MEXICAN TEXTILE INDUSTRY LOSING JOBS TO CONTRABAND

UNCLAS SECTION 01 OF 04 MEXICO 002858 SIPDIS SIPDIS DEPT FOR DRL/AWH AND ILCSR, WHA/MEX AND PPC, USDOL FOR ILAB DHS/CPB FOR JLABUDA AND BFENNESSY TREASURY FOR IA NSA FOR FISK E.O. 12958: N/A TAGS: ELAB ETRD KTEX PGOV PINR ECON MX CH SUBJECT: MEXICAN TEXTILE INDUSTRY LOSING JOBS TO CONTRABAND AND FOREIGN COMPETITION REF: (A) MEXICO 1678 (B) MEXICO 616 ¶1. SUMMARY: According to representatives of the Mexican Textile and Clothing Industries, as well as leaders of various Textile Workers Unions, their segment of the economy has lost some 318,000 jobs since 2000, with another 500,000 jobs currently at risk. Both the industry and the unions attribute this job loss to contraband products illegally entering Mexico and to what they describe as &unfair8 foreign (read Chinese) competition. The textile industry and unions recognize that much of the contraband problem originates in Mexico, but they also claim the problem is compounded by textile goods that, after arriving in the U.S. from Asia, are relabeled as &made in America8 in order to receive preferential treatment under the terms of NAFTA instead of paying the proper import duties. Another element of the contraband problem was recently highlighted by Mexico,s President Calderon, who characterized the growth of contraband textile products as a further example of organized crime,s diversification into yet another area of Mexico,s economy. The Mexican textile industry and unions believe that USG support in stopping or reducing contraband products coming from the US would help save thousands of jobs. They are therefore asking for our help to address the problem and to spur greater action from the appropriate Mexican government agencies. END SUMMARY. TEXTILE INDUSTRY COMING APART AT THE SEAMS -------------- ¶2. According to the president of Mexico,s National Chamber for the Textile Industry (CANAINTEX) and the head of one of the country,s larger textile workers unions, the country,s textile and clothing industries have been hemorrhaging jobs since 2000. Between the years 2000-2006 (or put differently, during the entire administration of Mexico,s former President, Vicente Fox) the country,s textile industry lost 60,000 jobs while its clothing industry lost approximately 258,000 jobs. Not coincidentally, China acceded to the World Trade Organization (WTO) in 2001, and the global system of textile and apparel quotas was finally abolished at the end of 2004, events which contributed to a boom in China,s global textile and apparel exports. These 318,000 jobs were all registered with the Mexican Social Security Institute, which means these workers and their families were entitled to health care coverage and the workers themselves accrued pension benefits. In other words, these workers had stable, working class jobs that put them among the ranks of the solid Mexican middle class. There are currently some 500,000 jobs remaining in the textile and clothing industries but CANAINTEX and the unions believe all of them are at risk. ¶3. The leaders of Mexico,s textile and clothing industries are not always in accord with the country,s various textile workers unions, but all three actors are in complete agreement over what they believe to be the reasons for this massive loss of market share and jobs. As the industry and the unions see it, the primary source of their problem is unfair foreign competition, principally from China. However, the unions and industry also see the problem of contraband, entering Mexico either directly or via the United States, as a secondary but equally frustrating element of their predicament &UNFAIR8 CHINESE COMPETITION -------------- ¶4. Mexico,s textile and clothing industries, as well as its textile workers unions, see what they describe as unfair competition from China as the main element of all their woes. In recent months the textile and clothing businesses have used various public fora to invite senior GOM officials and the media to highlight the gravity of their situation. According to the president of CANAINTEX, Mexico,s textile MEXICO 00002858 002 OF 004 industry is not afraid of competition and, in fact, from 2001-2006 it invested some USD 3 billion industry-wide in machinery and plant improvements to improve its ability to compete. However, as the CANAINTEX president states, these efforts have been undercut by &unfair Chinese competition8 in two different ways. ¶5. His first point is to stress that China is not a market economy and Mexican industries are therefore unable to compete on an equal basis. According to CANAINTEX, China: provides its industries with numerous subsidies that are specifically prohibited by the WTO (Note: Mexico has joined as a third party a U.S. case against Chinese subsidies); allows its numerous state-owned textile businesses to operate at a loss (something Mexican firms cannot do); and does not respect basic worker rights. ¶6. This last point on worker rights was firmly stressed recently by senior members of CANAINTEX staff in a meeting of Embassy Mexico Econ Section officers. According to the CANAINTEX staffers, one of the most galling aspects of competing with China was the unfair advantage it has over Mexico by not respecting worker rights (or environmental standards). Mexico, the staffers said, has been obliged under NAFTA to comply with a high level of worker rights (and environment standards) that prevents its industries from reducing costs below a certain minimum level. Since these worker rights (and environmental standards) do not apply in China, that country will always be able to produce goods at a lower cost than Mexico. They also complained that China openly tolerates contraband and piracy (see paras 8-12). (Comment: Post,s Labor Counselor came away from the meeting with the CANAINTEX staffers with the impression that they felt the US should accept some portion of responsibility for the fact that Mexico now has to respect worker rights and comply with environmental standards.) ¶7. Mexico has not been complacent about the surge of Asian imports. The GOM currently has in place a large number of anti-dumping duties against Chinese exports of textile and clothing. Under the terms of the bilateral agreement that Mexico hammered out with China in exchange for approving China,s accession to the WTO in 2001, China cannot challenge these duties before the WTO,s dispute resolution body until December of this year, even though most observers agree that the great majority of these cases are not consistent with WTO anti-dumping rules. In December, however, Mexico will either have to drop these duties or be prepared to face anticipated Chinese challenges (REF B). Mexican President Felipe Calderon has urged affected industries to provide the GOM with the necessary data to back up the current anti-dumping measures against Chinese imports or to justify new ones (REF A),but industry representatives say they will simply not be able to provide that kind of data between now and year,s end. How the GOM intends to handle this tricky balancing act between protecting an important domestic industry and complying with its international trade obligations remains to be seen, and will be reported septel. CONTRABAND: A GOM CUSTOMS AND LAW ENFORCEMENT PROBLEM -------------- -------------- ¶8. According to CANAINTEX, the second form of unfair competition ) contraband imports ) completely circumvents the anti-dumping duties in effect against Chinese textile and apparel. During a frank discussion with post,s Labor Counselor, the president of CANAINTEX and the leader of one of the larger textile workers unions admitted that a large part of the contraband problem lies with the GOM,s Customs service and its failure to prevent the entry into Mexico of unauthorized textile goods. The CANAINTEX president and labor leader stated that they have repeatedly detailed the extent of the problem to the appropriate GOM officials, but the results have been far less than they had hope or been promised. (Note: Mexican Customs have seized large volumes of contraband Chinese imports, but such seizures probably MEXICO 00002858 003 OF 004 represent just the tip of the iceberg.) ¶9. Another frustrating factor for them was the reluctance of Mexico,s elected politicians to control the country,s informal economy. The industry and union representatives stated that almost all of the contraband textile products entering Mexico end up on the informal economy. Mexico,s informal economy is estimated by the OECD to account for some 43 percent of the country,s total workforce. Other studies peg the figure at 25 percent. Whatever the real figure, the informal sector provides a huge number of jobs for people who would otherwise be totally unemployed. Mexican politicians, the union and industry representatives stated, are afraid to do anything (like cracking down on contraband) that might endanger the jobs of persons who would otherwise be totally unemployed. Little thought is given to the long term consequences of having such a large portion of Mexico,s working population without health coverage or without the prospect of retirement benefits. (Comment: Contrary to these assertions, President Calderon has publicly committed his administration to combating the illegal economy.) ¶10. On separate occasions union and industry representatives, and even Mexican President Felipe Calderon, have all touched on the law enforcement aspects of the contraband problem. The union and industry representative viewed this facet of the problem in terms of illegal goods entering the country to compete against legitimate domestic products, lost customs revenues, and a shockingly large number of questionable factories that receive contraband textile goods destined to supply Mexico,s informal economy. President Calderon recently stated at a Clothing industry event he viewed the growing problem of contraband as proof that the country,s organized crimes groups were diversifying into other parts of the Mexican economy. CONTRABAND: A NAFTA PROBLEM -------------- ¶11. While a large part of the contraband problem for Mexico,s textile industry and unions originates within the country,s borders, the representatives with whom post,s Labor Counselor interacts claim that there is also a significant US aspect to the dilemma. According to these interlocutors, unscrupulous individuals working on both sides of the border (not necessarily Chinese) legally import Asian textile products into Long Beach for transit to border cities like Laredo. Since the goods are bound for Mexico and will not enter the US market, they pay no US duties. Before they cross the border to Mexico, however, their labels of origin are changed to read &Made in USA8. These relabeled goods are then illegally exported to Mexico, where they receive little if any customs scrutiny and are falsely accorded duty-free NAFTA treatment. ¶12. Post,s contacts are firmly convinced that the re-labeling of Asian made textile products is causing significant damage to their own ability to maintain jobs and an economically viable textile industry. CANAINTEX believes it can help identify and locate some of the actors/factories in the US that are re-labeling textile good that will ultimately enter Mexico as contraband. The CANAINTEX staffers who met with post,s Econ Section officers commented that many of the textile workers who have lost their jobs in Mexico have migrated to the US to work in what is left of the American textile industry. They implied it would not be unreasonable to assume that these displaced workers might even be doing some of the physical re-labeling of Asian made textile products. TEXTILE INDUSTRY AND UNIONS SEEK MORE GOM AND USG ASSISTANCE -------------- -------------- ¶13. Post,s textile industry and union contacts have been working with GOM Customs officials on the problem of MEXICO 00002858 004 OF 004 contraband goods and with the Secretariat of the Economy for a coordinated GOM response to what they see as unfair Chinese competition. Despite the aforementioned seizures and high anti-dumping tariffs, they remain disappointed by the GOM response. Some are now pinning their hopes on the possibility of the new trade remedy cases that President Calderon said he is willing to pursue, but the GOM has made it clear that it intends to utilize only WTO-consistent measures, which means that Mexican industry will have to provide substantial evidence to back up its claims. If the current anti-dumping tariffs are eliminated or shrink significantly, and no new ones follow in their footsteps, this would have the positive effect of reducing the incentive for importing contraband textiles and apparel, though predictably this prospect does not appeal to either the domestic industry or unions. ¶14. CANAINTEX and the textile unions seem to accept that they must rely on the GOM to deal with both contraband and unfair competition. However, they believe the USG may also be able to help them with the former problem. The textile industry and unions believe that addressing the problem of contraband/re-labeled products entering Mexico from the United States would bring multiple benefits. First, it would help safeguard some of the 500,000 jobs they believe are now at risk. Next, it would show that effective government action is possible in this matter. Finally, although more implied than stated, CANAINTEX and the unions hope that effective action from the USG could spur a more active response from the GOM. COMMENT -------------- ¶15. The complaints about Chinese competition from Mexico,s textile and apparel industries and workers are probably being echoed by domestic industries and workers in almost every corner of the globalized world economy. None of our interlocutors discussed inefficiencies in the Mexican industry or acknowledged any of the comparative advantages enjoyed by their Chinese competitors. Clearly, they would prefer government protectionist measures to cutting their own costs (or wages); let alone developing new higher value-added markets. This is not to say that all the charges of unfair Chinese trade practices are invalid, and insofar as the Mexican government believes it has credible grounds to sue China in the WTO, we believe it will do so. Mexico, in fact has already demonstrated joined two US-initiated cases against China this year over Chinese industrial subsidies and failure to protect intellectual property rights. ¶16. With regard to the problem of re-labeled contraband textile goods entering Mexico from the United States, we believe it would be in both countries, best interests to tackle this phenomenon to the extent feasible given available enforcement resources. At the same time the scope of this problem could shrink significantly if/when Mexico removes some or all of its anti-dumping duties on Chinese textiles and apparel. Post has already been in touch (via e-mail) with the appropriate office in DHS and the Department of Labor on this matter and received an encouraging response. We hope that this message will help contribute to the dialogue began on this issue and serve as starting point for USG discussions on possible next steps. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity and the North American Partnership Blog at http://www.intelink.gov/communities/state/nap / BASSETT