Five-Year Update on the Free Trade Agreement between Peru and the US

What benefits has Peru received from the free trade agreement with the United States?

We just passed the five-year anniversary since the launch (in February 2009) of the free trade agreement (FTA) with the United States. It is a good time to evaluate the benefits that the FTA has brought to Peru in terms of foreign trade. Data from the U.S. Department of Commerce should make us happy — the nominal value of our exports to the United States increased by 40 percent, from $5.812 million in 2008 to $8.122 million in 2013. However, the net results are not so rosy — especially if we consider that our imports increased significantly more (by 63 percent), from $6.183 million in 2008 to $10.056 million in 2013.

The consequences of such asymmetry for our balance of trade should be a cause of concern, as will be explained by reviewing below the tedious but inevitable numbers. During its first year (2009), the FTA generated a trade deficit with the United States of $696 million. From that point onward, the deficit increased sharply, reaching average annual level of $2.02 million for the four-year period 2010 to 2013. Our trade deficit has helped the U.S. to reduce — even if just in a tiny way — its trade deficit with the rest of the world and increase its industrial production, especially in the automobile sector.

The outlook for our foreign trade with the U.S. was vastly different between 2002 and 2008, before the rushed signing of the FTA. During those seven years, the Andean Trade Promotion and Drug Eradication Act (ATPDEA) had been in force (except for the last year, 2008); Peru benefited from surpluses averaging $1.6 million per year between 2002 and 2007.

Unlike the mercantilist school of thought, we are not arguing that all trade deficits are bad. But it is troubling that if we open our eyes and compare our trade deficit to other national economies around the world. Let’s remember that for the past 11 years (2002-2012), we enjoyed surpluses — averaging the substantial sum of $5.15 million per year.

That trend has now shifted radically in the wrong direction. Our trade deficit last year was $308 million — still tiny, but very revealing. We are off to a bad start for the first two-month period of this year, with a cumulative deficit of $620 million. More serious, however, is the status of the balance of services whose growing deficits are taking our external balance of payments accounts to the cliff’s edge. The account has a deficit of $10.169 million in 2013, equal to 4.9 percent of the gross domestic product.

Over the long term, the impact could be very troubling for needed equilibrium in the balance of payments, which, thanks to capital infusions, allowed us to finish last year with a surplus of $2.907 million — at the same time, it showed a spectacular decline of 80 percent compared to 2012, the year Peru reached a record high of $14.827 million. The recent accelerated decline will continue even though it does not seem to provoke any major worries among our economic leaders, probably because of their overly optimistic expectations for an influx of direct foreign investment. We all know, however, as we’ve seen from the boring numbers that constitute our balance of payments, that external forces cook up Peru’s significant economic crises.