May 2008

MAC Economic Commentary

Celebrating a Canada-Peru free trade agreement

By P. Stothart

The past decade has not been particularly kind to those seeking further liberalization of global trade and investment. Progress through the World Trade Organization, as the main global responsibility centre, is stalled and it is not evident whether the entrenched agricultural subsidy interests in the European Union and United States have diminished at all in recent years. In the investment sphere, a wide range of countries, including Venezuela, Bolivia, Argentina, Mongolia, Chile and Russia, are conveying negative sentiments regarding the security of foreign capital invested in their economies.

In this context, it is certainly worth celebrating whatever progress can be made towards further liberalization, including free trade agreements signed on a bilateral basis — as these enhance the economic prosperity of the affected countries. In the example of an agreement between particularly important trade and investment partners, this impact and cause for celebration is doubly true. Such is the case with the Canada-Peru free trade agreement, on which negotiations were successfully concluded in late January 2008.

Peru is an attractive economic partner for Canada. As stated by Canada’s trade minister David Emerson, “Peru has emerged as one of the most dynamic economies in the Americas.” Peru has a strong economy, stable inflation, a responsible fiscal approach and, importantly, a clear stance in favour of trade liberalization. These characteristics contrast, perhaps, to the troubling signals coming from other countries in the region.

Canada and Peru already have a strong trade relationship. Two-way merchandise trade between the two countries amounted to $2.4 billion in 2006. Canadian exports of agriculture and food products, machinery and equipment, minerals and ores, paper and other products should benefit over time from a free trade agreement, as should exports of telecom, environmental and other services.

Peru is also an important destination for Canadian direct investment abroad. It is estimated that Canada has a stock of $2.9 billion in capital directly invested in the Peruvian economy, primarily in the minerals and metals (mining) sector, although important investment relationships also exist in electricity transmission, telecom and printing.

The Canadian mining industry has a long-standing involvement in the Peruvian economy and strongly supports the free trade agreement. The agreement commits Peru to eliminate tariffs on 94 per cent of current Canadian exports (and Canada to eliminate tariffs on 97 per cent of Peruvian exports) — the products that will move to duty-free access once the agreement comes into effect include machinery and equipment. This will serve to enhance the attractiveness of mining projects where specialized equipment may have to be imported to Peru.

On the investment front, the agreement will promote stronger two-way flows between Canada and Peru. It will lock in market access for Canadian investors in Peru and for Peruvian investors in Canada, will provide for non-discriminatory treatment of investment and will allow investors to access international arbitration bodies, to resolve disputes (although it presently remains unclear whether these commitments apply to existing direct investments, or whether they apply only to future investments — this will not be known until the FTA document is made public in the near future). Beyond the tariff and investment provisions, other dimensions of the agreement relating to the environment, labour, capacity-building and government procurement will further strengthen the Canada-Peru relationship.

There are an estimated 70 Canadian companies with an investment presence in Peru. Important Canadian mining companies such as Barrick Gold, IAMGOLD, Inmet and Teck Cominco are present in Peru. According to the Mines Handbook 2008, approximately 80 Canadian mining and junior exploration companies are developing and/or prospecting for resources in Peru. Teck Cominco, BHP Billiton and Xstrata have important ownership stakes in the Antamina mine in the Andes Mountains — one of the world’s largest copper-zinc mines. It is likely that these kinds of investments and interactions will increase as the free trade agreement becomes an entrenched component of the Canada-Peru relationship.

There are a few remaining steps to be taken before the benefits of a Canada-Peru free trade agreement take effect. The draft agreement is presently being translated and produced in English, French and Spanish before undergoing a “legal scrub.” The agreement will then be released to the public and proceed through the respective parliamentary and ratification processes of the two countries. It is hoped that a ratified agreement will take effect in January 2009.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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