PERU SIGNS TRADE AGREEMENT WITH CHILE

UNCLAS LIMA 003384

SIPDIS

SIPDIS
SENSITIVE

USTR FOR HARMAN, CARILLO
COMMERCE FOR 4331/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: ETRD ENRG ELAB ECON EAID SENV CI PE
SUBJECT: PERU SIGNS TRADE AGREEMENT WITH CHILE



1. (U) Summary. Overcoming decades of distrust, Peru and Chile
signed a trade agreement on August 22. The agreement "amplifies"
the 1998 Chile-Peru Economic Complementation Agreement (ECA),and
provides for national treatment of Peruvian investors in Chile, most
favored nation treatment by Chile to Peru, removal of non-tariff
barriers and the creation of a system for dispute resolution.
Opening of other areas, such as financial services, was put off
until next year. Other items, such as agricultural tariffs, were
covered under previous agreements. Nevertheless, trade between both
countries could increase by up to $2 billion over the next year.
Chile is likely to join the Andean Community of Nations (CAN),which
would then negotiate an FTA with the European Union. The GOP is now
focusing on an agreement with Mexico. End Summary.

A NEW ERA IN CHILE-PERU RELATIONS?
--------------

2. (U) The Peruvian and Chilean governments signed an Amplified
Agreement for Economic Complementation on August 22 in Lima.
Foreign Minister Jose Garcia Belaunde and Trade Minister Mercedes
Araoz Fernandez signed for Peru; Foreign Minister Alejandro Foxley
and Director General for Internatioanl Economic Relations Carlos
Furche signed for Chile. In the Peruvian Trade Ministry's press
release, Minister Araoz referred to the accord as a free trade
agreement, although technically it is an expansion of the existing
Chile-Peru Economic Complementation Agreement (ECA) signed in 1998.
President Alan Garcia's government, in office since July 28, closed
a deal initiated by President Toledo's government; the negotiations
took six rounds and twelve months to complete.


3. (U) The expanded ECA aims to create a level playing field for
Peruvian investors by granting them national treatment in Chile,
removing non-tariff barriers and origin requirements for service
providers, and creating a system of dispute resolution. Safeguards
are also included in the agreement for sudden increases in imports,
particularly in agriculture. Other items covered include expedited
customs clearance; a stand-still agreement on competition policies;
extension of health services to Peruvian workers in Chile; and an
equivalency agreement for sanitary and phytosanitary measures. The
Peruvian trade ministry MINCETUR has a summary of the agreement (in
Spanish) on its Web site:
http://www.mincetur.gob.pe/default.asp?pag=co mercio/
LEGAL/ACE38_ampliacion.html&lat=comercio/
lateral.asp?pag=comercio&num=3. The complete agreement is available
(in Spanish) at: http://www.mincetur.gob.pe/ comercio/LEGAL/
ACE38_modificatorio.html.


4. (U) The Chilean and Peruvian governments also signed Memoranda of
Understanding for cooperation in migration and labor protection
(including social security and the transfer of pension funds). The
creation of a number of joint labor mechanisms are currently being
negotiated, including a Peru-Chile business council, a border
committee, and committees on science and technical cooperation.

WHAT IS NOT COVERED
--------------

5. (SBU) The Agreement does not deal with several pressing disputes,
notably Peru's ire over Chile's trademarking of Pisco, the distilled
grape brandy that originated in Peru. Also, the unresolved maritime
sea border dispute has commercial implications, as the border area
is a rich anchovy fishery. Financial services and a full faith and
credit provision for licensed professionals such as lawyers or
doctors will be negotiated in the next 6 months. Other subjects not
covered include commercial airspace, hydrocarbons, and tariffs on
agricultural products, financial services and intellectual property.
Agricultural tariffs were negotiated under previous agreements, and
the last items, such as wine, are scheduled to go to zero by 2016.
Trade Ministry officials who negotiated the agreement told us that
while there were no chapters on IPR and labor, most of what would be
in those chapters is covered either in this or the previous 1998
agreement. Also, the respective requirements under the Peru/U.S.
and the Chile/U.S. free trade agreements made coverage unnecessary.

EXISTING TRADE AND INVESTMENT
--------------

6. (U) Chile and Peru already have extensive trade relations, and
Peru has frequently run a surplus. Trade has increased over 700
percent from 1997 to 2005 and is expected to reach $2 billion in

2007. Of Peru's $1.13 billion in exports to Chile in 2005,
molybdenum concentrates reached $694 million; other main exports
include crude oil; copper concentrates; various iron and steel
products; fish oil; zinc slabs; and liquefied propane gas. The $573
million in 2005 Chilean exports to Peru included diesel, gasoline,
paper, ammonium nitrate, plastics, frozen fish, manufactured goods,
and apples.


7. (U) While Peru frequently runs a goods surplus, Chilean
investments in Peru tower over those that Peruvian companies have
made in Chile. Chilean investments in Peru total around $4 billion
(stock) while Peruvian investments in Chile are estimated at $50
million. The Peruvian media and some former Toledo administration
officials have often raised concerns about this asymmetry, and
Peruvian exporters have long complained that while Peru treats
Chilean investors the same as any other foreign national, Chile
discriminates against Peruvian investors in Chile.


8. (U) Nevertheless, Chilean investment in Peru since the early
1990s has provided a much-needed injection and expansion of capital,
financing for infrastructure and credit -- all benefiting the
Peruvian economy and consumer. Chilean companies purchased power
generation and distribution companies in the privatization process,
retail outlets and other consumer-oriented businesses, and even
established a bank geared to micro-lending in partnership with the
largest Peruvian bank -- all of which were sold to Peruvian or other
foreign companies. Most visible among Chilean investments are two
department stores (Saga-Falabella and Ripley),which have become the
largest issuers in Peru of credit cards -- helping to make
creditworthy thousands of Peruvians. The largest domestic airline,
Lan Peru, is owned by Chileans. A Chilean pharmacy chain
spearheaded the establishment of well-run, low-cost pharmacies open
24/7.

TOWARDS ASIAN AND EUROPEAN MARKETS
--------------

9. (U) In their recent meetings, Chilean Prime Minister Michelle
Bachelet and Peruvian President Alan Garcia have emphasized the
importance of regional cooperation in exports to the growing
Asian-Pacific market. Bachelet has proposed that Peru be
incorporated in the P4 trans-Pacific pact -- with Brunei, New
Zealand, and Singapore -- to promote trade links with Asia. Peru
will host the APEC summit in 2008.


10. (U) This trade agreement should provide an additional impulse
for Chile to rejoin the Andean Community of Nations (CAN),from
which it withdrew in the 1970's. The four existing CAN members
(since Venezuela withdrew) recently asked Chile to rejoin; and Chile
may announce its agreement to become an associate member within the
next 30 days. A CAN that includes Chile will be in a better
bargaining position for negotiations with the EU, scheduled to start
in 2007.

COMMENT
--------------

11. (SBU) Trade Minister Mercedes Araoz has gotten off to a roaring
start with a signed trade agreement with a major partner within a
month of taking office; the Ministry's negotiators now turn to an
FTA with Mexico. This agreement is certainly less than
groundbreaking, and its coverage is limited, compared with U.S. free
trade agreements. But it provides a quick win for the Garcia
Administration and hopefully will broaden public support for trade
liberalization. While this agreement does not explicitly make
easier energy exports (natural gas) to Chile, the closer commercial
cooperation that should follow may lead to a political climate more
amenable to a natural gas connection. While trade and investment
issues remain, as well as thorny questions of the international sea
border and arms spending, this agreement will help contribute to a
stable, long-term commercial and economic relationship.


12. (SBU) For both political and economic reasons, President Garcia
has made it a priority to improve relations with Chile, making
visits there long before his election. Bachelet also has a history
of ties with Peru, where her parents lived for long periods. She
was President Garcia's guest of honor at the country's July national
day celebrations. Still, the Garcia Administration's political and
commercial rapprochement with Chile is controversial among many
Peruvians; Chile's occupation of Peru and seizure of territory in
1879 War of the Pacific still rankles many, as does Chilean arms
spending. For Garcia, with Bolivia and Ecuador in turmoil, Chile is
an attractive, stable commercial partner in the region. But as
Garcia focuses on how to make Peru's impressive economic growth
benefit its entire population, Chile also may be a partner worth
emulating, as its left-of-center government has also made enormous
strides against poverty by adopting free-market trade and investment
policies.

STRUBLE