ENGAGING THE NEW MEXICAN ADMINISTRATION ON TRADE

UNCLAS SECTION 01 OF 03 MEXICO 003322

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL ECON ETRD MX
SUBJECT: ENGAGING THE NEW MEXICAN ADMINISTRATION ON TRADE
AND COMPETITIVENESS ISSUES

REF: MEXICO 3305 AND PREVIOUS


1. (SBU) Summary: This is the fourth in a series of six
cables on transition issues in Mexico. Modern
infrastructure, including energy, transport, and
telecommunications; respect for the rule of law; and
vigorous and open trade under NAFTA will provide the
foundation to build a competitive Mexican society. As a
partner, we must find ways to bring our own expertise to
Mexican leaders and educate Mexican citizens as to the
reforms Mexico needs while being sensitive to our shared
history and many Mexicans' mistrust of our motives and our
message. End summary.

Energy
--------------


2. (U) Mexico's oil production will decline beginning this
year. Pemex has several opportunities to make up lost
production but these are medium- and long-term projects
that hinge on its ability to partner with foreign firms to
bring expertise and investment capital. Mexico's greatest
potential lies in the deep water of the Gulf of Mexico, but
constitutional restrictions prevent Mexico from sharing
ownership of the reserves with a foreign partner, an almost
necessary condition for attracting outside participation.
The only reforms now under discussion are modest changes to
Pemex's corporate structure that would allow the company to
retain and invest a greater share of its earnings.
Mexico's new leadership will have to confront real changes
immediately upon taking office to permit the new
developments needed to offset a significant medium-term
fall in production.


3. (SBU) Engagement: Any of the three candidates will
bring with them a desire to address the situation along
with experts well schooled in the industry. It is just as
likely; however, that the incoming legislature will be
divided and without the basic energy background to make
informed decisions on the topic. Though energy in Mexico
has traditionally been a "third rail" issue for U.S.
engagement, incoming Mexican legislators would benefit from
a non-politicized discussion on the basics of oil
exploration, production, transportation, refining, and
marketing; the situation in Mexico; and how Mexico's energy
industry relates to the global market.


4. (U) Activity: Organize through local NGOs or
universities, a seminar for Members of Congress and their
key staff on energy and oil, to be taught by a leading
Mexican or Latin American Institution through a study-trip
to Brazil or Norway -- successful examples of countries
like Mexico, with substantial petroleum reserves as well as
a state-run oil company.

Telecommunications and Information and Communications
Technology (ICT)
-------------- --------------
--------------


5. (U) New investors have been unable to offer competitive
services in the broadcast and telecommunications sector,
leaving consumers and businesses unable to afford the high
price of expansion. The International Telecommunications
Union's "Digital Access Index" ranks Mexico 64th, well
behind nearly all other OECD members. Meanwhile, Telmex
continues to control 95 percent of the fixed line market
and charges high prices for network access.


6. (U) Engagement: The incoming administration and
legislature will face the same roadblocks in the regulation
and promotion of ICT. Mexico has moved slowly in the past
to develop enabling policies in the sector, and technical
developments will come even more rapidly over the next six
years. We should use our position to better inform opinion
leaders, as well as the general public, as to the changes
that will be necessary to ensure that Mexico can develop
the IT and telecommunications infrastructure necessary to
compete.


7. (U) Activities:

-- Encourage regulator-to-regulator contact between Cofetel
and the FCC and DOC. Sponsor speaking tours and Mexican
appearances of IT and telecommunications professionals from
other nations' private sectors.


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-- Develop a one-day conference targeting incoming
executive branch officials and legislators to help raise
the visibility of ICT as a key component in Mexico's global
competitiveness. Speakers for the conference will be drawn
from our respective governments, multilateral
organizations, academia, industry and third countries (such
as Chile). We would enlist the support of the Institute of
the Americas to stage the event, which will be held in
early October.

Transportation
--------------


8. (U) Logistics costs in Mexico are some of the highest in
the world, reaching over 15 percent of GDP due to both a
lack of infrastructure and operating inefficiency. While
the GOM began rail reforms in 1996, a disproportionately
large quantity of goods are transported by road at higher
cost and lower efficiency.


9. (U) Engagement: In April 2006, the U.S. Trade and
Development Agency (USTDA) gave the Secretariat of
Transportation and Communications (SCT) $1.3 million to
develop a master plan for developing multi-modal corridors
in Mexico to improve transport and logistics. We must go
further.


10. (U) Activities:

--Engage the GOM in transition for follow-through on the
completion and implementation of the USTDA Master Plan as a
guide for logistics development to improve domestic and
international trade.

-- Bring logistics experts from around the world to
seminars and speaking engagements to raise public
understanding that high transport costs sap Mexican
competitiveness.

Commercial Law Reform
--------------


11. (U) Mexico needs to attract more private investment-
both domestic and foreign, and by large corporations as
well as small and medium size enterprises - to create more
jobs and improve Mexico's supply system. Mexico's
antiquated and inefficient justice system and the ongoing
criminalization of commercial disputes are major
constraints for commerce and investment. Mexican leaders
from all three major political parties are pushing for
criminal law reform; experts are also advocating for
comparable reform of the commercial law system.


12. (U) Engagement: Commercial law reform would increase
investor confidence in Mexico and would contribute directly
to improved competitiveness and future economic growth.
Building on the success we have had promoting criminal
justice reform, we propose to address the commercial side
early-on with the next administration.


13. (U) Activity: Offer the presidential transition team a
highly-structured seminar featuring presentations and Q&A
by Mexican commercial law reform advocates and
international experts on the legal reform process. USAID
will complement this initial high-level approach with a new
project involving government and business associations to
promote Mexican commercial law reform.

Trade and NAFTA
--------------


14. (U) Depending on the Presidential victor, the sectoral
openings already achieved under NAFTA -- and the remaining
few scheduled for 2008 -- could come under threat. To
protect NAFTA we must make certain that the Mexican people
understand and accept all the benefits it has brought them.


15. (U) Engagement: Full NAFTA liberalization is scheduled
for January 1, 2008, with final phase-out of controls on
trade in some of the most sensitive products-corn, beans,
milk powder and poultry. We should engage the new
administration early on to ensure these openings are not
reduced or delayed.


16. (U) Activities:

-- Coordinate a Public Diplomacy campaign with Canada and

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Mexico that explains to Mexicans the benefits they have
earned over twelve years of NAFTA implementation. Work
with the Secretariat of the Economy to provide content and
technical support as they work through the summer to update
the original 1994 NAFTA promotional video. Ensure senior
U.S. officials appear in the film. Arrange to show the
film in public venues throughout Mexico, including, for
starters, airports and our own visa waiting areas.

-- Encourage USTR to meet with the transition team and the
new Secretaries of Economy and Agriculture as soon as
possible to ensure that USG views on the final NAFTA
openings are clearly understood. USTR must emphasize the
importance of working together to facilitate global free
trade.

-- USDA and Mexico's Secretariat of Agriculture (SAGARPA)
have begun a joint analysis on integrating U.S. and Mexican
markets for white corn and beans. Once we complete this
study, we plan to convene a seminar in late fall for
leading agricultural officials from both countries to
present key findings and possible problem areas. The
transition team should participate in this process.

-- Schedule a Consultative Committee on Agriculture (CCA)
in the fall that will include incoming and outgoing
officials to promote continuing this tool to resolve
agricultural trade problems.

BASSETT