Potential Peru-Australia Free Trade Agreement: A step forward for exports into Latin America

Just a week after the launch of negotiations on an Australia-Hong Kong Free Trade Agreement, the negotiation of the Peru-Australia FTA (PAFTA) has been announced. The formal negotiation process for this agreement is expected to be relatively quick given the progress achieved between the two countries during negotiation of the Trans-Pacific Partnership Agreement (TPP). Australian businesses in, or considering involvement in, Latin America should consider the opportunities the PAFTA could present.

A snapshot of the Peru-Australia relationship

A review of the current trade and investment relationship reveals that in 2015-16, the value of two-way trade with Peru grew by 19.4% to A$504 million. Of this figure, the vast majority came from the sharp growth in the value of Australia’s goods imports from Peru (up 53.7% to A$255 million). If Australia's objective to reduce red tape and deliver greater legal certainty in Peru is achieved, it is likely these trade figures will grow and offer increased opportunity for Australian businesses to capitalise on the growth in Latin America.

Peru is currently Australia’s fifth-largest commercial partner in Latin America, with the value of Australian investment in Peru estimated to be worth A$5 billion. It is also one of the fastest growing Latin American economies and the PAFTA could offer a share of this growth and increased trade across the region for Australian business.

Why the PAFTA would benefit trade of Australian goods and services

Goods

Absent the TPP, the trade relationship between Australia and Peru is governed by Peru’s obligations under the World Trade Organisation (WTO). This means that many of Australia’s exports attract tariffs and face other barriers to entry, which are not encountered by Australia's competitors. For example, while Australian dairy and sugar exports attract tariffs of up to 29%, the US, EU and Canada have FTAs in place with preferential treatment with Peru. A successful PAFTA would allow Australian goods exporters to better compete in Peru by removing these barriers to entry and improve market access.

Services

Despite making up 80% of the Australian economy, services only represent slightly over 20% of Australia's exports and, as with other recent trade negotiations, increasing access for Australian services providers is also likely to be a focus of these discussions. Accordingly, Australian services suppliers, particularly sectors such as professional services, energy and mining-related services, environmental services, construction services and transport services will likely benefit from the PAFTA.

Major projects in Peru and the need for Australian expertise

The pipeline of major projects in Peru is extensive, and the PAFTA will facilitate the entry of Australian innovation and expertise into this market. This pipeline includes the:

• 2019 XVIII Pan American Games: Peru’s first major sporting event where expertise is required in areas such as event planning, venue design and construction, security, and transportation;
• National Sanitation Plan 2014-2021: a A$14 billion national scheme to achieve 100% coverage in the supply of potable water and sewage services; and
• Mining sector: a A$75 billion pipeline of major mining investments to be completed by 2020.

The opportunity the PAFTA presents for Australian business in the region

The Australia-Chile Free Trade Agreement (ACFTA), which entered into force on 6 March 2009, provides an example of the opportunities the PAFTA might provide. Since 2009, there has been a significant increase in the number of Australian companies operating in Chile and many of these companies have subsequently expanded into countries across Latin America.

Similarly, the PAFTA also has the potential to further:

• improve market access for Australian exporters of agricultural and manufactured goods;
• optimise terms and conditions for Australian exporters of services;
• provide improved procurement opportunities for Australian businesses;
• create greater legal certainty and transparency for Australian businesses;
• ensure digital trade (eg. e-commerce) remains free of barriers; and
• deliver improved two-way investment flows.

Reports suggest that the PAFTA also potentially signals a wider geopolitical play by Australia. Peru is a member of the Pacific Alliance trading bloc and a free trade agreement with Peru could be a stepping stone to a wider Australia-Pacific Alliance free trade deal, which would cover the other bloc countries – Mexico, Chile and Colombia.

How Australian businesses should respond

As earlier outlined, it is expected that trade negotiations will conclude quickly given the progress achieved from previous negotiations. Australian providers of goods and services, particularly those in the sectors earlier outlined, should now consider the new export and investment opportunities across the Pacific that a PAFTA may provide. We recommend that you consider how these changes might impact your business and position your business accordingly.

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