US embassy cable - 05LIMA1728

UNCLAS SECTION 01 OF 03 LIMA 001728 
 
SIPDIS 
 
SENSITIVE 
 
FOR A/USTR REGINA VARGO FROM AMBASSADOR STRUBLE 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, PGOV, PE 
SUBJECT: ANDEAN FTA: LIMA ROUND SCENESETTER FOR A/USTR VARGO 
 
 
1. (SBU) We very much look forward to your April 17-22 visit 
to Lima for the ninth round of the U.S.-Andean Free Trade 
Agreement (FTA) negotiations.  Peruvian public support for 
the FTA, at 68 percent, continues to be the highest in the 
region and the government remains committed to concluding 
negotiations by July 2005.  In addition to your busy 
negotiations schedule, we have arranged opportunities for you 
to engage in key outreach activities through a site visit to 
a local apparel exporter, a meeting with Members of Peru's 
Congress, breakfast at the Ambassador's residence with 
English speaking media leaders, and a lunch with Peruvian 
Ministers (also at the residence).  We have also requested 
meetings with President Alejandro Toledo and Trade Minster 
Ferrero.  The persistence of several commercial disputes 
between U.S. companies and the Peruvian Government remains a 
top concern.  You will have ample opportunities to push for 
progress during your bilateral meetings with the Peruvians. 
 
Political Scene 
--------------- 
 
2. (SBU) President Alejandro Toledo is approaching the last 
year of his term as a lame duck, with his popularity mired in 
the low-teens.  Peru's strong economic growth is beginning to 
trickle down to the poorest classes, but President is getting 
little credit for this from the population.  The GOP's 
strength is visibly declining, as the governing coalition 
composed of his Peru Posible party and the Independent 
Moralizing Front is fraying and fringe Peru Posible 
legislators are quitting the party to further their 
reelection prospects.   A minor Cabinet reshuffle in February 
did not generate enthusiasm, and major changes are expected 
by July, including the possible replacement of Prime Minister 
Carlos Ferrero, who survived two censure motions over the 
past six months.  Rural unrest continues to bedevil the 
regime, including violent anti-mining protests, 
demonstrations by small agricultural producers seeking 
subsidies, and cocalero blockades.  Toledo is further 
distracted by ongoing congressional and judicial 
investigations into allegations that his party engaged in the 
massive falsification of signatures in order to register for 
the 2000 elections. 
 
3. (SBU) Despite its weaknesses and challenges, the Toledo 
Government is not facing a serious threat to its survival. 
With presidential and congressional elections a year away, 
the major opposition parties are interested in maintaining 
institutional stability to ensure a free and fair election 
and a smooth transition to the next administration, which 
they hope to lead.  Consequently, they no longer show an 
interest in terminating Toledo's presidency, and, in fact, 
have tempered investigation into alleged party registration 
involving the President and his party.  Instead, political 
leaders and their parties are focused on reaching out to 
economic and social sectors for support, while warily 
exploring alliance options with each other. 
 
4. (SBU) President Toledo has two goals for the remainder of 
his term.  First, he wants to cement his legacy by finalizing 
international agreements and projects that will serve as the 
foundation for Peru's future development, such as the Free 
Trade Agreement with the U.S., the southern highway 
connection to Brazil, and the Camisea liquefied natural gas 
plant.  The opposition political parties, who stand to 
benefit from these accomplishments if they win office in 
2006, support these objectives in principle though they may 
differ on certain details.  Second, he wants to ensure that 
Peru Posible retains a sizable block of legislators in the 
next Congress to maintain his political influence, block 
retaliation against his government, and provide a base for a 
possible 2011 candidacy.  The GOP's chief initiative this 
year, a conditional cash transfer program that would 
distribute $30/month to Peru's poorest families, is widely 
criticized as an election-year popularity ploy aimed at 
boosting Peru Posible's chances, and opposition parties are 
considering ways in which to block that proposal. 
 
Strong Macroeconomics, but Challenges Remain 
-------------------------------------------- 
 
6.  (U) Peru's economy is one of the most dynamic in Latin 
America.  2004 GDP reached $67 billion, an increase of 5.1 
percent.  Growth was driven by exports, construction, mining, 
investment, and domestic demand.  Peruvian exports, propelled 
by high mineral prices, ATPDEA benefits and the completion of 
the Camisea gas project, swelled to over $12 billion in 2004, 
up 39 percent in dollar terms from 2003.  U.S. exports to 
Peru increased 27 percent during the same period, to reach 
$1.8 billion.  The resulting trade surplus of $2.6 billion 
drove up reserves to a record $12.6 billion, and caused the 
currency to appreciate 5.5 percent against the dollar by the 
end of the year. 
 
7.  (U) Peru's major trading partners are the U.S., EU, 
China, Chile and Japan.  In 2004, 29 percent of exports went 
to the U.S. and 20 percent of imports came from the United 
States.  Leading exports include gold, copper, fishmeal, 
petroleum, zinc, textiles, apparel, asparagus and coffee. 
Imports include machinery, vehicles, processed food, 
petroleum and steel. The registered stock of foreign direct 
investment (FDI) is $12.9 billion, with the U.S., Spain and 
Britain the leading investors.  FDI is concentrated in 
mining, electricity, telecom and finance. 
8.  (U) Despite Peru's macroeconomic success, major 
challenges remain.  The GOP must reduce poverty of 52 percent 
(under $58/month) and extreme poverty of 24 percent (under 
$32/month).  Wealth and economic activity are overly 
concentrated in Lima and other major cities.  Unemployment 
and underemployment levels total 56 percent nationwide and 
over 60 percent of the economy is informal.  Growth is barely 
strong enough to generate employment faster than new entrants 
come into the labor force.  The government lacks revenues for 
adequate social investment.  Boosting long-term growth and 
reducing poverty will require strengthening the judiciary and 
other institutions, reducing corruption and completing other 
reforms to improve the investment climate. 
 
Positive Local View on the FTA 
------------------------------ 
 
9. (SBU) You will find during your outreach activities that 
most Peruvians, including Congressmen, have a favorable view 
of an FTA with the United States; this perspective is 
reflected in editorial coverage by the print and media 
broadcast.  Questions as to the ability of Peruvian 
agriculture to compete effectively continue to be voiced, 
however, by some commentators and industry representatives, 
while press concerns expressed early in the negotiations 
regarding the local impact of proposed IPR protections have 
abated.  Minister Ferrero's comments after the Washington 
mini-round that the time had arrived to play the "coca" card 
did resonate with some editorialists, though little has been 
said or written on the subject in the last few weeks. 
 
10. (SBU) A January 2005 study of the general population 
commissioned by USAID found that 68 percent of those 
interviewed felt that Peru would benefit from the FTA. 
Increased employment and economic stability were the mostly 
commonly cited benefits.  However, lack of information and 
disinformation is common.  Nearly 52 percent claim that they 
are not informed at all regarding the FTA negotiations.  In 
addition, 55 percent felt that the U.S. would benefit more 
from an FTA than would Peru;  31 percent aid the latter would 
be favored.  The study also showed that 84 percent could not 
name members of the Peruvian negotiating team.  Only 23 
percent of those polled indicated that they have confidence 
in the Peruvian delegation, with 44 percent lacking 
confidence.  During your visit, you should take the 
opportunity to publicly praise the professionalism of the 
Peruvian FTA team. 
 
Outreach Opportunities 
---------------------- 
 
11.  (SBU) Your outreach activities begin with a visit to a 
textile and apparel producer on Monday, April 18.  You will 
be taken on a tour of the factory, accompanied by Trade 
Minister Alfredo Ferrero and Agricultural Minister Manuel 
Manrique.  The press will observe and you should expect to 
take some questions with the Trade Minister. 
 
12.  (SBU) On Tuesday, April 19, you will be attending a 
breakfast at the Ambassador's residence with English-speaking 
media directors.  This meeting will be helpful to put into 
perspective controversial topics such as agriculture and IPR 
and to reiterate how Peru has benefited from ATPA and ATPDEA. 
 
13.  (SBU) Later that day, you will be participating in an 
AmCham lunch at the Marriott Hotel, along with other chief 
negotiators: Hernando Jose Gomez, Christian Espinoza 
Canizales and Pablo de la Flor. 
 
14. (SBU) In the evening of April 19, you will hold a private 
meeting with members of the Peruvian Congress at the Sheraton 
Hotel.  No press will be allowed inside the meeting, but you 
might be asked questions by the media upon your departure. 
We expect the questions and comments to focus on agriculture, 
IPR, and used clothing. 
 
15.  (SBU) On April 20, you will be having lunch at the 
Ambassador's residence with several key Peruvian Ministers, 
including the Ministers of Trade, Finance, Agriculture, 
Labor, Health, and Production.  You will have an opportunity 
to discuss openly Peru's expectations for the FTA and the 
realities behind a U.S. Congressional approval of said 
agreement.  This is also an important opportunity to 
underline the need for Peru to develop now a political 
strategy to sell the FTA.  In that connection, it would be 
useful to observe that public infighting about FTA positions 
by cabinet members damages the GOP's own position with its 
public. 
 
16. (SBU) We have requested a meeting for you with President 
Alejandro Toledo, as well as a separate meeting with Trade 
Minister Alfredo Ferrero.  We are awaiting confirmation. 
 
ADVANCING THE TRADE AGENDA 
-------------------------- 
 
17. (SBU) Your presence and outreach activities should 
bolster further understanding of the U.S.-Andean FTA and the 
remaining processes.  The meeting with key ministers will be 
instrumental in establishing realistic expectations among the 
new cabinet ministers, as well as in explaining how we reach 
closure on the difficult issues, such as agriculture and IPR. 
 We expect the session with President Toledo should help 
focus him on GOP plans to move the trade deal through his 
Congress as well as reiterate the need to resolve the pending 
commercial disputes. 
 
 
STRUBLE