June 25, 1999
San Diego Dialogue Economic Analysis Concludes:
A model forecasting the impact of peso devaluations on taxable retail sales in San Diego and Imperial counties has been created by Dr. James Gerber, Director of San Diego Dialogue's Economic Research Program and Professor of Economics at San Diego State University. According to the model, a 10 percent decline in the value of the peso against the dollar would depress total taxable sales by 1 percent in San Diego County and 2.25 percent in Imperial County.
The study is the first to quantify the impact of exchange rate volatility on the significant role Mexican purchasers command in the San Diego economy. Cross-border shoppers are estimated to account for $2 billion per year in total sales in San Diego County (approximately 7 percent of total sales). And in neighboring Imperial County, Mexican consumers account for a much larger percentage of that area's smaller economy.
"Local governments collect tens of millions of dollars in sales tax revenue from crossborder shoppers, so Gerber's model should help city managers and elected officials develop their city budget," said Dr. Charles Nathanson, the Dialogue's Executive Director.
The model incorporates expectations about the future value of the peso and thus demonstrates the effects of unanticipated peso devaluations. Therefore if people expect the peso to decline, they may increase current purchases to avoid higher costs later.
While 1 percent of taxable sales is not large enough to be considered vital to the economic lifeline of the entire San Diego region, the impacts are economically important, according to Gerber. "During the quarter of the peso's [10 percent] decline, San Diego merchants can expect to see a collective loss in taxable sales of around $66 million," Gerber said. "Furthermore, the effects are felt more heavily in some parts of the region, such as South County, and in some commodity groups, such as apparel."
Gerber's analysis revealed those industries most sensitive to depreciation of the peso. In San Diego County, sales of automobiles and automotive parts are most strongly affected, followed by building materials. In Imperial County, Gerber determined that a 10 percent peso depreciation would lower apparel sales by over 6 percent. Two other categories of sales in Imperial County, specialty shops and general merchandise, would also be hardest hit by a peso depreciation.
Proximity to the border will also determine sensitivity to exchange rate volatility, according to Gerber's analysis. San Diego Chamber of Commerce survey estimated that approximately 80 percent of San Ysidro's retail sales and 20 percent of Chula Vista's sales at the time were transacted with Mexican residents. In Imperial County, Calexico's reliance on cross-border economic activity would be sharply impacted by a peso depreciation relative to the impact felt by El Centro.
Significant peso depreciation (such as the 20 percent change that occurred in the summer of 1998) depresses sales across the border by effectively reducing the Mexican consumer's income and making Mexican products cheaper relative to American products. But Gerber cautions that it is impossible to predict how any particular depreciation will affect retail sales because the correlation between depressed cross-border sales and the exchange rate is dependent upon the peso depreciation being unanticipated. This effect can be offset during periods of high currency volatility, when expectations of future peso depreciation spur short-term increased buying in the United States by Mexican consumers to avoid future purchases with a less valuable peso.
Other factors also could offset the impact of peso depreciation on sales north of the border, according to Gerber. The peso's impact can be completely discounted as a buying factor for those portions of Mexican border economies that are dollarized. And peso depreciation-induced price gaps between American and Mexican goods rapidly shrink because of the resultant inflation in the depreciation economy. In Tijuana, for example, the study showed that every 10 percent of peso depreciation resulted in 7.8 percent inflation within three quarters.
The economic analysis, "The Effects of a Depreciation of the Peso on Cross-Border Retail Sales in San Diego and Imperial Counties," is the second installment of a San Diego Dialogue-sponsored series (under Gerber's direction) of research papers on the economy of the San Diego/Tijuana cross-border region.
The study's findings were based on the correlation between the growth rate of taxable sales in San Diego and Imperial counties and leading economic indicators (e.g. employment, GDP growth, income growth, and exchange rate) from both sides of the border.
San Diego Dialogue is a regional public policy center at the University of California, San Diego.
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