SCENESETTER FOR COMMERCE SECRETARY GUITERREZ'S

UNCLAS MEXICO 000346

SIPDIS

SENSITIVE
SIPDIS

FOR SECRETARY GUTIERREZ FROM AMBASSADOR GARZA
STATE FOR WHA/EX

E.O. 12958: N/A
TAGS: BEXP ETRD ECON KJUS PREL MX
SUBJECT: SCENESETTER FOR COMMERCE SECRETARY GUITERREZ'S
JANUARY 31-FEBRUARY 1 VISIT TO MEXICO



1. (SBU) Summary: We welcome your visit to Mexico City as
an unparalleled opportunity to set the stage and coordinate
with the new Mexican government on concrete measures we can
take together to move the relationship forward in many
important economic areas, including improving competitiveness
in North America and facilitating the flow of goods across
our common border. End Summary.

The Mexican Political Landscape
--------------


2. (SBU) In his first weeks in office, President Felipe
Calderon Hinojosa seized the initiative on several important
issues, demonstrating his intent to forge an activist
presidency. The change in atmospherics between the Fox and
Calderon administrations has been evident from Calderon's
first day in office: his insistence on taking the oath in
the Chamber of Deputies, notwithstanding opposition efforts
to block the ceremony, portrayed to the nation a leader who
would not bow to pressure. Historically large counter
narcotics operations, followed by a decisive move against
narcotics kingpins this past week, as well as actions against
key participants in a nettlesome political conflict in the
state of Oaxaca, all demonstrate his understanding that
Mexicans are looking for executive action. Some observers
believe his most important accomplishment to date has been
restoring to the presidency the aura of authority that many
believe was eroded by President Fox's informal and disengaged
manner.


3. (SBU) Nevertheless, the political climate remains
conflictive. It remains to be seen just how much political
and financial support losing presidential contender and
self-proclaimed "alternative president," Lopez Obrador
retains. His support and media attention have dwindled in
recent weeks even as he seeks to further a divisive and
disruptive political agenda. His party, the left of center
Democratic Revolutionary Party (PRD),remains divided and
unable to fashion a national political agenda. A large
segment of Mexico's public feels it gained little from
economic and political reforms of recent years. President
Calderon faces the challenge of reaching out to the
constituency captured by Lopez Obrador during the election,
addressing the depth of poverty and social disparities in
Mexico, while moving ahead with the sometimes painful
structural reforms that are essential if Mexico is to remain
competitive in a global framework.


4. (SBU) At the same time, Calderon must advance his law
enforcement agenda in the face of spiraling narcotics-related
violence. Through decisive actions in recent weeks
(deployment of security forces to narco-trafficking hot zones
of Michoacan, Guerrero, Tijuana and northern border states,
and the unprecedented extradition of several major narcotics
traffickers wanted in the U.S. on January 19),Calderon has
shown he is committed to tackling this issue. That said, the
influence of the illegal trade in drugs is as corrosive in
Mexico as it is pervasive. The battle may have been joined,
but it will be a protracted one.


5. (SBU) The difficulties and challenges are compounded by
the legislative landscape. The results of the 2006
congressional races reflected completion of an historic
realignment in Mexican politics, with the long hegemonic
Institutional Revolutionary Party (PRI) relegated to third
place in what is now a highly competitive multiparty system.
As no party enjoys a legislative majority, the PAN will need
support from minor parties and at least some PRI members in
order to govern. The PRI's experienced legislative
leadership is prepared to cooperate with the PAN on a range
of specific issues, without offering across-the board
cooperation. The PRI will be wary of supporting
controversial reform initiatives that carry a high political
cost. As the 2009 midterm elections approach, we expect the
PRI to distance itself from the PAN further, to reassert a
distinct political identity.

Economics and Mexico's Competitiveness
--------------


6. (U) President Calderon inherited a stable, growing economy
tightly linked to U.S. economic cycles. Mexico chalked up an
estimated 4.7% growth rate in 2006, rebounding from near zero
growth in the first years of the decade. Real GDP growth is
expected to slow to around 3.5% this year. Public finances
have improved steadily in recent years, boosted by sound
macroeconomic management and high oil prices. Inflation has
risen in recent months to around 4%, but is under control.

International investors seeking higher yields have embraced
Mexican bonds. Debt and equity markets are stable. Mexico's
exports to the U.S. (which account for almost 90% of all
Mexico's exports) continue to grow at double-digit rates.
Many here are growing concerned, however, about Mexico's
future in an increasingly globalized world. Rising Asian
economic powers like China (which nipped Mexico to become the
second-largest U.S. trading partner last year) are taking
market share from Mexican producers both at home and in the
all-important U.S. market, while foreign investment and
manufacturing capacity is increasingly heading across the
Pacific. To assure Mexico's ability to compete in this new
environment, Calderon will need to tackle a series of
essential structural reforms.


7. (SBU) Constitutional restrictions on foreign involvement
have hindered Mexico's ability to replace declining oil
reserves. Its dependence on oil-related revenues for 37% of
its federal budget could easily lead to serious budget woes,
possibly in 2007 but more likely in 2008 and 2009. In the
Western Hemisphere, only Guatemala and Haiti have a lower tax
collection rate than Mexico. Poor tax collection has slowed
critical investments in education, health, and transportation
infrastructure and will limit Calderon's ability to respond
responsibly to demands from his political opposition.


8. (U) After crude oil revenues, remittances have become
Mexico's second largest source of foreign exchange, ahead of
foreign direct investment and tourism receipts. Through
November 2006, remittances totaled $21.3 billion, up 16.5%
from the same period in 2005. This sum is triple the $6.6
billion received in all of 2000. Remittance revenues support
many of the poorest families in Mexico. For them, remittance
income is critical, if not for survival, at least for
maintenance of their modest standard of living.


9. (U) Other economic challenges facing Calderon include
reform of Mexico's public pensions system, which has large
unfunded liabilities that each year consume a greater portion
of the budget. Labor market rigidity and lack of competition
in a number of sectors (telephones, broadcasting,
construction, cement, etc.) are also significant obstacles to
boosting economic growth. Few major reform proposals will
move forward without some confrontation with unions
representing workers in the affected industries, including
teachers, telecommunications, transportation, and mining
workers. The scheduled full opening of agricultural trade
under NAFTA in 2008 is a major challenge. Two of the most
politically sensitive products in Mexico are corn and dried
beans. Mexico has over two million corn farmers, most of
whom cultivate less than two hectares. Some agricultural
organizations and the PRD have argued that a full opening of
agricultural trade in 2008 would cause severe social
upheavals, as large numbers of farmers are forced out of
business and further impoverished.


10. (SBU) A key test for Calderon is whether he will be able
to build the political consensus to tackle the structural
changes Mexico needs to be more competitive in the global
economy. He chose a well-regarded team for his economic
cabinet, including the highly-respected former IMF Deputy
Managing Director Agustin Carstens as Finance Secretary and
Eduardo Sojo -- an experienced economic advisor and political
operative in the Fox administration -- as Secretary of the
Economy. Nevertheless, the sensitive political situation
outlined above may lead Calderon to refrain from spending too
much political capital on controversial economic reform
issues early on. He understands the early imperative of
winning over skeptics, particularly among those Lopez Obrador
supporters who perceive Calderon's party as representing the
interests of the elite. Accordingly, many of his early
initiatives will be focused on addressing Mexico's core
social problems of poverty and inequality, while seeking to
improve Mexico's competitiveness through improvements in
education and infrastructure.

The Border - Facilitating Legal Trade
--------------


11. (SBU) The U.S.-Mexico border presents an enormous set of
critical challenges for both countries. The immigration
reform debate in the U.S., the flow of illegal migrants,
insecurity and lawlessness in the Mexican border regions,
trafficking in narcotics and other types of smuggling are key
factors. We are rightly focused on the many criminal
activities prevalent at the border and the need to reduce
their influence in the U.S. On the positive side, in
addition to anti-terrorism cooperation, the last few years

have seen much improved U.S.-Mexican cooperation in
counter-narcotics operations and extraditions.


12. (U) At the same time, annual two-way legitimate
commercial trade between the U.S. and Mexico through November
2006 was $465 billion. Numerous studies and trade groups,
including the 2006 recommendations of the North American
Competitiveness Council, have stressed that border facilities
and procedures should be improved significantly to
accommodate current trade flows and expected future growth.
Commerce A/S Bohigian heard this message loud and clear in
his two recent visits to the border region. In this context,
it would be useful for both nations to make at least
short-term fixes at a number of key border points with the
aim of moving legitimate commerce more efficiently in both
directions. In some cases, this simply means extending
and/or synchronizing operating hours at U.S. and Mexican
facilities at the same border crossing, and sharing best
practices among ports of entry. There are also serious
infrastructure problems at our border crossing points. Both
nations will need to address the need to physically expand
ports of entry and related infrastructure, and to add
additional personnel.


13. (U) California and Baja California have begun a series of
studies/talks aimed at a "trade master plan" in light of the
difficulty of achieving more effective trade facilitation at
the federal level. Governor Schwarzenegger spoke about this
state-level effort when he was in Mexico City and met with
Calderon in November 2006.


14. (SBU) The key to actual bilateral progress on trade
facilitation in 2007 will be engagement by senior U.S. and
Mexican officials, including DHS and the Mexican SCT
(transport ministry). The fact is that we can deliver needed
short-term fixes and longer-term strategies with top-level
involvement in both countries. Moving legal trade better
across the border is part of the positive tone and engagement
that we need under the Prosperity pillar of the Security and
Prosperity Partnership (SPP). Importantly, it meets a very
real commercial need.

Rule of Law
--------------


15. (SBU) Rule of law problems stemming from an inefficient
and easily abused judicial system have plagued U.S. and
Mexican companies, and negatively affect the investment
climate. We are deeply concerned about a trend to
criminalize cases that are typically considered commercial
disputes. Criminalizing these disputes is an abuse of the
judicial system by some Mexican companies to consolidate
their protected position in Mexico and exclude strong
competitors. U.S. companies such as Tyco and General
Electric/NBC have become victims of this disturbing trend,
costing them substantial time, resources and money dedicated
to their defense. Such cases send a negative signal to other
potential investors, undermining their confidence in the
Mexican legal system and willingness to invest in this
market.


16. (SBU) Thanks in part to technical assistance from USAID,
there has been some reform. Three Mexican states have passed
legislation permitting oral trials in criminal cases; two
have actually implemented the reforms. Seven additional
states are developing judicial reform proposals while another
16 are studying the matter. Legislation pending before the
federal congress would, if passed, provide an opportunity to
substantially improve the effectiveness, efficiency and
transparency of Mexico's antiquated and corrupt judiciary.
President Calderon has expressed support for oral trials and
judicial reform, as have the three main party whips in
Congress and the newly-elected Supreme Court President. We
face the very real possibility of being able to help Mexico
achieve a reform that would facilitate law enforcement
cooperation, provide a better chance for viable prosecutions,
strengthen enforcement of intellectual property rights, and
ensure better protections for American residents, visitors
and investors in Mexico from nuisance suits and
criminalization of commercial disputes. We should do all we
can to encourage the Mexican Government to move forward, and
reevaluate our own ability to support a radical improvement
in Mexico's judiciary in the face of pending cuts in USG
assistance to Mexico.

Immigration
--------------


17. (SBU) Mexicans across the political spectrum have
expressed indignation about the border fence, even while
evincing a lack of understanding of its details and likely
affect. Authorization of the fence represents a response to
Mexico's inability to enforce rule of law on its side of the
border, and its failure to create adequate economic
opportunities for its people. If the issue is raised during
your meetings, you can reiterate that the United States is a
nation of laws, that Americans abhor the flagrant disregard
for the law, and that the fence is a necessary tool to ensure
our border security and the enforcement of our immigration
laws. In order not to focus on our differences, you can
stress President Bush's personal commitment to comprehensive
immigration reform and support for President Calderon's
efforts to increase jobs and economic development. While
Mexican expectations continue to include U.S. immigration
reform, the Calderon administration will seek to achieve what
Fox did not in a low-key effort that avoids making migration
the dominant bilateral issue. Our challenge is to encourage
realistic expectations, explaining those U.S. domestic
political factors affecting the issue of migration.

Cuba and Venezuela
--------------


18. (SBU) During the January 9-10 annual meeting of Mexican
ambassadors and counsels, Foreign Secretary Espinosa
confirmed the administration's wish to significantly improve
Mexico's relations with Cuba and Venezuela, noting that
Mexico has historically had friendly relations with these
states and wants to amend any differences with them.
Underscoring this message, President Calderon told his
country's top diplomats to execute a "responsible active
foreign policy," calling on Mexico to assume leadership in
international and regional forums -- particularly in Latin
America -- and conduct respectful relations with all
countries. It seems doubtful that the Mexican government
expects either Venezuela or Cuba to respond positively to its
offer of improved relations, but Calderon is showing that he
is taking Mexico's foreign policy in a new direction from
that of the Fox administration and does not want to alienate
anyone in the region at this early stage.

Closing
--------------


19. (U) In closing, I would like to thank you for coming to
Mexico. We are eager to work with President Calderon and his
team; who share a similar world view, have a viable vision
for Mexico's future, and most importantly are keen to work
with us in shaping that future. They represent natural
allies in tackling the challenges confronting our two nations
and our region. We will seek to emphasize concrete results
we can both applaud in the security (including
military-to-military),counter-narcotics, border
facilitation, economic reform, trade and education agendas.
Your presence sends a clear message as to the importance we
attach to continued good relations with our southern
neighbor, facilitating early progress on our bilateral
agenda. If there is anything I or my staff can do to make
your visit more enjoyable or productive, please do not
hesitate to let me know.
Sincerely, Antonio O. Garza, Jr.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity
GARZA