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Cablegate: Mexico and China Agree On Phased Lowering Of

VZCZCXRO7991
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1810/01 1642006
ZNR UUUUU ZZH
P 122006Z JUN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 2213
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0440
RUEHCN/AMCONSUL CHENGDU PRIORITY 0014
RUEHGZ/AMCONSUL GUANGZHOU PRIORITY 0051
RUEHHK/AMCONSUL HONG KONG PRIORITY 0331
RUEHGH/AMCONSUL SHANGHAI PRIORITY 0020
RUEHSH/AMCONSUL SHENYANG PRIORITY 0021
RUEHGV/USMISSION GENEVA PRIORITY 1034
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEAHLA/DEPT OF HOMELAND SECURITY PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 MEXICO 001810

SENSITIVE
SIPDIS

STATE FOR WHA/MEX/WOLFSON, WHA/EPSC/SALAZAR, EEB/TPP/BTA,
EAP/CM, EAP/EP
STATE PASS USTR FOR EISSENSTAT/STRATFORD
DOC FOR 4320/ITA/MAC/ONAFTA/WORD
TREASURY FOR IA
NSC FOR DAN FISK AND KURT TONG
STATE PASS FEDERAL RESERVE FOR CARLOS ARTETA

E.O. 12958: N/A
TAGS: ETRD EINV KTEX PINS MX CH
SUBJECT: MEXICO AND CHINA AGREE ON PHASED LOWERING OF
MEXICAN TRADE BARRIERS

REF: (A) 07 MEXICO 616 (B) 07 MEXICO 2858 (C) 07
MEXICO 5323 (D) 07 BEIJING 5700

MEXICO 00001810 001.2 OF 003


Summary
-------

1. (U) Mexico and China avoided a serious trade impasse by
reaching an agreement on a transitioned approach to
eliminating and/or reducing Mexican anti-dumping (AD) duties
on a wide range of Chinese manufactured imports. Assuming
the deal is approved by the Mexican Senate (as expected),
Mexico will eliminate duties on products covered under 749
tariff lines while maintaining, but lowering, duties on 204
others considered 'sensitive' by Mexican industry. Duties on
those 204 tariff lines will gradually be reduced to zero by
December 2011. Mexico will not seek any further protection
of those products before then, and China will refrain from
pursuing a WTO challenge. Separately, Mexico and China have
agreed to: coordinate on sanitary and phyto-sanitary
requirements; cooperate in combating illegal trade; and
expedite the conclusion of negotiations on a bilateral
investment treaty.

Background
----------

2. (SBU) Mexico currently levies extremely high AD duties on
a wide range of industrial products covered by 953 tariff
lines. These duties were imposed before China joined the
WTO, and clearly do not comply with WTO rules. China finally
gained the right to challenge Mexico's AD duties via the WTO
at the end of last year, when the grace period established in
China's WTO accession agreement with Mexico finally expired
(REFS A and B). China's interpretation of the "grace period"
provision was that Mexico would eliminate all of its
WTO-inconsistent AD duties on Chinese products by December
12, 2007, while Mexico's interpretation was that it merely
had to begin to review them by that date (REF C). This
situation was a major contributor to the bilateral trade
friction reported in REF D, and China had indicated it was
prepared to file a WTO complaint if Mexico did not change its
position. According to Rocio Ruiz, Mexico's Under Secretary
of Economy for Industry and Commerce, Mexico would surely
have lost the WTO case, and an appeal would only have staved
off the inevitable conclusion, giving domestic industry
perhaps a total of 18 months before Mexico would have been
compelled to eliminate its AD duties on all 953 of tariff
lines in question. In addition, Mexico was keen to prevent
further deterioration in economic ties with its
second-largest trading partner and a huge, growing economy
that presents both export and investment opportunities.
These considerations led the GOM to choose negotiation over
confrontation.

Terms of the Agreement
----------------------

3. (U) The two governments held four rounds of negotiations
between November 2007 and April 2008. These negotiations led
to the signing of a Transitional Trade Agreement on
Anti-Dumping Duties on June 2, 2008 by Mexican Economy
Minister Eduardo Sojo and Chinese Commerce Minister Chen
Deming (the two were attending an APEC trade ministerial in
Arrequipa, Peru). Under the terms of the agreement, Mexico
will eliminate its AD duties on 749 tariff lines this year,
assuming that the Senate approves the agreement when it
returns to session in September. Meanwhile, AD duties on
another 204 tariff lines will be gradually reduced until they
drop to zero on December 12, 2011, leaving just the MFN
tariff rate for each product (35 percent for apparel, 10
percent for textiles, etcetera). The 204 tariff lines that

MEXICO 00001810 002.2 OF 003


will continue to receive varying degrees of AD protection
cover products in the following sectors: textiles; clothing;
footwear; toys; bicycles; baby carriages; tools; domestic
appliances; machinery & electric devices; chemical products;
lighters; pencils; valves; certain light bulb materials;
locks; and candles. According to Mexico's Economy Ministry,
these industries account for 9.5 percent of the manufacturing
sector's GDP and almost a million jobs. Under the agreement,
the varying levels of AD duties on these tariff lines will be
lowered each year, reaching zero on December 12, 2011. For
example, in the case of textiles, anti-dumping duties of 501
perecent are currently in force. Many tariff lines will drop
to zero as soon as the Mexican Senate approves the deal. For
those considered sensitive, the 501 perecent AD duty will
fall to 110 percent upon entry into force this year. In
2009, it will fall to 100 percent, in 2010 to 90 percent, in
2011 to 80 percent, and on December 12, 2011, to zero.
Mexico will not seek further trade remedies against imports
of these items from China, and China will refrain from any
WTO challenge to the agreed-upon AD duty levels until
December 12, 2011. Both countries do retain the right to
initiate WTO complaints related to other products.

Business and Congressional Reactions
------------------------------------

4. (SBU) The agreement mandates its own entry into force by
October 15, 2008 at the latest, meaning the Mexican Senate
will have to act on it soon after it re-convenes in regular
sessions this September. Mexican producers would have
preferred keeping in place the protection provided by the
very high barriers currently in effect, but our private
sector contacts report that the GOM did a good job of
liaising with them, both to warn of the very real risks of
losing a WTO case and to help identify the specific tariff
lines for which it made sense to seek extended AD protection.
As a result, the manufacturing sector largely supports the
agreement, and this support will likely translate into smooth
Senate approval.

Sub-Committee on Economic and Trade Affairs
-------------------------------------------

5. (U) At the end of May, Beatriz Leycegui, Under Secretary
of Economy for International Trade Negotiations, visited
Beijing for a meeting of the econ/trade sub-committee under
the Permanent Bilateral Commission the two countries have
established. According to the Economy Ministry, the meeting
focused on enhanced coordination on sanitary and
phytosanitary requirements and initiating bilateral
cooperation to combat illegal commercial practices such as
contraband and triangulation (the practice of re-labeling
Chinese goods that arrive in U.S. ports such as Long Beach as
"made in the USA" before shipping them duty-free to Mexico
under NAFTA, thus avoiding Mexican MFN tariffs on Chinese
goods). The two sides also committed to wrapping up
negotiations of a bilateral investment treaty as soon as
possible.

Comment
-------

6. (SBU) It was clear that Mexico's prohibitively high
anti-dumping duties on a wide range of Chinese products (up
to 1,000 percent) would not have stood up to WTO scrutiny.
This, plus the Calderon Admnistration's free trade instincts,
led the GOM to the negotiating table, where it managed to
take much of the potential political sting out of the deal by
maintaining AD protection for the most sensitive industries
for another four years (after which MFN tariffs will continue
to apply), giving them yet more time to prepare for competing

MEXICO 00001810 003.2 OF 003


in the global marketplace. The GOM also believes that
normalizing tariff levels on Chinese imports will
significantly reduce instances of contraband, triangulation,
and corruption at ports of entry. The Chinese, on the other
hand, gained immediate relief for a big swath of affected
exports and a four-year time-line for achieving the same for
the rest, thus avoiding the delay and ill-will that a WTO
dispute would have entailed. End comment.
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

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