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Cablegate: Mexico Economic Notes, June 22 - July 13

VZCZCXRO2381
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3703/01 1941659
ZNR UUUUU ZZH
P 131659Z JUL 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7974
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHMFIUU/CDR USSOUTHCOM MIAMI FL PRIORITY
RHMFIUU/CDR USNORTHCOM PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 MEXICO 003703

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ENRG MX PGOV PTER
SUBJECT: MEXICO ECONOMIC NOTES, JUNE 22 - JULY 13


Summary
-------

1. (SBU) The Calderon Administration is working with the
Mexican Legislature to promote a fiscal reform initiative,
possibly a prelude to a series of other reforms (energy,
labor, education, etc.). Over the past two weeks, we have
spoken with officials outside and inside the Congress to get
a snapshot of the debate. The opposition Party of the
Democratic Revolution (PRD) and Institutional Revolutionary
Party (PRI) have voiced varying levels of concern about the
proposed reform. Nevertheless, the PRI has indicated its
willingness to work with the Calderon government to reach a
compromise that would allow the fiscal reform to move
forward. In a negative sign for prospects of reforms in
education, the national teacher's union has effectively named
their current leader, Elba Ester Gordillo,
president-for-life. Under Gordillo's leadership, the National
Education Workers Union, has consistently blocked attempts at
reforming Mexico's corrupt and poorly reforming education
system. The terrorist attack on gas pipelines in central
Mexico forced several factories to halt production
temporarily until alternate supplies could be arranged.
Finally, Washington State Governor Christine Gregoire
discussed apple tariffs and cross-border trucking with the
Secretariat of the Economy.

SIPDIS

Labor Politician Opposes Fiscal Reform Initiative
--------------------------------------------- ----

2. (U) Although the PRI is willing to work with the Calderon
administration to pass fiscal reform, the Coordinator of the
"labor" faction within the party has reportedly expressed
strong opposition to the initiative. According to a senior
staffer, the labor faction Coordinator, Patricio Flores
Sandoval, indicated that he will do everything within his
power to oppose the initiative. In addition to being a
Federal Deputy, Flores Sandoval is also a member of the
(Council of Mexican Workers') CTM's National Committee. The
CTM is the largest labor federation in Mexico and is roughly
equivalent to the AFL-CIO. Flores Sandoval's stance in
opposition to the fiscal reform initiative is more hard line
than that taken publicly by either the PRI or the CTM.
However, he is an influential figure among PRI Federal
Deputies and his opposition to the reform could become a
focal point for other members of the national legislature who
are against it.

Hacienda Official on Reform Calendar
------------------------------------

3. (SBU) The head of Hacienda's Economic Planning Unit,
Miguel Messmacher, told the Embassy and two visiting Treasury
officials that Finance Secretary Carstens' reform priorities
include fiscal reform, measures to deepen the financial
system, infrastructure, and energy. Messmacher only spoke
about fiscal reform in general terms and said that the
government is talking about energy reform "in a basic way."
He added that Hacienda wants to make Pemex more like a
business, reform the company's fiscal regime, and improve
corporate governance -- noting that the latter may come
first. When asked about prospects for educational reform, he
said that there will be talk about it, but that it will
require a significant amount of work because of "political
sensitivities" associated with dealing with the unions. He
said that the window of opportunity for passing reforms that
require significant political capital could be lost after
April 2008 because the lower house of Congress would be
gearing up for the 2009 elections. He believes the PRI will
back some measures after this timeframe, but that securing
their support will be more difficult.


MEXICO 00003703 002 OF 003


Energy Reform Debate Drifting
-----------------------------

4. (SBU) Francisco Diaz Palafox (protect), lead PRI staffer
on the Mexican Senate Energy committee was non-committal
about whether the Senate would be able to propose and pass
any kind of energy reform. He noted that early in the
closed-door talks over limited energy reforms that would give
Pemex some additional budget autonomy and freedom from
restrictive government procurement rules, representatives
from all three parties had agreed not to raise larger scale
constitutional reform. Palafox added that within the past
month, at least two National Action Party (PAN) Senators
rejected the earlier no-constitutional amendment rule, and
have poisoned the discussion.

New Tax Reform Law May Affect Maquilas
--------------------------------------

5. (U) Although Hacienda had previously said that the
proposed fiscal reform package would not have a negative
impact on maquilas, officials now acknowledge that it will.
Representatives from the National Maquiladora Council (CNIME)
met with Hacienda to discuss the effects of the reform.
Maquila owners complain that they would be subject to double
taxation, paying taxes in Mexico and in the U.S. where the
parent company headquarters is located because the cost of
inputs from the U.S would not be fully deductible under the
new regime.

Gordillo Now "President for Life"
---------------------------------

6. (SBU) During an "extraordinary" meeting of the National
Education Workers Union's (SNTE) Political Council, a select
group of union representatives voted to confirm Elba Ester
Gordillo in her position as union leader indefinitely,
effectively making her SNTE president-for-life. During
Mexico's 2006 presidential election Gordillo formed her own
political party and tacitly supported the candidacy of
National Action Party (PAN) candidate Felipe Calderon, a
critical factor in Calderon's ultimate electoral victory.
Labor and political observers we have spoken with claim that
the GOM's acquiescence on Gordillo's lifetime position is
part of the PAN's payoff for Gordillo's political support in
last year's presidential election. (Comment: Gordillo, who
is often referred nationally as "the Teacher" is generally
considered to be much more interested in increasing her
personal wealth and political influence than she is in
improving the quality of Mexico's corrupt and poorly
performing public education system)

Gas Infrastructure "Recovering" After Attack
--------------------------------------------

7. (SBU) Our sources remain confident that despite the
damage to the Pemex Gas pipeline system by the July 5 and 10
EPR bombings of valve sites which affected several
manufacturing sites in the states of Guanajuato and
Queretaro, economic disruption will be minor. Bypass
operations are currently underway and gas flows should
restart by July 13. Less certain is the long term effect the
attacks will have on investment (see septel).

Washington Governor Talks Apples, Trucking with Economia
--------------------------------------------- -----------

8. (SBU) Washington State Governor Christine Gregoire raised
the twelve-year litigation over tariffs on Washington State
Red and Golden Delicious apples with Economy Secretariat
Undersecretary of International Trade Negotiations Beatriz
Leycegui. Leycegui offered to "look into the merits of the

MEXICO 00003703 003 OF 003


case" and asked what Washington State might be willing to
"offer" to settle the dispute. Leycegui also asked Gregoire
to encourage Washington State legislators to support the
Cross Border Trucking Demonstration Project. She added that
as a result of congressional delays on trucking, some groups
in Mexico are questioning the need for Mexico to fulfill its
own NAFTA commitments and are pressuring the GOM to take the
next legal step with the U.S., i.e., a suspension of NAFTA
benefits enjoyed by the U.S. Leycegui said she wanted to see
better integration of Mexican and American markets and reduce
the number of U.S.-Mexico bilateral trade disputes.

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 /
PARNELL

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