What is Free Trade Agreement? (Also Called “FTA”)

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What is a free trade agreement?

A free trade agreement (FTA) is a binding trade agreement signed by two or more countries to agree on the granting of mutual tariff preferences and the reduction of non-tariff barriers to trade in goods and services. In order to deepen the economic integration of the signatory countries, an FTA incorporates, in addition to the issues of access to new markets, other regulatory aspects related to trade, such as intellectual property, investments, competition policies, financial services, telecommunications, electronic commerce, labour matters, environmental provisions, and trade defence and dispute resolution mechanisms. The FTAs ​​have an indefinite term, that is, they remain in force over time so they are perpetual.

Why is it important to sign free trade agreements?

The Free Trade Agreements are part of a long-term commercial strategy that seeks to consolidate markets for Peruvian products in order to develop a competitive exportable offer, which in turn generates more and better jobs. Experience shows that the countries that have managed to develop the most in recent years are those that have successfully entered international trade, thus expanding the size of the market for their companies. The need to promote trade integration as a mechanism for expanding markets is quite clear in the case of Peru, whose local markets, due to their small size, offer few business opportunities and, therefore, job creation opportunities.

What advantages and disadvantages can free trade agreements to bring?

Free trade agreements bring benefits that are related not only to commercial aspects but are also positive for the economy as a whole: they allow reducing and in many cases eliminating tariff and non-tariff barriers to trade; they contribute to improving the competitiveness of companies (since it is possible to have raw materials and machinery at lower costs); they facilitate the increase of the flow of foreign investment, by granting certainty and stability over time to investors; They help to compete on equal terms with other countries that have achieved access advantages through similar trade agreements as well as to obtain advantages over countries that have not negotiated preferential trade agreements; and finally, promote the creation of jobs derived from the increased export activity. Likewise, trade liberalization generates a greater integration of the country into the world economy, which makes it possible to reduce the volatility of its growth, the level of country risk and the cost of financing private activity in general.

However, not all sectors of the economy benefit equally from free trade agreements. There are undoubtedly more sensitive products in the negotiation process that must be protected with certain trade defence mechanisms. However, the negative effects on certain products can also be mitigated and in a better way if the appropriate measures are taken to boost their competitiveness or in any case encourage their conversion towards activities with greater growth potential.

What trade agreements does Peru keep in force?

Regional Agreements

Andean Community (CAN)

Peru participates in the CAN in agreements related to tariff reduction for trade in goods, subregional liberalization of services markets, community standards related to intellectual property, land, air and water transport, telecommunications and a wide range of other trade issues

Mercosur-Peru

This agreement seeks to create a free trade area between Peru and the four-member countries of Mercosur (Brazil, Argentina, Paraguay and Uruguay), through the expansion and diversification of trade and the elimination of tariff and non-tariff restrictions that affect the reciprocal exchange of goods and services.

Multilateral Agreements

World Trade Organization (WTO)

It is the negotiating forum in which the rules governing trade in countries around the world are discussed. The WTO is essentially where member states go to try to fix any trade problems that may exist with each other. Peru has been a member of the WTO since its formation in 1995.

Asia-Pacific Economic Cooperation Forum (APEC)

Peru has been a member of APEC since 1998 and joining this forum responds to the desire to strengthen existing economic ties and generate greater economic relations with the region, which, in recent years, has exhibited the greatest dynamism in terms of economic growth.

Bilateral Trade Agreements

For a complete list of these agreements, please check the home page of this portal, at www.acuerdoscomerciales.gob.pe

Does the signing of a Free Trade Agreement mean the abandonment of other trading platforms?

No. Peru has a long-term commercial vision that includes a comprehensive agenda of trade agreements and negotiations. In the field of international trade, there are not only Free Trade Agreements and Economic Complementation Agreements, which are instruments of a bilateral negotiation. There are also multilateral negotiation processes, such as the World Trade Organization (WTO) and the Free Trade Area of ​​the Americas (FTAA). In this sense, the commercial vision of Peru is not only aimed at consolidating certain benefits with a country, but also at expanding the opening of more markets for our exportable offer. Therefore, it is on the agenda of the Ministry of Foreign Trade and Tourism (MINCETUR) to carry out trade negotiations with other economic blocs, as it has recently done with Panama.

Why negotiate with large countries and not only with small countries, like Peru?

Large countries, such as the United States, China, or the European Union bloc, are three of our main trading partners, and the markets that buy the most in the world. But, in addition, for a simple reason: countries that compete with each other, that is, that produce similar goods, do not complement each other, while with countries that produce goods that we mostly acquire and do not produce if we complement each other perfectly. In the case of Europe, China and the United States, Peruvian imports are complementary. In this context, the tax relief of these products favours the competitiveness of Peruvian companies, since more specialized inputs and capital goods that our companies need will be imported at a lower price to give greater added value to their products and thus generate greater productivity and job.

How do consumers benefit from trade agreements?

Trade agreements are beneficial for Peruvian consumers because by reducing import tariffs, consumers will have access to a greater variety of final goods at cheaper prices, such as computers, transport equipment, cars, books, reading discs. by laser to reproduce, electronic devices, household appliances and cosmetics, which the country basically does not produce. On the other hand, they will lead to the establishment of rules and procedures that promote the efficient, transparent and agile operation of customs, which means lower costs of storage and handling of merchandise for importers and, therefore, additional reductions –– to those produced by the lowering of tariffs–– in the prices paid by consumers.

What impact do these agreements have on the price of the basic family?

In general, free trade agreements tend to lower the price of products, including those of the family basket, because imported products cost fewer thanks to the elimination of tariffs. Furthermore, as a result of the FTAs, inflation tends to reach international levels, which are generally lower than those in developing countries.

Do trade agreements create more jobs?

Yes. With these agreements, there are more and better jobs. To create more jobs we need to invest and produce more, and to produce more we need markets bigger than ours. In Peru, exports support approximately 15 out of every 100 jobs. We cannot stop having commercial agreements or exporting.

Will NAFTA create more jobs in the regions?

Looking towards external markets is essential for the regions. Foreign trade is increasing economic activity and formal employment mainly in the provinces. According to figures from the Ministry of Labor, the main cities benefiting from the increase in employment thanks to exporting companies, mainly agroindustrial products and textiles, are Piura, Ica, Trujillo, Chincha and Arequipa, although many other provinces see the benefits of trade agreements already today.

With the signing of the agreement with the United States, for example, will Peru be forced to change its laws to coincide with the laws of the United States?

No, the Agreement with the United States will not force Peru to change its laws to match the laws of the United States. On the other hand, what is negotiated in the FTA cannot be incompatible with the internal legislation of the signatory countries. In addition, the FTA maintains the independence of the country to dictate laws and regulations, as long as they are in accordance with the principles of free trade established in the agreement. However, it is possible that, in order to implement the treaty, in certain negotiation issues the internal regulations of each country – and that of the Andean Community – will have to be adapted to the regulations agreed in the FTA. In parallel, due to this necessary process of convergence of the aforementioned legal regimes,

Do Trade Agreements affect the populations?

No. The provisions on intellectual property in Peru’s trade agreements do not restrict the population’s access to generic pharmaceutical products, nor do they lead to price increases. With the trade agreements in place, generic drugs have not disappeared from pharmacies and they do not cost more money as a result of some FTA or trade agreement. On the contrary, as confirmed by the Ministry of Health, the reduction of tariffs on imported medicines benefits consumers, since they can access them at lower prices.

How can the State defend public health in emergency situations?

Peru’s position in the NAFTA negotiations is to maintain the option of resorting to the mechanisms of compulsory licenses and parallel imports when deemed necessary to preserve public health. Compulsory licenses are permits that governments can issue so that, without the consent of the patent holder, other companies make the patented products or use a patented process. Parallel imports are imports of products, without the approval of the patent holder, from a third country. Through the aforementioned mechanisms, in situations in which public health is at risk, Peru can access patented drugs that are not marketed within the country, or access others that are marketed at a lower price.

Does signing a trade agreement with the US or other countries put our traditional knowledge at risk?

No. One of the innovative topics in the negotiation of the FTA between the United States and the Andean countries was the proposal made by Peru to incorporate provisions that recognize, formalize and protect the rights of indigenous peoples over their traditional knowledge and genetic resources. This was materialized in joint documents signed by Peru and the United States as a result of that commercial negotiation.

The Peruvian position is always to protect and take advantage of the enormous cultural and natural capital of the indigenous peoples, which currently does not have an internationally recognized protection system. The recognition of the importance of native knowledge about the use of hundreds of natural species (used to make food, fertilizers, condiments, beverages, handicrafts, clothing, fibres, utensils and medicines) should contribute to generating tangible economic benefits for populations and , in particular, for the different ethnic groups in Peru that have protected them over time.

Do trade agreements threaten the preservation of the environment?

No. Trade negotiations related to the environment always seek to guarantee compliance with environmental standards and the environmental legislation of each country. Likewise, it seeks to encourage each party to achieve high environmental standards and levels of environmental protection, without implying the imposition of the rules of one country on others. Trade agreements with developed countries also represent an opportunity to comply with international standards on environmental issues, with the help of international cooperation programs.

Will trade agreement negotiations affect Peruvian labour laws?

With the signing of trade agreements, Peru undertakes to respect the effective compliance with its own labour legislation and the fundamental principles contained in the international agreements that it has ratified. In this sense, trade agreements do not impose for the Peruvian government the imposition of additional labour obligations to those already established in its own legislation.

On the other hand, the validity of trade agreements will lead to improvements not only in the quantity but also in the quality of jobs in Peru. Trade agreements (like any other treaty) always leave open the sovereign option of Peru to make increases in labour benefits for workers in accordance with the international agreements signed by the country within the framework of the International Labor Organization (ILO).

What is Peru’s pending agenda to take full advantage of the Trade Agreements?

The pending reform agenda to maximize the benefits of trade agreements includes: strengthening respect for the law and property rights; the fight against corruption and the transparent rendering of accounts by the State; the effectiveness of the regulatory framework and the facilitation of business activity (access to financing, the elimination of over-costs and the reduction of barriers to market entry and exit); the promotion of investment in education, training and research to improve production processes through technological innovation; the progressive reconversion of the most vulnerable sectors (especially traditional agriculture) towards more competitive productive activities and technical assistance through a comprehensive agricultural extension system; investment in port, airport, road, rail and lake infrastructure; the creation of a pro-export mentality in the population; the promotion of the productive chains and of the associativity, standardization and normalization of the SMEs; progress in the implementation of the National Export Strategic Plan (PENX) and the Regional Strategic Export Plans (PERX) promoted by MINCETUR.