Peru: Redefining Independence

On July 28th, the 189th anniversary of Peru’s independence from Spain, Peruvians both at home and abroad could not help but feel a heightened sense of pride over their country’s prosperity. Peru has been identified as possessing the fastest-growing Latin American economy in 2010 and has achieved a commendable reduction in poverty and inequality, with its income per capita Gini coefficient decreasing from 0.54 in 1997 to 0.49 in 2006. Despite the global economic meltdown and domestic social and political instability affecting the country, these improvements in poverty and inequality signal a promising future. However, as the country continues to implement neo-liberal policies that have contributed to a 9.8% GDP increase in 2008, Peru must continue to guarantee its independence against economic opportunism through effective use of existing bilateral free trade agreements. These agreements should be seen not so much as ends in themselves, but rather as tools for promoting economic prosperity and higher living standards.

The Free Trade Agreement (FTA) signed with the United States in April 2006 reaffirmed the economic progress of Peru by laying a groundwork for future neo-liberal expansion. It secured access to the largest world economy, which would increase and diversify exports and eliminate trade distortions caused by tariffs, import quotas, subsidies, and non-tariff barriers. Furthermore, free trade would even out market competitiveness through a process of gradually lifting barriers.

Now, Peru is intensifying its free trade strategy. After achieving this bilateral trade agreement with the US in 2006, Lima began to pursue a similar deal with China. On March 1st 2010, Peru became the second Latin America country, after Chile, to enter into a bilateral free trade agreement with China. Peru now has access to a potential market of 1.3 billion people, in addition to the 320 million from the US and the 500 million from the European Union. As President Garcia has emphasized, “esta abierta la cancha para hacer goles,” meaning that the field is now open for all Peruvian entrepreneurs to utilize their audacity and take advantage of these markets.

But for the millions of Peruvians opposed to Garcia’s free trade strategy, the battle for the freedom and independence that Peru once strove to achieve is not over, and must be maintained now more than ever. While free trade agreements are known for opening up many opportunities for economic growth and expansion, special attention must be paid to the small print to avoid counterproductive effects. Peru’s agreement with China, a nation that has garnered a well-known reputation of disregard for environmental regulations and labor rights, merits close monitoring, especially since Garcia has been equally indifferent in these areas of concern.

Some have high expectations for the Peru-China Free Trade Agreement (FTA). Peruvian exports to China are predicted to reach $15 billion in 2015 since the China-Peru Free Trade Agreement entered into force, according to the Peruvian Ambassador to China, Harold Forsyth. On the other hand, Peru must analyze whether the price of this newly acquired market isn’t more than bargained for. According to Peruvian economist Víctor Torres, the Peru-China FTA will hurt Peru’s garment, footwear and textile industries, among others. In addition, these sectors only receive partial protection from low prices in China, which has led to increased unemployment in these labor-intensive sectors. Torres also points out that small and medium enterprises (SMEs) will be the most vulnerable to losses, a difficult reality for industries such as footwear. This industry is mostly comprised of SMEs, with 98.5% defined as such.

Other possible problems with the Peru-China FTA include the uncertain presence of environmental standards and mechanisms for labor protection, as well as the ambiguous terminology used to define investor firms. While a foreign firm can be considered a Chinese investor firm so long as it is controlled by Chinese capital, this definition does not hold for its Peruvian counterpart. Lastly, while it is not possible to sue China before international courts without a prior internal administrative review process, this safeguard does not apply to Peru. The absence of this mechanism for compensation and complaint underlines dangerous bargaining asymmetries that could prove highly detrimental to Peru.

In an FTA, there is a myriad of highly sensible areas that require space for prototypical maneuver. These include the agreement’s impact on agriculture (due to FTA co-existence with pre-existing subsidies and domestic agricultural aid), the protection of traditional and native knowledge of folk medicine, and access to unique genetic resources. In addition, rights to intellectual property, norms and standards for the protection of labor laws and of the environment, and asymmetries in negotiation are also among factors requiring attention. In the case of the Peru-USA FTA, these areas of concern were addressed by establishing a commission for the “Strengthening of Commercial Capacities” whose objective was to compensate those industries that have difficulties adapting to an increasingly open market. This commission has the power to implement necessary mechanisms of cooperation in order to support the compensation process and theoretically yields a considerable amount of power and authority to the Peruvian government. Through this body, Peru is able to broker compromises and demand compensation. However, the fact that these built-in feedback and compensation mechanisms are in place is not sufficient to defend Peruvian interests. It is the responsibility of the Peruvian government to actively demand compensation from this commission.

Peru cannot shy away from future growth, but it must also be wary of FTAs that lack adequate compensation and complaint mechanisms. It is through such vehicles that Peru will be able to defend itself from threats to its autonomy and sustainability, such as biopiracy, infringement of environmental protection regulations, and of labor laws.

After finalizing the agreement with China, Peru has continued FTA talks with Japan, South Korea, Central America, and the Dominican Republic and has explored the Trans-Pacific Strategic Economic Partnership Agreement, which includes Chile, New Zealand, Singapore, and others. In this context of propelling the economy toward openness in order to maintain high GDP growth levels, Peru must continue to defend its economic independence by astutely demanding and making use of complaint and compensation mechanisms for the aforementioned reasons. Ultimately, ensuring sustainability translates into safeguarding Peruvian access to markets and natural resources, without which it might not fully remain fully independent in a world where natural resources, priceless knowledge, and limited commodities are essential to sustained economic growth.