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UNCLAS SECTION 01 OF 04 MEXICO 002858 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR DRL/AWH AND ILCSR, WHA/MEX AND PPC, USDOL FOR ILAB 
DHS/CPB FOR JLABUDA AND BFENNESSY 
TREASURY FOR IA 
NSA FOR FISK 
 
E.O. 12958: N/A 
TAGS: ELAB ETRD KTEX PGOV PINR ECON MX CH
SUBJECT: MEXICAN TEXTILE INDUSTRY LOSING JOBS TO CONTRABAND 
AND FOREIGN COMPETITION 
 
REF: (A) MEXICO 1678 (B) MEXICO 616 
 
¶1.  SUMMARY: According to representatives of the Mexican 
Textile and Clothing Industries, as well as leaders of 
various Textile Workers Unions, their segment of the economy 
has lost some 318,000 jobs since 2000, with another 500,000 
jobs currently at risk.  Both the industry and the unions 
attribute this job loss to contraband products illegally 
entering Mexico and to what they describe as &unfair8 
foreign (read Chinese) competition.  The textile industry and 
unions recognize that much of the contraband problem 
originates in Mexico, but they also claim the problem is 
compounded by textile goods that, after arriving in the U.S. 
from Asia, are relabeled as &made in America8 in order to 
receive preferential treatment under the terms of NAFTA 
instead of paying the proper import duties.  Another element 
of the contraband problem was recently highlighted by 
Mexico,s President Calderon, who characterized the growth of 
contraband textile products as a further example of organized 
crime,s diversification into yet another area of Mexico,s 
economy.  The Mexican textile industry and unions believe 
that USG support in stopping or reducing contraband products 
coming from the US would help save thousands of jobs.  They 
are therefore asking for our help to address the problem and 
to spur greater action from the appropriate Mexican 
government agencies.  END SUMMARY. 
 
 
TEXTILE INDUSTRY COMING APART AT THE SEAMS 
------------------------------------------ 
 
¶2.  According to the president of Mexico,s National Chamber 
for the Textile Industry (CANAINTEX) and the head of one of 
the country,s larger textile workers unions, the country,s 
textile and clothing industries have been hemorrhaging jobs 
since 2000.  Between the years 2000-2006 (or put differently, 
during the entire administration of Mexico,s former 
President, Vicente Fox) the country,s textile industry lost 
60,000 jobs while its clothing industry lost approximately 
258,000 jobs.  Not coincidentally, China acceded to the World 
Trade Organization (WTO) in 2001, and the global system of 
textile and apparel quotas was finally abolished at the end 
of 2004, events which contributed to a boom in China,s 
global textile and apparel exports.  These 318,000 jobs were 
all registered with the Mexican Social Security Institute, 
which means these workers and their families were entitled to 
health care coverage and the workers themselves accrued 
pension benefits.  In other words, these workers had stable, 
working class jobs that put them among the ranks of the solid 
Mexican middle class.  There are currently some 500,000 jobs 
remaining in the textile and clothing industries but 
CANAINTEX and the unions believe all of them are at risk. 
 
¶3.  The leaders of Mexico,s textile and clothing industries 
are not always in accord with the country,s various textile 
workers unions, but all three actors are in complete 
agreement over what they believe to be the reasons for this 
massive loss of market share and jobs.  As the industry and 
the unions see it, the primary source of their problem is 
unfair foreign competition, principally from China.  However, 
the unions and industry also see the problem of contraband, 
entering Mexico either directly or via the United States, as 
a secondary but equally frustrating element of their 
predicament 
 
 
&UNFAIR8 CHINESE COMPETITION 
---------------------------- 
 
¶4.  Mexico,s textile and clothing industries, as well as its 
textile workers unions, see what they describe as unfair 
competition from China as the main element of all their woes. 
 In recent months the textile and clothing businesses have 
used various public fora to invite senior GOM officials and 
the media to highlight the gravity of their situation. 
According to the president of CANAINTEX, Mexico,s textile 
 
MEXICO 00002858  002 OF 004 
 
 
industry is not afraid of competition and, in fact, from 
2001-2006 it invested some USD 3 billion industry-wide in 
machinery and plant improvements to improve its ability to 
compete.  However, as the CANAINTEX president states, these 
efforts have been undercut by &unfair Chinese competition8 
in two different ways. 
 
¶5.  His first point is to stress that China is not a market 
economy and Mexican industries are therefore unable to 
compete on an equal basis.  According to CANAINTEX, China: 
provides its industries with numerous subsidies that are 
specifically prohibited by the WTO (Note: Mexico has joined 
as a third party a U.S. case against Chinese subsidies); 
allows its numerous state-owned textile businesses to operate 
at a loss (something Mexican firms cannot do); and does not 
respect basic worker rights. 
 
¶6.  This last point on worker rights was firmly stressed 
recently by senior members of CANAINTEX staff in a meeting of 
Embassy Mexico Econ Section officers. According to the 
CANAINTEX staffers, one of the most galling aspects of 
competing with China was the unfair advantage it has over 
Mexico by not respecting worker rights (or environmental 
standards).  Mexico, the staffers said, has been obliged 
under NAFTA to comply with a high level of worker rights (and 
environment standards) that prevents its industries from 
reducing costs below a certain minimum level.  Since these 
worker rights (and environmental standards) do not apply in 
China, that country will always be able to produce goods at a 
lower cost than Mexico.  They also complained that China 
openly tolerates contraband and piracy (see paras 8-12). 
(Comment: Post,s Labor Counselor came away from the meeting 
with the CANAINTEX staffers with the impression that they 
felt the US should accept some portion of responsibility for 
the fact that Mexico now has to respect worker rights and 
comply with environmental standards.) 
 
¶7. Mexico has not been complacent about the surge of Asian 
imports.  The GOM currently has in place a large number of 
anti-dumping duties against Chinese exports of textile and 
clothing.  Under the terms of the bilateral agreement that 
Mexico hammered out with China in exchange for approving 
China,s accession to the WTO in 2001, China cannot challenge 
these duties before the WTO,s dispute resolution body until 
December of this year, even though most observers agree that 
the great majority of these cases are not consistent with WTO 
anti-dumping rules.  In December, however, Mexico will either 
have to drop these duties or be prepared to face anticipated 
Chinese challenges (REF B).  Mexican President Felipe 
Calderon has urged affected industries to provide the GOM 
with the necessary data to back up the current anti-dumping 
measures against Chinese imports or to justify new ones (REF 
A), but industry representatives say they will simply not be 
able to provide that kind of data between now and year,s 
end.  How the GOM intends to handle this tricky balancing act 
between protecting an important domestic industry and 
complying with its international trade obligations remains to 
be seen, and will be reported septel. 
 
CONTRABAND: A GOM CUSTOMS AND LAW ENFORCEMENT PROBLEM 
--------------------------------------------- -------- 
 
¶8. According to CANAINTEX, the second form of unfair 
competition ) contraband imports ) completely circumvents 
the anti-dumping duties in effect against Chinese textile and 
apparel.  During a frank discussion with post,s Labor 
Counselor, the president of CANAINTEX and the leader of one 
of the larger textile workers unions admitted that a large 
part of the contraband problem lies with the GOM,s Customs 
service and its failure to prevent the entry into Mexico of 
unauthorized textile goods.  The CANAINTEX president and 
labor leader stated that they have repeatedly detailed the 
extent of the problem to the appropriate GOM officials, but 
the results have been far less than they had hope or been 
promised.  (Note: Mexican Customs have seized large volumes 
of contraband Chinese imports, but such seizures probably 
 
MEXICO 00002858  003 OF 004 
 
 
represent just the tip of the iceberg.) 
 
¶9.  Another frustrating factor for them was the reluctance of 
Mexico,s elected politicians to control the country,s 
informal economy.  The industry and union representatives 
stated that almost all of the contraband textile products 
entering Mexico end up on the informal economy.  Mexico,s 
informal economy is estimated by the OECD to account for some 
43 percent of the country,s total workforce. Other studies 
peg the figure at 25 percent.  Whatever the real figure, the 
informal sector provides a huge number of jobs for people who 
would otherwise be totally unemployed.  Mexican politicians, 
the union and industry representatives stated, are afraid to 
do anything (like cracking down on contraband) that might 
endanger the jobs of persons who would otherwise be totally 
unemployed. Little thought is given to the long term 
consequences of having such a large portion of Mexico,s 
working population without health coverage or without the 
prospect of retirement benefits.  (Comment: Contrary to these 
assertions, President Calderon has publicly committed his 
administration to combating the illegal economy.) 
 
¶10.  On separate occasions union and industry 
representatives, and even Mexican President Felipe Calderon, 
have all touched on the law enforcement aspects of the 
contraband problem.  The union and industry representative 
viewed this facet of the problem in terms of illegal goods 
entering the country to compete against legitimate domestic 
products, lost customs revenues, and a shockingly large 
number of questionable factories that receive contraband 
textile goods destined to supply Mexico,s informal economy. 
President Calderon recently stated at a Clothing industry 
event he viewed the growing problem of contraband as proof 
that the country,s organized crimes groups were diversifying 
into other parts of the Mexican economy. 
 
CONTRABAND: A NAFTA PROBLEM 
--------------------------- 
 
¶11.  While a large part of the contraband problem for 
Mexico,s textile industry and unions originates within the 
country,s borders, the representatives with whom post,s 
Labor Counselor interacts claim that there is also a 
significant US aspect to the dilemma.  According to these 
interlocutors, unscrupulous individuals working on both sides 
of the border (not necessarily Chinese) legally import Asian 
textile products into Long Beach for transit to border cities 
like Laredo.  Since the goods are bound for Mexico and will 
not enter the US market, they pay no US duties.  Before they 
cross the border to Mexico, however, their labels of origin 
are changed to read &Made in USA8.  These relabeled goods 
are then illegally exported to Mexico, where they receive 
little if any customs scrutiny and are falsely accorded 
duty-free NAFTA treatment. 
 
¶12.  Post,s contacts are firmly convinced that the 
re-labeling of Asian made textile products is causing 
significant damage to their own ability to maintain jobs and 
an economically viable textile industry.  CANAINTEX believes 
it can help identify and locate some of the actors/factories 
in the US that are re-labeling textile good that will 
ultimately enter Mexico as contraband.  The CANAINTEX 
staffers who met with post,s Econ Section officers commented 
that many of the textile workers who have lost their jobs in 
Mexico have migrated to the US to work in what is left of the 
American textile industry.  They implied it would not be 
unreasonable to assume that these displaced workers might 
even be doing some of the physical re-labeling of Asian made 
textile products. 
 
TEXTILE INDUSTRY AND UNIONS SEEK MORE GOM AND USG ASSISTANCE 
 
--------------------------------------------- --------------- 
 
¶13.  Post,s textile industry and union contacts have been 
working with GOM Customs officials on the problem of 
 
MEXICO 00002858  004 OF 004 
 
 
contraband goods and with the Secretariat of the Economy for 
a coordinated GOM response to what they see as unfair Chinese 
competition.  Despite the aforementioned seizures and high 
anti-dumping tariffs, they remain disappointed by the GOM 
response.  Some are now pinning their hopes on the 
possibility of the new trade remedy cases that President 
Calderon said he is willing to pursue, but the GOM has made 
it clear that it intends to utilize only WTO-consistent 
measures, which means that Mexican industry will have to 
provide substantial evidence to back up its claims.  If the 
current anti-dumping tariffs are eliminated or shrink 
significantly, and no new ones follow in their footsteps, 
this would have the positive effect of reducing the incentive 
for importing contraband textiles and apparel, though 
predictably this prospect does not appeal to either the 
domestic industry or unions. 
 
¶14.  CANAINTEX and the textile unions seem to accept that 
they must rely on the GOM to deal with both contraband and 
unfair competition.  However, they believe the USG may also 
be able to help them with the former problem.  The textile 
industry and unions believe that addressing the problem of 
contraband/re-labeled products entering Mexico from the 
United States would bring multiple benefits.  First, it would 
help safeguard some of the 500,000 jobs they believe are now 
at risk.  Next, it would show that effective government 
action is possible in this matter. Finally, although more 
implied than stated, CANAINTEX and the unions hope that 
effective action from the USG could spur a more active 
response from the GOM. 
 
COMMENT 
------- 
 
¶15. The complaints about Chinese competition from Mexico,s 
textile and apparel industries and workers are probably being 
echoed by domestic industries and workers in almost every 
corner of the globalized world economy.  None of our 
interlocutors discussed inefficiencies in the Mexican 
industry or acknowledged any of the comparative advantages 
enjoyed by their Chinese competitors.  Clearly, they would 
prefer government protectionist measures to cutting their own 
costs (or wages); let alone developing new higher value-added 
markets.  This is not to say that all the charges of unfair 
Chinese trade practices are invalid, and insofar as the 
Mexican government believes it has credible grounds to sue 
China in the WTO, we believe it will do so.   Mexico, in fact 
has already demonstrated joined two US-initiated cases 
against China this year over Chinese industrial subsidies and 
failure to protect intellectual property rights. 
 
¶16. With regard to the problem of re-labeled contraband 
textile goods entering Mexico from the United States, we 
believe it would be in both countries, best interests to 
tackle this phenomenon to the extent feasible given available 
enforcement resources. At the same time the scope of this 
problem could shrink significantly if/when Mexico removes 
some or all of its anti-dumping duties on Chinese textiles 
and apparel.  Post has already been in touch (via e-mail) 
with the appropriate office in DHS and the Department of 
Labor on this matter and received an encouraging response. 
We hope that this message will help contribute to the 
dialogue began on this issue and serve as starting point for 
USG discussions on possible next steps. 
 
 
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 / 
BASSETT