The cover story in the December 22, 2008 issue of Forbes titled “The Next Disaster” offers a bleak view of the challenges facing Mexico amid rising social violence in the wake of Calderon’s crackdown on the drug trade and economic recession in the U.S., Mexico’s main trading partner. 

The title of the article, which is probably good for magazine sales, and its subject matter, contrasts sharply to comments in the same Forbes issue by Mexican billionaire Ricardo Salinas Pliego, who recently purchased a majority stake in ailing retailer Circuit City, Mexican Ambassador to the U.S., Arturo Sarukhan, and U.S. Ambassador to Mexico, Tony Garza Jr., all of whom were interviewed in adjacent columns. 

Salinas, having lived and profited through Mexico’s various crises, was not improbably sanguine about Mexico’s prospects, commenting: “I have been through so many crises.  This is just one.  And I’ve seen worse.”  Ambassador Sarukhan emphasized Mexico’s progress in rooting out corruption in government and the high demand for illicit drugs in the U.S.  Ambassador Garza said, “I am actually quite optimistic.  Long term, I think Mexico’s economic prospects are strong.”

The article includes a map illustrating the drug cartels that control various geographic regions of Mexico; cartel control over most of the country’s territory is disputed.  90% of the cocaine that enters the U.S. comes from Mexico, the article said.

Although Mexico’s economy will likely return to growth when the U.S. emerges from recession, until the U.S. can dramatically reduce black market demand (which appears to be inelastic) for illicit drugs, social violence will probably (and sadly) remain a major obstacle for Mexico’s long-term economic development.

Javier Villareal Teran, Minister of Tourism for the state of Tamaulipas, announced that the state will seek to expand health care options for U.S. and Mexican tourists seeking low-cost, high quality health care, ranging from surgeries to routine medical treatment, according to an El Financiero report.

As health care costs in the U.S. continue their seemingly inexorable rise, Mexico is wll poised to offer lower cost alternatives to financially struggling U.S. consumers.

The Foreign Policy Association Blog issued a good piece on what to expect from Mexico’s new Interior Minister, Fernando Francisco Gomez Mont Urueta, who was appointed following the death of Juan Camilo Mourino after his government plane crashed in Mexico City. 

Gomez Mont is an attorney and member of the ruling National Action Party (PAN). 

The Interior Minister in Mexico has historically been regarded as the second most important politician in the country.

Mexicans spent approximately US$2.5 billion on approximately 197 million bribes (mordidas) in 2007, according to a Transparency Mexico report that was cited in a Excelsior.com article.

U.S. companies with Mexican subsidiaries and Mexican companies that are required to file periodic reports with the SEC (e.g., because they issue American Depositary Shares) should be mindful of the U.S. Foreign Corrupt Practices Act when making any payment to foreign officials for the purpose of obtaining or keeping business for or with, or directing business to, any person.

The U.S. Department of the Treasury’s Commitee on Foreign Investment in the United States (known as “CFIUS”) issued final regulations governing national security reviews of foreign investments in U.S. companies on November 14, 2008. 

Only “covered transactions”, generally meaning transactions by or with any foreign investor that could result in control of a U.S. business by a foreign investor, are subject to CFIUS review.

Among the foreign investment transactions that are typically not ”covered transactions” are:

• Investments by a foreign investor in a start-up companies;
• Asset acquisitions if the assets acquired by a foreign investor are not a “U.S. business”; and
• Lending transactions unless a foreign investor acquires financial or governance rights characteristic of an equity investment.

Mexican and other foreign investors should consult with an attorney before making an investment in a U.S. company to determine whether the investment is a “covered transaction” subject to CFIUS review.  Civil penalties of US$250,000 per violation can be levied against investors who violate the regulations.

Mexican billionaire Carlos Slim offered his views to reporters regarding U.S. auto industry, health care, and other issues in an interview in San Antonio on November 18, 2008, summarized a Houston Chronicle report.

With respect to the auto industry, Slim suggested that struggling companies should file for Chapter 11 bankruptcy protection and renegotiate uncompetitive labor union contracts in exchange for giving workers company shares.  This is a suggestion lawmakers on Capitol Hill may wish to bear in mind today as they listen to pleas from auto industry executives for a US$25 billion slice of the US$700 billion Troubled Asset Relief Program (TARP).

My colleague Doug Jacobson has reported on his International Trade Law News blog that The American Association of Exporters and Importers (AAEI) and the Automotive Industry Action Group (AIAG) will hold the first-ever Southern Border Trade Symposium in San Antonio, Texas on November 18, 2008. The program will feature speakers on U.S. and Mexico customs issues, including supply chain security and other important cross border topics. The program’s keynote speaker is Mr. Brad Skinner, director of CBP’s C-TPAT program.

An optional Harmonized Tariff Schedule training program will be held on November 19, 2008.

More information and registration information for these programs is available here.

Mexican President Felipe Calderon has requested a January 20, 2009 meeting with President-elect Obama to discuss issues including immigration and anti-drug trafficking measures, according to a Reforma.com report (subscription required).

Strasburger & Price, LLP attorney Julian Nihill has written an excellent summary of the implications of the Mexican legislature’s recent approval of reforms to Pemex, which is set forth below in its entirety.

Amid much political jockeying and posturing, particularly by the PRD, the party of the narrowly defeated leftist candidate for the Presidency, Andrés Manuel López Obrador, the Mexican Congress, on Tuesday, October 28, passed a series of bills aimed at reforming how Pemex conducts business.  The bills go to President Calderón for his signature.  Although President Calderón has expressed his approval of this legislation, and is likely to sign it, the reforms that he proposed in his original draft of the law have been significantly watered down, and, for U.S. companies interested in participating in drilling and exploration activities in México, the legislation is a disappointment.

 

The good news is that this law marks a move toward a more nimble, market-responsive and accountable Pemex, which may be able to entice much needed foreign drilling and exploration technology into México.  The bad news is that it does not go nearly far enough, and is still mired in the old politics of national sovereignty  that has dogged Pemex since its foundation.

 

The law authorizes Pemex to:

 

- Raise funds in the world market and to issue so called “citizens bonds”, both of which suggest an increasing transparency and willingness to respond to outside financial market process.  But Pemex is not permitted to issue equity interests, a step that was widely anticipated by investors and commentators alike.

 

- Enter into contracts for drilling and exploration which contain incentives for the contractors.  But the incentives fall far short of what was hoped for.  Contractors may have no rights whatsoever to the reserves, and they may not report any such interest on their balance sheets or for financing purposes.  All payments must be in cash, and such payments may not be calculated by reference to a percentage of production or to the value of the sales of hydrocarbons, their derivatives, or the profitability of the Pemex entity that is contracting for services.  Contractors may not be granted preferential purchase rights nor any other rights that could impact the price at which the hydrocarbons (or derivatives) will be sold to third parties.

 

- Include in their contracts clauses permitting contractual modification as a result of technological advances brought by the contracting party, variations in the cost of equipment used in the project, or by other factors which result in increased efficiencies in the project.  These provisions in Article 60 of the Law of Pemex, are all considered advances in the rules governing Pemex’s contractual flexibility, but even these are restricted.  What Article 60 gives, Article 61 takes away.  Article 61 limits additional compensation to those situations in which (i) Pemex obtains economies resulting from early completion of the project, (ii) Pemex benefits from new technologies brought by the contractor, and (iii) “other circumstances attributable to the contractor which redound to the benefit of Pemex… provided that they are not in the form of a percentage of sales or production of hydrocarbons.”

 

Many potential foreign technology and equipment partners will consider these potential limitations too restrictive to warrant the investment of their time, equipment and human resources into the volatile Mexican hydrocarbon market.  Others may see this as a crack in the doorway, in particular the provisions for cash bonuses for benefits to Pemex.  It is expected that bidding for service contracts will begin as early as January 2009, and it may well be that those contractors who are willing to bid a relatively conservative price with the possibility of a contractual bonus, may be the real winners under this legislation.

The U.S. Commercial Service has issued a new report on Mexico’s digital media sector, which sets forth possible opportunities for U.S. companies in triple-play, mobile and wireless, pay-TV, consumer electronics and video games, and internet and broadband services sectors.  The report also includes an informative section on obstacles to market entry, including Mexican import requirements for hardware and software products.