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Cablegate: Scenesetter for Agriculture Secretary Johanns

VZCZCXYZ0001
RR RUEHWEB

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

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