Outward bound: Foreign policy centres on increasing trade ties and economic integration

Though incoming President Ollanta Humala was initially feared by some within the business community, owing to his close ties to Former Venezuelan President Hugo Chávez, foreign policy under the current administration has been largely a continuation of established procedure. Indeed, while Humala has sought to focus on improving relations with neighbours within the Americas through trips to Brazil, Colombia and the US, he has also made visits to Peru’s major trading partners in Asia such as China, South Korea and Japan. With foreign visits focused on deepening ties with key trading partners and regional conflict within Latin America at one of its lowest ebbs in history, foreign policy in Peru is currently often directly tied to economic strategy.

A Conflicted History

Peru, which shares a border with Ecuador and Colombia to the north, Bolivia and Brazil to the east and Chile to the south, has found itself at odds with its neighbours at various times throughout its history – more often than not disagreements have stemmed from border disputes. Peru’s territorial dispute with Ecuador spanned centuries, with major confrontations in the 20th century occurring in 1941, 1981 and 1995 before a peace accord was signed in 1998. Peru also fought with Colombia over territory in the Amazon in the early 1930s, while Peru found itself at odds with Chile back in the 19th century.

Efforts to resolve the long-standing border dispute between Chile and Peru are continuing at the International Court of Justice in The Hague. The conflict has been fuelled by disagreement over the delineation of the maritime border, and at the time of writing the ruling of the court had not yet been released. The verdict could have a notable impact on the fishing industries of both nations. In the meantime, it appears that Peru’s relationship within South America, despite the current dispute with Chile, has stabilised and looks likely to continue improving as the region becomes further integrated along political, economic and social lines.

Regional Integration

South American integration has deep roots and today the closest the continent has come to unifying under the same roof is the Union of South American Nations (Unión de Naciones Suramericanas, UNASUR), a regional body modelled on the EU. From November 30, 2012 to August 29, 2013 Peru held the presidency of UNASUR.

While still in its infancy – UNASUR was established on May 23, 2008 with the signing of the UNASUR Constitutive Treaty, which went into effect in March 2011 – several ministerial councils have already been established to increase economic, political and social cooperation. Of the nine established councils, those focused on energy, infrastructure and economic integration could produce the most tangible short-term results, while those centred on health, education and social development will likely take much longer to realise significant gains. UNASUR will also assist in monitoring elections. Most recently it sent a mission to monitor the presidential elections in Ecuador in February 2013.

However, the main goal for UNASUR is to create a single market. For decades South American trade has been partitioned by the existence of two trade bodies – the Southern Common Market (Mercosur) and the Andean Community (Comunidad Andina, CAN), while a third union has emerged in the Pacific Alliance. Mercosur was created to allow for the free flow of goods, people and currency between Argentina, Brazil, Paraguay, Uruguay and Venezuela, while CAN is an agreement between Peru, Colombia, Ecuador and Bolivia.

Though the concept of the Pacific Alliance was born in 2008, it was not officially launched until 2012 as a trade bloc between Peru, Colombia, Chile and Mexico with an orientation towards Asia; Costa Rica and Panama are expected to join later in 2013. The bloc covers more than 210m people and accounts for around a third of Latin America’s GDP and half of South America’s foreign trade, with $556bn in exports and $551bn in imports in 2012. Indeed, it is seen by some as a counter-weight to the Mercosur, which has a clear orientation towards the Atlantic. In August 2013 the four nations of the Pacific Alliance reached a preliminary agreement for the tariff-free movement of 92% of all goods and services. The agreement was ratified in late September 2013, while the trade bloc expects to expand tariff liberalisation to 99% of goods by 2020.

UNASUR aims to bring all 12 South American countries under a single market starting with the elimination of tariffs on certain non-sensitive exports by 2014, with the end goal of totally eliminating tariffs by 2019. As a member of UNASUR, Peru in particular stands to benefit from the creation of a single regional market because of its wealth of mineral and energy resources and the fact that regional integration remains an important buffer against larger international crises, though its broader global integration could indeed have a far more significant impact.

Global Integration

Generally, Peru’s largest trading partners are outside the region, with China being its leading trading partner followed by Switzerland, the US, Canada and Japan. Chile, its sixth largest trading partner, is the only South American country that ranks in the top-10 importers of Peruvian goods. Peru already boasts free trade agreements (FTAs) with all five of its largest trading partners, the vital agreements being those with three of the largest markets in the world in the US, China and the EU. At the beginning of 2012, Peru had FTAs with more than 20 nations, while a further 30 FTAs were due to be opened up when trade agreements with the EU, Guatemala and Costa Rica were implemented in the summer of 2013. Though this was still pending at the time of writing. Meanwhile, FTA discussions are ongoing between Peru and Venezuela.

Roughly 80% of all exports are now destined for a country with which Peru has an FTA, with additional agreements implemented throughout 2013 expected to increase that figure. And although much of the growth in exports can be attributed to the extractive industries, trade accords such as the FTA signed with the EU will likely have a significant impact on agriculture and manufacturing industries.

Peru is also a member of the Asia-Pacific Economic Cooperation (APEC) and the World Trade Organisation, as well as partaking in trade negotiations with the Trans-Pacific Partnership, an alternative to APEC.

A Looming War

Despite the foreign policy focus on pursuing economic and trade integration, there are some local issues which affect external relations in a negative way. One main issue stems from the fact that Peru has recently taken over from Colombia as the world’s largest producer of cocaine (a title it held on several occasions in the 1980s and 1990s).

According to a study conducted by the UN Office of Drugs and Crime, cultivation of coca, the raw material used in cocaine production, grew in each of the past six years. While government efforts to push farmers to switch to alternative crops such as coffee and palm oil have yielded results in some areas, the increasing coca production is worrying for neighbouring countries such as Brazil, as well as the large US and European markets.