Inca gold Peru is attractive trade partner for Michigan

February 14, 2012
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Just 11 days after President Barack Obama took office in 2009, a free trade agreement between the United States and Peru went into effect — an event that was largely unnoticed by the American public, given that Peru barely registers on the national consciousness.

But Peru is the world’s largest silver producer, third-largest copper producer and sixth-largest gold producer. And its economic performance over the last decade has led to some hailing it as an “economic miracle.”

Trade with Peru does not rank highly for the U.S. as a whole. Peru is this country’s 34th largest export market and 44th largest import market, accounting for just over $6.7 billion and $5 billion worth of trade in 2010, respectively. On the state level, Peru is Michigan’s 43rd largest merchandise export market, accounting for about $54.5 million in 2010. Now, I’m not going to turn up my nose at $54 million, but that pales in comparison to the $44.7 billion of goods that Michigan exported around the world that year. So, it all seems much ado about nothing. Well, not quite.

Peru has become one of the world’s fastest growing economies, with its average income increasing by about 8 percent in 2010, to almost double that of 12 years ago. Its metal-mining sector has received a major boost from rising commodity prices: About 62 percent of the country’s export revenues come from mining, with about 42 percent of the country’s exports coming from gold and copper alone. As a result, there has been a steady appreciation of the nuevo sol, which, along with ongoing cuts in import tariffs, has helped to keep inflation relatively low. Due to Peru’s increasing wealth, its trade with Michigan is growing, and the amount by which it grew over the last few years has been, frankly, phenomenal.

In the two years after the Peru Trade Promotion Agreement went into effect in early 2009, Michigan’s annual exports to Peru have almost quadrupled: They were 273 percent higher in 2010 than in 2008, when Peru was Michigan’s 65th largest export market, accounting for barely $15 million. This is all the more remarkable when you realize that Michigan’s overall exports dropped slightly over the same period — almost 1 percent lower in 2010 than in 2008. And this growth with Peru is continuing: In the first six months of 2011, Michigan’s exports to Peru grew by 44 percent, in comparison with the same period last year.

Interestingly, this pattern is not being duplicated nationwide. U.S. exports to Peru went up only 9 percent in 2008-10, while U.S. imports from Peru were down 13 percent.

So, where is the growth in Michigan’s trade coming from?

There have been numerous beneficiaries of this trade: Michigan exports to Peru of machinery, food, furniture, plastics and several other items are up since 2008, many with triple-digit percentage increases.

One big winner is Michigan’s chemical industry. The state’s exports to Peru of chemicals were 420 percent higher in 2010 than in 2008, as the growth of Peru’s economy increased its demand for pharmaceuticals, cosmetics, fertilizer, etc.

But Michigan’s biggest beneficiary of the improved trading relationship with Peru is the auto industry. The on-going liberalization of auto trade and the expanding middle class there has led to rapid growth in the Peruvian automotive sector. The Automotive Association of Peru estimates that new car sales increased 54 percent in 2010 and were on track to increase by another 42 percent in 2011. Adding to the allure for auto makers, the Peruvian government has started to limit imports of used vehicles and currently plans to ban them outright, based on concerns about pollution and vehicle safety.

As a result, Michigan’s annual exports of transportation equipment rose by 592 percent in 2008-2010, from almost $3 million to $20 million. (Such trade grew by a staggering 1,429 percent in 2010 alone, but that was after falling by 55 percent during the 2009 recession.) National data indicates that U.S. exports to Peru of motor vehicles were 80 percent higher in 2010 than in 2008, while exports of motor vehicle parts were 32 percent higher.

Competition for Peruvian auto consumers is fierce, however. The bulk of Peru’s new car imports are from Japan and South Korea, with Toyota and Hyundai representing around 19 percent and 15 percent of the market, followed by Nissan at 10 percent and Kia at 8 percent, according to Business Monitor International. This compares with a market share of about 8 percent for GM. Chinese makers have also moved in, with 96 Chinese auto manufacturers making up a 12 percent market share.

And while the PTPA has given the U.S. auto industry greater access to Peruvian consumers, Peru has been active in liberalizing trade with other countries, too. In the last three years, Peru has signed and/or implemented FTAs with Canada, China, Japan, Singapore, South Korea, Thailand and the European Union.

Peru offers a lot of opportunities for Michigan businesses, and Michigan exporters have been able to benefit from the country’s rapid economic growth and our improved trading relationship. As always, Michigan businesses must work to remain competitive. Such efforts are particularly important given the other trade deals that Peru has negotiated and its economy’s dependence on the price of gold.

Gerry Simons is a professor of economics in the Seidman College of Business, Grand Valley State University.

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