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Economic analysis 08 Jun 2016

Peru and the strengths of the Pacific Alliance

There is no question that Latin American countries are highly diverse. It is precisely now, in the absence of tailwinds and with very similar external shocks, when we see the difference in the credibility and strength of the macroeconomic political frameworks in the different countries, and their differing capacities to absorb these shocks without unduly affecting their growth.

In our last report on macroeconomic forecasts, we noted that within the generalized slowdown, the Pacific Alliance (Mexico, Colombia, Peru and Chile) is still growing at an average rate of 2.5% year-on-year, in comparison with a drop in GDP of -3.8% in Brazil last year, which is expected to reoccur this year.

Another dimension that highlights the heterogeneity in the region is the commitment to integration in the global economy. On the one hand, Mercosur (Brazil, Argentina, Uruguay, Paraguay and Venezuela) has shown uneven progress since its creation in 1991. There has been some integration between Brazil and Argentina in a few industrial branches, but many barriers to trade are still in place between its members and little effort has been made to integrate into the global economy.

In contrast, the stated aim of the Pacific Alliance is to pursue commercial and financial integration and the free movement of people among its member states, while also moving towards fuller integration with the world economy, with a particular emphasis on Asia. So whereas all the countries in the Pacific Alliance have already signed free trade agreements with the US and the European Union –Chile and Peru with China too–, none of the countries in Mercosur have done so. And this is ultimately reflected in the fact that the countries in the Pacific Alliance have access, without any tariff barriers, to between 52% and 76% of the global demand (in the case of Peru, to 46 countries representing 73% of world GDP).

However, it is still true that trade within the Pacific Alliance still accounts for only 4% of foreign trade in the member countries (9% in the case of Peru). But they have taken important steps to lay the foundations for an intensification of this integration process, including removing internal tariff barriers, agreeing rules for the accumulation of origin (essential for creating value chains) and reducing barriers to trade –for example by implementing single-window trading and through agreements on phytosanitary standards.

At BBVA Research we have identified the sectors that are best-placed to exploit the potential of the Pacific Alliance, either by developing value chains or enhancing the competitiveness they already have in some consumer goods sectors. In the case of Peru, the first group (intermediate and capital goods) includes sectors such as fish meal and oil, zinc, plastics, chemical products, alcoholic beverages and fabrics and woven goods. The most important final consumer goods are –again– fabrics and woven goods, plastics and alcoholic beverages, with the addition of perfumes and cosmetics, cereals and pasta and ceramic products.

There is no doubt that in view of the progress towards reducing non-tariff barriers within the Pacific Alliance, and the boost to the signatories represented by the ratification of the Trans-Pacific Partnership agreement (TPP), these sectors will be the first to benefit from the integration within the Pacific Alliance and the shift towards Asia throughout the whole region.

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