2 Implementation of the WTO agreement on agriculture

2.1 Market access

In the AoA, commitments under market access attempt to open markets by introducing such measures as tariffication, tariff binding and tariff reduction. Since Peru is a member of the Andean Group, tariff treatments in Peru have to be compared with the CET and other mechanisms in effect in the Andean countries.

Commitments on bound tariffs

Peru’s commitments on bound rates in the WTO are fairly simple: The country negotiated a general ceiling bound tariff rate equal to 30 percent. That was the bound rate agreed in 1995 and to be reached in 2004. There were a few exceptions to the 30 percent bound rate, including a number of agricultural products deemed sensitive by Peru (and the Andean countries) and for which tariffs were bound at a higher rate (Table 1). Most products in the table are included in the “price band system”, which will be discussed later. These tariff levels will be controversial when the time comes to discuss the deepening of market access measures in the next round of negotiations.

Table 1. Consolidated tariffs for sensitive agricultural products

Source: JUNAC (1996, 1997). Note: These tariffs are levels to be reached in 2004.

Applied tariffs

Peru’s trade policy aims to liberalize the trade regime so as to provide nondistorting incentives that allow an efficient allocation of resources and foster the development of economic activities according to market signals. Consistent with this aim, Peru uses tariffs as its main instrument of border protection.

Table 2. Tariffs on agricultural items in Peru

Sources: “Arancel de Aduanas del Perú”. The 5 percent surcharge applies to 350 items. JUNAC (2000). Only the first 24 chapters of the Nandina classification are considered here, although agriculture includes some products from other chapters.

The entire tariff in Peru is bound, but there is a wide margin between applied and bound rates. Since 1994, Peru has implemented a tariff policy consisting of a flat 12 percent rate for all tariff lines, with the exception of a 20 percent tariff for the most sensitive products. The general bound tariff (30 percent) is higher than the maximum tariff level in Peru (25 percent, which includes a 5 percent surcharge). Its commitments regarding ceilings on tariffs are thus higher than its applied tariffs and higher than the Andean CET (implemented since 1996 in Colombia, Ecuador and Venezuela; Peru will be subscribing to the Andean CET in the near future). That is, in practice, the WTO commitments are not relevant, and Peru did not have to change any duty to conform to these commitments.

An analysis of present tariff levels in Peru indicates the room for negotiating future tariff reductions. First, tariffs for agricultural products in Peru (no surcharge included) average 14 percent against 16 percent for the CAN. Second, tariffs in Peru are less escalated with only three levels (4 percent, 12 percent, 20 percent), while the Andean CET for agriculture has four levels, (5 percent, 10 percent, 15 percent, 20 percent). Third, when surcharges are included, the average tariff in Peru is equal to that of CAN. Peru’s average tariff and the Andean CET for the first 24 chapters of the Nandina classification are presented in Table 2.

Peru is now in the process of integrating its tariff schedule with the Andean CET. Because of the marginal disparities involved, no problems are foreseen in integrating both schedules. If Peru has to adjust a tariff for any sensitive product, the expected impacts will be negotiated with the Andean trading partners in the context of the price band mechanism discussed below.

A further change in tariff policy has taken effect since April 2001. The change involved lowering, for a list of 1390 tariff lines, the general 12 percent ad valorem tariff to 4 percent (the 12 percent level is the “flat rate” discussed above). This list is considered to cover most non-produced inputs to domestic industries.

Non-tariff restrictions

Peru had already eliminated all non-tariff restrictions on imports (quotas, licences, state monopolies, etc.) before the enforcement of the Agricultural Agreement. This process of trade liberalization was implemented within the structural adjustment programmes applied in the early 1990s. The process of eliminating non-tariff restrictions was not accompanied by a compensatory increase in import tariffs, that is, the “tariffication” option of the Agricultural Agreement was not used by Peru (JUNAC, 1997).

Non-tariff barriers to trade in Peru generally appear low. Anti-dumping measures have been used sparingly, with only nine measures in force in early 2000 (none of them on agricultural items) and with the majority affecting non-WTO exporters. Peru maintains local content requirements in relation to various government nutrition programmes, as well as a trade-related investment measure in dairy products. A number of provisions favour domestic suppliers in government procurement, which is governed by a more transparent regulatory framework introduced in 1997. Peru is not a member of the WTO Multilateral Agreement on Government Procurement (WTO, 2000a).

The list of prohibited imports is short, motivated only by health and environmental considerations. The only exception is the prohibition on importing foreign alcoholic beverages bearing the name Pisco, because of a dispute about the denomination of origin that Peru had with Chile (WTO, 2000a).

Peru’s other basic import formalities have remained essentially unchanged since 1994. Pre-shipment inspection, introduced in 1992 to prevent under-valuation, is still in use, although the range of goods covered has been reduced. Peru receives technical assistance to implement the WTO Agreement on Customs Valuation, and was granted a waiver to delay full implementation. Both preferential and nonpreferential rules of origin are applied, the latter in relation to contingency measures (WTO, 2000a).

Regarding safeguard mechanisms, the experience in Peru is rather limited. The country has not faced any significant problem of dumping in its agricultural imports, and no actions have been taken to counteract dumping of agricultural products. Dumping demands have concentrated in products such as steel, textiles and other manufactured goods (INDECOPI, 2000).

Peru has no state-trading enterprise within the meaning of GATT rules. The Peruvian authorities noted that all types of rights or restrictions or practices in production and marketing by public entities have been eliminated (WTO, 2000a).

Price bands

The most important exception to the elimination of non-tariff trade restrictions is the price-band system applied by Peru and other Andean countries (Bolivia excepted) to some sensitive products.

One basic argument for the price bands is that agricultural export subsidies in the United States and the EU generate trade distortions in the world markets of grains, oils, milk, meat and sugar. The variable tariffs in the band mechanism tend to compensate for these distortions (Josling, 1998).

The Andean System of Price Bands (Decision 371 of the Commission of the Cartagena Agreement) defines the price band as a “mechanism of stabilization consisting of fixing a floor and a ceiling price, and letting the import cost to vary freely within the band”. Stabilization is achieved by increasing the tariff when the international price falls below the floor and reducing the tariff when the price climbs above the ceiling (JUNAC, 1995). The Andean System covers 138 items, 13 of which are “markers”, and 125 are derivatives and substitutes. Peru applies its own system of variable tariffs to a more reduced range of products. The products of the Price Band System for Colombia, Ecuador and Venezuela are listed in Table 3.

Table 3. Products in price-band system: Colombia, Ecuador and Venezuela

Source: JUNAC (1995).

In Peru, application of the price band means that 29 items are subject to variable specific duties intended as a price stabilization and protection mechanism. The variable duties are over and above the additional 5 percent tariff surcharge applied to these same commodities. The scheme in Peru was one of variable tariffs, that is, a band “without ceiling”, until recently. In June 2001, a new price band system was established (El Peruano, 2001); the new system affects five product groups: milk, maize, sorghum, rice and sugar. It is applied as follows.

Every month, a new set of reference prices (floor-ceiling prices) for each relevant commodity is published; if the price of a commodity (say maize) falls below its floor price, the system is triggered, and a new specific duty is imposed to bring the maize price back to the floor price level. This additional tariff is valid for all shipments of maize until the system is revised with the publication of the new set of trigger prices.

Note that a country may limit these additional duties to comply with its bound tariff commitments in the AoA (JUNAC, 1994). Thus, in principle, application of the price band does not violate Peru’s bound tariff commitments, but these trade regimes give rise to concerns about their effects in undermining predictability, distorting production and possibly leading to the breach of tariff bindings (WTO, 2000a).

The price bands have been the subject of several evaluation studies (Reyes, 1997; World Bank, 1994). A study by the Board of the Cartagena Agreement arrived at the conclusion that the system was an important stabilizer of import costs with a neutral effect on protection (JUNAC, 1995a). The same institution (JUNAC) defends the legality of the system within WTO norms and concludes that the system is compatible with commitments on tariff equivalent measures (JUNAC, 1996a). The issue of the legality of the price band policy has been the subject of debate within the WTO. One argument is that the scheme is not compatible with the AoA rule of a “tariff-only” border regime because the Agreement explicitly proscribes this practice. The scheme may also be incompatible with some other WTO provisions, e.g. with GATT Articles dealing with customs valuation and the principle of nondiscrimination (FAO, 2000b).

Table 4. Price bands in Peru: Total tariff including variable specific duty

^a The periods for maize and rice are 95/12 to 96/01; the periods for sugar and milk are 98/03 to 98/04. Wheat products were affected until 1998. These particular periods are chosen to compare the Peruvian experience reported in the first country-case study with the most recent experience.

Sources: El Peruano (2002) and FAO (2000b).

The experience of Peru’s scheme during 1995-2002 is interesting because it shows that Peru applied total duties as high as 54 percent (for sugar) and 59 percent (for rice) at certain periods, in order to stabilize domestic market prices and provide some protection to its “sensitive” import-competing sectors (Table 4). The table shows that the additional “price-band” duty for rice in 2002 was 39 percent, and the final tariff was 59 percent. Therefore, the 30 percent bound tariff would not have been adequate for this product, and in retrospect, Peru’s decision to bind tariffs for all these products at 68 percent appears consistent with the policies that were followed. Although the 68 percent limit was not breached, the extent of flexibility was at times very small. Peru may face difficulties in pursuing domestic and border policy along the current lines if bound tariffs are markedly reduced as a result of further rounds of negotiations (FAO, 2000b)

Effective protection rates in Peru

In order to measure the real implications of tariffs for protection, the relevant concept is the effective protection rate. The effective protection rate (z) expresses the combined effect of tariffs on the final product vis-à-vis the tariffs on the inputs that are used in producing that final good.

The formula for the effective protection rate is:

where t_j is the tariff on the final good, t_i are the tariffs on the inputs, a_ij are the input-output coefficients, and v_j is the value added coefficient (equal to 1 - Sa_ij) (Corden, 1971). This formula includes only the tariff effect; more sophisticated formulae may incorporate other trade restrictions and macroeconomic policies (exchange rate, interest rate).

The analysis of effective protection presented here uses the 1994 input-output matrix, which incorporates the structural reform policies of the early 1990s (INEI, 2000). The resulting ranking of productive sectors is shown in Table 5. The sectors with a high effective protection are Agribusiness (Dairy, Leather products, Clothing, Other food, Fish Preparations, Beverages-tobacco, Milling, Textiles). These industries have effective protection rates between 45 percent and 26 percent. Other industries have moderate levels between 24 percent and 7 percent (traditional export sectors have negative effective protection rates). Agriculture is located in the 16th place in the ranking of effective protection rates.

Table 5. Effective protection by input-output sectors

Source: Fairlie and Torres Zorrilla (2002).

The above effective protection rates represent statistical averages of all products classified in each input-output sector. Since the maximum tariff for each sector of the input-output table is known, the maximum effective protection can also be estimated, affecting only the products with the maximum tariff, on the assumption that they share the same technical coefficients as the average for their sectors. The ranking of these maximum protection rates is given in Table 6. The products with a high maximum effective protection are those with high ad valorem tariffs plus a surcharge: Other food (67 percent), and Sugar (62 percent). Other important sectors are Dairy, Fish Preparations, Milling and Textiles. Note that the maximum effective protection is fairly high (67 percent as compared with 45 percent). Also note that the surcharges from application of the price-band mechanism are not included in this exercise.

Table 6. Ranking of maximum effective protection rates

Source: Estimated.

2.2 Domestic support measures

Peru and the other Andean countries, in general, do not use domestic support measures which are the subject of reduction commitments, such as those applied in the developed countries. Domestic support measures have been cut back as, since 1991, the country has pursued a sectoral policy approach that emphasizes neutrality of incentives. In fact, liberalization and reductions in state assistance in the agricultural sector have resulted in difficult adjustments. Nonetheless, some analysts argue that the concentration of various policy measures in a limited range of favoured products (certain crops and dairy products) may misallocate labour, land and capital resources at the expense of other activities (WTO, 2000a).^[87]

Peru did not submit detailed commitments on domestic support measures, essentially claiming that all such measures fell under the categories exempted from reduction commitments (the green box and SDT) or else involved outlays below de minimis levels. Nonetheless, Peru provided some information on its domestic support measures in its WTO notifications for 1995-1997 (Tables 7 and 8). Expenditures on Green Box measures tripled from US$80 million in 1995 to US$223 million in 1997, although in relative terms, these are very small amounts (5 percent of the total value of production in 1997). Almost all outlays were concentrated on general services, notably research and development (R&D) and infrastructure. A notable change in the pattern of support was a sharp increase in the outlay on infrastructure, which more than quadrupled from 1995 to 1997. However, there was virtually no change in outlays on R&D, which consequently amounted to only 14 percent of total green box support in 1997, down from 40 percent in 1995 (FAO, 2000b; WTO Notifications).

Table 7. Green Box expenditures, 1995-1997 (US$ million)

Source: FAO (2000b); WTO Notifications.

Expenditures on non-product-specific measures of support are listed in Table 8. The total outlay is estimated at US$277 million for 1997 (6 percent of output value). There has not been any product-specific support since 1995 except for those measures provided for in the Green Box.

Thus, expenditures in domestic support in Peru have not exceeded the 10 percent de minimis level allowed for developing country members in the Article 6 of the AoA, for each of the above categories.

Table 8. Non-product-specific Aggregate Measure of Support, 1995-1997

Source: FAO (2000b); WTO Notifications.

2.3 Export subsidies

The export subsidy commitments cap and reduce the use of direct subsidies. Developing countries are permitted to provide subsidies to reduce the costs of internal transport and marketing of exports as well as freight charges on export shipments, or such measures as specified in Annex 1 of the Agreement on Subsidies and Countervailing Measures.

The structural adjustment programmes in Peru during the 1990s eliminated any remaining export subsidies. Nevertheless, in Peru, regional, sectoral, and social policies make use of certain fiscal incentives. Free zones and other special fiscal zones are largely used for regional development objectives but seem to have fallen short of their goals; fiscal exemptions provided under the Centers of Export, Transformation, Industry, Commercialization and Services scheme, established in 1996, are conditional on export performance. Preferential credit to selected sectors is available from the national development bank, Corporación Financiera de Desarrollo, SA (COFIDE) (WTO, 2000a).

2.4 Export policy analysis

There have been no significant changes in domestic policy relating to export products. Peruvian exports receive limited direct government support. Peru’s drawback regime refunds 5 percent of the FOB value of the good exported regardless of the actual amount of duties paid on imported inputs. Export restrictions apply on guano, rough wood and certain animals.

On the other side, licences are required for textile exports to the United States, with export restraints on cotton towels. Under the WTO Agreement on Textiles and Clothing, the EU applies quotas to Peruvian exports of cotton yarns and fabrics. A number of non-tariff measures implemented in foreign markets (e.g. sanitary and phytosanitary measures) may also hinder other Peruvian exports (WTO, 2000a).

Regarding illegal crops, production of coca leaf and derived products, driven by international demand, still appears sizeable although declining. One cause of concern is the emergence of poppy plantations in the last year or two (WTO, 2000a). A significant change in tariff levels facing Peru’s agricultural exports in the US market occurred because of the failure to renew the Andean Trade Preference Act (ATPA) in December 2001. The ATPA agreement allowed all agricultural exports from Peru to enter the US market totally free of import duties; the agreement aimed to promote alternatives to coca cultivation and production. Although the ATPA may be renewed in the near future, at the time of writing, it is not in effect.

Peru has gained relatively little from the implementation of the AoA in its most important trade partner, the United States. The United States managed to implement the AoA rather easily through minor changes in its domestic policies. The AoA provisions on market access did not have a dramatic effect on opening the US market for Peruvian exports because tariffs and other trade barriers were already low before the UR. Improvements in market access in Peru’s major market were rather marginal. For example, Peru does not benefit much from the new TRQs that were implemented mainly for meats and dairy products. The only export quota that has been used is the US sugar market quota, which is now administered as a TRQ. Exports under the quota were nearly constant during the 1990s averaging 293 000 tonnes in the 1991-1995 period and 285 000 tonnes in the 1996-2000 period. Peru appears to have gained little in terms of improved market access for its exports in return for its domestic commitments.

2.5 SPS Agreement

The Peruvian SPS authority is the SENASA, which is responsible for enforcing regulations governing domestic and imported plants and animals and their respective products and by-products. It is composed of two major offices: the Plant and Animal Health Offices. The Plant Health Office is responsible for protecting the health of plants and preventing the introduction and spread of foreign pests within Peru. All unprocessed products of plant origin like bulk grains, fresh fruits and vegetables, nuts and seeds can only be imported into Peru if accompanied by a valid (US-APHIS, for instance) certificate, but to clear customs, these products are subject to inspection by SENASA. The Animal Health Office is responsible for enforcing regulations governing the import and export of live animals, semen, embryos and by-products of animal origin as well as the registration of veterinary products. In order to import animals, semen or embryos into Peru, exporters of genetics must meet the requirements issued by SENASA. In cooperation with other governments, SENASA enforces laws and regulations to protect and improve animal health, as well as to control and eradicate animal diseases such as foot-and-mouth disease.

SENASA is also the agency responsible for the regulation of pesticides, herbicides and fungicides used in the fumigation of agricultural crops. In general, Peru adopts the international standards established in the Codex Alimentarius applying to all chemically treated products produced or imported which are intended for human and animal consumption. The National Agency for the Defense of Competition and Intellectual Property (INDECOPI) is the regulatory authority for the patent registration of pesticides and other agricultural chemicals.

Regarding trade, on the export side, SENASA is in the process of advancing efforts to stimulate the export of fresh fruit, vegetables and other agricultural products. On the import side, sanitary provisions may be adopted by SENASA to suspend the entry of products that threaten sanitary and phytosanitary conditions.

The sanitary and phytosanitary standards and technical barriers to trade facing Peru’s exports, particularly in the US market, have been relatively stable. Therefore, sanitary standards have not been an important issue affecting export performance. Nevertheless, special safeguard measures were applied to mango exports in the US market, owing to control measures against the spread of the Mediterranean fruit fly. The damage that this has caused to fruit producers in northern Peru is being assessed at the moment. In fact, one of SENASA’s export programmes has been to institute a heat-treatment process for mangoes in Piura, the northern region of Peru, for export to the United States.

Regarding sanitary supervision and control of food and beverages, national regulations have been harmonized with the international standards of the Codex Alimentarius. These measures should facilitate the negotiation of agreements with Peru’s main export partners.

2.6 TRIPS

After Peru ratified the Marrakesh Agreement in 1994, it has enacted various domestic regulations to harmonize them with its WTO obligations. In particular, in the area of intellectual property rights, Peru has put into effect the TRIPS agreement.

The TRIPS agreement should be seen as part of the competition policy framework. Because of the linkages and the need for consistency between competition policy and protection of intellectual property rights and the use of contingency measures, responsibility for all three areas has been given to a single agency, INDECOPI.

Protection for new plant varieties is granted to members of the Andean community through a sui generis system under Andean Decision 345. The system gives special rights to indigenous firms and sets rules for multinational enterprises. At present, Peru is not member of UPOV.

2.7 Marrakesh Decision

Peru is an NFIDC in the context of this Decision. Since there has been little progress in implementing it, Peru has no experience in this area. Peru’s only experience has been that the volume of food aid received has fallen sharply over time during the 1990s. In short, failure to implement the Marrakesh Decision has been a disappointment for Peru and other beneficiaries, although the justification for the Decision remains valid.