number three. And cars that are made in Canada will start with the number two or five."

"Another restriction," he continues, "is the car has to be no more than three months old from the period it was built. And another thing is -- say I go to Bob Baker in San Diego and buy a Chevy Silverado pickup. He has to give me a letter that states at least 62.5 percent of the car's parts are made in the United States, and then I can bring it here and import the car."

All those hassles add up to a severe disincentive for Mexicans to shop north of the border, Romano believes. Another disincentive is price. "Say you want a Honda Accord EX model V6, fully loaded," he proposes. "Here in Tijuana, it goes for around $26,000 to $27,000. For the same car, if you are to go and buy it in the States and import it into Mexico, you are going to pay something around $30,000 to $32,000. So it is not going to be a good deal for a Mexican national to go north and buy a car."

Still, there are reasons certain Mexican buyers may venture north. "Say you want to buy a Honda Accord DX model," Romano explains. "That model is not sold here in Mexico. That car, in the States, is the lowest you can pay for a brand-new Honda Accord. You will pay around $17,000 to $18,000 for that car. Here in Mexico, the cheapest Honda Accord will run you around $22,000, but it will have much better equipment on it than the DX. But if you want an Accord, even if it doesn't have the same equipment, that is going to be some kind of incentive.

"But here in Mexico," Romano continues, "your average consumer likes cars that have everything, and he doesn't quite like the idea of buying packages. If you walk into your local dealer in San Diego -- you go and see a Honda Accord, for example -- they will start with a basic model and then they start showing you packages and packages and packages, and you end up buying the fully loaded car. Here in Mexico, I don't sell by packages. I just show you, 'Here is the fully loaded, here is the semi-loaded, and here is the standard model,' and that is it. And that actually is how it works in all the other dealerships here."

Possibly the biggest difference between the two new car markets is financing. In the U.S., between 80 and 90 percent of new car purchases involve financing. "Here in Mexico," Romano says, "around 50 to 60 percent buy with financing or leasing; 40 to 50 percent, depending on the economy of the country, will buy in cash."

Only the cash buyers would be able to buy here in San Diego. "The only way [for a Mexican citizen to buy here] would be to pay in cash," Carrillo says. "There is no credit, no financing available for Mexican citizens."

"Most of our finance companies," Anastasia explains, "won't finance a car that is not going to remain in the United States because of a difference in road conditions and driving habits between the two countries. The roads down there are rougher, and warranties are designed with American driving conditions in mind, as well as the fact that there are dealerships all over in the U.S. where you can get your car serviced on a regular basis. There may be a premium you can pay to upgrade a warranty for export. But are there the outlets down there to service them? I don't know yet."

Though new-car prices are lower in Mexico, there are some disincentives for Americans looking in that direction. Finance rates at Mexican dealerships start in the high teens. And a car purchased in Mexico isn't necessarily identical to the same make and model sold at a San Diego dealership. "Sometimes," Romano says, "the safety features and the emissions levels are not up to United States standards. And [according to the new regulations] the car has to meet federal and state standards of the country it will be used in."

Though there will be no importation fee, a Mexican buying in San Diego will not be exempt from paying new-car taxes in Mexico once he imports the car. He will pay a 15 percent tax on the sales price, plus another 5 percent for buying a new car. Similarly, a San Diegan who buys in Tijuana will have to pay the same federal, state, and local taxes he'd pay at a San Diego dealership when he returns. "There are a lot of regulations that we are still trying to find out," Carrillo says, "but one thing I know is there was supposed to be a module set up on the border to inspect all the new units that are going to be crossing the border."

Though nobody knows how, if at all, the new regulations will change the new car markets north or south of the border, there is some anxiety among Mexican dealers. "The whole brand-new car industry here," Romano says, "we actually are predicting that sales will be a little bit down for the first quarter of the year because a lot of people are speculating with this. They think it might be a little easier [to buy across the border]. They think they are going to save some money on it. But the bottom line is, it won't be easier, and they won't really save any money."

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