US embassy cable - 05LIMA2720

C O N F I D E N T I A L SECTION 01 OF 04 LIMA 002720 
 
SIPDIS 
 
DEPT FOR D, E, WHA/AND 
DEPT POASS TO USTR - BHARMAN 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
TRESURY FOR OASIA/INL 
USDA FOR FAS/ITP/GRUNENDEFELDER 
 
E.O. 12958: DECL: 06/17/2015 
TAGS: ETRD, PGOV, EAGR, PE, ENIV 
SUBJECT: VISIT OF PERUVIAN MINISTERS TO DISCUSS FTA 
 
 
Classified By: Economic Counselor Timothy Stater for reasons 1.4 (b) an 
d (d). 
 
1.  (C) Summary.  Four Peruvian Ministers -- Trade, Finance, 
Agriculture, and Production -- will be traveling to 
Washington D.C. for high-level meetings with Deputy Secretary 
Zoellick, USTR Portman, Commerce Secretary Gutierrez, NSC Tom 
Shannon and several members of Congress, June 21-22.  The 
Peruvians are interested in concluding the Free Trade 
Agreement (FTA) negotiations in September, with or without 
their Andean partners.  Post recommends that in each meeting 
we congratulate the Peruvians on their economic achievements 
and proactive pursuit of an FTA, but also emphasize the 
difficulties of obtaining Congressional approval of CAFTA and 
how that limits the flexibility of our negotiators, the 
unlikelihood of ATPDEA renewal, and the need to resolve the 
remaining ATPDEA commercial disputes.  It is particury 
important that these political-level officials come away with 
a firm impression of our llimited flexibiliyy in agriculture 
and IPR issues.  End Summary. 
 
2.  (C) Pablo de la Flor told us that President Toledo is 
increasingly nervous about the timing of the U.S.-Andean FTA. 
 De la Flor added that Peru is ready to pick up the pace and 
conclude the FTA negotiations by September without its Andean 
partners, provided U.S. Agriculture negotiators are flexible 
and ready to engage.  What is not yet clear is whether the 
GOP's hope for flexibility is within the bounds of realism. 
He added that there are several minor issues pending in such 
chapters as Dispute Settlement and Institutional Issues that 
could be resolved before the July 18-22 round in Miami.  They 
will be gauging U.S. interest in such an accelerated endgame. 
 
 
Suggested Message 
----------------- 
 
3.  (U) The Peruvian Government should be complimented on its 
solid economic growth.  However, we need to reiterate several 
messages related to the Andean FTA. 
 
--Effective Economic Policies:  Highlight Peru's strong 
macroeconomic performance, particularly high recent growth 
rates, which underline the country's dynamism and economic 
leadership in the region.  Measures such as Peru's reform of 
the pension system last year and the recent Paris Club debt 
buyback should improve the country's fiscal sustainability. 
(If asked: We were only unable to participate in the Paris 
Club deal for technical and legal reasons). 
 
--We applaud your progress on a domestic dialogue over 
compensation mechanisms for agricultural producers that could 
be adversely impacted under the FTA.  We also note your 
valuable work promoting competitiveness and pushing for other 
reforms to complement the FTA and modernize Peru's economy. 
 
--CAFTA's Implications for the Andean FTA:  USTR will have a 
difficult time selling the CAFTA agreement to the U.S. 
Congress.  As a result, USTR has less leeway to be flexible 
during the Andean negotiations.  USTR has already agreed to 
concessions on two Peruvian priority issues -- including 
adding biodiversity text for the first time in an FTA and 
language on technology cooperation in the IPR chapter.  It is 
now up to the Andeans to make concessions, particularly in 
agriculture market access and pharmaceutical data protection. 
 
 
--ATPDEA Renewal:  Some Peruvians unrealistically hope that 
ATPDEA could be renewed when it expires in December 2006.  It 
is important to reiterate that ATPDEA extension is highly 
unlikely and that the FTA would expand on and make permanent 
many of Peru's benefits under ATPDEA. 
 
--Resolving Commercial Disputes:  In order to obtain ATPDEA 
benefits, the Peruvian Government in 2002 made a commitment 
to resolve nine commercial disputes.  Although Peru has made 
some progress on these cases, four disputes remain unresolved 
(Engelhard, Princeton Dover, LeTourneau, PSEG).  It is 
important to emphasize that the GOP must resolve the 
remaining cases if Peru wants to be included in the Andean 
FTA.  The most difficult case is that of New Jersey-based 
Engelhard, a major gold importer from Peru until late 1999. 
 
Peru on the Right Economic Track 
-------------------------------- 
 
4.  (U) After four solid years, Peru's economic expansion has 
recently entered a stronger phase, with nearly all key 
macroeconomic indicators -- GDP growth, deficit reduction, 
reserves -- exceeding expectations in 2004.  Last year GDP 
grew 4.8 percent, and the economy is on track to grow five to 
six percent in 2005.  Inflation remains low and the currency 
is strong.  The government recently concluded a Paris Club 
debt buyback that will save $350 million in annual debt 
service for several years. 
 
5. (U) Thanks in part to ATPDEA, growth is broadening across 
sectors, private investment is climbing and employment and 
commerce are expanding in the regions.  Exports hit $12.5 
billion last year and could reach $15 billion in 2005.  Given 
a strengthening pro-market consensus across the political 
spectrum, analysts consider that 2006 elections will have 
little impact on macroeconomic policy. 
 
6.  (U) Nevertheless, despite recent successes, major 
challenges remain.  Poverty afflicts 52 percent of the 
population, and the government collects insufficient revenues 
for adequate social investment.  Wealth and growth are 
concentrated in coastal cities, with rural sierra and jungle 
areas extremely poor and underdeveloped.  Peru is handicapped 
by major infrastructure bottlenecks and a low quality 
educational system.  The government is struggling to 
strengthen weak institutions, and the investment climate 
remains problematic due to inconsistent application of tax 
policies, social unrest and other concerns.  Completion of 
the FTA is viewed as a critical tool to help Peru over some 
of these hurdles and implement needed reforms; failure to 
complete the FTA would impact Peru's continuing export 
growth. 
 
Sensitive Issues: Agriculture and IPR 
------------------------------------- 
 
7.  (U) Agriculture: Agriculture remains difficult for the 
GOP to negotiate in face of protests from producers of dairy, 
poultry, and commodity crops.  These producers are pressuring 
the government to not fully eliminate tariffs on their 
products.  (Note: Ministers Ferrero and Manrique may seek the 
USG's flexibility on agricultural issues in the wake of 
recent protests by both coca and rice farmers.  End Note.) 
Some Peruvian exporters (of mainly fruits and vegetables), 
however, are pressuring the GOP to finish the agreement 
quickly, as nearly one half of Peruvian agricultural exports 
are shipped to the U.S. market.  One-third of the Peruvian 
working population, approximately 8 million people, depends 
on agriculture for their livelihood.  The most sensitive 
products are dairy, corn (Peru imports half of its 
consumption) and chicken leg quarters. 
 
8.  (U) Even in the face of such pressure, the GOP has 
advanced further in the agricultural table than their Andean 
counterparts.  One of the reasons is that of the three Andean 
FTA participants, Peru has the most liberalized agricultural 
sector.  Their price band is limited to 46 products compared 
to 168 for both Ecuador and Colombia.  Peru currently does 
not use a tariff-rate quota or have domestic purchase 
requirements for approval of imports, as Colombia and Ecuador 
do. 
 
9.  (U) Despite Peru's comparatively liberalized agricultural 
sector, both the agricultural market access and Sanitary and 
Phytosanitary (SPS) negotiations are moving very slowly. 
Fundamental differences exist between the United States and 
the Andeans, including Peru, on SPS.  The Andean countries, 
led by Colombia, seek obligations that go beyond the approach 
for SPS agreed to in other FTAs in the region, as well as the 
obligations of the WTO SPS Agreement. 
 
10.  (U) On the market access side, Peru is looking to 
receive permanent zero-duty treatment for products currently 
under the ATPDEA.  Its largest export by far is asparagus 
(over $100 million in 2004), which accounts for nearly 
one-third of the country's total food and agricultural 
exports to the United States.  Defensively, Peru wants 
exceptions to eliminating tariffs for some sensitive 
products.  From the initial negotiation, the United States 
has stated that the goal is to consolidate Peru's ATPDEA 
benefits.  As of now, while it has moved in a favorable 
direction, Peru has yet to offer immediate access on any U.S. 
priority items. 
 
11.  (C) Intellectual Property Rights (IPR): The most 
sensitive issue for the pharmaceutical industry remains the 
lack of protection of data relied on to obtain marketing 
approvals for drugs in Peru.  Senior government officials 
contend that this is a very delicate political issue.  Recent 
studies by the Ministry of Health and Indecopi, Peru's IPR 
administrative agency, argue that the price of medicines will 
increase substantially under an FTA, playing on fears that 
Peruvians' access to medicines will decline sharply. 
Nevertheless, GOP negotiators realize that they will need to 
provide 5- and 10-year protection for pharmaceutical and 
agrochemical test data, the same levels cited in the CAFTA 
IPR chapter. 
 
12.  (U) Another top concern of U.S. industry in Peru is the 
lack of IPR protection relating to both copyrights and 
patents.  Peru remains on USTR's Special 301 Watch List. 
Copyright industries face chronic high rates of piracy (98 
percent for the recording industry; an estimated 70-80 
percent for the audiovisual industry).  Industry 
representatives and officials from Indecopi have jointly 
called for increased enforcement through tougher sentencing, 
the creation of specialized judges and an increase in 
authority for specialized IPR prosecutors. 
 
Bio Data 
-------- 
 
13.  (C) Minister of Trade Alfredo Ferrero - Alfredo Ferrero, 
who was educated in the United States, was appointed Minister 
of Trade and Tourism in early 2004.  He has been the Toledo 
Administration's strongest proponent of free trade and an FTA 
with the United States.  Ferrero has strong ties to the 
business community and fares well with the Peruvian media. 
He is smart, well versed, but has a hot temper.  His uncles 
are the current Peruvian Ambassador to Washington and the 
Prime Minister. 
 
14.  (C) Minister of Finance Pedro Pablo Kuczynski - PPK, 
Peru's star cabinet member, is internationally known in the 
investment banking and development fields.  An orthodox 
economist and staunch proponent of free trade, PPK has 
reiterated in the press that the FTA is necessary for Peru to 
continue its economic expansion.  PPK is President Toledo's 
candidate for the Presidency of the Inter-American 
Development Bank.  PPK may also be stepping down in August to 
run for the Presidency in Peru's April 2006 national 
elections. 
 
15.  (U) Minister of Agriculture Manuel Manrique - Manuel 
Manrique, appointed in late February, is a civil engineer who 
has studied at Northwestern University.  He was the Executive 
Director of a major irrigation project for the Ministry of 
Agriculture, but is not seen as an expert on a wide range of 
agricultural issues.  Manrique has spoken in favor of the 
FTA, stating that Peru will remain a poor country without it. 
 Manrique is the only member of this group who does not speak 
fluent English. 
 
16.  (C) Minister of Production David Lemor - A relative 
newcomer to the Cabinet, David Lemor, a civil engineer, was a 
textile producer.  He previously held the post of Vice 
President of National Industrial Society, a protectionist 
organization of textile manufacturers.  Lemor is a strong 
supporter of the Andean FTA. 
Comment: Ready to Deal 
---------------------- 
 
17.  (C) The GOP is serious about concluding FTA negotiations 
with the United States by September, before Peru's national 
electoral campaign begins.  During the Washington meetings, 
the Ministers will likely compare Peru to the other Andean 
countries, arguing that Peru is better prepared, more 
liberalized, and has made more concessions during the FTA 
negotiations.  These officials realize that without an FTA or 
an extension of ATPDEA, Peru will be unable to maintain its 
current level of economic growth and carryout needed 
structural reforms.  The Ministers will also probably cite 
the latest United Nations study, which indicates that Peru's 
coca crops have increased 14 percent to more than 50,000 
hectares, to contend that an FTA and economic growth are 
necessary to stem coca cultivation in Peru. 
 
 
STRUBLE