China And Peru Sign Free Trade Agreement

FTA will help diversify Peru's export economy and will give China access to important minerals.

The Free Trade Agreement (FTA) between Peru and China was signed on April 28. For China, Peru is an important source of minerals, primarily copper. For Peru, increasing trade with China is a key way of diversifying the export economy toward an area of dynamic demand.

Liberalization agenda.
Since he came to office in July 2006, President Alan Garcia's trade policy has been to aggressively pursue a series of trade deals with key commercial partners:

--The most important was the signing of the Peru-U.S. FTA, a project that Garcia's predecessor, Alejandro Toledo, initiated. Peru also entered into an FTA with Canada.

--Peru is seeking to negotiate an FTA with the E.U., along with Colombia and Ecuador. This has caused difficulties with Bolivia, which takes a more guarded stance toward trade liberalization. The E.U. has agreed to negotiate with individual countries, rather than with the Andean Community as a bloc.

--As well as the China FTA, Peru signed a Trade and Investment Facilitation Accord with Hong Kong at the end of last year.

--Negotiations have been under way with Singapore and South Korea. Talks on an FTA with Japan will begin at the end of May.

The Garcia administration is convinced that bilateral trade liberalization agreements provide the means not just to increase Peru's export capacity and diversify its foreign markets, but also bring in foreign investment. Garcia has made attracting foreign direct investment (FDI) the cornerstone of his government's long-term economic strategy, notwithstanding opposition from a number of sometimes-vocal groups.

He has promised to maximize exploitation of Peru's rich mining, hydrocarbon, forestry and fishing resources on the basis of agreements that attract inward investment. Substantial FDI inflows have helped increase Peru's growth rate to one of the highest in Latin America in recent years.

Aims and objectives.
Both countries have an interest in increasing business contacts:

--China. China is interested in securing permanent access to sources of raw materials that are essential to its economic prowess. Peru is strategically important because it is potentially one of the world's major suppliers of base metals, particularly copper. Unlike some of its neighbors, it has a government that is committed strongly to attracting investment, offering attractive contractual conditions. However, it is also a country where long-term political uncertainties persist, not least with respect to treatment of foreign mining companies.

--Peru. The Peruvian authorities are anxious to take full advantage of trading with a country whose economy continues to expand. Although growth this year will fall far short of the 2008 out-turn, continuing Chinese demand for Peruvian minerals and other extractive resources will provide much-needed dynamism in local markets when other international markets are depressed. The FTA goes some way toward protecting sectors vulnerable to Chinese competition--notably textiles.

China will provide Peru with an expanding market for its main exports for the foreseeable future, helping it cope with the global economic downturn. In seeking to guarantee sources of supply, China is likely to expand further investments in Peru, both in extractive industries and infrastructure.