Regional agreement key to Peru trade strategy

The Pacific Alliance is an integration agreement created in 2011 between Chile, Colombia, Peru and Mexico, with several other countries expected to join the near future. The first formal proposal had been tabled by then-president, Alan García, who convened a meeting with the leaders of the three other countries on April 28, 2011. The meeting concluded with the Lima Declaration, calling for an alliance to advance free trade, described as the free movement of goods, services, resources and people. The declaration also spoke of its members having “a clear orientation towards Asia”, as all four countries are located on the Pacific rim.

Formal Agreement

The alliance was formally set up in June 2012 in Antofagasta, Chile and the member countries have organised a series of successive Pacific Alliance summits. At the seventh summit, in May 2013, Costa Rica was declared a candidate for full membership. Other potential candidates for membership in include Panama and Guatemala.

The four member countries share market-friendly policies; open, export-oriented economies; and a commitment to encouraging a strong private sector role in investment and development. They represent 37% of Latin American GDP, about 50% of the region’s trade and 45% of inward foreign direct investment. The population of the four countries is 237m people, one third of the regional total.

The Pacific Alliance’s initial focus has been on promoting free trade, but it has already developed some important differences from other regional blocks, such as Mercosur (consist of Argentina, Brazil, Paraguay, Uruguay and Venezuela). It does not, for example, favour a Customs union with a protectionist common external tariff, nor has it sought to set up a complex governance and committee structure modelled on the EU. There has also been a greater initial emphasis on capital integration, through the Mercado Integrado Latinoamericano (MILA), an agreement between the Colombian, Chilean and Peruvian stock exchanges, which was later joined by the Mexican bourse in 2014.

Some analysts have highlighted the policy differences between Mercosur and the Pacific Alliance, noting that on both growth and inflation Pacific Alliance countries have performed much better in recent years than their Mercosur peers. While some consider them as two rival blocks, the Pacific Alliance leaders have consistently refused to present their initiative as either politically or ideologically adversarial, preferring to describe it as practical and pragmatic. Javier Paulinich, director-general for economic affairs at the Ministry of Foreign Affairs, told OBG, “We are like four friends who like going to the same restaurant, but we don’t really discuss politics.”

During the course of 2014 the four member countries agreed to remove all tariffs on 92% of the goods traded within the bloc, with tariffs on the remaining 8% due to be reduced and eventually eliminated over a seven-year period. This liberalisation of the vast majority of intra-alliance trade came into effect in July 2015. Although trade within the alliance is relatively small compared to the group’s extra-regional trade flows, the removal of import tariffs is expected to have a positive effect. It should help build cross-border production value chains within the Pacific Alliance countries.

Paracas Summit Boosts Integration

At the 10th summit meeting of the Pacific Alliance held in Paracas, Peru, in July 2015, the presidents agreed to accelerate their integration efforts in capital markets, infrastructure, trade and pharmaceuticals. A key initiative launched at Paracas is a $2bn fund, managed by the Interamerican Development Bank (IDB), to support small and medium-sized enterprises, public-private partnerships in infrastructure investment and innovation projects. The four governments will raise the necessary financing from multilateral lenders and private investment funds. Luis Alberto Moreno, president of the IDB said the initiative, which he described as offering an additional private sector funding window, would begin operations in 2016. The infrastructure component of the fund is designed to finance transport, telecoms, energy and water projects.

Peru has expressed interest in interconnecting member country power grids. More widely the aim is to begin to reduce the massive infrastructure investment deficit across Latin America as a whole. “The interesting thing about the Pacific Alliance is the size of its ambition,” Moreno said, adding that “the tailwinds we had in the region have become headwinds”.

The IDB president added that despite this less-than-supportive international environment, the alliance economies would grow by around 3% in 2015, better than the Latin American average, which was then being predicted at around 1%. Regional growth predictions were further reduced to 0.3% later in the year, but the projections for the Pacific Alliance countries remained in positive territory.

Interconnected

In other measures agreed at the July 2015 summit, the four countries said they would deepen the MILA stock exchange agreement to allow investors across the four countries to take part in initial public offerings launched in any individual exchange. In addition to this initiative, a finance ministers’ council was set up to study ways of easing capital movements across the four markets. Officials are also looking at the possibility of greater integration between private pension funds. Luis Valdivieso Montano, president of Association of Private Pension Fund Managers, the Peruvian pension fund association, told OBG, “There is a move to try and make pensions portable between the four Pacific Alliance countries, but there are a number of important tax and foreign currency issues that we will have to resolve to make that possible.”

It has also been noted that at present the private pension funds – which make significant overseas investments – invest only about 1% of their total assets in fellow Pacific Alliance countries. By reducing red tape and better sharing information on capital market opportunities within their respective countries, it has been suggested that this percentage could be increased to beneficial effect.

Peru Benefits

The Pacific Alliance clearly brings a number of important benefits to Peru. Perhaps top of the list is that it helps consolidate and expand Peru’s two-decades-plus commitment to free trade and an open economy. The process began in 1991: important milestones along the way include the negotiation of a free trade agreement (FTA) with the United States in 2008-09 and an FTA with China three years later. Paulinich, told OBG, “The average Peruvian import tariff is now 1.3% ad valorem. Around 95% of our total trade is carried out under FTAs.”

A general advantage of the alliance is that it provides a key forum for mutual support. As the four countries share a common approach to the development of their economies, the alliance gives them a powerful way of sharing advice, skills, and insights on how to tackle shared or similar problems. One example is the infrastructure investment deficit, perhaps experienced most acutely by three out of the alliance’s four members; Peru, Colombia and Mexico. The basic proposition is that acting together the four countries may be able to attract greater foreign investment inflows into infrastructure projects than if they were to act separately.

Another benefit for Peru is that the Pacific Alliance has proven to be an efficient promotional and marketing tool. Within the framework of the Alliance it has been possible to significantly raise Peru’s profile with investors and global financial markets. On September 28, 2015, for example, the finance and foreign ministers of the four countries rang the opening bell of the New York Stock Exchange as part of an international road show to drum up investor interest. As part of the same tour there was also a related “Pacific Alliance Day” on the London Stock Exchange.