US embassy cable - 05LIMA4962

UNCLAS SECTION 01 OF 05 LIMA 004962 
 
SIPDIS 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/ESC/IEC/EPC 
TREASURY FOR OASIA/INL 
COMMERCE FOR 4331/IEP/WH/MCAMERON 
USDA FOR FAS/ITP/GRUNENDFELDER 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, PGOV, PREL, PE 
SUBJECT: Peru's 2006 National Trade Estimate Report 
 
REF: State 186328 
 
1.  The following is Post's submission of the National Trade 
Estimate, as requested in reftel. 
 
Trade Overview 
-------------- 
 
2.  The U.S. trade deficit with Peru was $1.6 billion in 2004, an 
increase of $895 million from the 2003 trade deficit of $710 
million.  U.S. goods exported in 2004 totaled $2.1 billion, up 
23.4 percent from the previous year.  Corresponding U.S. imports 
from Peru were $3.7 billion, up 53.6 percent.  Peru is currently 
the 42nd largest export market for U.S. goods. 
 
3.  The stock of U.S. foreign direct investment (FDI) in Peru in 
2003 and 2004 was $2.7 billion, down from $2.8 billion in 2002. 
U.S. FDI in Peru is concentrated primarily in the mining sector. 
 
Free Trade Negotiations 
----------------------- 
 
4.  In May 2004, the United States initiated free trade agreement 
(FTA) negotiations with three Andean nations -- Colombia, Peru 
and Ecuador.  Bolivia is participating as an observer and is 
expected to become part of the agreement at a later stage.  The 
U.S. Government will seek to address the issues described in this 
chapter within the context of these negotiations.  The four 
Andean countries collectively represented a market of about $8.5 
billion for U.S. exports in 2004, and were home to about $7.2 
billion in U.S. foreign direct investment. 
 
Import Policies 
--------------- 
 
5.  Tariffs:  Peru applies tariffs to virtually all goods 
exported, excluding services, from the United States, although 
the Government of Peru has consistently lowered tariff rates 
since the early 1990s.  Currently, 91 percent of the products 
imported into Peru are covered by three tariffs: a 12 percent 
tariff covers 43 percent of the products, four percent tariff 
covers 37 percent of the products and 20 percent tariff apply to 
about 11 percent of goods.  Tariffs of zero (recently added), 
seven, nine, 17 percent and 20 percent apply to the remaining 
balance goods.  The government maintains a five percent 
"temporary" tariff surcharge on agricultural goods to protect 
local production and domestic investment in the sector.  The 
United States is seeking the elimination of Peru's duties on U.S. 
exports in the FTA negotiations, upon entry into force of the 
agreement where possible and over time for the most sensitive 
products. 
 
6.  Certain sensitive agricultural products - e.g., corn, rice, 
sugar and powdered milk - are subject to a Peru-specific "price 
band," or variable levy, which fluctuates to ensure that the 
import prices of such products equal a predetermined minimum 
import price.  This levy is the difference between the minimum 
import price and an international reference price plus an 
adjustment for insurance, freight and other factors. 
 
7.  The U.S. Government is seeking through the FTA negotiation to 
eliminate Peru's barriers to trade in our agricultural products, 
while providing reasonable adjustment periods and safeguards for 
producers of import sensitive agricultural products. 
 
8.  Non-Tariff Measures:  The Government of Peru has eliminated 
almost all non-tariff barriers, including subsidies, import 
licensing requirements, import prohibitions and quantitative 
restrictions.  However, the following imports are banned: used 
clothing and shoes (except as charitable donations, which are 
subject to the 19% VAT), used tires, remanufactured machine 
parts, cars over five years old and heavy trucks (weighing three 
tons or more) over eight years old.  Used cars and trucks that 
are granted import permits must pay a 45 percent excise tax - 
compared to 20 percent for a new car - unless they are 
refurbished in an industrial center in the south of the country 
upon entry, in which case they are exempted entirely from the 
excise tax.  Import licenses are required for firearms, munitions 
and explosives, chemical precursors (since these can be diverted 
to illegal narcotics production), ammonium nitrate fertilizer, 
and wild plant and animal species. 
 
9.  SENASA, the Peruvian plant and animal health agency, imposes 
several significant trade barriers (which include bans, import 
requirements and sanitary permits) on agricultural products, 
including poultry, live animals and animal genetic material. 
Among the affected products are: 
 
--Poultry Products:  The Peruvian government lifted its ban on 
U.S. poultry products in July 2004.  Peru will accept imports of 
U.S. poultry and poultry products from 42 states, except from the 
states of California, Connecticut, Road Island, Pennsylvania, 
Texas, Delaware, New Jersey and Maryland due to Avian Influenza. 
Additionally, in October 2004 SENASA revised its import 
requirements, which brought imports from the U.S. to a halt. 
Currently Food Safety Inspection Service (FSIS) is working with 
SENASA to implement a list of requirements acceptable to both 
countries. 
 
--Beef and beef products:  SENASA enacted a ban on U.S. beef 
products in March 2004, due to Bovine Spongiforn Encephalopathy 
(BSE). 
 
--Pork:  In November 2004, SENASA revised its import 
requirements, effectively stopping trade.  Since then FSIS has 
been working with SENASA to agree on a set of requirements that 
would satisfy both parties. 
 
--Paddy Rice:  Peru has a ban on paddy rice imports from the 
United States.  SENASA is currently conducting a Pest Risk 
Assessment that, if successful, will result in lifting the ban. 
SENASA has not indicated when it will make a final decision. 
 
Government Procurement 
---------------------- 
 
10.  In 2002, in an effort to support national companies, Peru 
began adding 20 percent (on its rating scale of 100) to bids by 
Peruvian firms on government procurement contracts.  U.S. 
pharmaceutical and medical equipment firms have raised concerns 
about this practice with regard to bidding on Health Ministry 
purchases.  U.S. firms contend that the 20-point margin is 
excessive, giving unfair advantage to Peruvian competitors that 
would otherwise lose these bids on cost or technical grounds.  In 
2001, Peru began distinguishing between national and 
international bidding processes, reserving certain solicitations 
for participation by domestic firms only.  In November 2004, the 
Peruvian government eliminated this distinction for the majority 
of products, applying it only to construction works.  Peru is not 
a signatory to the WTO Agreement on Government Procurement.  In 
the FTA negotiations, the U.S. Government is seeking 
opportunities for U.S. companies to bid on Peruvian government 
procurement contracts. 
 
Intellectual Property Rights Protection 
--------------------------------------- 
 
11.  Peru is a member of the World Intellectual Property 
Organization (WIPO).  It is also a member of the Paris 
Convention, Berne Convention, Rome Convention, Geneva Phonograms 
Convention, Brussels Satellites Convention, Universal Copyright 
Convention, the WIPO Copyright Treaty (WCT) and the WIPO 
Performances and Phonograms Treaty (WPPT).  Peru remains on the 
U.S. Trade Representative's Special 301 Watch List.  Concerns 
remain about the adequacy of IPR law enforcement, particularly 
with respect to the relatively weak penalties imposed on IPR 
violators by the criminal justice courts.  Although the Peruvian 
government recently increased the minimum penalty for piracy to a 
four-year sentence, there have yet to be any convictions under 
the new law. 
 
12.  The United States is currently negotiating IPR provisions 
under the ongoing Andean FTA negotiations to improve protection 
and strengthen enforcement of IPR.  The U.S. Government is 
seeking to address specific U.S. industry concerns related to the 
protection and enforcement of copyrights and related rights, 
patents, proprietary data for pharmaceutical and agricultural 
products, trademarks and geographical indications. 
 
13.  Copyrights:  Peru's 1996 Copyright Law is generally 
consistent with the TRIPS Agreement.  Peru joined the WCT in July 
2001 and the WPPT in February 2002.  Although most of the 
provisions of these two WIPO treaties are included in Peru's 1996 
Copyright Law, officials at Indecopi, the IPR administrative 
agency, have acknowledged the need for additional legislation in 
order to clarify the rights of artists and producers.  The 
National Association of Music Publishers continues to criticize 
Indecopi's enforcement, claiming that its members are not 
receiving the royalties due to them. 
 
14.  Despite Peruvian government efforts to increase enforcement, 
including increased raids on large-scale distributors and users 
of pirated material, piracy remains widespread.  The 
International Intellectual Property Alliance estimates that 
piracy levels in Peru for recorded music was 98 percent in 2004- 
2005 with damage to U.S. industry estimated at $100 million, 
while motion picture piracy accounts for 60 percent of the market 
for a loss of an estimated $5.5 million.  Indecopi estimates that 
software piracy levels remained the same in 2005, at 56 percent. 
 
15.  In July 2004, the Peruvian Government published a Supreme 
Decree establishing the Law of Artists, Interpreters and Music to 
protect the interests and rights of those involved in the 
creative arts, including performers and producers of musical 
recordings and motion pictures, from acts of piracy.  The decree 
argued that blank optical media was being used for "private 
copies" and piracy of media and software, violating copyright 
laws.  Under the law, the Peruvian Artists Association will apply 
a levy on all blank optical discs, to be paid by the 
manufacturers of blank recording media.   All imports of blank 
optical discs since November 2004 are subject to the levy. 
Imported blank CDs are subject to a $0.25 fee per unit, with 
imported blank DVDs subject to a $1.20 levy per unit.  These fees 
represent 200-300 percent of product cost. 
 
16.  Indecopi, the Lima Chamber of Commerce and several companies 
are working with the Peruvian Artists Association to lower the 
levy to a more reasonable rate. 
 
17.  Patents and Trademarks:  Peru's 1996 Industrial Property 
Rights Law provides the framework for patent protection.  In 
1997, based on an agreement reached with the U.S. Government, 
Peru addressed several inconsistencies with the WTO TRIPS 
Agreement provisions on patent protection and most-favored nation 
treatment for patents. 
 
18.  However, the U.S. pharmaceutical and agrochemical industries 
continue to have concerns about Peru's protection of confidential 
test data.  Peruvian government health authorities approved the 
commercialization of new drugs that were the bioequivalents of 
already approved drugs, thereby denying the originator companies 
the exclusive use of their data.  In effect, the government of 
Peru is allowing the test data of registered drugs from some 
companies to be used by others seeking approval for their own 
pirate version of the same product.  U.S. companies also are 
concerned that the Peruvian government does not provide patent 
protection to second uses, which would allow a company with a 
patented compound for one use to subsequently patent a second use 
of that compound.  Although Peruvian law provides the means for 
effective trademark protection, counterfeiting of trademarks and 
imports of counterfeit merchandise remain widespread. 
 
Services Barriers 
----------------- 
 
19.  The U.S. Government is seeking through the FTA negotiations 
to secure greater access for U.S. providers of cross-border 
services to the Peruvian market, including in the areas of 
financial and telecommunications services. 
20.  Basic Telecommunications Services:  In the WTO negotiations 
on basic telecommunications services, concluded in March 1997, 
Peru made commitments on all basic telecommunications services, 
with full market access and national treatment to be provided as 
of June 1999.  Peru is continuing the process of developing a 
competitive telecommunications market and lowered its 
interconnection rates for most types of telephones in 2001. 
Termination rates for calls to mobile networks, however, remain 
one of the highest in the world.  This issue has become 
particularly acute as a result of the recent acquisition by 
Telefonica of the second largest wireless provider in the 
country, thereby increasing Telefonica's market share in the 
wireless sector to over 70 percent. 
21.  OSIPTEL, Peru's telecommunications regulator, is currently 
working to establish its model to lower mobile termination rates. 
This model, according to the OSIPTEL timeframe, should be 
published in late December 2005.  In May 2005, OSIPTEL 
temporarily reduced the mobile termination rate from $0.25 to 
$0.21.  Other suppliers claim that unconstrained pricing by the 
dominant supplier has created significant barriers to competition 
in the wireless sector.  In addition, some concerns remain about 
the independence and strength of the government regulatory body 
established to oversee the sector.   In particular, U.S. industry 
has complained about the lack of transparency in the regulatory 
decision-making process. 
 
Investment Barriers 
------------------- 
 
22.  National treatment for foreign investors is guaranteed under 
Peru's 1993 constitution.  Prior approval is not required for 
investment by foreign or domestic persons, except in banking and 
defense-related industries.  There are no limitations on the 
repatriation of capital or profits.  Arbitration is available for 
disputes between foreign investors and the Government of Peru. 
Several U.S. companies have chosen to pursue claims through 
arbitration, with mixed results.  In July 2005, the Supreme Court 
issued an edict stating that final binding arbitration awards 
cannot be disputed in the Judiciary. 
 
23.  Peruvian law restricts majority ownership of broadcast media 
to Peruvian citizens.  Foreigners are also restricted from owning 
land or investing in natural resources within 50 kilometers of a 
border, but they can operate within those areas with special 
authorization.  National air and water transportation are 
restricted to domestic operators.  In July 2001, inter-urban land 
transportation was also reserved for Peruvian carriers. 
 
24.  Under current law, foreign employees may not comprise more 
than 20 percent of the total number of employees of a local 
company (whether owned by foreign or Peruvian persons) or more 
than 30 percent of the total company payroll, although some 
exemptions apply.  Newly established companies, multinational 
service providers, banks and transportation companies are all 
granted exemptions.  Additionally, foreign companies do not have 
limitations on the number of foreign management officers they may 
hire. 
 
25. Several U.S. firms complain that executive branch ministries, 
regulatory agencies, the tax agency and the judiciary lack the 
resources, expertise and impartiality necessary to carry out 
their respective mandates.  Peru's weak judicial branch is a 
particular problem.  Commercial disputes that end up in Peruvian 
courts are often delayed and can yield results that are not 
foreseeable based on a review of relevant precedents.  The tax 
agency, with its retroactive reinterpretation of rules and 
disproportionate fines, has also created additional investment 
and trade barriers.  The Toledo Administration has tried to 
address institutional weaknesses in the executive branch and has 
offered plans for judicial reform.    The U.S. Government has 
worked with the Government of Peru both before and in parallel 
with the FTA negotiations to ensure a fair resolution of U.S. 
investor disputes, consistent with Peruvian law.  Several of 
those disputes have been resolved while others remain pending. 
 
26.  The U.S. Government is seeking through the FTA negotiations 
a range of protections with respect to the treatment of U.S. 
investors, as well as a guaranteed right for those investors to 
have recourse to international arbitration in the event of 
disputes with the Peruvian government. 
 
Electronic Commerce 
------------------- 
27.  The Peruvian government is moving to put in place 
legislation that will facilitate electronic commerce.  It has 
already passed laws giving legal status to digital signatures, 
creating a framework for electronic contracts and making it 
illegal to tamper with, destroy or interfere with computer 
systems or data.  The U.S. is seeking in the FTA negotiations to 
include rules prohibiting duties on and discrimination against 
digital products, such as computer programs, videos, images, and 
sound recordings, based on where they are made or the nationality 
of the firms or persons making them. 
 
STRUBLE