VZCZCXYZ0000
PP RUEHWEB

DE RUEHME #0346/01 0232305
ZNR UUUUU ZZH
P 232305Z JAN 07
FM AMEMBASSY MEXICO
TO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
INFO RUEHC/SECSTATE WASHDC PRIORITY 5056

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