VISIT OF PERUVIAN MINISTERS TO DISCUSS FTA

C O N F I D E N T I A L SECTION 01 OF 04 LIMA 002720

SIPDIS

DEPT FOR D, E, WHA/AND
DEPT POASS TO USTR - BHARMAN
COMMERCE FOR 4331/MAC/WH/MCAMERON
TRESURY FOR OASIA/INL
USDA FOR FAS/ITP/GRUNENDEFELDER

E.O. 12958: DECL: 06/17/2015
TAGS: ETRD PGOV EAGR PE ENIV
SUBJECT: VISIT OF PERUVIAN MINISTERS TO DISCUSS FTA


Classified By: Economic Counselor Timothy Stater for reasons 1.4 (b) an
d (d).


1. (C) Summary. Four Peruvian Ministers -- Trade, Finance,
Agriculture, and Production -- will be traveling to
Washington D.C. for high-level meetings with Deputy Secretary
Zoellick, USTR Portman, Commerce Secretary Gutierrez, NSC Tom
Shannon and several members of Congress, June 21-22. The
Peruvians are interested in concluding the Free Trade
Agreement (FTA) negotiations in September, with or without
their Andean partners. Post recommends that in each meeting
we congratulate the Peruvians on their economic achievements
and proactive pursuit of an FTA, but also emphasize the
difficulties of obtaining Congressional approval of CAFTA and
how that limits the flexibility of our negotiators, the
unlikelihood of ATPDEA renewal, and the need to resolve the
remaining ATPDEA commercial disputes. It is particury
important that these political-level officials come away with
a firm impression of our llimited flexibiliyy in agriculture
and IPR issues. End Summary.


2. (C) Pablo de la Flor told us that President Toledo is
increasingly nervous about the timing of the U.S.-Andean FTA.
De la Flor added that Peru is ready to pick up the pace and
conclude the FTA negotiations by September without its Andean
partners, provided U.S. Agriculture negotiators are flexible
and ready to engage. What is not yet clear is whether the
GOP's hope for flexibility is within the bounds of realism.
He added that there are several minor issues pending in such
chapters as Dispute Settlement and Institutional Issues that
could be resolved before the July 18-22 round in Miami. They
will be gauging U.S. interest in such an accelerated endgame.


Suggested Message
--------------


3. (U) The Peruvian Government should be complimented on its
solid economic growth. However, we need to reiterate several
messages related to the Andean FTA.

--Effective Economic Policies: Highlight Peru's strong
macroeconomic performance, particularly high recent growth
rates, which underline the country's dynamism and economic
leadership in the region. Measures such as Peru's reform of
the pension system last year and the recent Paris Club debt
buyback should improve the country's fiscal sustainability.
(If asked: We were only unable to participate in the Paris
Club deal for technical and legal reasons).

--We applaud your progress on a domestic dialogue over
compensation mechanisms for agricultural producers that could
be adversely impacted under the FTA. We also note your
valuable work promoting competitiveness and pushing for other
reforms to complement the FTA and modernize Peru's economy.

--CAFTA's Implications for the Andean FTA: USTR will have a
difficult time selling the CAFTA agreement to the U.S.
Congress. As a result, USTR has less leeway to be flexible
during the Andean negotiations. USTR has already agreed to
concessions on two Peruvian priority issues -- including
adding biodiversity text for the first time in an FTA and
language on technology cooperation in the IPR chapter. It is
now up to the Andeans to make concessions, particularly in
agriculture market access and pharmaceutical data protection.


--ATPDEA Renewal: Some Peruvians unrealistically hope that
ATPDEA could be renewed when it expires in December 2006. It
is important to reiterate that ATPDEA extension is highly
unlikely and that the FTA would expand on and make permanent
many of Peru's benefits under ATPDEA.

--Resolving Commercial Disputes: In order to obtain ATPDEA
benefits, the Peruvian Government in 2002 made a commitment
to resolve nine commercial disputes. Although Peru has made
some progress on these cases, four disputes remain unresolved
(Engelhard, Princeton Dover, LeTourneau, PSEG). It is
important to emphasize that the GOP must resolve the
remaining cases if Peru wants to be included in the Andean
FTA. The most difficult case is that of New Jersey-based
Engelhard, a major gold importer from Peru until late 1999.

Peru on the Right Economic Track
--------------


4. (U) After four solid years, Peru's economic expansion has
recently entered a stronger phase, with nearly all key
macroeconomic indicators -- GDP growth, deficit reduction,
reserves -- exceeding expectations in 2004. Last year GDP
grew 4.8 percent, and the economy is on track to grow five to
six percent in 2005. Inflation remains low and the currency
is strong. The government recently concluded a Paris Club
debt buyback that will save $350 million in annual debt
service for several years.


5. (U) Thanks in part to ATPDEA, growth is broadening across
sectors, private investment is climbing and employment and
commerce are expanding in the regions. Exports hit $12.5
billion last year and could reach $15 billion in 2005. Given
a strengthening pro-market consensus across the political
spectrum, analysts consider that 2006 elections will have
little impact on macroeconomic policy.


6. (U) Nevertheless, despite recent successes, major
challenges remain. Poverty afflicts 52 percent of the
population, and the government collects insufficient revenues
for adequate social investment. Wealth and growth are
concentrated in coastal cities, with rural sierra and jungle
areas extremely poor and underdeveloped. Peru is handicapped
by major infrastructure bottlenecks and a low quality
educational system. The government is struggling to
strengthen weak institutions, and the investment climate
remains problematic due to inconsistent application of tax
policies, social unrest and other concerns. Completion of
the FTA is viewed as a critical tool to help Peru over some
of these hurdles and implement needed reforms; failure to
complete the FTA would impact Peru's continuing export
growth.

Sensitive Issues: Agriculture and IPR
--------------


7. (U) Agriculture: Agriculture remains difficult for the
GOP to negotiate in face of protests from producers of dairy,
poultry, and commodity crops. These producers are pressuring
the government to not fully eliminate tariffs on their
products. (Note: Ministers Ferrero and Manrique may seek the
USG's flexibility on agricultural issues in the wake of
recent protests by both coca and rice farmers. End Note.)
Some Peruvian exporters (of mainly fruits and vegetables),
however, are pressuring the GOP to finish the agreement
quickly, as nearly one half of Peruvian agricultural exports
are shipped to the U.S. market. One-third of the Peruvian
working population, approximately 8 million people, depends
on agriculture for their livelihood. The most sensitive
products are dairy, corn (Peru imports half of its
consumption) and chicken leg quarters.


8. (U) Even in the face of such pressure, the GOP has
advanced further in the agricultural table than their Andean
counterparts. One of the reasons is that of the three Andean
FTA participants, Peru has the most liberalized agricultural
sector. Their price band is limited to 46 products compared
to 168 for both Ecuador and Colombia. Peru currently does
not use a tariff-rate quota or have domestic purchase
requirements for approval of imports, as Colombia and Ecuador
do.


9. (U) Despite Peru's comparatively liberalized agricultural
sector, both the agricultural market access and Sanitary and
Phytosanitary (SPS) negotiations are moving very slowly.
Fundamental differences exist between the United States and
the Andeans, including Peru, on SPS. The Andean countries,
led by Colombia, seek obligations that go beyond the approach
for SPS agreed to in other FTAs in the region, as well as the
obligations of the WTO SPS Agreement.


10. (U) On the market access side, Peru is looking to
receive permanent zero-duty treatment for products currently
under the ATPDEA. Its largest export by far is asparagus
(over $100 million in 2004),which accounts for nearly
one-third of the country's total food and agricultural
exports to the United States. Defensively, Peru wants
exceptions to eliminating tariffs for some sensitive
products. From the initial negotiation, the United States
has stated that the goal is to consolidate Peru's ATPDEA
benefits. As of now, while it has moved in a favorable
direction, Peru has yet to offer immediate access on any U.S.
priority items.


11. (C) Intellectual Property Rights (IPR): The most
sensitive issue for the pharmaceutical industry remains the
lack of protection of data relied on to obtain marketing
approvals for drugs in Peru. Senior government officials
contend that this is a very delicate political issue. Recent
studies by the Ministry of Health and Indecopi, Peru's IPR
administrative agency, argue that the price of medicines will
increase substantially under an FTA, playing on fears that
Peruvians' access to medicines will decline sharply.
Nevertheless, GOP negotiators realize that they will need to
provide 5- and 10-year protection for pharmaceutical and
agrochemical test data, the same levels cited in the CAFTA
IPR chapter.


12. (U) Another top concern of U.S. industry in Peru is the
lack of IPR protection relating to both copyrights and
patents. Peru remains on USTR's Special 301 Watch List.
Copyright industries face chronic high rates of piracy (98
percent for the recording industry; an estimated 70-80
percent for the audiovisual industry). Industry
representatives and officials from Indecopi have jointly
called for increased enforcement through tougher sentencing,
the creation of specialized judges and an increase in
authority for specialized IPR prosecutors.

Bio Data
--------------


13. (C) Minister of Trade Alfredo Ferrero - Alfredo Ferrero,
who was educated in the United States, was appointed Minister
of Trade and Tourism in early 2004. He has been the Toledo
Administration's strongest proponent of free trade and an FTA
with the United States. Ferrero has strong ties to the
business community and fares well with the Peruvian media.
He is smart, well versed, but has a hot temper. His uncles
are the current Peruvian Ambassador to Washington and the
Prime Minister.


14. (C) Minister of Finance Pedro Pablo Kuczynski - PPK,
Peru's star cabinet member, is internationally known in the
investment banking and development fields. An orthodox
economist and staunch proponent of free trade, PPK has
reiterated in the press that the FTA is necessary for Peru to
continue its economic expansion. PPK is President Toledo's
candidate for the Presidency of the Inter-American
Development Bank. PPK may also be stepping down in August to
run for the Presidency in Peru's April 2006 national
elections.


15. (U) Minister of Agriculture Manuel Manrique - Manuel
Manrique, appointed in late February, is a civil engineer who
has studied at Northwestern University. He was the Executive
Director of a major irrigation project for the Ministry of
Agriculture, but is not seen as an expert on a wide range of
agricultural issues. Manrique has spoken in favor of the
FTA, stating that Peru will remain a poor country without it.
Manrique is the only member of this group who does not speak
fluent English.


16. (C) Minister of Production David Lemor - A relative
newcomer to the Cabinet, David Lemor, a civil engineer, was a
textile producer. He previously held the post of Vice
President of National Industrial Society, a protectionist
organization of textile manufacturers. Lemor is a strong
supporter of the Andean FTA.

Comment: Ready to Deal
--------------


17. (C) The GOP is serious about concluding FTA negotiations
with the United States by September, before Peru's national
electoral campaign begins. During the Washington meetings,
the Ministers will likely compare Peru to the other Andean
countries, arguing that Peru is better prepared, more
liberalized, and has made more concessions during the FTA
negotiations. These officials realize that without an FTA or
an extension of ATPDEA, Peru will be unable to maintain its
current level of economic growth and carryout needed
structural reforms. The Ministers will also probably cite
the latest United Nations study, which indicates that Peru's
coca crops have increased 14 percent to more than 50,000
hectares, to contend that an FTA and economic growth are
necessary to stem coca cultivation in Peru.


STRUBLE