US embassy cable - 05LIMA2600

UNCLAS SECTION 01 OF 05 LIMA 002600 
 
SIPDIS 
 
STATE FOR E, EB, WHA/AND, WHA/EPSC, INL 
USTR FOR B. HARMANN 
COMMERCE FOR 4331/IEP/WH/MCAMERON 
 
SENSITIVE - NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, SNAR, EFIN, EINV, SOCI, PGOV, PE 
SUBJECT:  VISIT OF STAFFDEL WALKER TO PERU 
 
1.  SUMMARY.  (SBU) During a busy two-day visit, Staffdel 
Walker raised pending U.S. company commercial disputes, 
trafficking of narcotics and persons, and the benefits of an 
U.S.-Andean Free Trade Agreement (FTA) in discussions with 
Members of Congress, high-ranking government officials, and 
private sector leaders.  Most of the Peruvians emphasized 
the importance of the FTA as a national development tool to 
reduce the country's high levels of poverty and to provide 
alternatives to illicit coca production.  The well-received 
visit proved useful in explaining the difficult 
Congressional vote on CAFTA and reiterating the message that 
a U.S.-Andean FTA with Peru will require that the GOP 
resolve its few remaining ATPDEA commercial disputes.  END 
SUMMARY. 
 
2. (SBU) House Western Hemisphere Subcommittee Staff 
Director Mark Walker and Professional Staff Member Dan Getz 
discussed the benefits of a U.S.-Andean FTA with a wide 
cross-section of Peruvians during a June 1-4 visit to Peru. 
Among public officials, they met with Congressmen from 
different political parties, Peru's Chief FTA negotiator, 
the ATPDEA Commercial Disputes Coordinator, officials in the 
Foreign, Finance, and Trade Ministries.  Their private 
sector meetings included discussions of the Central American 
and Andean FTAs' prospects with the AmCham Board of 
Directors, business association leaders, and top economic 
consultants.  Walker and Getz reviewed USAID trade capacity 
building efforts and a pilot project focused on a key 
Millennium Challenge Account criterion - business 
registrations.  On drug trafficking, the StaffDel met with a 
leading NGO and two Congressmen, including the chairman of 
the counternarcotics commission.  During a site visit in the 
port city of Callao, Walker and Getz reviewed efforts by 
Catholic nuns to combat the trafficking in persons. 
 
FOREIGN MINISTRY ON TRADE AND TIPS 
---------------------------------- 
 
3. (SBU) Following a Country Team briefing at the 
Ambassador's residence, Walker and Getz visited the Foreign 
Ministry to discuss the U.S.-Andean FTA with Undersecretary 
for Economic Affairs Gonzalo Gutierrez; Director for North 
America Nestor Papolizio; Director for Economic Affairs Juan 
Carlos Gamarra; Foreign Ministry FTA Commission members 
Sylvia Alfaro and Roberto Rodriguez, and FTA Agriculture 
Negotiator Cecilia Gervasi.  Walker expressed appreciation 
for the dinner Peruvian Ambassador Ferrero hosted for 
Western Hemisphere Subcommittee Chairman Dan Burton, 
Walker's boss, and Latin American Ambassadors. 
 
4. (SBU) Under Secretary Gutierrez highlighted Peruvian 
sensitivities in agriculture and intellectual property 
rights, and urged that the pace of FTA negotiations be 
accelerated because of upcoming Andean elections.  Gutierrez 
noted that there is the perception that the Central American 
Free Trade Agreement (CAFTA) is limiting U.S. flexibility in 
the Andean deal.  Gutierrez emphasized that successes in 
Plan Colombia has had the effect of increasing coca prices 
and production in Peru; yet illicit narcotics are not even 
mentioned during the FTA negotiations.  Gutierrez cautioned 
that if there is too much pressure on traditional small 
farmers growing corn and cotton, there could be a switch to 
illicit crops, such as coca.  The objective, he said, is to 
give Peru stability, eradicate poverty and support 
democratic processes. 
 
5. (SBU) Director for Human Rights Carlos Roman highlighted 
the Foreign Ministry's new social diplomacy role in 
combating Trafficking in Persons (TIP).  He described how 
the Foreign Ministry had taken the lead in organizing every 
sector that had previously operated on its own with TIP- 
related programs.  Roman stated that the Peruvian Congress 
is now working on a law that will, for the first time, 
define the TIP problem in legal terms.  This will enhance 
the GOP's ability to marshal all its resources to fight TIP. 
(Note: Congress in fact has passed the law.  End note). 
Because of Peru's leadership, the Inter-American Development 
Bank chose Peru to participate in one of three new TIPS 
projects.  Walker praised the Ministry for its work against 
the trafficking in persons, particularly for its quick 
reaction and the leadership role Peru has assumed.  Walker 
stated he would brief Congressman Burton, who served 
previously as the Human Rights Subcommittee Chairman and 
cares deeply about this issue. 
 
CHIEF FTA NEGOTIATOR: CONCERN ABOUT CAFTA 
----------------------------------------- 
 
6. (SBU) Peru's Trade Vice Minister and Chief FTA Negotiator 
Pablo de la Flor asked about CAFTA's prospects on Capitol 
Hill, noting that Peru's fate is probably tied to the 
outcome of the Central American trade deal.  Walker 
cautioned that the CAFTA vote will be difficult and close. 
While Congressman Burton had opposed several Free Trade 
deals in the past including NAFTA, he is now a strong 
proponent of CAFTA and the Andean FTA because of our broad 
national interests in the region.  Walker noted that 
Congressman Burton keeps a list and on a daily basis 
discusses the CAFTA vote with undecided Members.  Walker 
welcomed the White House's engagement, which will entail 
calls from President Bush to fence-sitting Members.  Walker 
described why trade votes are so difficult.  Burton's 
district in Indiana, for example, lost its manufacturing 
base following NAFTA's approval:  RCA, Whirlpool, AC Delco, 
Ford, among other companies, relocated their plants to other 
countries. 
 
7. (SBU) De la Flor stated that Peru's Ministers of Trade, 
Finance, Production, and Agriculture will visit Washington 
the third week of June to lobby for the U.S.-Andean FTA. 
Walker offered to organize a meeting for the Ministers with 
the members of the Western Hemisphere Subcommittee.  De la 
Flor added that Peru's widely-acclaimed economist Hernando 
de Soto has agreed to help with Peru's lobbying, but the 
Vice Minister was not sure of the details of this effort. 
De la Flor made a final plea for increased U.S. flexibility 
on agriculture, noting that it would be short sighted if the 
deal were to collapse over issues such as market access, 
which are not the U.S.'s overriding interests in Peru.  De 
la Flor expressed concern over recent demonstrations by 
agricultural and coca farmers who oppose the FTA. 
 
ATPDEA DISPUTES NEARING CLOSURE 
------------------------------- 
 
8. (SBU) Peru's ATPDEA Disputes Coordinator Aurelio Loret de 
Mola reviewed in detail each of the remaining ATPDEA 
disputes.  He highlighted that three arbiters are near a 
final decision in the Northrop Grumman case, and that the 
Tax Court should be issuing a final ruling shortly in the 
dispute involving Luz del Sur (owned by New Jersey-based 
PSEG and California-based Sempra Energy). 
 
9. (SBU) Loret de Mola stated that in both the Princeton 
Dover and Engelhard cases, a fifth and final Superior Court 
justice will issue an opinion to break the 2-2 ties in each 
dispute.  Oral hearings are scheduled for June 13 and June 
28 respectively.  If either company loses 3-2, the U.S. firm 
can make a final appeal to the Constitutional Court; the GOP 
cannot appeal a 3-2 decision against it. 
 
10. (SBU) In the LeTourneau case, Loret de Mola reviewed a 
document written by the company in 1968 that his team found 
recently in the Agriculture Ministry's archives.  Loret de 
Mola argues that the GOP should use the total value of the 
road assessed by the company's then-Vice President, which 
totaled about $865,000.  According to Loret de Mola, the 
exercise should now be to take that number through time to 
2005, leaving to a three person panel the task of 
determining the final compensation figure by selecting the 
mix among U.S. Treasury Bills, Treasury Bonds, and the Prime 
Rate. 
 
11. (SBU) Walker described the frustration among some 
Members of Congress over the long delays in resolving the 
U.S. company disputes, and informed de la Flor, Loret de 
Mola, and the Foreign Ministry officials that failure to 
resolve the pending ATPDEA commercial disputes would prevent 
Peru's inclusion in the U.S.-Andean FTA.  At Walker's 
request, Loret de Mola promised to send via e-mail 
developments in the ATPDEA disputes. 
 
PERUVIAN CONGRESS: GENERALLY SUPPORTIVE OF FTA 
--------------------------------------------- - 
 
12. (SBU) During a meeting at the Ambassador's Residence 
with three Members of Congress -- Jacques Rodrich 
(Independent), Kuennen Franceza (Unidad Nacional) and Cesar 
Zumaeta (APRA) -- Walker and Getz discussed the U.S.-Andean 
FTA and the prospects for its approval in Peru.  The three 
Congressmen were generally optimistic.  Zumaeta said he 
believes the Peruvian Congress will approve the trade deal 
provided the Peruvian team has negotiated well.  He noted 
that Peruvians are concerned about the FTA's impact on 
agricultural production and the cost of medicines, and are 
apprehensive since this is Peru's first FTA negotiation. 
 
13. (SBU) Rodrich stated that timing is key for FTA 
approval, the sooner the better.  The electoral campaign 
will begin shortly as political parties must register in 
October for national elections in April.  Rodrich noted that 
President Toledo will be a lame duck and he exercises little 
party discipline; however, at the moment there appears to be 
a comfortable majority in Congress that supports the FTA. 
Kuennen said that an FTA would be good for Peru because it 
would improve the country's economic integration and reduce 
widespread poverty.  He expressed concerns, however, noting 
that opponents (such as coca growers) are increasing 
pressure through demonstrations in an effort to turn public 
opinion against the FTA. 
 
PRIVATE SECTOR LEADERS AND ECONOMISTS FULLY BEHIND FTA 
--------------------------------------------- --------- 
 
14. (SBU) During a meeting with the Board Directors of the 
AmCham, which represents more than 400 companies that 
produce roughly 60 percent of Peru's GDP, Walker answered 
questions about CAFTA and its prospects for approval.  He 
encouraged representatives from large U.S. companies to take 
an activist role in support of CAFTA, emphasizing that 
approval of the Central American trade deal is key to 
obtaining approval of the Andean FTA.  Walker explained that 
there is organized opposition to the CAFTA bill on several 
fronts (labor unions and Democratic party leadership) and 
that the Bush Administration will need to win the vote 
convincing one Member at a time. 
 
15. (U) Over lunch with Peruvian Business Association 
Leaders -- Foreign Trade Association (Comex) Executive 
Director Patricia Teullet; Peruvian Private Business 
Confederation (Confiep) Vice President Raul Sanchez; and 
former Confiep President Leopoldo Scheelje -- Walker and 
Getz heard about the FTA's importance for Peru's economic 
development and the positive effects it would have on the 
country's fragile democracy and institutions.  All agreed 
that investors would benefit from clearer rules of the game, 
including a well-defined dispute resolution mechanism. 
 
16. (SBU) In a separate meeting, both Apoyo Consultant 
Alvaro Quijandria and Instituto Peruano de Economia 
Consultant Roberto Abusada highlighted Peru's outstanding 
economic performance and praised the results that ATPDEA 
helped generate.  They stressed the importance of 
consolidating ATPDEA benefits through an FTA.  The 
economists also expressed concerns about the negative impact 
of failing to conclude a trade deal, notably lower economic 
growth and investment and increased social pressures. 
Quijandria emphasized that the FTA is an essential 
development tool; if implemented successfully, the trade 
pact would generate alternatives for traditional farmers in 
the sierra -- the FTA's least likely beneficiaries. 
Quijandria noted that underemployed highland farmers are 
currently migrating to booming agriculture areas, such as La 
Libertad and Ica Departments, but they could easily move to 
the coca-growing, eastern jungle areas of Peru if the FTA is 
not concluded and the economy stagnates. 
 
FTA-RELATED TRADE CAPACITY BUILDING 
----------------------------------- 
 
17. (U) AID briefed Walker and Getz on a pilot project in 
the Municipality of Villa del Maria del Triunfo on the 
outskirts of Lima that has dramatically reduced the number 
of days to register a business there, from 211 to between 5- 
7 days.  The project became a success because the 
Municipality was able in six months to reduce duplication 
and confusion in the business registration process as well 
as increase its revenues.  The project helped lower the 
number of registration forms from 20 to seven or eight.  Now 
there is one office that handles the registrations; 
previously there were at least six, and the number of 
officials that review the applications has been reduced from 
34 to six.  USAID would like to reproduce this success story 
in more of Peru's 1800 municipalities, but the agency 
cautioned that a prerequisite is a committed mayor who is 
willing to revamp the registration system. 
 
18. (U) The Consortium of Private Organizations to Promote 
the Development of Small and Micro Enterprises (Copeme) 
explained how through training and technical assistance it 
helped improve the performance of 30 microfinance 
institutions, improving operational efficiency, lowering 
interest rates, and significantly increasing their 
portfolios and the number of loans issued. 
 
19. (SBU) Walker and Getz also visited the OAS and State INL- 
sponsored conference of the Andean Countries Cocoa Export 
Support Opportunities (ACCESO), which is a regional network 
designed to provide support and coordination of cocoa 
initiatives in Bolivia, Colombia, Ecuador, and Peru.  The 
goal is to improve the production and marketing of quality 
cocoa and increase the income of small farmers.  The ACCESO 
Secretariat, financed by the Cocoa Industry and USAID, will 
 
SIPDIS 
be located in Lima and share information and best practices 
throughout the Andean region.  Walker and Getz discussed the 
initiative with representatives from U.S. industry, such as 
Mars, and officials from USAID, OAS, INL, and the World 
Cocoa Foundation.  U.S. industry would like to diversify its 
cocoa supply from Africa (70 percent) and Indonesia (12 
percent) and increase its share from the Andes (5 percent). 
 
COCA: CONCERNS ABOUT BALLOON EFFECT 
----------------------------------- 
 
20. (SBU) Alejandro Vassilaqui, the Executive Director of 
CEDRO, a drug-awareness NGO, briefed Walker and Getz about 
expanding coca and poppy production in Peru and the positive 
effects an FTA could have in deterring the production of 
illicit coca.  Congressmen Jose Miguel Devescovi (FIM) and 
Luis Iberico (FIM) -- President of the National Defense, 
Intelligence, Alternative Development and Counternarcotics 
Committee -- also participated in the discussion.  They both 
expressed support for the quick conclusion of the trade 
accord.  The two Congressmen plan to meet with House Foreign 
Affairs Committee Chairman Henry Hyde to discuss Peru's 
narcotics situation during an upcoming visit to Washington. 
 
21. (SBU) Vassilaqui stated that while Peruvian coca 
production has dropped from 150,000 hectares in 1985 to less 
than 40,000 hectares in 2004, the price of coca has reached 
new highs, raising incentives to produce coca.  He is 
concerned that effective eradication in Colombia has created 
opportunities in Peru for poor farmers to produce illicit 
coca.  Regarding latex production in Peru, which is of a low 
quality, Vassilaqui stated that no one knows the number of 
hectares under poppy cultivation.  He guessed the figure 
ranged between 500-1,000 hectares, but he noted these cannot 
be located by aircraft.  Latex seizures in the first few 
months of 2005 now exceed seizures during all of last year, 
which Vassilaqui attributed to improved police work. 
 
DOING GOD'S WORK:  FIGHTING TRAFFICKING IN PERSONS 
--------------------------------------------- ----- 
 
22. (U) Walker and Getz visited The Center of the Lima 
Woman, a facility operated by The Adoring Sisters (Las 
Hermanas Adoratrices), an order of nuns that dedicates 
itself to helping prostitutes.  The center provides a home 
and vocational training for 65 underage girls who have 
suffered sexual exploitation.  Twenty of the young women are 
accompanied by their children (one girl forced into 
prostitution over three years gave birth on her twelfth 
birthday).  Formerly an abandoned state facility in the port 
city of Callao, the center teaches the young women how to 
operate a bakery and store, word processing on computers, 
and hair styling and beauty salon skills.  The government 
donated the facility and covers the utility costs of the 
center.  The GOP also provides a psychologist from the 
Ministry of Women's Affairs.  The nuns help cover medical 
expenses including dental care for the young women and their 
children.  The young women stay two-to-three years on 
average at the center, and the nuns estimated that two- 
thirds of those that return to society do not go back to 
prostitution.  The nuns are recognized as heroes in the 
Department's Country Report on Trafficking in Persons. 
 
COMMENT: A USEFUL MESSAGE 
------------------------- 
 
23. (SBU) Staffdel Walker successfully conveyed to different 
Peruvian audiences the difficult task ahead for the Bush 
Administration in obtaining Congressional approval of CAFTA. 
He helped dampen expectations that the USG can be more 
flexible in its FTA negotiations with its Andean partners. 
The Staffdel also helped reinforced the USG message to the 
GOP:  that Peru needs to resolve its outstanding ATPDEA 
commercial disputes to be part of a U.S.-Andean FTA. 
 
24. (U) The Staffdel cleared this message. 
 
STRUBLE