KEY ECONOMIC THEMES FOR THE MARCH VISIT OF

C O N F I D E N T I A L SECTION 01 OF 05 MEXICO 000939

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E.O. 12958: DECL: 02/20/2017
TAGS: OVIP ECON MX
SUBJECT: KEY ECONOMIC THEMES FOR THE MARCH VISIT OF
PRESIDENT BUSH


MEXICO 00000939 001.3 OF 005


Classified By: AMBASSADOR ANTONIO O. GARZA, JR., REASONS: 1.4(B/D).

Summary
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1. (C) The President,s visit comes at critical time as the
new Mexican government seeks to set and implement its
priorities across many fields. Our common border with Mexico
gives us strong common interests, including security and
North American economic success. The United States has a
great stake in what Mexico can accomplish in the next few
years. Our key economic aim in 2007 is to encourage, in a
quiet way, needed Mexican actions in vital areas such as
reducing barriers to legitimate trade across our common
border, deregulation, energy reforms, professionalization of
government, education, anti-poverty efforts and job creation.
Mexican leaders generally understand what needs to be done,
but are often blocked by internal political and vested
interest gridlock. Sharing best practices, helping set the
Mexican policy stage for needed actions, and technical
assistance will be useful actions that we can take. It is
also important to maximize private sector interest in
undertaking the reforms needed to make Mexico competitive in
the global economic market. We should highlight that annual
U.S.-Mexico trade is set to exceed USD 375 billion in 2007.
End Summary.

The Border - Ensuring Security and Prosperity
--------------


2. (C) The U.S.-Mexico border presents an enormous set of
critical challenges for both countries, ranging from 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
contraband smuggling. We are rightly focused on the many
criminal activities prevalent at the border and the need to
reduce their impact on the U.S. We should continue to
encourage the marked progress we have seen in recent years in
U.S.-Mexico cooperation against terrorism, counter-narcotics
operations and extraditions.


3. (C) Our common border poses an equally great economic
challenge. Total trade in goods between the U.S. and Mexico
is now in excess of USD 330 billion annually. We also traded
more than USD 36 billion worth of services in 2005, the most
recent year for which we have numbers. U.S.-Mexico trade is
growing rapidly, almost 15 percent between 2005 and 2006.
Based on conversations with senior Mexican officials, we
expect President Calderon will raise facilitation of legal
trade as a priority in the March Summit.


4. (U) Numerous North American studies and trade groups have
stressed that border facilities and procedures must be
improved significantly to accommodate present trade and
expected future growth. In their February 2007 report to the
Security and Prosperity (SPP) Ministerial, the North American
Competitiveness Council declared their first priority to be,
"improving the secure flow of goods and people within North
America." In this context, it is important to remember that
trade facilitation does not come at the expense of security.


5. (C) Commerce Assistant Secretary David Bohigian heard this
message loud and clear in his two recent visits to the border
region. His visit helped refine and expand a list of
short-term fixes at a number of key border points in order to
shorten waiting times while assuring border security. In
some cases, this means extending and/or synchronizing
operating hours at U.S. and Mexican facilities at the same
border crossing, and ensuring that industry takes advantage
of this opportunity. In other cases, it means sharing best
practices and reducing duplicative inspections. It also
means employing new technologies to track and speed the
secure movement of cargo. It includes identifying critical
infrastructure investments needed on both sides of the
border. Finally, it involves the private sector to make the
North American supply chain more secure and efficient.
Commerce Secretary Gutierrez and Mexican Economy Secretary
Sojo stressed the importance of bilateral trade and making
the border as efficient as possible in their February
meetings in Mexico and Ottawa.

Recommendation
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6. (C) The key to concrete bilateral progress in 2007 in
ensuring security while reducing barriers to legitimate trade
across the border will be engagement by senior U.S. and

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Mexican officials, including White House/Presidencia, DHS,
Commerce, DOT and their respective Mexican counterparts. A
first step could be the creation of a senior U.S./Mexican
working group with decision-making authority that could
report to the Presidents at the next SPP leaders meeting with
a specific work plan that lays out a strategic approach to
solving specific border crossing issues. Empowering U.S. and
Mexican border personnel with best practices, additional
resources, new technology, and adequate infrastructure will
enhance their ability to ensure that commercial vehicles
entering the United States do not pose a threat to national
security -- while protecting North America's competitive
advantage versus economic powerhouses outside our region.

Mexico's Overall Economy
--------------


7. (C) Mexico,s senior economic officials are top-notch
across the board. Most have Ph.Ds from leading U.S.
universities and a keen sense of the nation's economic
strengths and weaknesses. They can take justifiable pride in
the very positive rating Mexico now enjoys in world financial
markets, including the enthusiastic response of investors
when Mexico became the first country in Latin America to
issue a 30-year bond denominated in the local currency. They
do not need macroeconomic advice.


8. (C) Mexico,s most pressing public policy problem is that
the government relies on oil-related revenues for 37% of the
federal budget, and states and municipalities rely on funds
from the federal government for nearly all their revenues.
In Latin America, only Guatemala has a lower tax collection
rate than Mexico. Finance Minister Agustin Carstens has said
publicly that Mexico needs to implement a broad fiscal reform
to improve tax collection, reduce over reliance on oil
income, confront growing pension liabilities and rising
payments on government borrowing outside the federal budget,
and meet growing needs for spending on poverty alleviation,
education, health and other social programs.


9. (C) Because of these challenges, the government will
focus its fiscal reform efforts over the next few years on
increasing tax collection, reducing tax evasion, making
government spending more efficient, and lowering the
country's dependence on oil revenues. Carstens has already
asked for U.S. technical assistance and training that would
allow the Mexican government to build a better tax service,
professionalize Mexican Customs, and develop better
analytical capabilities to combat money laundering, terrorist
financing and related areas.

Recommendation
--------------


10. (C) Talks on the provision of such assistance by
Treasury, DHS, and others are progressing well. It will be
important to assure President Calderon that the U.S. is
committed to doing its utmost to provide these types of
training and technical assistance as desired by Mexico.

Mexico,s Global Competitiveness
--------------


11. (C) Mexico,s leaders are keenly aware of the need to
stop Mexico,s declining global competitiveness. Moreover,
most agree on what needs to be done: reform the labor code;
encourage competition in major sectors dominated by only a
few firms; reform the fiscal regime; attract new investment;
fix a deficient education system; provide opportunities to
talented people across Mexico; and improve respect for rule
of law, including intellectual property rights. By any
measure, the challenges are daunting, and entail taking on
entrenched interests.


12. (C) Just three months into their term, Calderon and his
team are still setting overarching economic priorities. As
Finance Minister Carstens and Economy Minister Sojo recently
told the Ambassador, Calderon is serious about taking on the
monopolies and labor unions, but they are strong enemies and
the GOM needs to navigate carefully this political mine
field.

Recommendation
--------------


13. (C) We should emphasize our common stake in Mexico,s
overall economic success and the nation's ability to improve
its competitiveness across the board. In broad terms, we

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should encourage implementation of needed reforms and ask
Calderon how we can help. Based on conversations here, we
should not expect GOM requests for massive aid for economic
development, but instead interest in sharing best practices
across a range of fields: education; poverty alleviation;
technical training; anti-trust regulation, etc. We should be
ready with concrete ideas. Examples are small high-level
exchanges on globalization challenges along the lines of the
September 2006 North American Forum convened by George Shultz
or even more targeted sector-specific sessions (wired
classroom, adult vocational training, microfinance options,
etc.) between Mexican policy makers and top U.S. business,
foundation, and academic officials.

Energy
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14. (C) After Canada, Mexico is the largest source of U.S.
oil imports. The United States has a strong strategic
interest in continued stable supplies of energy from our
southern neighbor. Within Mexico, energy is an extremely
sensitive political and even emotional topic tied
historically to national sovereignty. That said, Mexico,s
energy sector requires difficult reforms soon and the outcome
of Mexican government decisions (or lack thereof) will have a
significant effect on future oil production as well as
Mexico,s budget picture. Due to the current constitutional
prohibition against private investment in many areas of the
energy sector, the government must provide the tens of
billions of dollars that Pemex (the state oil monopoly) needs
in energy investments over the coming decade. Booming oil
revenues have largely been squandered on subsidizing
electricity, gasoline, and natural gas consumption. Luckily,
oil revenues have been high enough to keep public finances
healthy for the time being. However, the current system,
which spends rather than saves excess oil revenues, will not
withstand a major drop in oil prices or production over the
next few years (which is close to inevitable if current
restrictions remain in place).


15. (C) As our second largest crude supplier, what Mexico
does or does not do to maintain production will have a major
impact on North American energy supply and security for at
least the next ten years. We have largely avoided any direct
discussions over energy because of its sensitivity in Mexican
politics. President Calderon, a former Energy Secretary, is
looking at how best to maintain production and invest in this
critical sector.

Recommendation #1
--------------


16. (C) The March meeting would be a good opportunity to
underscore our common interest in North American energy
security and supply. Adopting a recommendation of the North
American Competitiveness Council (NACC),it would be useful
to propose preparation of a joint North American
(U.S./Mexico/Canada) energy outlook with a 25 year time
horizon. The idea would be to focus on the broad and complex
dynamics of the sector, especially in terms of exploration,
investment, planning cycles and secure supplies for the
region. Assuming Canada also agrees, the project could be
announced by the three leaders in Canada in August as a
deliverable for their presumed meeting in mid-2008.
Preparation of the report in Mexico during 2007-08 (perhaps
by an elite university) would spur needed energy reform
policy discussions and could fit well with informal GOM
comments that the Calderon administration will tackle energy
issues more robustly in 2008-9.

Recommendation #2
--------------


17. (C) In terms of a short-term actions (and linked to a
separate NACC recommendation),the President could ask if
Calderon would support the idea of a Gulf of Mexico
Governors, meeting (or a more general energy states meeting
to include Alaska and 2-3 Canadian provinces) to discuss the
role of sub-federal entities in energy planning for the
longer-term (development, financing issues, infrastructure,
environment, etc.). This could prove too sensitive for the
GOM at this point, but might be another trilateral way to
promote dialogue on the importance of energy supplies and
revenues.

Recommendation #3
--------------


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18. (C) The President could also propose to Calderon
implementing the terms of the 2000 Western Gap Treaty between
the U.S. and Mexico. This could include forming a working
group of scientists and engineers to exchange geological and
geophysical information from both sides of the border to
define and delimit transboundary reservoirs. The groups
could also discuss models for the equitable development of
transboundary reservoirs as set out in the 2000 Treaty. U.S.
officials worked to this end unsuccessfully during the Fox
Administration, but cooperation in this area could be an
excellent opportunity to begin speaking practically with
Mexican officials about shared energy goals in the Gulf of
Mexico.

NAFTA and Trade Policy Topics
--------------


19. (C) According to Mexican Economy Minister Sojo and
senior Mexican trade officials, the Calderon Administration
believes that many of NAFTA,s provisions need to be updated,
and want North American political leaders to consider
re-opening chapters that deal with market access, rules of
origin, and customs treatment. We have highlighted the
domestic U.S. political dangers of this approach. We have
urged the GOM to proceed cautiously given the U.S debate this
spring about trade promotion authority renewal, expected
opposition from vested interest groups with strong lobbies in
Washington, and internal Mexican demands that NAFTA
agricultural provisions be renegotiated to stop the planned
January 1, 2008 opening of corn and bean markets here. That
said, there is still a good chance that President Calderon
will make a case for moving more quickly on such North
American integration topics. Separately, Mexico has been a
steady partner in the world effort to restart the stalled
Doha round of world trade talks.

Recommendation # 1
--------------


20. (C) One way to respond to Mexican requests on updating
NAFTA would be to suggest a senior working group on trade
topics that will focus, in the first instance, on areas for
improvement in a broad array of technical issues (rules of
origin, cumulation, regulatory harmonization, customs rules).
These would be NAFTA trade-facilitating fixes that would not
require new legislation. We could postpone consideration of
other options until we have a clearer picture of how Capitol
Hill intends to deal with trade issues later in 2007.

Recommendation #2
--------------


21. (C) On agricultural issues, we can say that the U.S.
wants to work with Mexico on technical ways to help the
transition in sensitive agricultural sectors. The
Consultative Committee on Agriculture could offer a venue
here. We should also draw from the results on Secretary
Johanns, March 5-6 Mexico visit for possible additional
approaches.

Recommendation #3
--------------


22. (C) We should thank Calderon for Mexico,s consistent
support of U.S. and other efforts to restart the Doha round.
We should also encourage Mexico to play a stronger role in
this regard.

Intellectual Property Rights (IPR)
--------------


23. (C) Over the past several years, Mexico,s federal IPR
agencies have ratcheted up the numbers of raids, arrests, and
seizures against commercial piracy and counterfeiting
operations. Unfortunately, these efforts remain stymied by
lack of resources, outdated legislation, a judicial system
that makes it difficult to obtain convictions and jail-time
for violators, lack of cooperation from state and municipal
governments, and a broad cultural acceptance of illegal
commerce. As a result, U.S. (and Mexican) companies continue
to lose hundreds of millions of dollars each year to the
increasingly well-organized criminal gangs that run this
sprawling illicit business. The new Calderon administration
has initially focused its law enforcement energies on
high-profile campaigns to combat narco-traffickers, but
business groups are lobbying for stronger IPR enforcement as
well, particularly given Calderon,s commitment to improving
Mexico,s investment climate.

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Recommendation
--------------


24. (C) President Bush could remind Calderon that Mexico will
have a hard time attracting investment from high value added
creative industries unless it is able to control rampant
piracy and counterfeiting, and emphasize that we want to
continue working with Mexico both bilaterally and via the
Security and Prosperity Partnership to strengthen protection
of intellectual property rights.


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