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The US – Peru FTA: Impact and PerspectivesThe George Washington University

Elliott School of International Affairs

October 30, 2008

Mateo Paz Soldán, Attorney-at-Law

Peru at a Glance (2007)Population: 29.2 million.GNP: $82 billion.Annual GNI per Capita (PPP): $7,240Inflation Rate (Consumer Prices): 3.5%Total Exports: $27.5 billion.Total Imports: $20.4 billion.Exports to US: $5.2 billion. Imports from US: $4.1 billion.US-Peru TPA: 80% of US exports of consumer and industrial products and 67% of US farm exports will become duty-free immediately.

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Source: CIA (The World Factbook) and The World Bank

The US – Peru FTA: Impact and Perspectives

Historic events leading to US-Peru FTA

Overall US-Peru Trade

Case Studies on Future Impacts of FTA--Asparagus IndustryTextile and Apparel Industry

“Negative” Events Leading to FTA

70s and 80s experimentation with leftist, statist, and populist growth strategies, which largely failed in spurring growth and reducing poverty:

1968-1975 Velasco regime land reform, nationalization of major industries, inefficient import substitution policies.

1985-1990 1st Garcia govt confrontation with financial lending institutions over debt payments, policies leading to hyperinflation, effort at nationalization of banks.

Concurrently, Peru dealt with extremist Shining Path and Tupac Amaru guerrillas which were at their peak in late 80’s and early 90’s.

Globally: fall of the Berlin Wall and collapse of the Soviet Union.

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“Positive” Events Leading to FTA

Passage of NAFTA in 1993 and the success of the Chilean export-led growth model.In the 90s economic liberalization and privatizations under Fujimori regime. Success of the ATPA program in creating export dependent industries and generating jobs starting in 1991.Need of Peruvian industries to secure access to key markets in an increasingly competitive global marketplace.

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Main Trade Partners, 2007 (US$Millions) Relationships Drive Pursuit of FTAs

EU2,31011%

Others4,89324%

Col.9895%

Chile8844%

Japan7904% Argentina

1,1266%

Ecuador1,5117%

Brazil1,884

9%

China2,47412%

US3,60318%

US5,25020%

EU4,93919%

Brazil9383%Chile

1,6936%

Canada1,7856%

Japan2,1848% Switzer-

land2,3358%

China3,04211%

S. Korea8833%

Others4,54116%

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Imports Exports

Source: Ministry of Commerce of Peru

Peru’s Growing Web of Trade Relationships

Multilateral: WTO Doha Round.Regional: APEC, LAIA (ALADI), Andean Community.Bilateral:

FTAs with USA, Singapore, and Canada. Economic complementation agreements (ACE) with Chile, Mexico, and Mercosur.Pending: E.U., EFTA, China, Thailand, Chile, and Mexico (the latter two ACEs are being expanded). Peruvian proposal for APEC FTA?

Objectives 1) diversification of markets; 2) become a hub for Asian economies in South America; 3) a window for Brazilian trade with Asia-Pacific region.

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US-Peru Trade

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Peru’s Exports to World, 2006Traditional Exports = 78%. A Need to Diversify.

62%8%

6%

2%

7%

5%7%3%

Mining

Petroleum

Fishing

Agric. Trad

Tex/Apparel

Agric. Non-Trad.Metallurgic

Others

Source: SUNAT and Central Bank of Peru DTB Associates, LLP

US Exports to Peru, 2007 (US $Thousands)

1,064,92026%

366,5659%

232,1126%

183,1684%

160,7714%

128,1703%

113,6493%

90,8852%

408,84010%

503,80612%

866,64521%

84 - Nuclear Reactors and Machinery 27 - Mineral Fuel39 - Plastics and Articles 85 Electric Machinery and Equipment10 - Cereals 87 - Vehicles and Parts29 - Organic Chemicals 90 Optic, Photo and Medical Instruments98 Special Classification Provisions 52 - Cotton, Yarn and FabricOther

DTB Associates, LLPSource: US Department of Commerce

Total US Exports to and Imports from Peru (US$ Thousands) Since 2002

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2002 2003 2004 2005 2006 2007

Exports Imports

DTB Associates, LLPSource: US Department of Commerce

Total US Imports from ATPDEA Countries (US$ Millions)

0

2,000

4,000

6,000

8,000

10,000

2002 2003 2004 2005 2006 2007

Bolivia Ecuador Peru Colombia

Source: US Department of Commerce DTB Associates, LLP

Total US Exports to ATPDEA Countries (US$ Millions)

01,0002,0003,0004,0005,0006,0007,0008,0009,000

2002 2003 2004 2005 2006 2007

Bolivia Ecuador Peru Colombia

DTB Associates, LLPSource: US Department of Commerce

The Case of the Peruvian Asparagus Industry

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Peru’s Asparagus IndustryOverview

Peru is the world’s top exporter of asparagus.Asparagus is Peru’s first agricultural export.In 2007 asparagus exports to US totaled $194 million.US-Peru FTA, will grant permanent duty free status to Peruvian asparagus and to 99% of total exports.

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Development of the AsparagusIndustry in Peru

50’s to 80’s:Industry began in northern Peru with white asparagus cultivated for canned products.In the late 80’s, green fresh asparagus was developed in the south with USAID support.Concurrently, the frozen asparagus industry developed and Spanish investment in the south led to the development of canned/jarred asparagus.

90’s:Growth spurred by ATPA in 1991.Heavy investment from U.S. and E.U.Approx. 24,000 hectares cultivated.

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Competitiveness: Peru has the World’sSecond Highest Productivity (2007)

6254800

283473 92900 62000 50620 36000 33093 29000 22500 22000

50,002

118,114

49,94641,333

32,742 37,894

61,92546,400

145,161

50,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

China

Peru

German

y

Mexico U.S.

Spain Ita

ly

Japan

Philip

pines

Chile

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Production (MT) Yield (hectogram/ha)

Source: FAOSTAT DTB Associates, LLP

Benefits for Peru• 60,000 jobs (60% are held by

women).• From 2000-04 investments of

$100 million.• Industry is driving

infrastructure development and adoption of global business practices.

• Multiplier Effect: model for new industries--mangoes, paprika, peppers, onions.

• Total of 600,000 jobs in agroexport sector.

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U.S. Fresh Asparagus Imports by Major Country (US$ Thousands)* HTS 0709201, 0709209

0

50,000

100,000

150,000

200,000

250,000

300,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Peru Mexico Canada Colombia Chile

Source: USDA DTB Associates, LLP

U.S. Canned Asparagus Imports from the World (US $Thousands)* HTS 200560

0

5,000

10,000

15,000

20,000

25,000

30,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Peru China, Rep. of Spain New Zealand

Source: USDA DTB Associates, LLP

US Frozen Asparagus Imports by Country (US $ Thousands)* HTS 0710809510, 0710809710

0

2,000

4,000

6,000

8,000

10,000

12,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Peru China, Rep of Chile Mexico

DTB Associates, LLPSource: USDA

Top World Producers of Asparagus(Hectares)The FTA will help secure the US market.

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

China Peru Germany Mexico US

Source: FAOSTAT DTB Associates, LLP

Benefits for the US“Rising tide lifts all boats” – increased availability has led to increased consumer demand year-round for asparagus including that produced in the US.More than 5,000 jobs created in the US: air, sea, land transportation; warehousing; distribution; port inspections; importers; wholesalers; retailers.70% of every asparagus dollar exported to US stays in US. Imports of fresh asparagus from Peru are largely counter-seasonal to US crops. War on Drugs: asparagus industry has helped Peru to create alternative, legal, employment opportunities and to reduce illegal coca cultivation.

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Fresh Asparagus Distribution Chain Job Creation

Growers

Packing House Processing/Quality Control Inspection

Cold Storage Air Pallet Clearance

Peru to Miami

Brokers

Miami Airport Clearance Cold Storage USDA

Insp. fumigation

Importers/Distributors Pre-

cooling Quality Inspection

Retailer

ConsumersLogistics

Warehousing

Sales

Wholesalers

Increased Exports and Declining Coca Leaf Production in Peru 1995-2006 (Has)

115,300

94,400

68,800

51,000

38,700 43,400 46,200 46,700 44,20050,300 48,200 51,400

0

20,000

40,000

60,000

80,000

100,000

120,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

HectaresSources: US Department of State and United Nations

*Agroexports such as asparagus create legal employment opportunities for impoverished highland agricultural workers.

*Geographic correlation between agroexport producing areas on the coast of Peru and coca-leaf cultivation areas in the Ceja de Selva region.

The Case of Peruvian Textile & Apparel Industry

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US Imports of Apparel from Peru (US $ Thousands)Total projected exports to world: $1.8 billion in 2008.

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

DTB Associates, LLPSource: US Department of Commerce

Competitiveness: Apparel Manufacturing Labor Costs 2008(US $/Hour, including social charges)

0.49 - 0.55

0.97 - 1.03

1.42

1.65

1.55 - 1.95

1.78

1.79

2.54

2.57

3.35

0.10 0.60 1.10 1.60 2.10 2.60 3.10

Haiti

Nicaragua

COLOMBIA

Guatemala

Dom. Rep.

PERU

El Salvador

Honduras

Mexico

BRAZIL

Costa Rica

USA Regional Import Supply Base

TPL

TPLTPL

FTA Completed

FTA/TPA

FTAA / 5 YR. ?

NAFTA/CAFTA ANDEAN / S. AMERICA

DTB Associates, LLPCourtesy: Pro-Nicaragua

Benefits to Peru’s Textile and Apparel Industry and Overall Economy

Competitive advantage due to unique raw materials such as pima and tanguis cottons and llama/alpaca fibers as well as ancient cultural tradition.Today, T&A make up close to 10% of Peru’s total exports.Direct/indirect employment of over 500,000 Peruvians, nearly 20% of Peru’s manufacturing jobs.Peru’s T&A industry is high in value-added and is creating a skilled workforce necessary for new industries. DTB Associates, LLP

U.S. Exports to Peru of Cotton, Yarns, Threads and Woven Fabrics (US$ Thousands)

010,00020,00030,00040,00050,00060,00070,00080,00090,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Cotton Cotton Yarns, Threads and Woven Fabrics

DTB Associates, LLPSource: US Department of Commerce

Benefits to US Cotton, Yarn and Fabric Industry

95% of Peru’s T&A exports are manufactured from cotton fiber. 70% of Peru’s cotton imports are from US.

Imports of cotton fiber from the US increased 80% in ten years, from $48 million in 1998 to $85 million in 2007.

US yarn and fabric exports to Peru grew from $4.5 to $12 million from 2002 and 2007. FTA is designed to foster use of US yarn and fabric inputs.

As a result, US cotton industry and various US textile industry sectors supported FTA. DTB Associates, LLP

Benefits to the US Apparel Value Chain and Other Considerations

Under the ATPDEA, apparel imports from Peru have generated benefits for US distribution networks and retailers, supporting thousands of US jobs along the chain. FTA-led growth will increase this benefit.

Most of value-added activities remain in US hands: article of clothing FOB Callao = $6.00, sold in US for $40-50.

War on Drugs: Peru’s growing apparel industry is an indispensable tool in US and Peruvian efforts to reduce illegal coca-leaf cultivation and combat narcotrafficking.

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US Total Imports of Apparel (US$ Thousands)

$1,226,8692%

$7,854,93611%

$23,375,60331%

$5,441,4787%

$18,963,74926%

$15,053,11320%

$2,237,4703%

$203,5250%

CAN CAFTA ASEAN EU-25 NAFTA GCC China Others

Source: US Department of Commerce DTB Associates, LLP

Displacement of Ag Workers? The Key is to Assist in Conversion

Low Job GenerationAnnual Jobs/100 Has

Yellow Corn 26

Barley 20

Wheat 20

White Corn 27

Broad Bean 20

Grain Pea 20

High Job GenerationAnnual Jobs/100 Has

Asparagus 65

Onions 97

Grapes 45

Paprika 52

Garlic 79

Artichokes 66

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Agricultural export products generate two to three times more jobs than traditional agricultural products (non-sensitive and sensitive)

Source: Peru Ministry of Agriculture

Concluding Observations

Global financial crisis has raised concern about stability of the US market for niche, high value, products such as those that Peru and other L.A. countries export. A prolonged drop in demand will impact exports and job creation and potentially erode support for FTA, especially if sensitive agricultural sectors are not assisted.However, in longer term, FTA should consolidate and spur further investment and growth of key, labor intensive, export sectors. The growth spurt that took place after expansion of the ATPA in 2002 is perfect example.The FTA by itself is not a silver bullet. The FTA must be accompanied by internal reforms such as the proposed ‘TLC Hacia Adentro’ (Internal FTA) and infrastructure development such as the ‘Sierra Exportadora’ (Exporting Highlands) program to ensure that the FTA has a positive impact on poverty reduction and economic growth.

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Questions?

Carlos Mateo Paz-Soldán, Esquire901 New York Av., N.W.Washington, DC 20001Phone: 202-661-7099Fax: 202-661-7093E-mail: cpaz-soldan@dtb.usWeb site: www.dtbassociates.com

… thank you!

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