The Effects of a Depreciation of the Peso on Cross Border Retail Sales in San Diego and Imperial Counties

The Effects of a Depreciation of the Peso on Cross Border
Retail Sales in San Diego and Imperial Counties
Summary: June 8, 1999
James Gerber
Professor of Economics, San Diego State University
Economic Research Fellow, San Diego Dialogue
jgerber@mail.sdsu.edu
ABSTRACT: Changes in taxable sales in San Diego and Imperial counties are
correlated with fluctuations in the value of the peso. An empirical model is used to
specify and estimate the relationship between fluctuations in the value of the peso and
total taxable sales. Regression results show that an unanticipated ten percent decline in
the value of the peso depresses total taxable sales by approximately one percent in San
Diego county and 2.25 percent in Imperial county. During periods of high peso
volatility, expectations of future depreciations can offset much of this effect, however,
and lead to increased purchases. The paper also shows that the effects of the peso
depreciation vary by retail sector and region. The largest relative effects are in the auto
and automotive products sector in San Diego and the apparel sector in Imperial county.

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SUMMARY OF FINDINGS
Introduction
Recent turmoil in international financial markets has focused attention on a
number of highly important global economic issues. Policymakers and politicians
around the world have taken an interest in international financial economics and are
working to increase their understanding of capital flow volatility, the role of the IMF
during an international crisis, and the overall architecture of the international financial
system.
Invariably, global economic turmoil has local secondary effects. These effects are
less noted because they are spread over a narrower region and lack the dramatic national
and international significance of issues tied to the impacts of volatile short term capital
flows in emerging markets. One local secondary effect is tied to the role of the peso in
U.S. communities located along the border with Mexico. When the peso’s value fell by
twenty percent in less than two months during the summer of 1998 (from 8.8 to the dollar
on July 21, 1998, to 10.63 to the dollar on September 10) it had important implications
for the economies of San Diego and Imperial counties. While these may be less dramatic
than the national and international implications of a sudden depreciation, in regional
economies such as San Diego-Tijuana and Imperial-Mexicali, where different national
currencies are widely circulated and where U.S. and Mexican citizens mix together in
business, social, and family circles, local effects of a decline in the value of the peso are
deeply felt. One effect is that a decline in the value of the peso affects the ability of
Mexican citizens to make purchases on the northern side of the international border.
The cross border market
In all communities along the border, cross border purchases are a significant part
of the local economy (San Diego Chamber of Commerce, 1979; Patrick and Renforth,
1996; Prock, 1983; San Diego Dialogue, 1994; San Diego Dialogue, et. al., 1998). Clark
(1994) hypothesized that these effects decrease as the distance from U.S. cities to the
border increases, and as the relative size of the cross border market increases. Patrick
and Renforth (1996) confirmed this empirically for a sample of four Texas border cities.
They estimated that sales to Mexican citizens comprised between 20 and 50 percent of
total retail sales along the Texas border, with larger cities having a share closer to the
smaller number and smaller cities closer to the larger one. After the collapse of the peso
in late 1994, they estimate that retail sales fell by approximately 40 percent in their
sample of 374 retailers in four cities.
Estimates of the importance of cross border shopping in California have been
made by the San Diego Dialogue (1994) for San Diego, and a consortium of San Diego
Dialogue, Centro de Estudios Ecónomicos del Sector Empresarial de Mexicali, A.C., and
Universidad Autónoma de Baja California (1998) for Imperial county. The study of San
Diego, based on a 1992 survey of border crossers estimated that $1.5 billion of taxable
sales in San Diego county were to northbound border crossers. This was equal to
approximately 7.1 percent of taxable sales in the county in 1992 (California State Board
of Equalization, 1992). In it interesting to compare this figure to an estimate made in

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1979 by the Economic Research Bureau of the San Diego Chamber of Commerce. The
Chamber conducted spot surveys of shopping districts around the county and concluded
that 7.5 percent of the county’s taxable sales were to residents of Mexico who crossed the
border to shop.
The estimate that 7 to 7.5 percent of taxable sales in San Diego county are to
Mexican citizens is reasonable. Since the San Diego market is the largest in the border
area, the percentage should be below the comparable figures for urban areas in Texas.
Taxable sales in San Diego county during the first half of 1998 were $14 billion and
seven percent of that amount is $980 million. It is not surprising that a decline in the
peso’s value will hurt many local retailers.
The impact on Imperial county taxable sales of a decline in the value of the peso
is smaller in dollar amounts, but larger relative to the size of the regional economy. This
follows from the facts that at the beginning of 1998 Imperial county had 142,100 people
compared to San Diego county's 2,794,800 (Department of Finance). In addition, it was
estimated in early 1998 that over 900,000 monthly northbound border crossings occurred
at the Calexico port of entry in Imperial county, a number roughly seven times the size of
the population. While estimates are uncertain of the total expenditures in Imperial county
by these border crossers, there are ample indications that it is a much larger share of the
county economy than in San Diego.
How the peso matters
A fall in the value of the peso affects the ability of Mexican residents to make
purchases in the U.S. The most immediate and obvious effect is that dollars become
more expensive, so goods that are priced in dollars are more expensive too.
Economically, this is equivalent to a fall in income since it pushes many goods out of the
family budget. The depreciation also creates an incentive to substitute Mexican made
goods for U.S. made ones because, for awhile at least, relative prices favor Mexican
goods and services. Over time, the substitution effect will disappear since a depreciation
in the peso is soon followed by an increase in the price level. In Tijuana, for example,
between 1980 and 1998, every ten percent depreciation in the value of the peso resulted
in a 7.8 percent increase in prices within three quarters.
Several factors ameliorate the impact of a decline in the value of the peso on San
Diego and Imperial county retail sales. First, a significant part of the economies of
Tijuana and Mexicali is dollarized. In other words, many receipts and payments take
place in dollars. Second, the aforementioned increase in prices in Mexico after a
depreciation quickly eliminates price gaps between U.S. and Mexican produced goods.
Third, in times of extreme peso volatility and turmoil, Mexican citizens come to expect
future depreciations of equal or greater magnitude. This effect can increase current
spending on the northern side of the border since necessary purchases are better made
now rather than later when the peso will be worth even less.
Characteristically, periods of rapid depreciation are associated with periods of
much higher peso volatility. Over the period from 1980 to 1998, there were two major
episodes of rapid depreciation and high volatility, as shown in the following table. The
fact that depreciations are associated with increased uncertainty about the future value of
the peso makes it impossible to predict how any given depreciation will affect retail sales.

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If expectations about the future value of the peso remain unchanged, then a depreciation
will reduce spending across the border. If, however, expectations are altered and
Mexican shoppers expect a significant depreciation in the future, then they may increase
spending in this period in order to avoid having to make purchases in the future when the
peso is expected to be worth less.
Quarterly Rates of Change in the
Dollar Value of the Peso
Mean rate of change
Standard deviation
Group 1
1981:4 to 1988:1 and
-16.68 percent
10.72 percent
1994:4 to 1995:4
Group 2
1980:2 to 1981:3 and
-2.22 percent
2.83 percent
1988:2 to 1994:3 and
1996:1 to 1997:3
Source: Bureau of Labor Statistics (BLS), Instituto Nacional de Estadística, Geografía e Informática
(INEGI), JP Morgan, author’s calculations.
Empirical estimates of the impact of a peso depreciation on taxable sales in San
Diego and Imperial Counties
The real value of taxable sales are a function of incomes in San Diego and
Tijuana, and the exchange rate. Several variables are included in the estimating equation
to proxy the effects of a change in either San Diego/Imperial incomes and
Tijuana/Mexicali incomes. The exchange rate is the nominal rate measured as the
number of dollars per peso. The following table shows the estimated effect on taxable
sales of a ten percent depreciation in the value of the peso.
The Effects on Taxable Sales in San Diego and Imperial Counties
of a Ten Percent Depreciation in the Value of the Peso
San Diego County
Imperial County
Total taxable sales
-0.99 percent
-2.22 percent
Retail sales
-0.97 percent
-1.93 percent
Autos and automotive products
-1.67 percent
-1.71 percent
Building materials
-1.27 percent
-0.48 percent
General Merchandise
-1.12 percent
-2.64 percent
Eating and drinking places
-0.44 percent
-2.03 percent
Apparel
-0.70 percent
-6.04 percent
Specialty shops
+0.02 percent
-3.12 percent
Source: Author’s calculations. See Tables 6, 7, 8 and 9.
Interpretation of the numbers in the table is as follows. Holding constant the
expectations of Mexican consumers, a ten percent depreciation in the peso causes total
taxable sales in San Diego county to fall by just under one percent (0.99 percent), or
about $73 million dollars in the most recent quarterly data (Q2:1998). In Imperial county
the effect is relatively larger, with a ten percent depreciation leading to a 2.22 percent fall
in taxable sales, an amount equal to about $6.4 million dollars when measured by the
most recent quarter (Q2:1998, California State Board of Equalization). Declines in total

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taxable sales are unevenly spread across product groups, with autos and automotive
products, building materials, and general merchandise retailers all experiencing relatively
larger effects in San Diego county, and apparel, specialty shops and general merchandise
the hardest hit in Imperial county.
Caution should be exercised in applying these numbers since they are contingent
on the assumption that expectations about the future movement of the peso are
unchanged. If, however, Mexican consumers anticipate that a current depreciation will
lead to significant future depreciations, they will increase certain types of expenditure.
That is, the current decline in the value of the peso imposes a tighter budget constraint on
Mexican households and reduces expenditure, but at the same time, expectations of future
depreciations increases expenditure. During periods of prolonged turmoil in exchange
markets the expenditure inducing elements may actually outweigh the expenditure
decreasing elements.

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Document Outline

• Introduction

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