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FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 2434
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 06 MEXICO 002037 
 
SIPDIS 
 
FROM AMBASSADOR FOR UNDER SECRETARY JEFFERY 
STATE FOR E TOM PIERCE 
STATE FOR WHA/MEX ELIZABETH WOLFSON AND IAN BROWNLEE 
 
E.O. 12958: N/A 
TAGS: ECON MX
SUBJECT: SCENESETTER FOR UNDERSECRETARY JEFFERY'S VISIT TO 
MEXICO JULY 9-11 
 
¶1. (U) My staff and I warmly welcome you to Mexico City. 
President Calderon recognizes the broad-ranging challenges 
his country faces and has the vision and political will to 
address them strategically.  He has demonstrated resolve in 
implementing his key policy objectives: improving security 
and the rule of law, attacking poverty, and creating jobs. 
The U.S. and Mexico have developed a solid set of 
institutional relationships that allow us to work 
productively on most of our priorities, including fundamental 
issues of homeland security and North American prosperity. 
Those links are set to expand.  Your visit is a sign of U.S. 
support for the Calderon government and dedication to this 
complex, interdependent relationship. 
 
¶2. (U) Mexico's democratic institutions weathered a 
contentious presidential election in July 2006, and Calderon 
was quick to emerge as an activist President with a strong 
and respected cabinet, particularly in the security and 
economic areas.  His security efforts are designed to 
reassure foreign investors and Mexicans worried about 
drug-related crime and lawlessness that organized criminals, 
including pirates and counterfeiters, will no longer act with 
impunity.  He knows that attracting investment is pivotal to 
curbing migration and narrowing the social and economic 
inequalities that undercut Mexican society and result in 
bitter political divisions.  Calderon also recognizes that 
his vision of Mexico becoming a more prosperous country and a 
regional leader depends first on security and the rule of law. 
 
Bilateral Relations 
------------------- 
 
¶3. (U) Calderon has demonstrated pragmatism in his posture 
toward the United States and is building on an already modern 
and mature U.S.-Mexico relationship.  The President's message 
is that Mexico will seek what it needs from us on the basis 
of equality, respect, and the close cooperation expected of 
neighbors that share wide-ranging interests and challenges. 
Our common border, responsible for extensive commercial, 
community, and family ties, is transforming our societies 
into two of the most deeply and broadly connected on earth. 
 
Immigration 
----------- 
 
¶4. (U) Far more than his predecessor, President Calderon 
recognizes that immigration reform is a U.S. domestic matter 
that is dependent upon U.S. congressional action.  He will 
seek progress in a low-key effort that avoids making 
migration the dominant bilateral issue.  He places great 
emphasis on creating opportunities and jobs for Mexicans 
inside Mexico.  President Calderon has publicly said that the 
solution to the immigration problem is the responsibility of 
the Mexican government, and must be done by bringing capital 
to the workers in Mexico, rather than having Mexican labor 
flow to capital in the United States.  Nevertheless, the 
Mexican public draws little distinction between documented 
and undocumented migrants, seeing both as hard-working 
countrymen who have been driven to the U.S. by domestic 
economic adversity and U.S. economic demands.  As such, 
domestic political considerations require that Calderon and 
his cabinet raise the issue with USG officials and that he 
publicly criticize measures that most Mexicans find 
offensive.  Should the issue arise in your meetings with your 
Mexican interlocutors, we encourage you to explain U.S. 
domestic political factors affecting the issue of migration 
and help your Mexican interlocutors maintain realistic 
expectations. 
 
¶5.  (U) Similarly, the U.S. border fence is an extremely 
sensitive issue, and in public settings, Mexican government 
officials frequently posture against it.  Likewise, minor 
incidents on the border, associated with infrastructure 
development, can quickly become public disputes.  The 
occasional cases in which Border Patrol agents (often acting 
in self-defense) injure or kill undocumented aliens 
inevitably provoke a sharp reaction here.   Should the issue 
arise, we believe it is useful to emphasize that given the 
rampant violence in the border region -- as well as the 
threat of international terrorism -- the USG has the 
responsibility to take all available measures to protect its 
citizens and enforce its laws. 
 
Security 
-------- 
 
¶6. (U) The Calderon administration has moved forcefully to 
improve public security, significantly increasing the 
 
MEXICO 00002037  002 OF 006 
 
 
security budget; launching surge operations against drug 
traffickers in six of the most conflictive states; working to 
overhaul Mexico's national police organization; getting the 
Congress to pass a major criminal justice reform; and 
authorizing the extradition to the United States of a record 
number of  wanted criminals, including drug king-pins.  The 
President's actions reflect his commitment to intensify 
security-related cooperation with the U.S., and his 
willingness to incur political risk in doing so. 
 
¶7. (U) The President fully understands the depth of U.S. 
concerns about international terrorism and the 
transformational effect of the 9/11 attacks on USG policy, 
and he has signaled his strong commitment to work with us to 
preempt terrorist activity or entry through our shared 
border.  While a solid foundation for joint counter-terrorism 
cooperation has been established, and the Mexican 
government's efforts should be recognized, we also need to 
press for further progress on information sharing.  With 
respect to weapons of mass destruction, the Mexican 
government -- on its own initiative -- has requested our 
assistance in strengthening its detection capabilities. 
 
¶8. (U) Mexico is a central partner in USG efforts to combat 
drug trafficking and other trans-border threats.  While 
taking aggressive measures to tackle organized crime at home, 
Calderon has also publicly urged the U.S. to boost our own 
efforts to drive down demand for narcotics and improve 
controls on arms, cash, and precursor chemicals smuggled into 
Mexico.  He acknowledges that Mexico cannot effectively 
confront narco-trafficking without our cooperation and is 
eager for expanded assistance, including help with combating 
money laundering.  During several visits to Mexico, Secretary 
Chertoff has heard from Mexican Attorney General Medina Mora 
that Mexico's most critical law enforcement challenges are: 
improving the institutional strength of local, state, and 
federal police forces; dismantling the sophisticated business 
operations run by the drug cartels; and crafting a regional 
strategy encompassing the U.S., Mexico, and Central America. 
President Bush recently signed the Merida Initiative, a 450 
million USD package that provides funding for technical 
assistance and equipment for Mexico to use in their fight 
against narco-trafficking.  This assistance is a key example 
of our cooperation in the counter narcotics arena. 
 
The Southern Border 
------------------- 
 
¶9.  (U) Mexico's southern border remains extremely vulnerable 
to illegal immigration, trafficking in persons, and the 
smuggling of all manner of contraband, including 
drugs/precursors.  It is an issue of great concern to the 
Mexican government, which attributes its lack of success in 
dealing with the problem to the difficult local terrain; the 
lack of enforcement infrastructure; the historically informal 
nature of the border, particularly among local residents; and 
the inadequate border security efforts of its southern 
neighbors, Guatemala and Belize.  Mexican law enforcement 
agencies have begun factoring southern border security 
considerations into ongoing programs and are seeking to 
expand/improve operations in southern Mexico.  Nevertheless, 
progress in securing Mexico's southern border is of vital 
importance in achieving our own security objectives. 
 
Strong Leader in a Conflictive Environment 
------------------------------------------ 
 
¶10.  (U) President Felipe Calderon is showing strong 
leadership at home and abroad in a manner much appreciated by 
Mexicans.  Although he won election with a bare 36% plurality 
in a three-way race, a recent opinion poll showed that 62% of 
Mexicans approve of his performance to date.  Nevertheless, 
the political climate overall remains conflictive, with a 
congress closely divided between the president's 
right-of-center National Action Party (PAN), the leftist 
Democratic Revolutionary Party (PRD), and the left-of-center 
Institutional Revolutionary Party (PRI).  Calderon faces 
significant domestic challenges in pursuing his security, 
economic and social reform agendas.  At the same time, he 
must chip away at the historic Mexican ambivalence toward the 
U.S. that has slowed progress on many common fronts, 
including security.  Because of this divided political 
environment, it is difficult to predict the results of the 
mid-term Congressional elections to be held in July 2009. 
PRD's fortunes seem to be waning and 
 good showings by PRI candidates in state and local elections 
over the past year may be a harbinger of strong gains in next 
year's mid-term elections. 
 
MEXICO 00002037  003 OF 006 
 
 
 
Stable but Vulnerable Economy 
----------------------------- 
 
¶11. (U) U.S. strategic interests in Mexico are tied to three 
key economic factors:  (1) a population of 110 million 
bordering the United States with a poverty rate over 40 
percent, (2) the second largest supplier of oil to the U.S. 
in 2007 (though so far this year it has slipped to third 
behind Canada and Saudi Arabia), (3) over one billion dollars 
a day in trade in goods and services, with a highly 
integrated production cycle between factories in the U.S., 
Mexico and Canada. 
 
Poverty and Economic Performance 
-------------------------------- 
 
¶12.  (U) Mexico has the highest income inequality of any 
nation in the OECD.  The latest Mexican government figures, 
(from 2006) show the poverty rate declined slightly to 42.6 
percent overall, with 10.3 percent living in "food-based 
poverty," unable to meet the nutritional needs of their 
families.  Widespread poverty encourages illegal immigration, 
narcotics smuggling to the United States, and other forms of 
illicit commerce.  Growing income inequality fuels the 
tensions that almost resulted in the election of a populist 
President, Andres Manuel Lopez Obrador, who openly embraced 
President Chavez of Venezuela. 
 
¶13. (U) President Calderon inherited a stable, growing 
economy tightly linked to U.S. economic cycles.  Mexico 
chalked up an estimated 3.3 percent growth rate in 2007, 
rebounding from near zero growth in the first years of the 
decade.  Real GDP growth is expected to slow to around 2.6 
percent this year, primarily due to the U.S. economic 
slowdown.  Inflation, fueled by spiking international food 
and energy prices, has risen in recent months to over 5 
percent, prompting the Central Bank to raise interest rates 
in June 2008, shortly after the government had reduced import 
tariffs for key food items, increased subsidies for poor 
consumers, and obtained voluntary price controls from 
producers.  Most jobs currently being created in Mexico are 
in the informal economy, which the World Bank estimates 
employs 27-45 percent of the working age population.  Many 
here are growing concerned about Mexico's ability to compete 
in an increasingly globalized world, as it loses market share 
to China and other emerging economies. 
 
Need for Bolder Economic reform 
------------------------------- 
 
¶14.  (U) World Bank, OECD, Mexican and other economists say 
Mexico would need sustained, long-term growth rates of at 
least six percent to alleviate widespread poverty -- but 
cannot achieve that level of growth without structural 
economic reform beyond what President Calderon has currently 
proposed.  We agree with Finance Minister Carstens that in 
order to compete internationally and develop the poorest 
parts of Mexico, Mexico needs broad reform to improve tax 
collection, reduce reliance on oil income, confront growing 
pension liabilities and payments on government borrowing 
outside the federal budget, and provide needed spending on 
poverty alleviation, education, health and infrastructure. 
Mexico desperately needs education reform, since currently 60 
percent of its people do not graduate high school.  In order 
to achieve sustained robust growth, Mexico must improve 
competition in an economy long dominated by business 
monopolies and oligopolies, and to take on powerful labor 
unions (including the national teachers union) in order to 
amend labor laws that discourage job creation in the formal 
economy. 
 
¶15.  (U) While President Calderon has achieved more reform in 
18 months than his predecessor did in six years, the lack of 
a majority in Congress has forced him to compromise with the 
special interests that have long slowed progress in Mexico's 
economy.  While the President's skill at pragmatic political 
negotiation has led to a series of successful economic 
reforms, it has also meant the reforms were watered down and 
are not yet sufficient to place Mexico on a sustained growth 
path sufficient to alleviate widespread poverty.  Reforms to 
date include a tax reform that solved about one-third of the 
need for additional collections, and a pension reform that 
combined with that of his predecessor solved about 80 percent 
of the insolvency crisis in Mexico's pension systems.  To 
overcome a key to economic growth, President Calderon has 
announced a National Infrastructure Plan, under which his 
government would spend five percent of GDP for the next five 
 
MEXICO 00002037  004 OF 006 
 
 
years to improve Mexico's long-neglected infrastructure.  The 
President recently joined with the leader of the national 
teachers union to announce a program to improve primary 
education, although many are skeptical that the union will 
allow real reform.  While Calderon's government has taken 
incremental steps to reduce the market dominance of 
monopolists and oligopolists in key sectors like 
telecommunications and banking, Congress has blocked serious 
reform.  Currently, Mexico is in the midst of a heated debate 
over the President's rather modest energy reform proposal 
(see below). 
 
Actively Seeking to Expand Trade and Investment 
--------------------------------------------- -- 
 
¶16.  President Calderon has made increased international 
trade and investment a cornerstone of his presidency.  In 
June 2007, he created ProMexico, a federal entity charged 
with promoting Mexican exports around the world and 
attracting foreign direct investment to Mexico.  He has also 
worked to strengthen economic relations with European and 
Asian countries in order to lessen Mexico's dependence on the 
U.S. economy.  Last year, Mexico's FDI inflows reached a 
record 23 billion USD while at the same time the percentage 
of such inflows originating in the U.S. decreased to 47.3 
percent, only the second time since NAFTA implementation that 
the U.S. has accounted for less than half of Mexico's FDI. 
Mexico has also seen its percentage of exports to the U.S. 
decrease from 87 percent in 2004 to 82 percent in 2007.  As 
the U.S.'s economic slowdown continues, Mexico will expand 
efforts to diversify away from a U.S. centered economy. 
 
¶17. (U) That said, Calderon is eager to deepen commercial 
integration with the United States and the rest of the 
region, something his government views as essential to 
strengthening competitiveness vis-a-vis competitors, 
especially from Asia.  His top officials have reacted 
positively to our proposal for an Alliance for Growth and 
Prosperity, though they understand that U.S. domestic 
politics make progress right now difficult.  Mexico sees the 
August 15 entry into force of the CAFTA-DR textile 
accumulation provisions as a model for linking together the 
free trade agreements among common partners in the 
Hemisphere, and is working with like-minded Latin countries 
in a group called the Pacific Arc Forum to harmonize rules of 
origin among common free trade partners. 
 
Energy 
------ 
 
¶18. (U) After Canada, Mexico was the largest source of U.S. 
oil imports last year.  We therefore have a strong strategic 
interest in continued stable supplies of Mexican oil. Within 
Mexico, energy is an extremely sensitive topic tied to 
national sovereignty, but the energy sector requires 
difficult reforms urgently.  Mexico's oil production and 
reserves continue to decline due to a lack of investment in 
oil exploration and production.  Sufficient investment funds 
are not available because of the constitutional prohibition 
on private investment and the fact that most of Pemex's 
revenue goes to pay for as much as 38% of the government's 
budget.  Pemex's liabilities have grown so large that it can 
no longer fund investment in exploration through borrowing in 
international markets.  President Calderon understands that 
declining oil production can only be addressed through fiscal 
reform to reduce the amount of Pemex revenue sucked into the 
government budget, and through energy reform to improve the 
efficiency of Pemex operations and allow for private and 
foreign investment in the petroleum sector.  A comprehensive 
tax reform package was passed last year and there is 
currently a mild energy reform package being heatedly debated 
in the Mexican Congress as well as in the court of public 
opinion.  While the package that the Calderon administration 
submitted to Congress would not open Pemex up to the level of 
investment that it sorely needs, it seems to be a small but 
important step toward the large task of reforming Pemex. 
While polls indicate that most Mexicans now understand 
something needs to be done with PEMEX, unions and opposition 
parties reflect the views of many Mexicans who are skeptical 
of foreign involvement.  Even seemingly benign, factual 
statements by U.S. officials about Mexico's petroleum sector, 
such as those made by President Bush in March 2007 or Former 
Fed Chairman Greenspan several months later set off a tempest 
of responses and front page condemnations, including from 
officials largely supportive 
 of opening the sector. 
 
Improving North American Competitiveness 
 
MEXICO 00002037  005 OF 006 
 
 
---------------------------------------- 
 
¶19.  (U) Under NAFTA, the industrial production cycle in the 
U.S., Canada and Mexico has become tightly integrated with 
factories in each country dependent of parts suppliers in the 
others.  Bilaterally and under the auspices of both the NAFTA 
and the trilateral Security and Prosperity Partnership of 
North America (SPP), we are to improve North American 
competitiveness.  Numerous studies and trade groups, 
including the North American Competitiveness Council, the 
private sector component of the SPP, have stressed that 
border facilities and procedures must be improved 
significantly to accommodate current trade flows and expected 
future growth.  We can make the needed improvements while 
protecting U.S. security by, inter alia:  extending and/or 
synchronizing operating hours at U.S. and Mexican facilities 
at the same border crossing; sharing best practices among 
ports of entry; cutting back on redundant inspections; 
employing new technologies to track and speed the secure 
movement of cargo; identifying critical infrastructure 
investments needed on both sides of the border; and involving 
the private sector to make the North American supply chain 
more secure and efficient.  At the March 2007 summit between 
Presidents Bush and Calderon, both governments agreed to 
increase efforts to facilitate legitimate trade across the 
border. In response, the U.S. and Mexican governments formed 
a senior-level working group that has reached out to both 
public and private sector border residents to solicit 
solutions to the bottlenecks that stifle border trade.  The 
group has implemented a series of short term measures, 
including the addition of better divisions between lanes, an 
increase in signage, and better coordination of operating 
hours at certain ports of entry.  Now the group plans to work 
on medium and long term solutions such as coordinated 
infrastructure planning and port of entry expansions. 
 
¶20. (U) At their April 2008 Summit, the three North American 
Leaders called for greater progress under the SPP Regulatory 
Cooperation Framework to make regulations more compatible in 
order to support integrated supply chains.  They called for 
an increased focus on reducing congestion and bottlenecks at 
our common borders and improving long range coordination on 
border infrastructure.  The Leaders also called for greater 
efforts under the SPP Intellectual Property Action Strategy. 
The USG already has a robust program of bilateral engagement 
with Mexico on improving its protection of intellectual 
property rights. The three Leaders also reiterated their 
support for a comprehensive and ambitious conclusion to the 
Doha round of WTO negotiations. 
 
Climate Change 
-------------- 
 
¶21.  (U) On May 25, 2007 President Calderon announced 
Mexico's National Climate Change Strategy.  The centerpiece 
of the Climate Change Strategy is the ambitious and 
well-funded PROARBOL program which aimed to plant 250 million 
trees in Mexico in 2007 to stop the decades-long 
deterioration of Mexican forests.  President Calderon has 
publicly stressed that developing countries should not use 
the fact that the brunt of the responsibility for climate 
change lies on the developed countries as an excuse to avoid 
their commitments to the environment.  He emphasized the 
importance of building an international regime to address 
climate change.  Criticizing the joint implementation and the 
clean development mechanism of the Kyoto Protocol, Calderon 
said the international community cannot limit itself to 
implementing mitigation actions where they are less 
expensive.  High-emitting countries must do more than buy 
developing country emission credits but must actively reduce 
their own emissions. 
 
¶22.  (U) President Calderon followed his Climate Change 
Strategy one week later by announcing the National 
Development Plan, which highlights environmental 
sustainability as one of its five focus areas and notes 
Mexico's potential as an effective intermediary between 
developing and developed countries in dialogue and 
cooperation on sustainable development.  The first of two 
goals listed under "climate change" is to reduce emissions of 
green house gases (GHG) through energy efficiency measures 
(including innovative housing designs) and the use of clean 
technologies.  Other GHG reducing measures include the 
adoption of international standards on vehicle emissions and 
energy generation from waste.  The second goal deals with 
promoting climate change adaptation measures.  Among others, 
the Plan proposes to assess vulnerabilities, develop 
different climate change scenarios, including adaptation in 
 
MEXICO 00002037  006 OF 006 
 
 
future planning, protecting coastal buffer areas, evaluating 
economic and environmental impacts of climate change, and 
 educating the public.  No numerical targets are listed under 
the climate change section. 
 
U.S. Assistance 
--------------- 
 
¶23. (U) Our official U.S. assistance budget for FY08 is USD 
50.6 million, a 13.7 percent cut from FY06, and funds much of 
our efforts to help the Calderon government fight crime, 
secure borders, reform the justice system, increase economic 
opportunity, and protect the environment.  Just as the 
President has demonstrated commitment to work collaboratively 
with the U.S. on a broad agenda, an increasing umber of 
Mexican state governors are working constructively with both 
U.S. federal agencies and border states to achieve common 
goals.  Of our total USD 50.6 million in official assistance, 
USAID manages USD 22.8 million in projects that support 
overall U.S. efforts to address two key causes of migration 
pressure: lack of economic opportunity and weak public 
safety.  USAID projects work directly with Mexican 
institutions (including NGOs) at the federal, state, and 
local levels to: introduce market-based financing for state 
and local infrastructure; increase access to financial 
services; increase economic opportunities at home; strengthen 
security; raise Mexican competitiveness via policy and 
regulatory reform; improve the judicial system; expand access 
to credit; and link marginalized producers in poorer areas to 
national and international markets.  Education and health 
programs also build the capacity of Mexico's work force. 
 
Consular Issues 
--------------- 
 
¶24. (U) One of the clearest indicators of the deep links 
between our two societies is our consular workload in Mexico. 
 About one third of all USG employees stationed in Mexico are 
dedicated to providing consular services.  An estimated one 
million American citizens reside in Mexico and about 12 
million visit every year.  Most Americans rarely encounter 
problems here, but each year hundreds are arrested, 
assaulted, die, fall ill, or become destitute, and seek 
assistance from consular employees.  More abductions of U.S. 
citizen children take place (in both directions) between the 
U.S. and Mexico than anywhere else in the world.  The 
migration of U.S. citizen retirees to Mexico has provided 
impetus to improve property rights protections in Mexico, 
including the introduction of title insurance offered by U.S. 
insurance companies.  The air phase of the Western Hemisphere 
Travel Initiative went into effect January 23 with few 
problems and 99 percent of U.S. citizen passengers bound for 
the U.S. carried passports.  The land and sea phase, which 
will go into effect before June 2009, will present a greater 
challenge due to the fact that there may be as many as 
700,000 U.S. citizens residing in Mexico without 
documentation who will need passports. 
 
¶25. (U) U.S. Consular Sections in Mexico processed about 1.3 
million nonimmigrant visa applications in fiscal year 2006, 
including 114,000 temporary worker (H2) visas (71 percent of 
the world total), of which almost 35,000 were temporary 
agricultural workers (92 percent of the world total).  There 
are no numerical limits on temporary agricultural worker 
visas and Mission Mexico stands ready to process much greater 
numbers of these visas if U.S. agribusiness chooses to make 
greater use of this program.  All immigrant visas in Mexico 
are issued in Ciudad Juarez, where we processed about 86,000 
immigrant visa applications in 2006, of which 54,000 were 
issued.  This is the greatest number of immigrant visas 
issued to any one nationality in the world.  This fluid legal 
movement of Mexicans northward, along with long-standing 
documented and undocumented communities in the U.S., makes 
the USD 23 billion in remittances that Mexicans send home 
Mexico's second largest source of foreign exchange revenues, 
behind petroleum and now ahead of both foreign direct 
investment and tourism. 
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 / 
GARZA