VISIT OF ASSISTANT SECRETARIES SULLIVAN AND LOWERY

C O N F I D E N T I A L SECTION 01 OF 08 MEXICO 006186

SIPDIS

SIPDIS
SIPRNET

WHA FOR PDAS KELLY, DAS JACOBSEN, MEX/WOLFSON, EPSC
EEB FOR A/S SULLIVAN AND EEB/TPP/BTA DELAWIE

E.O. 12958: DECL: 12/01/2017
TAGS: ECON ETRD EFIN PREL MX VE
SUBJECT: VISIT OF ASSISTANT SECRETARIES SULLIVAN AND LOWERY
-- MEXICO ENTHUSIASTIC ABOUT EXPANDING THE BENEFITS OF FREE
TRADE WITHIN THE REGION


Classified By: Economic MinCouns Laura Kirkconnell, Reasons 1.5 (b) and
(d).

Summary
--------------


1. (C) Summary: Over the course of meetings with prominent
Mexican economic opinion leaders within and outside
government, a visiting State/Treasury delegation received
enthusiastic responses to U.S. ideas to establish an
association of free trade partners in the hemisphere to
promote competitiveness and ensure the benefits of trade are
spread as broadly as possible within our societies. Mexico
would be prepared for a regional group to tackle the
sensitive issue of knitting FTAs together sooner than might
be politically feasible in the United States. Mexican
officials expressed understanding of the delicate U.S.
Congressional mood on trade, and responded positively to U.S.
ideas for initial areas of cooperation. The Finance and
Economy Ministries discussed measures Mexico is already
taking to knit together a number of its 12 bilateral and
multilateral FTAs it has with 42 countries. In explaining
their initiative to integrate free trade efforts among
"Pacific Arc" Latin countries, Economy Ministry officials
made clear they would like to see the U.S. seriously engaged
as well. They said the U.S. proposal would need to do more
than create another talk shop, and warned that it could not
be perceived as a cloak for addressing U.S. security concerns.


2. (SBU) Both public and private sector officials agreed
developing infrastructure was key to spreading the benefits
of free trade. They discussed the need for technical
assistance to develop project proposals, find qualified
investors and ensure funded projects are actually built. The
head of Mexico's largest government-run development bank
discussed his agency's success in reaching out to small and
medium-sized enterprises. The chief of the government-run
infrastructure bank discussed his agency's focus on
municipalities.


3. (C) Secretary of Finance Carstens proposed that another
deliverable might be implementing policies and practices to
encourage U.S. citizens to retire in Mexico and Central
America (such as allowing medicare coverage outside the U.S.)
He also voiced support for the Merida Initiative to tackle
organized crime and narco-trafficking. Private sector
opinion leaders voiced similar views on how to extend the
benefits of free trade agreements, and added strong
suggestions on cumulation of origin, Open Skies, and other
ways to deepen economic engagement. The Mayor of Mexico City
stressed education programs (including English language) and
policies to foster technology development. Private sector
interlocutors noted that a lack of internal reform within
Mexico was largely responsible for the benefits of NAFTA not
having been spread more widely. All gave President Calderon
credit for reforms he had undertaken to date, but stressed
that deeper reforms are needed. Every interlocutor, public
and private, who commented on Hugo Chavez expressed
satisfaction that more world leaders are now standing up to
his bullying tactics. They also uniformly praised the USG
for staying out of the fray, which they said was the best
contribution we could make to blunt his influence in the

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Hemisphere. End Summary.


4. (U) EEB A/S Dan Sullivan, Treasury A/S Clay Lowery, WHA
PDAS Craig Kelly, Treasury DAS Brian O'Neill, EEB/TPP/BTA
Director Greg Delawie, and Treasury Director Luyen Tran
visited Mexico City November 29-30 for meetings with the
Ministries of Finance and Economy, the heads of Mexico's
state-run development and infrastructure banks, the Mayor of
Mexico City, and a number of well-known Mexican economic
opinion leaders.


5. (SBU) In the meetings with Mexican federal government
officials, conversation centered around the USG idea to form
an association of free trade partners in the hemisphere to
promote competitiveness and ensure the benefits of trade
liberalization are spread as broadly as possible. Sullivan
stressed that the immediate priority for the USG was the
passage of FTAs with Peru, Columbia, and Panama, and noted
the positive House of Representatives vote on Peru. (Note:
On December 4, the Senate passed the Peru FTA with a margin
of 77-18. End note.) He said that the USG wanted to
consolidate and maintain the momentum of the historic
achievements that have been made with regard to free trade in
the hemisphere. He suggested the establishment of an
association of free trade partners in the hemisphere,
committed to democracy, the rule of law, and open market
policies, the primary purpose of which would be to work
together to promote competitiveness and ensure the benefits
of trade liberalization were spread as broadly as possible in
all our societies, especially to small businesses, farmers,
and others who had not yet directly benefited from free
trade.


6. (SBU) Such an association could have strong links to the
private sector and could include initiatives -- such as the
US Treasury,s program to enhance access to financing for
small and medium enterprises (SMEs) -- to help citizens take
better advantage of FTAs in the region. An important longer
term goal of such an association would be to work on
&knitting together8 the different hemispheric trade
agreements ) possibly harmonizing issues like customs
procedures, rules of origin, intellectual property rights,
etc., and working on cumulation issues.


7. (SBU) This association of free trade partners could
potentially include an administrative headquarters to serve
as a coordinating body and driving force for continued
progress on reducing poverty, increasing competitiveness, and
strengthening social cohesion in the Western Hemisphere. It
could complement the work of other institutions in the
region, such as the OAS and IDB.


8. (SBU) Sullivan emphasized that the delegation was seeking
input from the three leaders on trade in Latin America )
Chile, El Salvador, and Mexico ) as well as Canada - before
moving forward with this idea. He noted the delegation would
return to Washington to work with other agencies in the USG
to consolidate the ideas of the Latin leaders and refine the
proposal for final approval by the USG interagency economic
team.


9. (U) Lowery explained that expanding access to credit and

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extending infrastructure networks could make excellent areas
of cooperation for such a regional initiative. Kelly put the
initiative into a regional perspective and emphasized that
this sort of association could complement the Merida
Initiative to help Mexico and Central America combat
organized crime by adding a prosperity component to U.S.
regional engagement. In meetings with Mexico City's mayor
and outside experts, the proposed association was not raised
specifically. Instead, discussion focused on how to spread
the benefits of free trade to those currently left out.

Finance Ministry
--------------


10. (C) Under Secretary of Finance Alejandro Werner said that
Mexico was already working unilaterally to harmonize its
various FTAs, including using a "least common denominator"
approach for rules of origin, cumulation, tariff levels, and
customs procedures. The purpose, he said, was to reduce
business transaction costs and opportunities for corruption.
Werner noted Mexico's efforts with Chile and the
Inter-American Development Bank (IDB) to identify and
eliminate differences among FTAs between Latin American
countries along the Pacific Rim. He stressed that both
initiatives were important to boost Mexican competitiveness,
especially given a possible slow down in U.S. economic
activity over the next two years.


11. (C) Secretary Carstens thanked the USG for its proactive
attitude toward Mexico and for the U.S. ideas about expanding
regional trade. He said his Ministry would be as supportive
as possible of the U.S. proposal for an association of free
trade partners, and would recommend that the government back
it. Carstens stressed the importance of thinking clearly
about the final objective, mechanism of collaboration, and
deliverables, and noted that the proposal should leverage
existing vehicles like the IDB. He agreed that Latin America
needed to address its huge challenge of providing employment
to a young population. Given demographic trends, he
explained, unless we develop rural areas, we will see
continued migration to urban areas within Latin America and
to the United States.


12. (C) One specific deliverable Carstens suggested was
facilitating the retirement of U.S. and Canadian baby boomers
in Mexico and Central America by allowing them to receive
medicare benefits there. If some of the 25 million American
and Canadians expected to retire in the next 10 years came to
Mexico and Central America, he argued, it would induce a huge
creation of small and medium enterprises (SMEs). The U.S.
side noted the political difficulties within the U.S. about
extending medicare coverage to Amcits living in Mexico and
Central America, but said Treasury was looking at the
technicalities. Given the difficulties of fully resolving
this issue, Carstens suggested that the governments determine
what Americans would need to retire in Mexico and seek a
gradual way to take care of their needs. He noted that a big
flow of U.S. emigrants heading from north to south might help
dampen political sensitivities about the south to north flow
of Mexican and Central American emigrants.


13. (C) PDAS Kelly noted the link between prosperity and

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security, and expressed the hope that Secretary Carstens will
support the U.S.-Mexico Merida Initiative to combat organized
crime and drug-trafficking. Kelly noted that the Initiative
included a proposed USD 5 million for the Financial
Intelligence Units to receive technology enhancements (data
management and analysis software and hardware). Such
improvements would better link the information management
systems being used to combat money laundering. Carstens
responded that his Ministry was very appreciative and
supportive of the Initiative, and of the work the U.S.
Department of Homeland Security was doing with the Mexican
government, including the recent MOU between U.S. and Mexican
Customs. Carstens noted the extensive nature of U.S. and
Mexican collaboration to combat the flow of drugs to the U.S.
and the flow of money and arms to Mexico. He said both
governments had a good level of confidence in each other, and
should strengthen that confidence and extend it to Central
America.

Development Banks
--------------


14. (SBU) Mario Laborin, chief of NAFIN, Mexico's largest
government-run development bank, explained how NAFIN has
improved its outreach to SMEs. Among recent changes was a
requirement that by 2012 35% of government purchases be made
from SMEs, and a mandate that payments to SMEs be done
through a federal government electronic payment system.
Laborin explained that electronic payments prevented
corruption and ensured that SMEs actually got paid when they
sold to the government. In a separate meeting with O'Neill
and Tran, the Director General of BanObras, a government-run
development bank focused on infrastructure, explained that
BanObras focused on municipalities because many lacked the
capacity to develop and manage infrastructure projects.
These officials as well as Secretary Carstens agreed that in
Mexico, financing was generally available for infrastructure
projects. The problem was a lack of capacity to develop
project proposals, find qualified investors, and ensure all
regulatory and legal hurdles are cleared so that funded
projects actually proceed.

Economy Ministry
--------------


15. (SBU) The team met with Beatriz Leycegui, U/S of Economy
for International Trade Negotiations and Carlos Ortega
Venzor, chief adviser to the Economy Secretary. Both were
very enthusiastic about the U.S. proposal. Leycegui said
that a number of pro-trade countries from the "Pacific Arc"
(Chile, Peru, Ecuador, Colombia, the Centrals and Mexico) are
already engaged in exploring deeper economic integration
among themselves as a way around the failed Free Trade Area
of the Americas talks, which foundered due to resistance from
Venezuela, Brazil, and others. With Mexico and Chile in the
lead, the Pacific Arc countries are exploring how they might
establish cumulation of origin and other convergence
mechanisms among the various FTAs in the Hemisphere. In
fact, the IDB had already done a general paper looking at
rules of origin and was poised to do a more detailed analysis
of methodologies that could actually be used to achieve
convergence. Given the size of the U.S. market and a general

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Latin American desire to see the U.S. engage in a clear
economic win-win proposition such as this, she said U.S.
participation would be warmly welcomed. In fact, she said,
Mexico was open to any country truly interested in freer
trade and greater economic integration joining the group,
including the Caribbean and Uruguay.


16. (C) Leycegui was disappointed that 1) the limited
CAFTA-Dominican Republic textiles cumulation provisions could
not be implemented between Mexico and the U.S. until all the
Centrals had finished the required amendments to their laws
and rules and 2) that Canada had not included cumulation
provisions in its recently concluded FTAs with Peru and
Colombia, but said this was clearly the direction to head in
if we were serious about integration. Nonetheless, she
acknowledged that protectionist politics in the U.S. (and
Mexico as well) had to be taken into account and thus the
more aggressive linking up of FTAs might work better as
longer term goals of an association of free trade partners.
Both she and Ortega were interested in the USG proposals of
focusing on SMEs, access to financing, infrastructure, and
English language training.


17. (C) Ortega echoed Leycegui's overall positive response,
noting this kind of initiative would demonstrate U.S.
commitment to the region. However, he asserted that for
something like this association to work, there would need to
be clear lead agencies in each country, or lacking that,
strong participation by the various offices of the presidency
(e.g., the White House, Los Pinos, etc.) to make sure the
bureaucracies moved. In this respect, he cited the Security
and Prosperity Partnership of North America as a good example
of an initiative that worked well due to strong executive
involvement, though he agreed with the USG team that the
association of free trade partners would have to be organized
differently. He also stressed that an association without
easily identified deliverables would end up being
counter-productive. Finally, he warned that Latin America's
reflexive U.S. critics would be looking for signs that this
was another U.S. effort to hide an unwelcome regional
security agenda under an economic cloak. A/S Sullivan
assured him this was not the case.


18. (U) Both sides noted that three meetings relevant to
regional integration were scheduled to be held in April 2008:
1) the IDB annual meeting April 4-8 in Miami; 2) a meeting of
the Pacific Arc countries April 10-11; and 3) the World
Economic Forum for Latin America April 13-15 in Cancun,
Mexico.

Mayor of Mexico City
--------------


19. (SBU) Marcelo Ebrard, the mayor of Mexico City, told the
team that Mexico was not growing fast enough to provide good
jobs for its people, noting that many well-educated citizens
of Mexico City immigrated to the U.S. because of lack of
opportunities. He and his chief adviser for economic
competitiveness, Sam Podolsky, described a series of
initiatives to improve the city's infrastructure, strengthen
education, ensure public security, and attract foreign
investment. After the mayor left the meeting, Podolsky also

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described recent initiatives aimed at making law-abiding
merchants out of informal street vendors who frequently sell
pirated or contraband goods and do not pay taxes.

Opinion Leaders
--------------


20. (SBU) The delegation discussed how to extend the benefits
of free trade over a dinner hosted by the DCM with opinion
leaders from Mexico-based economic research institutes:
Salvador Mallo, Director of Research for the Mexican
Competitiveness Institute; Luis Rubio, President of the
Center for Development Research; Alfredo Thorne, JP Morgan
Director General for Economic Investigation for Latin
America; and Rogelio Ramirez de la O, Director General for
ECANAL (and former unofficial economic advisor to the
campaign of losing leftist Presidential candidate Andres
Manual Lopez Obrador). Initial discussion concerned the
heated immigration and NAFTA debate within the U.S., and how
it is harming efforts to promote economic integration in the
region. Alfredo Thorne expressed concern about recent
statements by Presidential candidate Hillary Clinton about
the "failures" of NAFTA. Salvador Mallo said that although
Mexicans do not view NAFTA as having been bad for their
economy, they have lost the optimism they had about their
economic futures. It was understandable, he said, because
around 60% of Mexicans do not graduate high school and are
unprepared for the jobs and other opportunities provided by
NAFTA. He said there is a widespread feeling that Mexico has
"missed the boat" in terms of taking advantage of
opportunities under NAFTA. Luis Rubio described how a lack
of competition, credit to the private sector, and an
over-regulated economy make it hard to be an entrepreneur in
Mexico.


21. (C) All four agreed that the main reason NAFTA had failed
to reduce poverty in Mexico was the failure of Mexico to open
its economy to competition and enable SMEs and other new
entrants to take advantage of opportunities opened by NAFTA.
All gave credit to President Calderon for the reforms he has
achieved to date, but stressed that more was needed,
especially strengthened anti-trust measures to combat
near-monopolies such as in telecommunications and hospitals.
They said Mexicans were too complacent and unwilling to
tackle difficult economic reforms in the absence of a crisis.
Ramirez believed that declining oil production may bring
such a crisis in about six years, but predicted that in 2008
Congress would pass reforms of the state energy monopoly
Pemex to reduce the amount of revenue sucked away to support
overall government spending, improve Pemex's corporate
governance and give it more flexibility to contract for
services from the private sector. Ramirez argued that the
USG should encourage Mexico to undertake reforms, such as
when Treasury insisted on reforms to bolster long-term
macro-economic stability in exchange for support during the
1994 debt crisis. The other economic analysts did not voice
support for this view, with one noting that it could be
counterproductive.


22. (SBU) As to what the United States could do to help
spread the benefits of free trade, the analysts agreed that
improving infrastructure was key. They also stressed the

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importance of supporting SMEs, including a recommendation
that the World Bank and international institutions need to
modify their rules to support SME development.


23. (SBU) An after-dinner discussion hosted by Fernando
Solana, (former Senator, General Director of the Central
Bank, Minister of Foreign Affairs, Minister of Commerce and
Industrial Promotion, and Minister of Public Education)
yielded a precise prescription of how to extend the benefits
of free trade. Solana had gathered two fellow ex-officials
who had actively worked on NAFTA: Jaime Zabludovsky, who had
served as Mexico's Deputy Chief Negotiator for NAFTA and
Under Secretary for International Trade Negotiations; and
Luis de la Calle Pardo, also a former Under Secretary for
International Trade Negotiations. Zabludovsky and de la
Calle recommended cumulation of origin among FTAs in the
hemisphere, starting with prompt implementation of textile
cumulation provisions between CAFTA and the Dominican
Republic. They argued that the USG was mistaken in believing
that all CAFTA members had first to make the necessary
changes to their domestic rules and laws before textile
cumulation could be implemented with any of them. (Note:
Embassy and Washington are confident that the CAFTA text
clearly supports the USG interpretation, though actions taken
by Honduras appear to have made this a moot point. End
note.) They argued that cumulation in other sectors was a
logical way out of the morass left by the failure of
negotiations for a Free Trade Agreement of the Americas, one
that would deepen ties among participants, and turn them from
competitors to partners in fostering integrated supply chains
to better compete against Asia and the European Union. De la
Calle later e-mailed the delegation and Post a paper making
this cumulation argument.


24. (SBU) The second step in the prescription was improving
infrastructure within the region. Zabludovsky said that
countries cannot afford to wait for capital market reform in
Central America, but needed to find other ways to finance the
infrastructure needed to move goods covered by FTAs.
Zabludovsky, de la Calle and Solana believed that
infrastructure should be the main mandate of the IDB,
including subsidizing projects that would not otherwise be
viable through funding them at a loss. A/S Lowery noted that
Latin America seems to want the IDB to be everything to
everyone, but the IDB clearly needs to focus its efforts. De
a Calle recommended an expansion of the NADBank mandate to
cover border infrastructure.


25. (SBU) Other steps recommended by Solana and his
compatriots were an Open Skies agreement. De la Calle opined
that Mexican resistance to a cargo open skies would be
overcome once the runway at the San Luis Potosi airport was
lengthened because this would deprive ESTAFA, Mexico's
biggest cargo airline, of the protectionist excuse that it
would be at an unfair disadvantage as long its main hub could
not handle large airplanes. He noted that the U.S. Trade
Development Agency (TDA) was supporting the project.
(Comment: TDA has funded a "definitional mission" in support
of this potential project. End Comment.) Finally, de la
Calle recommended pre-clearance for travelers between the
U.S. and Cancun, perhaps after Mexican immigration officials
had been stationed at a key U.S. airport port-of-entry like

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Houston.

Comment
--------------


26. (SBU) It is no surprise that Mexicans welcome the U.S.
idea to work as a region to boost competitiveness and spread
the benefits of free trade throughout our societies. Having
the highest level of income inequality in the OECD, Mexicans
are well aware that they have failed to extend the benefits
of NAFTA to the 40 percent of its population still living in
poverty. Understanding domestic political challenges within
the U.S., the Calderon Administration is taking its own
initiatives to knit together its FTAs, especially in Latin
America. They especially welcome USG engagement on economic
integration in the hemisphere because they are concerned that
anti-immigration rhetoric in the U.S. is harming U.S. and
Mexican efforts to cooperate in trade, in fighting organized
crime and narco-trafficking, and in other shared interests in
the hemisphere. Mexicans note that their efforts to
integrate Latin American Pacific Rim FTAs will encourage
other countries such as Brazil to adopt more open trade
policies. With respect to Venezuela, several Mexican
interlocutors expressed satisfaction that "regional" leaders,
including King Juan Carlos, are standing up to Chavez's
bullying tactics, but welcomed U.S. restraint in staying
above the fray. They appreciated the fact that instead of
generating support for Chavez through public criticism, the
USG was encouraging countries of the region to work together
to expand the benefits of open markets and strong democracies.


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 /
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