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Cablegate: Scenesetter for Undersecretary Jeffery's Visit To

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DE RUEHME #2037/01 1852105
ZNR UUUUU ZZH
P 032105Z JUL 08
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

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