Executive Summary

The Peru-China Free Trade Agreement (FTA), China’s first FTA with a Latin American nation, has strengthened its foothold in the region by reducing trade barriers and fostering bilateral economic cooperation. It eliminated tariffs on over 90% of goods, boosted two-way trade in services, and encouraged reciprocal investments. The agreement catalyzed a remarkable growth in bilateral trade, with Peru leveraging increased exports of minerals and non-traditional goods and China ensuring access to critical resources and strategic investments in Peru. However, socio-environmental challenges and Peru’s limited technological absorption capacity underline areas requiring strategic attention.

Background

The Peru-China FTA, signed on 28th April 2009 and implemented from 1st March 2010, symbolized a strategic economic partnership. The agreement encompassed:

1. Trade Liberalization: Over 90% of goods traded were subject to zero tariffs.
2. Services Commitments: Aligning with WTO standards, both nations expanded access to service industries.
3. Investment Protections: Adherence to national treatment, Most Favored Nation (MFN) principles, and fair treatment of investments.

Progress in optimizing the agreement has been ongoing, with five rounds of negotiations between 2019 and 2023 aimed at enhancing trade outcomes and addressing emerging issues.

Strategic Analysis

PEST Analysis of the Peru-China Free Trade Agreement

Political:

• Government Relations: The FTA reflects a shared commitment to economic integration and resisting protectionism.
• Leadership Volatility: Peru’s frequent changes in leadership (six presidents since 2010) have posed challenges to policy continuity.

Economic:

• Trade Growth: Bilateral trade has doubled, with Peru’s exports to China increasing by 325.9%.
• Export Diversification: Peru added over 700 new products, mainly in non-traditional sectors like chemicals and textiles.
• Chinese Investments: Over $15 billion has been invested by Chinese firms, primarily in Peru’s mining industry.

Social:

• Conflict Dynamics: Persistent social unrest, including 198 recorded social conflicts by 2021, complicates infrastructure projects, particularly those affecting indigenous populations.
• Public Sentiment: While 50% of Peruvians view China’s presence favorably, concerns about socio-economic and environmental impacts persist.

Technological:

• Tech Transfer: Both nations emphasize technology dissemination, aiding modernization.
• Capacity Constraints: Peru’s limited technological absorption hinders its ability to fully leverage Chinese investments, despite advancements like the Chancay Port project.

Strategic Assessment

Impact on Peru:

• Economic Gains: Boosted mineral exports and agro-food production. However, Peru’s hopes of significant export diversification to China remain unmet.
• Trade Imbalance: Imports from China have increased by 107%, potentially crowding out trade with other partners.
• Environmental Challenges: Mining projects have spurred environmental and social opposition, undermining long-term economic benefits.

Impact on China:

• Resource Access: China secures vital resources, particularly copper, through investments in Peru.
• Trade Margins: Gains remain marginal on a macroeconomic scale, with a 0.07% increase in total exports.

Future Outlook

• The upgraded FTA is expected to boost bilateral trade by 50%, further integrating the economies.
• Completion of the Chancay Port, a $3 billion infrastructure project, will enhance Peru’s role as a trade hub, benefiting both nations.

Recommendations

1. R&D Investments: Peru should prioritize research and development to leverage Chinese technological investments effectively.
2. Sustainable Protocols: The FTA must incorporate enforceable environmental and social safeguards to address local resistance and promote sustainable development.
3. Balanced Trade Strategy: Peru needs policies to diversify its exports and reduce reliance on mineral exports, ensuring a balanced economic relationship with China.