Notes on the Multi-Party Trade Agreement between the EU and Peru and Colombia

César Larraín. Minister-Counselor. Embassy of Peru in Spain

27 June 2013

The Multi-Party Trade Agreement (MTA) between the EU and Peru and Colombia provides a base for judicial stability in economic and trade exchanges between the different countries aimed at generating productive investment, preferential access to markets and the transfer of technology and innovation. 

The EU is the third biggest source of imported goods in Peru, particularly machinery and transport equipment, and is the main destination for Peruvian exports (mainly fuel and mining products). The agreement is a timely opportunity to strengthen Peru’s export of agricultural and fishery products, which already comprise almost a third of all the country’s exports to the EU. Both Peru and Colombia will be able to expand their trade with one of the world’s key markets, with mutual preferential access that is both secure and permanent for the export of its goods and services.

Trade levels between the EU and Peru have increased significantly over the last few years, reaching €9.8 billion in 2012, which represents 16% of the Peru’s total trade volume. The EU is still the world region that invests most in Peru, with EU investment making up 50% of direct foreign investment in the country, concentrated mainly in key sectors like communication, energy, and banking.

With the MTA trade relations will change from being a series of unilateral concessions to being reciprocal obligations. In effect, Peru, for example, has already benefitted from trade links with the EU through different preferential systems based on the principle of Most Favored Nation (MFN), like the General Preference System (GPS) for developing countries and the Drugs GPS, or the more recent GPS Plus. Although the latter of these has had a positive impact on exports and job creation, it has limitations when applied on a temporal basis, and has to be subject to periodic reviews which means it is by no means ideal for the consolidation of the judicial stability needed to attract productive investment.

The importance of this MTA lies not only in the dynamism that it brings to trade flows, but also because it basically establishes a more transparent economic and trade relation that is predictable and legally safe, which is vital for the expansion of trade and investment.

We are therefore about to see a marked improvement on the preferences afforded by the  GPS plus, especially for non-traditional agricultural products, given that a substantial part of tariffs have been eliminated. For products that have traditionally enjoyed protection in the EU, like banana, rice, sugar, meat and dairy product, tariffs have been reduced or the quotas now in place will grow on an annual basis. Apart from agriculture, the agreement totally eliminates all EU tariffs on industrial and fishing products from the very first day. All this gives exporters an immediate and substantial advantage in terms of access to the European market.

The MTA covers the entire range of tariffs. Peru will benefit from the immediate introduction of 99.3% tax relief on its exports to the EU, which currently make up 95% of tariff lines. Products like asparagus, avocado pears, coffee, peppers, artichokes, will enter the European market free of tariffs as soon as the agreement comes into force.

With regard to non-agricultural products, those that play an important role in the Peruvian economy, namely plastics, textiles and fashion, footwear and metal, are deductible over 10 years. These products make up just over 800 tariff lines and 9% of Peru’s imports from the EU. Peru in turn offers tax deductions ranging from immediate to over five years on products that are of special interest to the EU, including iron and steel bars, compressors, certain medications, and diesel 2.

The Peruvian economy will benefit from the strengthening effect and possibilities that the agreement will bring to trade in general, and specifically in terms of greater aggregated value and quality services, both of which are necessary for the development of industry. Thus it will contribute to economic growth, job creation and technology transfer.

Another aspect that is worth underscoring is that due to the fact that Spain has been the top investor in Peru for several years now, it will very probably be Spanish companies within the EU that will be the first to take the fullest advantage of the agreement, at least to start with, given that they already have a significant presence and experience in the Peruvian market that could bring them further advantages over firms from other European countries.

A recent study carried out by BID found that the middle classes in Peru have  increased considerably in size between 2005 and 2011 due mainly to the country’s sustained economic growth. This trend has generated higher levels of internal consumption and access to credit, contributing to a favorable climate for investment and business. It is therefore a good idea to take advantage of these opportunities. Spanish SMEs could, for example, forge strategic alliances with their Peruvian counterparts to achieve a greater foothold in Peru through production plants which could export to the EU or to other markets, using different free trade agreements that Peru currently has in place.

It should also be noted that the MTA does not only cover tariffs, but also issues like denomination of origin, intellectual property, services and establishments, and governmental purchases, all of which help improve the country’s risk rating, thereby consolidating the capital market.

With regard to Colombia everyone is currently waiting to see how it will be impacted by the termination of preferences it has hitherto enjoyed through GPS-Plus, said termination being set to take place on December 31, 2013.

The EU is Colombia’s second largest trade partner after the US, followed very closely by China. In 2012 EU exports to Colombia totaled $4.7 billion, and imports stood at $5.1 billion. During the first three months of 2013, the EU member countries which demanded most Colombian products were Germany, Ireland, Romania, Austria, Lithuania, Denmark, Belgium, Italy and Portugal. In the same period the products which most increased their market presences in the EU were metals and derivatives (176%), textiles (31.3%), electric machinery (28%.7), leather and derivatives (3.3%), paper and derivatives (2.2%).

The agreement is also aimed at preserving the regional integration of the Andean countries in such a way that it keeps alive the hope of achieving an association between the two regions in the future, leaving the door open to other Andean countries like Ecuador and Bolivia.  It also contains two long-term provisions for the protection of human rights and the rule of law, as well as commitments to apply international agreements effectively in terms of labor rights and the protection of the environment. Moreover, civil society organizations will participate systematically in helping to ensure that these commitments are met.

In addition to these advantages and opportunities to increase trade and investment volumes for Peru and Colombia, the agreement and all it encompasses will secure and strengthen EU relations with Latin America, and will serve as a demonstration of the intense convergence of trade policies and openness to foreign trade.

The MTA has been provisionally in force since March 1, 2013, pending the approval of four articles (non-proliferation of arms, intellectual property, and two others related to transparency of processes) by the respective parliaments of the twenty seven member states of the EU.

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