RETALIATORY TARIFFS - MEXICO PULLS TRIGGER BUT AIMS

UNCLAS SECTION 01 OF 02 MEXICO 000808

SENSITIVE, SIPDIS

STATE FOR EEB/TPP/BTA/GROUT
STATE FOR WHA/MEX/WOLFSON
STATE PASS TO USTR FOR MELLE/SHIGETOMI
STATE PASS TO COMMERCE FOR ITA/MAC/ONAFTA/WORD/OLSEN
STATE PASS TO DOT FOR TRAINI

E.O. 12958: N/A
TAGS: ECON ETRD MX
SUBJECT: RETALIATORY TARIFFS - MEXICO PULLS TRIGGER BUT AIMS
WIDE

1.(SBU) SUMMARY: In response to the cancellation of the U.S.-
Mexico Cross Border Trucking Demonstration Project, the
Mexican Secretariat of Economy (SE) published in the March
18 Mexican Federal Register an announcement modifying the
import tariffs on 89 U.S. agricultural and industrial
products, effective March 19. In a March 18 meeting with
ECONOFF and AGOFF, the SE Director General of International
Trade Negotiations acknowledged that Mexico had indeed
"pulled the trigger", but explained that the tariffs
followed a calculated logic to effect a change in the U.S.
position on the trucking program. He stressed that the list
of affected products could be modified or stay in place
until a satisfactory outcome is achieved, and that the ball
is now in our court. END SUMMARY.

2.(SBU) On March 18, Mexico imposed retaliatory tariffs on 89
U.S. goods totaling about $2.4 billion in exports from 40
states in response to the cancellation of the pilot trucking
program. Only about 1.5 percent of U.S. exports to Mexico
are affected by these new tariffs. Staple goods not covered
by Mexican producers - including rice, corn, and wheat -
were excluded from the tariff scheme, according to SE, to
avoid inflationary repercussions. Among the goods affected,
53 are finished products, including shampoo, books, and
jewelry; 36 are agricultural goods. New tariffs range from
10 percent on many goods Q including onions, pet food, and
toilet paper Q to 45 percent on table grapes. Local media
reports that based on 2008 import amounts, if maintained in
2009, duties could increase by approximately $420 million.

3.(SBU) Following the announcement of the retaliatory tariffs,
ECONOFF and AGOFF met with Juan Carlos Baker, SE's Director
General of International Trade Negotiations to gain
clarification of Mexico's latest step in this trade dispute.
Baker was cordial as always, but equally frank in his
assertion that Mexico had exhausted all options to induce
the United States to honor its international obligations
under NAFTA and implement the trucking provisions of this
agreement. He said that the elimination of preferential
tariffs on certain products was a calculated effort designed
to evoke a change in the U.S. position and prompt the
reestablishment of a trucking program. He assured us that
no U.S. agricultural or industrial producer should consider
itself "safe" if its product does not appear on the list.
If the products in this announcement are not the right
formula to elicit a satisfactory result, then the GOM will
consider modifying or expanding the list of affected
products.

LIST COULD EXPAND; US COMPANIES COULD BE EXCLUDED FROM BIDS
-------------- --------------

4.(SBU) Baker said that although the announcement has been
released, SE is still fighting domestic pressure from
various sectors to include additional U.S. products. For
many, this is an opportunity to secure protection for
domestic producers from competitive U.S. manufacturers.
This is not what this modification of import tariffs was
intended to do, he said, and it is contrary to President
Calderon's repeated calls for countries to cease their
protectionist ways. However, the longer there is no
progress, the harder it will be for SE to fend off this
pressure. Baker also suggested that the suspension of
benefits of equivalent effect, as provided in NAFTA Article
2019, is not limited to the elimination of preferential
tariffs. If necessary, Mexico could consider not allowing,
for example, U.S. companies to bid on a key infrastructure
project.

MEXICO: INTEGRITY OF NAFTA IS ON THE LINE
--------------

5.(SBU) When asked about the possible nature of a new trucking
program, Baker replied it was unclear as to what sort of
program would be satisfactory. He said the recent
announcement that President Obama had instructed USTR, DOT
and State to work with Congress on a new trucking project is
a gesture of goodwill that is appreciated, but insisted that

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the tariffs will stay in place until a mutually-satisfactory
solution is found. He did acknowledge that these tariffs
could be removed quickly should conditions warrant such an
action.

6.(SBU) Taking a step back, Baker pointed out that the
integrity of NAFTA is on the line, and that if U.S.
noncompliance continues unabated, then there is nothing to
stop the Mexican congress from passing legislation in
violation of Mexico's international commitments under this
or another agreement. He insisted that Mexico is being very
responsible in its retaliatory steps and is doing so in
accordance with the rules laid out in NAFTA. Baker
dismissed media reports that a Mexican delegation was to
travel to Washington to discuss this issue. There is no
need, he said. It is now the responsibility of the United
States to act.

7.(SBU) COMMENT: Baker concluded that we should note that
Mexico has left its side of the trucking program open,
signaling its support for North American economic
integration and its optimism that this trade dispute will be
resolved. The list of affected products includes such
seasonal products as Christmas trees, strawberries, and
pears Q items that are not flowing south at this time Q and
excludes such "substantial trade" items as beef, pork, and
corn syrup. Although Mexico has pulled the trigger, they
view their retaliation as merely a grazing at this point.
Officials here hope that a more robust and more permanent
trucking project in the very near future will prevent a more
deadly shot. END COMMENT.

BASSETT