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. 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