What Is Driving Peru’s Relationship with China?

˙ China & Latin America

Originally published in the Inter-American Dialogue’s daily Latin America Advisor.

Q: President Ollanta Humala will pay an official visit to Beijing in April, Peru’s government announced earlier this month. While China has reportedly invested about $6 billion in Peru over the past three years, Foreign Minister Rafael Roncagliolo recently called on Chinese companies to diversify their investments in the Andean nation, naming specifically the infrastructure, telecommunications and information technology sectors. What is the state of Peru-China commercial ties today? What is driving the bilateral relationship, and what things stand in the way of improvement? Who stands to benefit or lose the most from expanding Peru-China ties?

A: Cynthia McClintock, professor of political science and international affairs at George Washington University: “In 2011, China became Peru’s number-one trade partner. Buying about 15 percent of Peru’s exports, China has been key to Peru’s recent robust economic growth. Peru’s mining potential is enormous and of great interest to China. However, to date, China’s stock of investment in Peru remains well below that of European countries or the United States. Also, although the flow of China’s investment is increasing rapidly, figures vary and Peru’s expectations for Chinese investment have tended to be disappointed. Overall, Ollanta Humala has not been as eager to embrace China as was his predecessor Alan García. In general, Peru is seeking a diversity of international partnerships that maximize its capacity to pursue its own interests. Numerous government officials have said repeatedly that China should not only invest in sectors beyond mining, but also that it should play by international economic rules and respect international environmental and labor standards. Their warnings reflect a common Peruvian view that China’s companies (such as Shougang) have been particularly disrespectful of the communities in which they operated. Although in April Humala is visiting China, in May 2012 he traveled to Japan and South Korea but not China, and Peru recently made military purchases from South Korea. (Humala was Peru’s military attaché in South Korea in the early 2000s.) Further, despite U.S. wariness of Humala during the 2011 presidential campaign, the Peru-U.S. relationship has become notably friendly, with considerable anti-narcotics cooperation. Over the longer term, however, Peru’s goal of diverse partnerships could be compromised by China’s economic clout. Despite China’s declarations to the contrary, economic power and political power are inextricably linked.”

A: Margaret Myers, director of the China and Latin America program at the Inter-American Dialogue: “Both China and Peru have benefitted from China’s economic engagement in the South American nation over the past decade. Trade, in particular, is booming. China is Peru’s largest trading partner; bilateral trade nearly doubled since Peru and China signed a free-trade agreement (FTA) three years ago. Of concern, as Foreign Minister Roncagliolo notes, is the basket of goods that Peru exports across the Pacific. Primary commodities like copper and other metals account for the vast majority of Peruvian exports to China. In an effort to diversify production and improve prospects for economic development, Peru and other major raw materials exporters are calling for more investment from China in the infrastructure, telecommunications and information technology sectors. To its credit, China has begun working with the Inter-American Development Bank and through regional organizations like ECLAC and CELAC to develop stronger partnerships, diversify investment and promote balanced trade relations with the region. A nearly $2 billion IDB – China Ex-Im Bank private equity fund will presumably focus investment on a wider variety of sectors in Latin America. The China-Peru FTA was also expected to increase Chinese investment in Peruvian telecommunications, electricity, banking and infrastructure, but attention from China remains focused on the country’s primary commodities. By all accounts, this ‘balancing’ or diversification process will be a slow one. Much depends on development policy in the region. The Chinese, furthermore, are calling for patience from Latin American partners. Though cognizant of the region’s development challenges, China still sees trade complementarities as the foundation for commercial relations.”

A: Carlos Mateo Paz-Soldan, member of the Advisor board and partner at DTB Associates: “Peru-China relations have evolved rapidly in the past two decades in large part due to the economic reforms and ambitious trade agreements pursued by both countries. During this period, China’s thirst for Peruvian minerals and other commodities to fuel its growth coincided with a more attractive climate for investment in Peru. Case in point: the recent takeover attempt by China Fishery of Copeinca, one of Peru’s largest fishing companies. In recent years, China has become Peru’s top export market accounting for 17 percent (or close to $8 billion) of its exports in 2012. By way of comparison, the United States fell to second place and in 2012 took 13 percent ($6 billion) of Peru’s exports. However, in common with other Latin American countries, Peruvian exports to China are overwhelmingly commodity-based, while its imports are value-added manufactured products. This has generated friction with certain industries, in particular Peru’s important textile/apparel sector, which is pursuing an antidumping investigation. Nevertheless, the overall picture is optimistic. With a bilateral free-trade agreement in place since 2009, Peruvian exports to China are beginning to diversify, in particular in the booming agroexport sector, and the potential for growth in sectors such as tourism is of great interest to Peru. Moreover, with the recently inaugurated Trans-Amazon Highway to Brazil, Peru is hoping to benefit from trade between the two giants through its Pacific ports. With an estimated 3 percent to 10 percent of Peruvians of Chinese descent acting as a bridge for trade and closer ties, Peru is well positioned to benefit from a China-centered ‘commonwealth’ should one emerge later this century.”