FREE TRADE AND ECONOMIC GROWTH
An evaluation of the American – Peruvian Free Trade Agreement,
5 years after its implementation

Adolfo Neira
Economy (ECON6090)
William Paterson University
10/24/14
Professor Dr. Taghi Ramin

Contents

ABSTRACT 3
INTRODUCTION 4
LITERATURE REVIEW 9
METHODOLOGY 11
FINDINGS AND DISCUSSION 13
CONCLUSION 17
REFERENCES 20
ANNEX OF FIGURES AND TABLES 22
Figure 1. Peru nominal and real GDP, 1994-2013 and Inflation Rate, 1994-2013 22
Figure 2. Peru Exports (FOB) and Imports (CIF). 1994-2013 22
Figure 3. Peru Trade Openness Index and Contribution of US trade to TOI. 23
Table 1. Trade evolution for Exports, Imports, and Trade Balance, Peru-USA 2009-2013. 23
Figure 4. Trade evolution for Exports, Imports, and Trade Balance, Peru-USA 2009-2013. 24
Figure 5. Peru-USA Trade Exports and Imports per capita. 2009-2013. 24
Figure 6. Peru-USA and Peru-World Net Trade and Balance Trade Comparison. 2009-2013. 25
Figure 7. Peru’s Foreign Direct Investment stock and flow (Equity Capital). 2003-2013. 25

ABSTRACT

Peru has signed a Free Trade Agreement with United States on February 2009, this FTA with the US is a balanced and comprehensive agreement covering all aspects of bilateral economic relationship such as: trade in goods, investment promotion, procurement, border services, and protection of intellectual property. It also includes chapters on labor and environmental protection.
Objectives for the Agreement are of two orders, to increase and guarantee preferential access to Peruvian exports to US economy, diversify exports, and attract Foreign Direct Investment, and on the other hand (and maybe most important in the long term) to strengthen the stability of the Peruvian economic policy reforms and institutions, as well as to contribute to improved international risk classification of Peru, promoting in that way the stability for the capital market.
Our data shows that the first order of objectives, directly related to trade, have been largely accomplished even when by previous trade agreements with US the actual situation of tariffs did not have an ample variation; of great importance for the accomplishment of the second order of objectives has been Foreign Direct Investment, which could explain the way the Peru-USA Free Trade Agreement has contributed to the stabilization of economic policy in the country and the greater-than-expected economic results.

INTRODUCTION

FREE TRADE AGREEMENTS
Free trade is the movement of goods and services among nations without political or economic obstruction. Historically, by applying tariffs, import quotas or embargoes, (trade protectionism), countries have tried to limit the import and export of goods and services, in order to protect domestic industries, but it become clear (especially after the Great Depression) that free exchange of most efficiently produced products will benefit economies and lower prices all around (Kinicki & Williams, 2012). The World Trade Organization has reported that more than 200 FTAs are in force worldwide, the US has 15 FTAs (Cooper, 2014). There is a clear relation between free trade and economic growth, according to the World Trade Organization, they base their opinion on the fact that all countries, even the poor ones, have capabilities of production to compete, and by the principle of comparative advantage, which states that even if one country is more efficient than the other in producing everything, the first country will still benefit from trading the goods in which the other country is least efficient (Baumol & Blinder, 2012). Free Trade Agreements (FTAs) are one of the best ways to open markets for US exporters; according to the International Trade Administration in 2012, 46% of US goods exports went to countries with FTAs, totaling $718 billion with an increase of 6% from the previous year; additionally, the trade surplus in manufactured goods with FTA partners totaled almost $60 billion, which is a 30% increase from