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DE RUEHME #1041/01 0601644
ZNR UUUUU ZZH (CCY TEXT AD88317E MSI5968)
R 011644Z MAR 07
FM AMEMBASSY MEXICO
TO RUEHRC/DEPT OF AGRICULTURE WASHDC
INFO RUEHC/SECSTATE WASHDC 5611

UNCLAS MEXICO 001041 
 
SIPDIS 
 
 
SENSITIVE 
SIPDIS 
 
FOR SECRETARY JOHANNS FROM AMBASSADOR GARZA 
STATE FOR WHA/MEX AND EB/TPP 
 
C O R R E C T E D  C O P Y 
FOR GARBLED TEXT IN PARAS 3,5,7,8,10 
E.O. 12958: N/A 
TAGS: EAGR BEXP ETRD ECON KJUS PREL MX
SUBJECT: SCENESETTER FOR AGRICULTURE SECRETARY JOHANNS 
MARCH 5-7 VISIT TO MEXICO 
 
THIS IS A CORRECTED COPY.  SEE PARAGRAPHS 3,5,7,8, AND 10. 
 
¶1.  (SBU) Summary:  We welcome your visit to Mexico City as 
an outstanding opportunity to demonstrate our continued 
interest in working with the new Mexican government on 
tackling the sensitive issues surrounding the bilateral 
agricultural relationship, which will be key to making 
progress on other fronts as well.  Your visit provides an 
excellent opportunity to elaborate concrete measures we can 
take together to move the relationship forward, including 
improving the competitiveness of North American agriculture 
and facilitating the continued 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, 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.  Inflationary pressures, epitomized by the 
"tortilla crisis", could provide an opportunity for the 
opposition to re-energize its base.  While support for 
failed Democratic Revolutionary Party (PRD) presidential 
candidate Andres Manuel Lopez Obrador seems to have 
dwindled, the part of Mexico's public that feels it gained 
little from economic and political reforms of recent years 
has not gone away.  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.  The rural poor are a particularly 
visible and compelling segment of the disenfranchised. 
 
¶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. 
 
Economics and Mexico's Competitiveness 
--------------------------------------- 
 
¶5. (U) President Calderon inherited a stable, growing 
economy tightly linked to U.S. economic cycles.  Mexico 
chalked up an estimated 4.8  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. 
 
¶6. (SBU) 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.  The key test is whether he will be 
able to build the political consensus to tackle these 
needed changes.  The delicate political situation 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 focus on boosting competitiveness through improvements 
in education and infrastructure while addressing Mexico's 
core social problems of poverty and inequality, especially 
in rural areas.  If he can manage these issues 
successfully, he will be much better positioned to take on 
structural reforms. 
 
Opening Corn and Beans a Major Political Challenge 
--------------------------------------------- ----- 
 
¶7. (U) Mexico's relatively modernized export-oriented 
agriculture sectors have flourished since NAFTA went into 
effect in 1994, but much of the rest of the countryside 
still protected from free trade and plagued by low 
productivity - has lagged.  For this reason, the scheduled 
final opening of agricultural trade under NAFTA in 2008 
will be a major challenge that, if not handled well, could 
use up much of the political capital Calderon will need to 
enact other reforms.  Two of the most politically sensitive 
products in Mexico are corn and dried beans.  Mexico has 
over two million corn and bean farmers, most of whom 
cultivate less than two hectares.  Some agricultural 
organizations, the PRD, and many political commentators 
have argued that a full opening of agricultural trade in 
2008 would cause severe social upheavals, as large numbers 
of farmers would be forced out of business and further 
impoverished.  While the issue garnered less attention than 
expected during the election, the sudden rise in the price 
of tortillas in late January re-ignited the debate. 
Although corn farmers in Mexico are enjoying unprecedented 
prices for their corn, the criticism of agricultural policy 
and calls for a re-negotiation of NAFTA persist.  The 
emphasis of the debate has shifted somewhat from fears of 
cheap, subsidized U.S. corn inundating the market to 
concerns over the low productivity of poor Mexican farmers, 
food sovereignty, and excessive dependence on the U.S. as a 
supplier, given the increasing costs of importing U.S. corn 
to supplement the Mexican white corn crop.  Markets for 
milk powder and sugar will also be finally and fully 
liberalized at the start of next year, and these too could 
prove problematic.  The U.S. and Mexico ended a 
longstanding impasse in trade in sweeteners last year when 
we signed an agreement in July 2006 putting us on a smooth 
glide path toward implementation of the NAFTA sugar 
provisions in January 2008.  Under this agreement, Mexico 
eliminated in January 2007 its tax on the use of high 
fructose corn syrup and other non-cane sugar sweeteners in 
beverages.  Despite this agreement, Mexico is poised to 
lodge a NAFTA dispute against the U.S. for alleged past 
injuries to its domestic sugar industry, aimed more at 
influencing the investor-state cases it is afraid it will 
lose to U.S. high-fructose corn syrup companies than 
anything else.  As the July 2006 agreement resolved all the 
alleged problems this new case would address, you should 
urge Mexico to not file a complaint if it has not already 
done so. 
 
¶8. (SBU) Calderon has made clear his intention to comply 
fully and on time with MexicoQs NAFTA obligations, but at 
the same time is trying to dampen political opposition by 
calling for talks with the U.S. and Canada on how to ease 
the transition and increasing assistance for Mexican 
farmers.  Calderon held a "Week of the Countryside" event 
February 19-23 to announce a series of programs in support 
of agriculture and rural areas, but opposition 
organizations criticized the process and the programs as 
non-inclusive and inadequate even before they were fully 
announced.  In your meetings with Calderon and his cabinet, 
you should expect requests for U.S. help in handling this 
hottest of political potatoes. 
 
Needed Structural Reforms 
------------------------- 
 
¶9. (SBU) Agriculture aside, Mexico is in need of a number 
of deep structural reforms if the country wants to be 
economically competitive.  The most important of these is 
 
reducing the governmentQs reliance on oil-related revenues, 
which currently account for 37 percent of the federal 
budget.  In Latin America, only Haiti and Guatemala have 
lower tax collection rates than Mexico.  To compound the 
problem, constitutional restrictions on foreign involvement 
have hindered Mexico's ability to replace declining oil 
reserves.  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. 
 
¶10. (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 (telecommunications, 
broadcasting, banking, construction, cement, etc.) are also 
significant obstacles to boosting economic growth.  Few 
major reform proposals will move forward without serious 
resistance from vested stakeholders, whether it be Mexico's 
richest oligopolists or the powerfully entrenched unions 
representing workers in the affected industries. 
 
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 in goods between the U.S. and Mexico in 
2006 was $332 billion, including over $20 billion in two- 
way agricultural trade.  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.  Perishable agricultural products are particularly 
affected by delays at the border.  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 have to address the need to physically 
expand ports of entry and related infrastructure and boost 
personnel levels.  Progress on these fronts should boost 
bilateral agricultural trade. 
 
Rule of Law 
----------- 
 
¶13. (SBU) Rule of law problems stemming from an inefficient 
and easily abused judicial system have plagued U.S. and 
Mexican companies in all sectors, including agriculture, 
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. 
 
¶14. (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 
----------- 
 
¶15. (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 
effect.  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 asked, you can reiterate 
that the United States is a nation of laws, which Americans 
want to see enforced.  You can also 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. 
 
Closing 
------- 
 
¶16. (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 and 
economic reform agendas, including final implementation of 
our NAFTA obligations, border facilitation, and 
strengthening bilateral agricultural trade.  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. 
 
 
GARZA