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Peru seeks trade expansion into U.S., Mercosur markets
Journal of Commerce / October 13, 1998

By Larry Luxner

LIMA, Peru -- In strictly dollar terms, the United States is well behind Spain when it comes to the amount of money invested by foreigners in Peru during the last seven years -- largely a consequence of Telefónica de España's huge investments in the Peruvian telecom sector.

According to government statistics, Spain accounts for $2.39 billion, or 32.6%, of the total, followed by the United States, with $1.51 billion (20.6%) and Great Britain, with $1.01 billion (13.8%).

However, during the past two years, the U.S. has been responsible for 40% of all new foreign investment, and 75% of all foreign capital invested in the Lima Stock Exchange. Equally important, Peru's exports to the United States jumped 7% over the first five months of 1998, and today, the U.S. receives 29% (or $600 million) of the country's total exports, with textiles an area of particularly impressive and sustained growth.

"It is also worth noting that while Peru's exports to the United States were increasing, its exports to the rest of the world were falling by a dramatic 27%," said John Youle, president of the American Chamber of Commerce in Peru. He noted that the United States is also the most important source of Peru's imports, increasing 2.7% in the first five months of 1998, while holding relatively steady at 26% (or $930 million) of the total.

That has important implications for Peru's efforts to integrate its economy with those of the other four member nations of the Andean Community -- Bolivia, Colombia, Ecuador and Venezuela -- not to mention the four founding members of Mercosur -- Argentina, Brazil, Paraguay and Uruguay.

"I think Peru offers good, though not ideal, conditions for economic stability," said President Alberto Fujimori during an interview in Lima. "There's plenty of guarantees for remittances of capital and other incentives. And because Peru is integrating into the Andean free trade zone and will soon integrate into Mercosur, we're creating better conditions for investment."

Adds Gustavo Caillaux, Peru's minister of industry and commerce: "Of all South America, Peru is one of the most open economies in all of South America, along with Chile. In services such as banking, Peru is the most open. I think in some ways the U.S. is more protectionist than we are."

Mr. Caillaux told The Journal of Commerce that despite close political ties between Washington and Lima, the United States "is not so pro-free trade as they say. Tariffs on textiles, for example, are 25%. Some products like oranges must fulfill very strict sanitation norms. We would like to have a more open market in the United States."

Peru's most immediate problem is economic difficulty sparked by El Niño and fallout from Asia's financial crisis. During the first seven months of 1998, Peruvian exports came to $2.984 billion -- a 26.2% drop from the $4.044 billion recorded in the year-ago period. Particularly affected by El Niño was the fisheries sector, which saw fishmeal exports shrivel 79% to only $167 million. Mining exports, meanwhile, fell 14.8% to $1.793 billion, with the "Asian flu" contributing to the fall in prices of copper, iron, lead and tin.

Peru's apparel and textile sector, meanwhile, has lost up to 30% of its workforce as a consequence of Asia's financial meltdown, which has suddenly slashed the cost of garments from Indonesia, South Korea, Taiwan, Pakistan and Panama (where many of the garments enter Latin America). Two associations, the Sociedad Nacional de Indústrias (SNI) and the Asociación de Exportadores (ADEX), are demanding the immediate application of tariffs and other protectionist measures to fight the importation of Asian garments flooding the Peruvian market.

David Lemor, president of the SNI's textile committee, says apparel imports from the Far East rose 54.6% during the first quarter of 1998 compared to the same period in 1997.

Non-traditional exports, however, rose 2.3% during the first seven months of 1998, while Peru's trade deficit hit $2.11 billion -- up 179% from 1997.

"Our policy is free commerce," said Mr. Caillaux, noting that Lima -- headquarters of the Andean Community -- has resolved the disputes that forced Peru to withdraw from the trade pact briefly last year. "We think our market is too small, so necessarily we must depend on exports to be competitive. We are in the middle of negotiations trying to create a bigger free trade area consisting of Mercosur and the Andean Community. We are not going to be an associate member of Mercosur. Instead, it'll be like a joint venture between the two trading blocs."

Ricardo Marquez Flores, Peru's vice-president, says the government is actively pursuing closer trade ties with the other four members of the Andean Community.

"We are trying to complement each other, because all of a sudden we realize there's a big industry in textiles and agribusiness," said Mr. Marquez, who also heads Prompex, an export promotion agency. "In Peru, we never considered the Latin American market, but now we realize this is a big market. Before year's end, we should be signing a pact with Mercosur which would take effect in 1999."

Meanwhile, U.S. and other investors here are cautiously optimistic.

"Peru is not viewed as favorably as Chile, but is more favorably viewed than Bolivia, Ecuador or Colombia," said Kevin Tynes, vice-president of Parsons Latin America, which is designing a $140 million water and wastewater treatment system for southern Lima. "Investors are happy with Fujimori."

Yet David C. Griffith, general manager of the 151-room Hotel Las Américas in Lima's upscale Miraflores neighborhood, says "foreigners don't want to invest heavily in a country where they can't guarantee their investment. In Argentina and Chile, there's a sense of continuity which is not based on a person who's running the country at the moment. Right now, there's a wait-and-see attitude."

Having President Fujimori in power, says Mr. Griffith, "gives businessmen a sense of stability, but the question is what'll happen after 2000. "I believe there will be sort of a lull until the election theme is defined. Once that's taken care of, investors will have a clearer view. Obviously, anybody who doesn't know the market will be nervous, but the economy will grow after this period is passed, and this will probably happen within the next six months."

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