Leadership and Democracy LabWestern Social Science

The Effects of Political Uncertainty in Peru

The Trump Presidency and the Possible Legal Ramifications on Energy Resource Investment in Peru

Roann Enriquez: Primary Article Contributor and Analyst following Peru 

Sydney Scott: Primary Article Contributor and Analyst following Peru

Marshall Dupuy: Article Researcher following Peru

Marko Gombac: Article Researcher following Peru

Bethany Hernandez Mayorga: Article Researcher following Peru

Mehek Noorani: Article Researcher following Peru 

Rebeccca Yang: Article Researcher following Peru

Alexa Bran: Editor and Team Leader following Peru

Key words: US, United States, Peru, US-Peru relations, Trump, Donald Trump, energy resource, TPP, Trans-Pacific Partnership, energy resource investment, PTPA, FTA,

Global Edge describes the United States as Peru’s second largest exporting and importing partner in 2014/2015. Peru exports close to $6.2 billion in goods to the United States, up to 18% of their total global exports, and imports totaling approximately $8.8 billion in goods from the United States, which encompasses 21% of imports. As one of Peru’s top trading partners, the US supports Peru’s further integration into the world economy, which is critical for economic development.

US-Peru relations span far beyond trade. The United States has been a key partner in reducing possible risks to Peruvian security, through counter narcotic efforts, military cooperation, and democratic advancement. This partnership has had a considerable impact on reducing terrorism and drug-trafficking, as well as increasing response to natural disasters. Through heavily funded programs, the United States has assisted in strengthening democratic institutions. The two countries signed a $35.6 million Millennium Challenge Threshold Program (2008-2010) that supported Peru’s efforts to reduce corruption in public administration and improve child immunization coverage.

Of particular importance to the energy sector is environmental deals between the two countries, including the US-Peru Trade Promotion Agreement (PTPA), commonly referred to as the Free Trade Agreement (FTA). In effect since February 2009, this agreement requires both the US and Peru to enforce domestic environmental laws and to adopt new laws, in accordance with multilateral environmental agreements. The dissolution of this agreement under a Trump presidency could have considerable impact on the regulations surrounding non-renewable natural resources.

Peru’s reception of Trump’s victory indicates a positive outlook for the future of Peru-US relations. Martin Perez, chairman of Peru’s National Confederation of Private Business Associations (CONFIEP), assures that the Trump Administration will not have a negative impact on the Peru Free Trade Agreement. Despite expressing earlier concerns over US trade relations under Trump’s presidency, President Pedro Pablo Kuczynski congratulated Trump, expressing interest in strengthening bilateral relations between the two countries. Kuczynski did, however, emphasize Peru’s desire to uphold the values of “democracy, the rule of law, human rights and free trade, among others.”

However, investors should proceed with caution as Trump has been a strong critic of trade deals made throughout Obama’s time in office. Considering the stance of the President-elect, Peru’s plans to expand international trade may be hindered as a result of this election. If Trump does intend to renegotiate the FTA between Peru and the United States, problems for Peru’s economic expansion may arise as Peru’s former Foreign Minister,  Eduardo Ferrero Costa, explains.

Should the United States choose to back out of the Trans-Pacific Partnership (TPP) in particular, the projected effect on the Peruvian economy is uncertain. The TPP is a treaty that proposes to augment economic ties between twelve nations, including the US and Peru, that reduces tariffs, removes trade barriers, and encourages trade so as to promote mutual economic growth between member states. Although the agreement is not yet in effect, should the US withdraw, it would ultimately be the end of negotiations. Through the TPP, Peru has specifically committed to remove barriers on energy refinement, exploration, extraction, and distribution of sale. This will give increased access to foreign providers of energy products and services, like electricity provision, to the Peruvian market. While this move may lower the cost of electricity provision and energy to consumers in Peru, it could have the adverse effect of crowding-out domestic energy producers and state owned enterprises. Given that domestic energy companies will be subject to foreign competition, the market could potentially be flooded with cheap energy that undermines domestic firms. Furthermore, the ratification of the TPP would make signatories subject to the Investor-State Dispute Settlement (ISDS) mechanism. This allows investors to legally challenge foreign governments over disputes. What is concerning is that over the last 30 years, ISDS has been overwhelmingly and asymmetrically used by multinationals against developing countries.

Overall, there will be some changes with the agreements regarding investment in Peru’s energy sector under Trump’s government. Trump has stated that he will be dissolving some current foreign treaties with the United States once in office. However, according to Costa, it is likely that the PTPA will not be one of the agreements that Trump eliminates, but rather renegotiates, if anything. The PTPA has proven to be a very beneficial agreement for Peru, especially because the US is Peru’s largest trading partner and its direct source of foreign direct investment. The treaty eliminates tariffs and removes barriers to U.S. services; provides a secure, predictable legal framework for investors; and, finally, strengthens protection for intellectual property, workers, and the environment. The PTPA is the “first agreement in force that incorporates groundbreaking provisions concerning the protection of the environment and labor rights.”

 In terms of the TTP, Trump has continuously vowed to block the TTP while on the campaign trail and more recently announced his intention to stop the TPP once in office. Congress has not yet ratified the decision, but without the backing of Trump it is unlikely to be brought into law. In order to take effect, the deal has to be ratified by February 2018 by at least six countries that account for 85% of the group's economic output, meaning that both the US and Japan must ratify the deal. Rejection of the deal will likely cause a decrease in trade between the United States and Peru, ultimately having a negative impact on the Peruvian economy. President Kuczynski has already begun negotiations on a new trade deal with Russia and China if the United States backs out of the TPP. China has been leading discussion on the alternative agreement, the Regional Comprehensive Economic Partnership (RCEP).

President-elect Trump is seemingly in favour of free trade, though he advocates for fairer practices and keeping jobs within the United States, and plans to implement 35% import taxes, eliminate corporate taxes, and implement a 20% tax on all imported goods. Furthermore, Trump has stated he will reduce the federal business tax rate from 35% down to 15%, thus transforming  it from one of the highest in the world to one of the lowest. Trump’s tax rate may make Peru less attractive for foreign investors, as Peru’s corporate tax rate is currently 30%. This could result in both a decrease in future foreign investment in Peru, as businesses outsource and relocate out of Peru to take advantage of lower tax rates. All of these effects could result in serious implications for the working people of Peru. However, worries should be mitigated by the fact that US views Peru as being one of the least problematic countries when it comes to negotiations and treaties.