The recent Senate Finance Committee hearing on the U.S.-Peru Trade Promotion Agreement is an encouraging sign that Congress is moving forward on completed agreements that have not been voted on. The agreement was signed in April of 2006 and is covered by the May 2007 agreement on labor and environmental issues in free trade agreements between the Administration and Democratic leaders. Committee Chairman Baucus (D-MT) noted in his opening remarks, “For the first time in any trade agreement, the U.S.-Peru Trade Promotion Agreement includes meaningful, and fully enforceable, labor and environmental protections.”

Peru is not a big market with a population of 29 million people increasing about 1.3 percent per year in an area slightly smaller than Alaska. It is surrounded by five countries – Bolivia, Brazil, Chile, Columbia and Ecuador. The U.S. has a free trade agreement with Chile and has negotiated one with Columbia. The U.S. is on good terms with Brazil, but has strained relations on economic policies with Bolivia and Ecuador. Peru is part of a larger U.S. effort to strengthen economic relationships with countries in South America.

Peru’s GDP was $77 billion in 2006 on an official exchange rate basis and $187 billion on purchasing power parity (PPP) basis, with yearly real growth averaging over 4 percent for 2002-06. Per capita GDP was $6,600 (PPP), about half of Chile’s $12,700, behind Brazil at $8,800 and Columbia at $8,600 and higher than Ecuador at $4,500 and Bolivia’s $3,100. Agriculture has 9 percent of the labor force, industry 18 percent and services 73 percent. Despite a 7 percent unemployment rate around Lima, the capital with one-third of the population and 60 percent of the national income, there is widespread underemployment, with half the population living below the poverty line. Reliance on minerals and metal mining subjects the economy to swings in metals prices. The U.S. accounts for about 25 percent of Peruvian exports and 20 percent of imports. The International Trade Commission estimated that total U.S. exports to Peru would increase by 25 percent with the agreement and imports by 8 percent.

Current agricultural trade policy is asymmetrical. Over 99 percent of Peru’s agricultural exports to the U.S., $602 million in calendar year 2006, entered duty free under the Andean Trade Preference Act of 1991 and the Andean Trade Preference and Drug Eradication Act of 2002. These preferences are made permanent in the new agreement. Only 2 percent of the $209 million of U.S. agricultural exports to Peru entered duty free. Consumer-oriented products accounted for 67 percent of the imports to the U.S., $403 million, with $338 million of that fruits and vegetables. The major bulk commodity exports were unroasted coffee at $120 million and sugar at $39 million.
Bulk commodity exports from the U.S. to Peru totaled $112 million in 2006, 54 percent of total exports. Coarse grains and cotton were the leaders at $44 million and $43 million, respectively. Wheat exports were $151 million in 2004 and declined to $19 million for 2006 because of strong price competition from Canada and Argentina. Intermediate agricultural exports of $57 million, 27 percent of the total, were led by soybean oil at $15 million and other vegetable oils at $10 million. Consumer-oriented products accounted for the remaining 19 percent of exports, $40 million. Dairy product sales were $12 million followed by snack foods at $9 million.

Under the agreement about 90 percent of current U.S. exports will be immediately tariff free. These include cotton, wheat, soybeans, soybean meal, crude soybean oil, high quality beef, apples, pears, peaches, cherries, almonds, and foods like frozen French fries, cookies and snack foods. Tariffs on pork will be phased out over five to ten years. Tariff rate quotes (TRQ) are created for corn, rice, dairy products and over 30 other products to replace variable tariffs (price bands) that can be as high as Peru’s WTO bound tariff of 68 percent. Other tariffs will be phased out over 2-17 year transition periods. TRQs will expand and over-quota tariffs decline over 10 years for beef variety meats, yellow corn and refined soybean oil; 12 years for standard quality beef; 15 years for butter, yogurt and dairy products; and 17 years for rice, milk powder, cheese and chicken leg quarters.

Increased trade will be a two-way street with the U.S. accepting more imports for commodities now protected with TRQ. Processed dairy products will have expanding TRQ for 15 years and cheese and condensed/evaporated milk for 17 years. The current sugar TRQ of 43,175 metric tons (MT) will be increased by 9,000 MT in the first year and then by 180 MT per year in perpetuity. The extra TRQ can only be used in years when Peru has a sugar trade surplus. Organic sugar has a separate annual 2,000 MT TRQ. The 26-percent tariff on beef imports to the U.S. will be phased out over 15 years.

Peru would continue to recognize the equivalence of the U.S. meat inspection system and fully open markets to U.S. poultry and products from all states. Consistent with international standards, Peru will permit imports of all U.S. beef and beef products, except high risk materials. An SPS Committee will be established to expedite resolution of technical issues.

Except for 99 percent of Peru’s agricultural exports already entering the U.S. tariff free, there is nothing special about the U.S.-Peru Trade Promotion Agreement. Like many developing countries, Peru created high tariffs on agricultural products at a time when trade policy was mostly focused on protecting domestic production. With a growing middle class, lower transportation costs and comparative advantages in production in other countries, trade policy has to unwind the protectionist barriers of the past. Transition periods of up to 17 years are not good economics, but in the end, this agreement opens markets and that is good for producers and consumers in both countries.