Beat the clock: with elections around the corner, Peru's Toledo needs big trade deals--and growth--now.

Peruvian President Alejandro Toledo has had a rough ride ever since taking office in 2001. Last year was no exception, with political opponents harshly criticizing--and ultimately frustrating--his attempts to lock in mechanisms to expand the economy. His popular support has drifted in the low teens, while attempts to restart a stalled privatization program, increase investment in mining exploration, and encourage private investment have largely failed.

Things could improve in 2004, however, as Toledo's recent efforts to land international trade agreements start to materialize. At least that's what the business community is counting on. In addition to initialing talks with the United States during the first half of the year. Toledo has received support from the French and German governments for a free-trade agreement between Peru and the European Union as well as support for a deal with Thailand.

"The concern that has prevailed throughout Peru's business sector over the past year has quickly transformed into a state of reserved optimism as a bilateral trade agreement with the United States becomes plausible," says Juan Mulder, president of Peru's Foreign Commerce Society (Comex), which represents the country's largest exporters.

The LATIN TRADE Consensus Forecast sees Peru's economic output slowing through the year to 3.7%, down from a strong 5.2% growth rate in 2002. Trade deals could sustain future growth, particularly for an export-dependent economy like Peru's. No one is more aware of this than Toledo himself, who has been lobbying hard since the beginning of his presidency to land big trade deals.

Private investment often rises in tandem with free trade, although Peru's textile industry has yet to benefit. Under the Andean Trade Promotion and Drug Eradication Act (ATPDEA), thousands of Andean region products enter the United States at zero tariffs. Peru's garment exports to the United Stales increased by more than 30% during the first half of 2003 as compared to a year earlier, yet new investments in the sector have not budged. The deal, hinged on meeting drug eradication targets, expires in 2006.

"While ATPDEA is an excellent tool for penetrating the U.S. market, it has a dark cloud looming over it as it's a temporary phenomenon," says Juan Francisco Raffo, CEO of the Raffo Group, which owns Textiles San Cristobal, one of Peru's largest textile companies. "This is why we haven't been receiving any new foreign direct, investment: No one in their right mind is going to invest with that cloud hanging there."'

Raffo estimates that a long-term free-trade deal with the United States could increase textile and garment exports by as much as 25% annually. Minerals now represent nearly half of the country's total exports, but bilateral accords with industrialized nations could tilt the balance towards food exports, too. Mangos, grapes, and avocados represent growth opportunities; asparagus is currently 45% of Peru's total agricultural sales abroad.

"In order for companies to grow and help the economy expand, companies need to export their goods," says Juan Chlimper, president and CEO of Agrokasa, a large exporter of Peruvian table grapes and asparagus. "And for this to happen, Peru needs to establish free-trade agreements with large economies. Right now there is nothing driving the economy or promoting this growth."

While few question the benefits of landing these bilateral trade accords, opposition lawmakers aren't so keen on the administration's bias towards free-trade terms with the United States. They charge that focusing on the United States has soured relations with potential trade partners such as Brazil.

Following the collapse of World Trade Organization talks in Cancun, Peru withdrew from the Brazil-led Group of 21, or G-21, followed by Colombia, Costa Rica, El Salvador, and Guatemala. The underlying reason: To facilitate bilateral free-trade agreement, or FTA, talks with the United States. "Clearly, the impact of a future FTA with the world's largest economy and Peru's main trading partner surpasses the benefits of any agreement derived from mere geographical or political interests, like the G-21," says Alfredo Ferrero, Peruvian Minister of Trade and Commerce.

Opponents, however, argue that Peru's withdrawal from the group sent mixed signals. In August, Brazil and Peru nevertheless signed a strategic alliance that paved the way for Peru's entry into the Mercosur trade bloc as an associate member.

The G-21 would have resulted in few benefits for Peru, according to Comex's Mulder. "Unfortunately, the proposals set forth by the G-21 are very pragmatic. Its agenda is that of the world's largest producers--Brazil, China and India--that have more at stake. Peru has to be more astute and not gel involved in those games," Mulder says.

Ferrero argues that Peru's priority to sign a trade deal with the United States does not affect "in any way" the bilateral relationship that Peru maintains in its recent accord with Mercosur. "This accord goes beyond preferential tariffs and the participation in the G-21," he says. "The G-21 is a circumstantial negotiation, where entering or exiting is part of the negotiating process."

Cost-benefit. The recent alliance with Brazil, Ferrero says, is part of the government's foreign policy and development agenda, while an FTA with the United States forms part of its commercial agenda, since it would solidify current trade preferences and help forge new ones. "Our decision to withdraw from the G-21 was strictly based on cost-benefit criteria," Ferrero says. "We have not subordinated our sovereignty to any country."

Though government officials involved in Peru's trade negotiations insist that the bilateral and multi-country deals are not mutually exclusive, picking sides is many times part of a negotiating process, says Jean Paul Chabaneix, a partner at the Rodrigo, Elias y Medrano law firm. "Without a doubt, a bilateral agreement gives you a better chance to focus on what benefits you more," says Chabaneix, who specializes in trade issues. "When negotiating as a bloc, you are just one among many, making it difficult to achieve concrete goals."

Many obstacles remain. At the forefront are Peru's pending commercial disputes with U.S. companies in the country, which include Doe Run, Northrop Grumman, Duke Energy, PSEG and Sempra. Many of these companies have seen the promises of tax and judicial stability vanish as politicians seek to profit politically by forcing these companies to re-hire fired employees, pay alleged past due taxes, and accept new rate regulations.

"It's important that the government give clear and convincing signals that they will resolve these cases in a transparent, fair and expedited manner," says Aldo R. Defilippi, general manager of Peru's American Chamber of Commerce.

A bilateral deal with the United States could help Peru avoid future commercial disputes of this kind, as it would require the country to accept terms related to investments, resolution mechanisms, discriminatory treatment for foreign companies, and intellectual property rights.

"The sooner these disputes are resolved, the better chance [Peru] has of landing an agreement," says John Caulfield, the charge d'affaires at the United States Embassy in Peru. "An FTA with the U.S. brings an aura of interest from investors as it locks in certain rules of the game. It brings commonality and predictability." This is exactly what Toledo--and investors--are looking for. Voters will get their say when Toledo's term ends in 15 months.

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