The economic competition between US and China
increases with time. United States
companies are looking for to depend less in China for its production and are
setting up operations in other countries. One trend is to bring production
close to home, in what is known as “nearshoring”. The advantage to this is that
as their operation are near home, the time and cost of bringing the goods to
the US market is lower than bringing them from China.
This article will examine what are the opportunities
that nearshoring can present for Peru, if Peru is prepared for that or has a
plan for it, and if US government is approaching Peru government for that effect.
I.
What are the opportunities for Peru
that nearshoring can offer?
The nearshoring of some production from China by US
companies has raised interest in Latin America that perhaps some production
could be set up in the region. This will represent a good opportunity for
countries like Peru to diversify its production and exports, now concentrated
in the commodity sector, and could help to create more employment.
Peru economy depend in the exports of natural
resources, which are prone to sudden price changes. Nearshoring manufacturing
production in Peru could allow a more stable source of foreign exchange for the
country, and, as these industries are labour intensive, this could help to
alleviate the lack of employment.
But for that to happen, countries need to have some
conditions, so companies move on and produce. What can be those conditions?
First, the country has to offer facilities like good
and stable macroeconomic conditions, like low inflation rate, government
finances in order, easy entrance for foreign investors, and social and
political stability.
Second, in an era of increasing trade agreements that
allow countries to access other markets at advantageous conditions, to have a
free trade agreement among them is a must, then to have an FTA with US is a
necessary condition.
Third, the country should offer good physical
infrastructure, like roads, ports, airports, so goods and persons can move
easily and cheaply. Besides this, cheap and skilled labour force are needed.
If we take into account those three conditions, not
many countries in the Latin America region fulfil those conditions. Perhaps the
best positioned is Mexico, that already has a strong economic and trade
relationship with US thanks to the USMCA agreement. This United States Mexico
Canada Agreement has created the North America free trade area, one of the
biggest in the world. And already Mexico is benefiting from US companies moving
from China to its soil even before the decoupling of US economy form China
gained much attention. As Mexico labour cost is now lower than in China, some
companies have already moved to Mexico. Also the restrictions imposed by the
strict COVID-19 policy in China made some companies take decision to move to
Mexico. The “nearshoring” movement means for Mexico more possibilities of
receiving US companies moving from China[1].
But what about Peru? Looking at the above three
reasons, it can be said that Peru could fulfil the first condition in the sense
that is one of the countries in Latin America with the best macroeconomic
conditions, together with Mexico and Chile. That is why in the qualifications
given by credit rating agencies like Standard and Poor´s (S&P), Moody´s
Investors Services, and Fitch Group, Peru is among the best placed in the
region, together with Chile and Mexico[2].
But recent events in Peru, like the ousting of the President Pedro Castillo
last December by the Congress, have made some foreign investors aware of the
political instability in the country. Since 2018 Peru has seen 6 Presidents in power,
and it seems that new elections will be held in 2024 again (or before, Castillo
was elected for a 5-year period and took power in July 2021).
Regarding the second condition, Peru has an FTA in
force with US since 2009. US is the second biggest trade partner of Peru, only
behind China, and Peru has a very good political and economic relationship with
the US.
As for the third condition, Peru infrastructure
requires modernization. In this aspect, a big seaport is being built north of
Peru capital Lima, in Chancay city, by a Chinese company, Cosco Shipping Ports,
with an investment of around 3 billion dollars[3].
This will become the biggest and more modern port in the Pacific of South
America. But, still roads and railroads connecting to the port will be needed.
And also, the country needs to have more skilled labour, and its cost is still cheap
compared to other countries in the region[4].
II.
Is Peru prepared for US nearshoring,
does the country has a plan?
Peru has not a consistent industrial policy that could
attract investing in the manufacturing sector, like let’s say Mexico or
countries like Argentine and Brazil. Peru is an open economy, one of the most
open in the world, with a tariff rate for imported goods of an average 0.7%,
compared with a figure of 6.9% for Argentina and 8.4% for Brazil for example[5].
And is one of the countries with the most numbers of FTA in force[6].
In 2014 the government published a National Plan for
Production Diversification, with the aim to promote Peru integration into
global value chains and diversify the country production and exports[7].
Peru mostly exports commodities (minerals, energy, and fishery products
accounts for 70% of Peru exports). But the following governments did not implement
this Plan.
As was said, one of the problem in Peru is the not
consistent industrial policy as it changes from administration to
administration. Each government have priorities that can be different from the
former government, and this is most acutely seen in the industrial field. The
ousted President Castillo in the election campaign and when was elected
announced a new industrial policy, but later he failed to formulate a concrete
one. And its administration will be remembered as one that saw many changes in
government officers, from Ministers to low ranking officers and with people
considered not competent ones.
III.
Does US administration have approached
Peru administration for a possible nearshoring consideration?
It is known that US administration is very interested
in increasing its relationship with Latin American countries, as it consider
that China is increasing its presence in the region and competing there with US.
Nearshoring could help increase US presence in the region.
The Biden administration is seen as keen in increasing
US relations with the region, and it is interesting to see that, previous to
the Ninth Summit of the Americas held in US last June 2022, in April that year
there was a Pre-Meeting on the issue of nearshoring organized by a US think
tank. In that meeting officers from US government meet with officials from 13
Latin American countries to discuss about nearshoring[8].
Also, in a meeting in June 2022 before the Summit of
the Americas, the President of the Inter-American Development Bank told
Ministers of Trade and Foreign Affairs, and CEOs present there, that nearshoring
offer countries in the region huge opportunities. Even he mentioned estimations
of increasing exports that countries in the region could achieve if they participate
in nearshoring. He mentioned that nearshoring could add annually 78 billion
dollars in additional exports in the short and medium term for the region[9].
US President Biden meet with then Peru President Pedro
Castillo in September 2022 during the UN general assembly meeting and reiterated
US government support for Peru economic development[10].
But there is no evidence that US government has approached Peru government to specifically
talk about nearshoring.
As said before, the recent political instability of
the country and the lack of a concrete industrial policy designed to attract
investment in the manufacturing sector probably dose not put Peru in an
attractive position as a candidate for nearshoring. It would be a good
opportunity for Peru but nearshoring would need a different government eager to
provide the conditions for that to happen.
January 16th, 2023
[1] See IVEMSA: Why manufacturers
consider nearshoring to Mexico a competitive advantage? https://www.ivemsa.com/why-manufacturers-consider-nearshoring-to-mexico-a-competitive-advantage/
[2] See for example Trading Economics:
Credit Rating/ America https://tradingeconomics.com/country-list/rating?continent=america
[3] See Silk Road Briefing: Cosco to invest US$3 billion in Peru´s Chancay Port
https://www.silkroadbriefing.com/news/2022/05/18/cosco-to-invest-us3-billion-in-perus-chancay-port/
[4] See Bloomberg Linea: https://www.bloomberglinea.com/english/which-latin-american-countries-minimum-wage-hikes-outpace-inflation/
[5] According to World Bank data:
Tariff rate, applied, weighted mean, all products (%) https://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS
[6] See WTO: Regional Trade
Agreements Database https://rtais.wto.org/UI/PublicMaintainRTAHome.aspx
[7] See OECD STIP COMPASS: Peru´s
National Plan for Production Diversification https://stip.oecd.org/stip/interactive-dashboards/policy-initiatives/2021%2Fdata%2FpolicyInitiatives%2F4788
[8] See Wilson Center: Summit of the
Americas Pre-Meeting on Nearshoring and Renewable Energy Investment in Latin
America https://www.wilsoncenter.org/article/summit-americas-pre-meeting-nearshoring-and-renewable-energy-investment-latin-america
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