PERU ELIMINATES TARIFFS ON 2,894 ITEMS

UNCLAS LIMA 000041

SIPDIS

SIPDIS

USTR FOR EEISSENSTAT, BHARMAN AND MCARRILLO
GENEVA FOR USTR
COMMERCE FOR 4331/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EAGR ENRG PE
SUBJECT: PERU ELIMINATES TARIFFS ON 2,894 ITEMS


1. (U) SUMMARY: On December 27, the Council of Ministers
unilaterally eliminated the tariffs on 2,894 product
subcategories, most of which are capital goods. President
Garcia announced the measure as part of his government's
"investment shock" program, saying the tariff reductions
would: help 50,000 companies (mainly microindustry) purchase
needed machinery, increase production, improve tax
collection, generate employment, and immediately help
consumers through lower prices. These tariff reductions will
benefit U.S. companies, particularly those involved in the
agricultural, information technology and energy sectors. The
new tariff rates took effect January 1, bringing Peru's
average tariff down from 10.1 to 8.3 percent, and will cost
the GOP an estimated USD 259 million in tariff revenue. End
Summary.


2. (U) The full list of product subcategories whose tariffs
were reduced from either 4 percent or 12 percent to zero was
published in El Peruano (Peru's Federal Register) on December

28. The items include machinery, equipment and animals used
in the agricultural, medical, textile, construction, and
transportation industries, as well as information technology
items, gasoline originating outside the Andean Community,
some agricultural inputs (such as soy products) and
water-borne vessels (including yachts, sailboats and canoes).


3. (U) This unilateral tariff reduction was suggested by
Minister of Economy and Finance Luis Carranza. Carranza
explained that the measure would help fuel private industry
and bring private investment to 25 percent of GDP, which is
necessary to maintain the GOP's target annual GDP growth rate
of 6-7 percent. As for the USD 259 million cost, Carranza
said this would be offset by increased production and would
have minimal budgetary impact as the 2007 budget foresaw
reduced tariff revenue due to the expected entry into force
of the U.S.-Peru Trade Promotion Agreement (PTPA) in January

2007. (Note: the PTPA has not yet been approved by the U.S.
Congress and implementation is months away at best. End
Note.)


4. (U) Not surprisingly, the principal opposition to these
tariff reductions has come from Peruvian producers of the
affected items. As Minister of Production Rafael Rey noted,
"the reduction is across the board, with no differentiation
for items produced locally, but eliminating protection
increases competition, leads to better products and benefits
Peruvians."


5. (U) COMMENT: Peru's excellent macroeconomic situation
makes this tariff reduction relatively easy to swallow. In
addition to five years of greater than five percent annual
GDP growth, Peru had a 1.6 percent budget surplus and less
than two percent inflation in 2006. This tariff cut and
resulting reduction in production costs are also an effort by
the GOP to slow the growth of foreign reserves (currently
about USD 17 billion) and decrease upward pressure on the
Peruvian currency, which is currently at its highest value in
eight years. These tariff reductions will benefit U.S.
investors in Peru and U.S. companies exporting to Peru,
particularly those involved in the agricultural, information
technology and energy sectors. End Comment.
POWERS