Eastward bound: Promising economic integration with Asia continues

The world’s largest and most populous continent, Asia is home to more than half of the global population. It also boasts some of the world’s fastest-growing economies with a significant demand for natural resources. The relative geographic proximity and rich natural resources of Peru provide a straightforward explanation for the ever-increasing trade between the two continents. The US and Europe’s sluggish recoveries from the global financial crisis have served only to expedite the process. In Peru’s case, China’s thirst for natural resources has played a large role in the Asian giant’s ascent to become Peru’s largest trading partner, yet ties are much deeper than first meets the eye.

Working Together

Apart from trade, private sector companies from Japan and South Korea have been keen to assist in closing Peru’s infrastructure gap. But activity is not just limited to Asia’s larger economies. Vietnam’s Viettel is the fourth-largest telecoms operator in the country after winning a tender in 2012. Viettel, a distinctive telecom operator wholly owned and operated by Vietnam’s Ministry of Defence, opened its telecoms network after investing $324m in establishing its infrastructure base.

In November 2013 Viettel revealed that it had assembled 70% of the network and expected to complete the remaining 30%, which is concentrated mainly in the traditional districts of Lima, by the end of the year. Hoang Quoc Quyen, general manager of Viettel Peru, said it aims to launch commercial services in early 2014, starting with a particular area and eventually expanding nationwide with offerings for all existing market niches. Meanwhile, the Philippine’s Energy Development Corporation (EDC) is looking to bring its expertise in geothermal energy to concessions in the southern Andes. While investment is limited as it explores the viability of concessions, EDC is the world’s largest integrated geothermal producer, and the Ministry of Energy and Mines is hoping to attract around $3.1bn worth of investment in geothermal projects over the next 25 years to exploit about 3000 MW of potential capacity.

Regional Integration

Peru’s growing relationship with Asia is symptomatic of a larger regional trend as Latin America and Asia continue to develop ties as evidenced by the presence of bilateral trade and economic organisations formed between the two continents. Though still convoluted, due to the presence of two large trade blocs, such links should ultimately bear fruit for both sides as mutually advantageous opportunities continue to arise. Peru has been a part of the 21-member Asia Pacific Economic Cooperation (APEC) group since 1998, while it is also part of ongoing trade negotiations with the Trans-Pacific Partnership (TPP), an expanded version of the already-in-force four-nation free trade agreement (FTA) between Brunei Darussalam, Chile, New Zealand and Singapore dubbed the Trans-Pacific Strategic Economic Partnership Agreement. Seven nations, including the US and Mexico, have been involved in intermittent trade negotiations for the TPP since 2008. The larger Asian economies of China, India, Japan and South Korea are notably absent from negotiations, though Japan and South Korea have shown interest. The older APEC is much broader and includes large economies such as China, Australia, Russia and Japan. However, its size makes establishing an APEC-wide free trade zone, known as the Free Trade Area of the Asia-Pacific, an arduous process as overlapping agreements complicate matters.

Open Markets

While China has received a great deal of attention as Peru’s largest trading partner, Japan and South Korea’s status as its fifth- and ninth-largest trading partners, respectively, can easily go unnoticed. Additionally, trade with smaller partners such as India, Thailand and Indonesia continues to grow rapidly. Peru also now boasts FTAs with five Asian countries. The China-Peru FTA was signed in April 2009 and entered into force in March 2011. The Peru-Japan FTA, signed in May 2011, went into force in March 2012. Magali Silva, the minister for foreign trade and tourism, announced in September 2013 that FTA negotiations are also under way with India, Russia, Israel and Turkey, among others.

Investment

The mining sector has attracted the majority of investment from Asia, in large part due to demand from China. Several Chinese companies are already involved in the sector. Chinalco Perú is in the process of constructing the $3.5bn Toromocho copper mine in Junín, while Shougang Iron Peru is investing $1.5bn to expand operations at its iron mine in Marcona. Zijin Mining Group is spending a further $1.5bn on its copper project in Rio Blanco, though protests halted progress in 2012. Minmetals is expected to spend $2.5bn on its El Galeno copper project in Cajamarca. These four projects alone will attract $7.4bn worth of investment over the next five years.

Branching Out

Outside the mining industry, Peru has hopes of attracting investment, knowledge and expertise from South Korea and Japan as a raft of infrastructure projects related to transportation, energy and water utilities are likely to be auctioned off in the near future. South Korea and Peru further deepened relations after signing a strategic partnership pact in May 2012 which included a $208m deal that will see South Korea provide 20 military aircraft for the Peruvian Air Force, four of which will be shipped from South Korea, with the remaining 16 to be built in Peru. Park Hee-kwon, the country’s ambassador to Peru, told local press in November 2012 that South Korea’s $3.5bn current and planned investment portfolio, which is focused on hydroelectric power and water treatment systems, in Peru is its largest in Latin America. Meanwhile, Peru’s ambassador to Japan has suggested planned indirect investment from Japan currently exceeds $5m, though direct investment is limited to $750m – nearly half of which stems from the $300m investment by Mitsui Mining in Brazilian firm Vale’s Bayóvar phosphate plant in northern Peru.

Diversifying

Although the primary attraction will likely remain mineral wealth, the burgeoning economy is creating opportunities and diversifying exports is a necessary long-term objective for Peru. The soaring prices of gold, copper, silver and other precious metals over the past decade have been responsible for a great deal of economic growth and foreign investment in Peru, but it has left the country susceptible a collapse in commodity prices. Thus far, the majority of Chinese interest stems from significant mineral resources, although some of the country’s non-traditional exports stand to do well in the Asian marketplace. The agriculture and fishery industries in particular should help to diversify Peru’s export base as demand for products such as fishmeal, asparagus and citrus fruits continues to grow. Increasing trade and investment with Asian partners will continue to be a key aspect of long-term economic development in Peru. Currently, five of Peru’s top 25 export destinations are Asian nations, while India looms large as number 26. Indeed, the potential FTA between the two countries is an exciting prospect. The overall significance of economic integration with Asia will likely be heightened in the short term as the US (formerly the biggest importer of Peruvian goods) and Europe continue to face slow recoveries after the 2008-09 global economic crisis.