China Outbound Alert

    View Author June 2010

    The China-Peru Free Trade Agreement (FTA) was officially ratified by each country's government on December 6, 2009 and went into effect on March 1, 2010. The bilateral FTA is designed to eliminate trade and investment obstacles between China and Peru.

    The FTA creates a framework of coherent rules that will open up organized bilateral trading and investment relationships. The FTA is the first broad commercial agreement between China and another developing country that includes provisions for goods trading, services trading and investments.

    China’s markets represent a great opportunity for Peru. In demographic terms, China is the world’s largest market, with a population of almost 1.3 billion people, of which approximately 500 million are located in urban areas, representing a rapidly growing purchasing power. From an economic point of view, China is one of the few countries that have grown at a high rate in the last two decades. That growth has involved the importation of greater volumes of raw materials, intermediate goods and capital goods.

    Peru’s and China’s commercial structures are complementary. Peru’s exports and China’s imports are well matched in the case of the raw materials and manufactured goods based on natural resources (mining, fishing and agro-industrial products). Conversely, Peru’s imports and China’s exports complement one another in manufacturing not based on natural resources — mainly capital goods (machinery and equipment) and durable consumer goods not produced in the country. From a commercial point of view, China is already Peru’s second-largest commercial partner; in 2008 commercial trading with China reached US$7.8 billion, 62.8 percent higher than 2007.

    Agreements between the two countries have been reached in the following areas: trading of goods, origin rules, trade remedies, services, investment, temporary entry for business persons, sanitary and phytosanitary measures, technical barriers to trade, dispute settlement, customs procedures, intellectual property rights, cooperation and institutional matters. Moreover, a Customs Cooperation Agreement and a Memorandum of Understanding for Labor and Social Security Cooperation have been successfully negotiated as separate instruments to the FTA.

    The FTA also represents a great opportunity for Peru-based exporters. Among the products that will benefit from preferential access to China’s market is a wide range of agricultural and fishing products, such as grapes, asparagus, citrus fruits, peppers, tomatoes, cacao, dried fruits, beans, artichokes, garlic, onions, avocadoes, strawberries, fish meal, fish oil, pota fish, fresh octopuses, frozen fish and shrimp. A significant percentage of Peru’s exports has enjoyed preferential access to China since the FTA went into effect; tariffs on 61.2 percent of the products that make up 83.5 percent of Peru’s exports to China were reduced to 0 percent from day one. Furthermore, 94.5 percent of the products that make up 99 percent of Peru’s exports to China now have access to this market at a lower tariff rate. Finally, 62.7 percent of the products that make up 61.8 percent of imports coming from China will enter Peru’s market tariff-free.

    It is important to mention that the FTA takes into account the sensitivities of both countries. Peru has managed to exclude from the fee deduction process its most important products. Peru will not eliminate the fees for a significant number (592) of textile products, clothing, footwear and some metal-mechanical products, which generate a lot of employment in Peru. These products make up 10 percent of the total value imported from China. In the same way, China has excluded wood and paper products from the fee deduction process, as well as some agricultural products.

    The FTA also allows affected parties to employ the trade defense measures (antidumping and global safeguards) allowed by the World Trade Organization. It also comprises an additional bilateral safeguard instrument and establishes cooperation mechanisms so that investigating authorities can assist each other in order to collect relevant information.

    The cooperation chapter included in the FTA establishes the framework and objectives to carry out cooperation activities in diverse areas including science and technology, information technologies, small and midsize businesses, fishing, traditional medicine, tourism, mining and industry, among others.

    In addition, the FTA helps improve Peru’s openness in service trading and establishes preferential access for Peru’s services and providers into China’s market. Both parties must apply the national treatment principle, meaning that they cannot discriminate between their own services and the other country’s services, or between domestic service providers and the other country’s service providers.

    The negotiated investment chapter coexists with and complements the scope of the Investment Promotion and Protection Agreement the countries entered into in 1994. It is interesting to note that an Essential Security article covering aspects of expropriation for national security reasons, in accordance with the provisions established by Peru’s Constitution, was included in the agreement. Moreover, the term "goodwill" was included in the definition of "investment," independent of intellectual property rights.

    Finally, in relation to the Customs Cooperation Agreement, the competent customs authorities will be able to exchange information about the origin of a product and its declared value. In this way, it will be possible to rely on tools to investigate situations in which a customs felony such as product subvaluation is suspected.

    This FTA, so far, is the most complete agreement of its type that China has negotiated with another developing country.

    For more information on the FTA, contact your principle Squire Sanders lawyer or one of the lawyers listed in this Alert.