This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 11 LIMA 001346 
 
SIPDIS 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OIA 
TREASURY FOR OASIA/INL 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
DEPT PASS TO USTR - RSMITH 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV PE OPIC USTR
SUBJECT: Peru: 2005 ATPDEA Eligibility Report 
 
REF: State 18743 
 
¶1. The following is Post's submission of Peru's 2005 ATPDEA 
Eligibility Report, as requested in reftel. 
 
Effect of the ATPA/ATPDEA 
------------------------- 
 
¶2.  The growing importance of the U.S. market for Peruvian 
exporters is reflected by the fact that the U.S. share of 
Peru's total exports has almost doubled from about 16.1 
percent in 1994 to 29 percent in 2004.  Peru became eligible 
for preferential trade benefits under Andean Trade Promotion 
Act (ATPA) in August 1993 and received renewed and expanded 
benefits under ATPDEA in October 2002.  Exports under ATPA, 
and now the Andean Trade Promotion and Drug Eradication Act 
(ATPDEA), have since gained an increasingly important role 
in Peru's economy, as exporters have discovered that the 
ATPA as amended offers greater advantages than benefits 
offered under the Generalized System of Preferences (GSP). 
Of the $3.7 billion of goods that Peru exported to the 
United States in 2004, $1,603 million worth of goods entered 
the United States under ATPA.  Between 1997 and 2004, 
exports from Peru accounted for 28 percent of all exports 
under ATPA. 
 
¶3.  Under original ATPA benefits, four products (copper, 
asparagus, jewelry and zinc) of the roughly 5,500 covered 
items represented more than 90 percent of the value of ATPA 
exports from Peru.  In 2004, the United States imported 
copper valued at $458 million and asparagus valued at $112 
million. Under the ATPDEA, large increases have taken place 
in a wide range of non-traditional exports such as apparel, 
jewelry and various agricultural products.  The Government 
of Peru original estimates that Peruvian exports to the 
United States would increase by over 13 percent per year 
through 2006 (driven by annual gains of more than 17 percent 
for non-traditional exports), have proven conservative since 
exports under the ATPA-ATPDEA Program more than tripled in 
2003 and rose an additional 25 percent in 2004.  This 
momentum has propelled total Peruvian export increase to the 
United States of 24 percent in 2003 and 53 percent in 2004. 
 
¶4.  Peru's textile and apparel sector, a key job-provider, 
anticipates continued substantial growth as a result of new 
ATPDEA benefits.  Prior to the ATPDEA, Peru's apparel 
exports entered the United States with tariffs averaging 
about 21 percent.  With largely duty-free treatment under 
the ATPDEA, the National Society of Industries (SNI) 
estimates that apparel exports to the United States from 
Peru could increase from $400 million in 2002 to $2 billion 
in 2006.  The Government of Peru estimated that exports of 
products made with local alpaca fiber, included under the 
ATPDEA, grew by 25 percent in 2004.  Industry and government 
sources consider that the textile and apparel industry could 
generate up to 200,000 new jobs (including in cotton 
cultivation) in Peru through 2006 (compared with 270,000 in 
2004).  Due to the high rate of unemployment and 
underemployment, job creation is vital  to economic 
development in Peru. 
 
¶5.  Increased cotton cultivation in support of Peru's 
apparel industry could serve as a new valuable alternative 
to illicit coca growing.  During the first ten years of the 
ATPA, asparagus exports were the most significant direct 
alternative development benefit of the program.  The 
asparagus producers estimate that 60,000 people worked 
directly in 2004  in asparagus cultivation and processing. 
 
Expropriations 
-------------- 
 
¶6.  According to Peru's Constitution, the Government can 
only expropriate private property on public interest (such 
as for public works projects) or national security grounds. 
Any expropriation requires the passage of a specific act of 
the Congress.  The Government of Peru has expressed its 
intention to comply with international standards concerning 
expropriations.  Adequate payment to owners of agricultural 
lands expropriated by the Peruvian Government in the late- 
1960s and early-1970s is still at issue.  The Government of 
Peru has committed to the U.S. Government to resolve 
expeditiously one such claim involving an American company. 
 
Arbitral Awards 
--------------- 
 
¶7.  Peru accepts binding international arbitration of 
investment disputes between foreign investors and the state, 
in accordance with national legislation or international 
treaties signed by the Government.  A law permitting 
international arbitration of disputes between foreign 
investors and the Government or state-controlled firms was 
issued by decree during December 1992, and such recourse to 
arbitration was provided for in the 1993 Constitution. 
Although Peru theoretically accepts binding arbitration, on 
several occasions parastatal companies disregarded 
unfavorable judgments.  Instead, they turned these 
arbitration cases over to the judiciary, where they were 
bureaucratically delayed until the company conceded the 
case.  Peru is a party to the 1958 New York Convention on 
Recognition and Enforcement of Foreign Arbitral Awards. 
 
¶8.  Peru's adherence to ICSID (International Conference on 
Settlement of Investment Disputes) has improved the 
Government's ability to conclude bilateral investment 
agreements.  Disputes between foreign investors and the 
state regarding pre-existing contracts must still be 
submitted to national courts.  However, investors who 
conclude a juridical stability agreement for new investment 
are permitted to submit contract disputes with the 
Government to national or international arbitration by 
common agreement. 
 
¶9.  Several private organizations, including the American 
Chamber of Commerce and the Lima Chamber of Commerce, 
operate private arbitration centers.  The quality of these 
centers varies, however, and investors should choose a venue 
for arbitration carefully.  In one 2001 case involving the 
Lima Chamber of Commerce's arbitration center, a U.S. 
investor discovered irregularities in the way the case had 
been handled by the center. 
 
¶10.  The Peruvian government committed to resolve a number 
of commercial disputes as a condition of the U.S granting 
trade benefits under the ATPDEA in 2002.  In April 2004, the 
Peruvian government provided USTR with "roadmaps" for the 
resolution of several of these investment disputes.  As of 
December 2004, seven ATPDEA commercial disputes remain, of 
which two are in arbitration. 
 
Reverse Preferences 
------------------- 
 
¶11.  The U.S. Government has no indication that Peru has 
granted such preferences to the products of a developed 
nation.  Furthermore, Peru is a member of the World Trade 
Organization (WTO) and, accordingly, is bound by the most- 
favored-nation provisions in the WTO Agreements. 
 
Intellectual Property 
--------------------- 
 
¶12.  Protection of intellectual property rights (IPR) in 
Peru has improved significantly over the past decade, but 
still falls short of U.S. and international standards in 
several areas.  After two years on the U.S. Government's 
"Priority Watch List" under the Special 301 provisions of 
the 1988 Trade Act, Peru was moved to the "Watch List" in 
2001 in recognition of progress on copyright issues.  In 
2003 and 2004, Peru remained on the Watch List due to 
concerns about the adequacy of Peru's enforcement of its IPR 
laws, particularly with respect to the relatively weak 
penalties that have been imposed on IPR violators.  Although 
the Peruvian government in July 2004 increased the minimum 
penalty for piracy to four-year's imprisonment, there have 
yet to be any convictions under the new law.   Other factors 
contributing to continued placement on the "Watch List" 
include Peru's revocation of second-use patent protection 
for pharmaceuticals and a lack of protection for 
confidential test data that is submitted for the marketing 
 
SIPDIS 
approval of pharmaceutical and agrochemical products. 
 
¶13.  Peru belongs to the World Trade Organization (WTO) and 
the World Intellectual Property Organization (WIPO).  It is 
also a signatory to the Paris Convention, Bern Convention, 
Rome Convention, Phonograms Convention, Satellites 
Convention, Universal Copyright Convention and the Film 
Register Treaty.  In December 2001, the Public Ministry 
created the first office of a special prosecutor for the 
enforcement of IPR.  This move has increased the efficiency 
and number of IPR enforcement actions.  In August 2002, the 
Interior Ministry entered into an agreement with the IPR 
administrative agency, INDECOPI, to facilitate greater 
interagency cooperation on IPR enforcement actions, 
including police raids.  Nevertheless, concerns remain about 
the adequacy of IPR law enforcement, particularly with 
respect to the relatively weak penalties that have been 
imposed on IPR violators by the criminal justice courts. 
 
Copyrights 
---------- 
 
¶14.  Peru's 1996 Copyright Law is generally consistent with 
the TRIPS Agreement.  However, sound recordings, textbooks, 
books on technical subjects, motion picture videos and 
software are widely pirated.  While the government, in 
coordination with the private sector, has conducted numerous 
raids over the last few years on large-scale distributors 
and users of pirated goods and has increased other types of 
enforcement, piracy continues to be a significant problem 
for legitimate owners of copyrights.  Peru signed the WIPO 
Copyright Treaty in July 2001 and the Performances and 
Phonograms Treaty in February 2002.  Progress is being made 
on the government's legalization of computer software; the 
Government of Peru published a decree in February 2003, 
requiring all government entities to use legal software and 
establish effective controls to ensure such legal use 
between now and March 31, 2005. 
 
Patents and Trademarks 
---------------------- 
 
¶15.  Peru's 1996 Industrial Property Rights Law provides the 
framework for effective protection for patents and moves 
Peru closer to conformity with international obligations. 
In 1997, based on an agreement reached with the U.S. 
Government, Peru resolved several inconsistencies with the 
TRIPS Agreement provisions on patent protection and most- 
favored nation treatment for patents.  However, U.S. 
companies continue to have concerns about Peru's protection 
of patents, as counterfeiting of trademarks and imports of 
pirated merchandise remain widespread. 
 
¶16.  U.S. drug manufacturers are concerned that Peru does 
not provide sufficient protection for data submitted to 
regulatory authorities in connection with marketing approval 
for pharmaceutical products.  The Government of Peru does 
not provide for a fixed period of data exclusivity for 
pharmaceutical producers.  Peru's health regulatory agency 
provides sanitary registrations to copies of innovative 
pharmaceutical products despite WTO TRIPS Article 39.3, 
which requires governments to prohibit the "unfair 
commercial use" of confidential test data.  Peru also does 
not provide adequate patent protection to "second-use" 
innovations.  The U.S. Government believes that qualifying 
"second use" inventions are entitled to patent protection 
under international obligations. 
 
Extradition 
----------- 
 
¶17.  A new extradition treaty entered into force in August, 
¶2004.  It specifies a list of extraditable offenses and 
permits the extradition of nationals. 
 
Workers' Rights 
--------------- 
 
¶18.  The Constitution and the law provide for the right of 
association.  About five percent of the formal sector 
workforce of 5 million belongs to organized labor unions. 
Peru's 2004 total workforce totaled 13 million. 
Approximately 8.3 million (62 percent) work in the informal 
sector, with 5 million workers employed in the formal 
sector.  About 91 percent of the economically active 
population has some kind of employment, but 57 percent work 
less than 35 hours a week or earn less than the minimum 
household consumption basket. 
 
¶19.  Labor regulations provide that workers may form unions 
on the basis of their occupation, employer affiliation or 
geographic territory.  Workers are not required to seek 
authorization prior to forming a trade union, nor may 
employers legally condition employment on union membership 
or non-membership. 
 
¶20.  In the past, labor advocates asserted that laws 
promulgated by the Fujimori administration in the 1990's, as 
well as provisions in the 1993 Constitution, failed to 
protect the rights of workers to form unions and bargain 
collectively.  In January 2003, President Toledo signed into 
law legislation that addresses some of the International 
Labor Organization's (ILO) primary objections to the 
Peruvian labor code.  The 2003 labor law includes provisions 
to allow apprentices to join unions, reduces to 20 the 
number of individuals required to form a union, recognizes 
the right to strike and allows for collective bargaining by 
sector. 
 
¶21.  In recent years, the ILO criticized a provision that 
permitted businesses to employ up to 30 percent of their 
workers between the ages of 16 to 25 in apprenticeship-type 
jobs; workers in this age bracket were precluded from union 
membership and participation.  To address this complaint, a 
2001 law reduced this number to 10 percent, and the 2003 
labor reforms allow apprentices to join unions and 
participate in union activities. 
 
¶22.  The 2003 labor reforms remedied some of the ILO's long- 
standing concerns over Peruvian law in the areas of 
collective bargaining and the right to strike.  The new law 
allows unions to bargain collectively at both the firm and 
sector levels, and removes a 1992 requirement that a 
majority of workers in an enterprise, regardless of union 
membership, must vote in favor of any strike.  A second 
decision by the Supreme Court in March 2004 guaranteed the 
right of industry-wide collective bargaining by workers in 
the civil construction industry. 
 
¶23.  In the area of illegal dismissals for union activity, 
the main union confederations criticized the Employment 
Promotion Act, amended in 1995 and 1996, for restricting the 
rights of workers.  Unions complained that the law 
eliminated the right of dismissed workers to compulsory 
reinstatement if they prove that employers dismissed them 
unjustly.  In practice, companies sometimes offered 
financial compensation instead of reinstatement as the 
legislation allows.  Although the law prohibits companies 
from firing workers solely for involvement in union 
activities, this provision was not enforced rigidly.  In 
November 2000, the ILO's Committee of Freedom of Association 
recommended that the Government enforce legislation 
protecting workers from dismissal on account of membership 
in a union or participation in union activities. In the 
first such action by the judiciary, in September 2002 the 
Constitutional Tribunal ruled that a major company, 
Telefonica, had to rehire over 400 workers suspected of 
being fired for their union affiliation. 
 
¶24.  In July 2002 Congress passed a law regarding collective 
dismissals that reinstated workers' rights in this area. 
During 2003 and 2004 over fourteen thousand former state 
workers received some form of compensation for dismissals 
during the Fujimori era, including payments, reinstatement 
into their old jobs or reassignment to other jobs in the 
state sector.  At the end of 2004, the GOP was considering 
petitions from other workers who claimed coverage under the 
2002 law.  The workers were among those deemed to have been 
fired unjustly during the Fujimori Administration. 
 
¶25.  There are no restrictions on the affiliation of labor 
unions with international bodies.  Several major unions and 
labor confederations belong to international labor 
organizations such as the ICFTU, the international trade 
secretariats, and regional bodies. 
 
SIPDIS 
 
¶26.  The Constitution recognizes the right of public and 
private sector workers to organize and bargain collectively; 
however, it specifies that this right must be exercised in 
harmony with broader social objectives.  Labor regulations 
provide that workers may form unions on the basis of their 
occupation, employer affiliation or geographic territory. 
The law does not prohibit temporary employees from joining a 
union, but they may not join the same union as permanent 
workers. 
 
¶27.  The Constitution prohibits forced or bonded labor, and 
there were no reports of forced labor during 2002.  The law 
specifically prohibits forced or bonded labor by children. 
Forced labor previously was found in the gold mining 
industry in the Madre de Dios area; however, the changing 
nature of the industry and government efforts to regulate it 
have at least partly addressed the problem. 
 
¶28.  The Constitution provides that the State promote social 
and economic progress and occupational education.  It states 
that workers should receive a "just and sufficient" wage to 
be determined by the Government in consultation with labor 
and business representatives, as well as "adequate 
protection against arbitrary dismissal." 
 
¶29.  In September 2003, the Government raised the statutory 
minimum wage from $124 (410 soles) a month to $153 (460 
soles).  The Ministry of Labor employs approximately 170 
labor inspectors. 
 
¶30.  The Constitution provides for a 48-hour workweek, a 
weekly day of rest, and an annual vacation.  As of February 
2002, a law requires companies to pay overtime to employees 
who work more than 8 hours, to provide additional 
compensation for work at night, and to provide a 45-minute 
meal break to employees during their 8-hour shift. 
 
¶31.  While occupational health and safety standards exist, 
labor advocates argue that the Government dedicates 
insufficient resources to enforce existing legislation.  The 
Ministry of Labor receives worker complaints and intervenes 
in cases.  When firms are found to be in violation of the 
law, the Government sanctions them with fines or, in some 
cases, closure.  In cases of industrial accidents, the level 
of compensation awarded to the injured employee usually is 
determined by agreement between the employer and the 
individual involved.  The worker does not need to prove an 
employer's culpability in order to obtain compensation for 
work- related injuries.  No provisions exist in the law for 
workers to remove themselves from potentially dangerous work 
situations without jeopardizing their continued employment. 
 
Economic Conditions 
------------------- 
 
¶32.  Over the past decade, Peru has been transformed by 
market-oriented economic reforms and privatizations that 
generated many of the conditions for long-term growth. 
Peru's dynamic economic performance in 2004 contrasted 
sharply with turmoil elsewhere in South America.  The 
country led the hemisphere with 5.1 percent real growth, 
driven by investment, domestic demand and exports.  GDP in 
2004 reached $67.1 billion.  Inflation was 3.5 percent, the 
currency appreciated 5.5 percent over the year and Lima 
unemployment fell to 8.8 percent.  GDP per capita reached 
$2,440, up significantly from $2,100 in 2001.  Fiscal 
accounts were under control, though the deficit hit 1.1 
percent of foreign reserves closed the year at $12.6 
billion.  External debt was 45.2 percent of GDP.  Banking 
and retail services, mining, manufacturing, agriculture and 
fishing are key economic sectors. 
 
¶33.  Peruvian exports reached $12.5 billion in 2004, with 
imports of $9.8 billion, producing a trade surplus of $2.7 
billion.  ATPDEA benefits may propel exports above $13.8 
billion in 2005 (provided the Peruvian Government continues 
to improve the investment climate).  Peru's major trading 
partners are the United States, China, European Union, 
Japan, Colombia, Brazil and Venezuela.  Approximately 29 
percent of Peruvian exports are destined for the United 
States and 20 percent of Peruvian imports come from the 
United States.  Exports include fishmeal, copper, zinc, 
gold, petroleum, coffee, sugar and textiles and apparel. 
Imports include machinery, vehicles, processed food, 
petroleum and steel.  Peru belongs to APEC and the WTO and 
actively participates in FTAA negotiations.  Peru's stock of 
foreign direct investment (FDI) was over $12.9 billion in 
2004, with the United States, Spain and Britain the leading 
investors.  FDI is concentrated in privatized sectors such 
as mining, electricity, telecommunications, and finance. 
 
¶34.  Peru's economy is one of the better-managed in Latin 
America, but challenges remain.  Growth should be near 5 
percent in 2005, driven by construction, investment, 
domestic demand and ATPDEA-related exports, with inflation 
of 2.5 percent.  Tax collections are currently 13.4 percent 
of GDP.  The Peruvian Government still faces strong social 
pressures to reduce high poverty (52 percent) and both 
unemployment and underemployment (56 percent).  Maintaining 
long-term growth will require improving the investment 
climate, reducing corruption and completing other reforms. 
 
Market Access 
------------- 
 
¶35.  Tariffs apply to virtually all goods exported from the 
United States to Peru, although rates have been lowered over 
the past few years.  The government maintains some 
"temporary" tariff surcharges on agricultural goods in an 
effort to protect local production, assure fiscal revenues, 
and promote domestic investment in the sector.  Under the 
current system, a 12 percent tariff applies to 45 percent of 
the products imported into Peru; four percent and seven 
percent tariffs apply to about 23 percent and 15 percent of 
goods, respectively; and 17 percent and 20 percent tariffs 
apply to most of the rest.  A few products, mostly 
agricultural, are assessed rates (because of the additional 
"temporary" tariffs) of 5 percent.  In March 2002 the tariff 
rate for most capital goods was reduced from 20 percent and 
12 percent to 7 percent.  On December 31, 2003, the Ministry 
of Economy and Finance announced the reduction of tariffs 
from seven percent to four percent for more than one 
thousand capital goods, which account for 95 percent of the 
items previously set at the seven percent level. 
¶36.  In theory, Peru has a two-tier import tariff system (12 
and 20 percent), but in reality it has four levels for 
agricultural imports: 4, 12, 17 and 25 percent. 
Additionally, all products are subject to a value added tax 
(VAT) of 19 percent, although discounts have been granted to 
local production in some cases.  Most products of interest 
to U.S. agricultural exporters are subject to high import 
duties.  Meats, offal, dairy products, ice cream, processed 
potatoes, beans, fruit and vegetables (fresh and processed), 
rice, wheat, confectionery, chocolate, pasta and pastry are 
assessed an import duty of 25 percent.   Malt, wine and 
beverages are assessed a 17 percent import duty, while 
yellow corn, 12 percent.  Inputs such as seeds, cattle for 
reproduction, semen and fertilizers are imported into the 
country duty free.  Peru's bound levels for agricultural 
products under the WTO are quite high, from 80 percent to 
141 percent. 
 
¶37.  Imports of "sensitive" products, including corn, rice, 
sugar and powder milk, plus scores of related products, are 
subject to a price band.  This levy is the difference 
between the minimum import price and an international 
reference price plus an adjustment for insurance, freight 
and other factors.  On September 27, 2002, the Government of 
Peru increased the number of products related to these for 
categories of "sensitive" products.  This new law 
principally affects U.S. import of dairy products, and in 
September 2002, import duties on sugar were raised from 40 
to 100 percent. 
 
¶38.  In the second half of 2002, the five member countries 
of the Andean Community started to negotiate a common 
external tariff and initially reached agreement on 62 
percent of tariff items. If implemented, this harmonization 
will have the effect of increasing Peru's tariffs on a 
number of products, particularly with respect to consumer 
goods. 
 
¶39.  Some non-U.S. exporters to Peru have preferential 
access to the Peruvian market because of Peru's bilateral 
tariff reduction agreements.  A top U.S. agricultural market 
access priority is the elimination of the price band system. 
 
WTO Agreements 
-------------- 
 
¶40.  Peru was a founding member of the WTO and was a 
contracting party to the GATT beginning in 1948.  The U.S. 
Government has raised concerns regarding Peru's failure to 
provide adequate protection for confidential test data as 
required by WTO TRIPS Article 39.3.  The U.S. Government has 
also pressed for increased cooperation between INDECOPI, the 
administrative agency that handles patents, and DIGEMID, the 
health agency that licenses pharmaceutical products. 
 
FTAA Participation 
------------------ 
 
¶41.   Peru is an active participant in FTAA negotiations. 
Peru hosted an FTAA vice ministerial meeting in 2001. 
 
Subsidies or Other Requirements 
that Distort International Trade 
-------------------------------- 
 
¶42.   Almost all non-tariff barriers, including subsidies, 
import licensing requirements, import prohibitions and 
quantitative restrictions have been eliminated.  However, 
the following imports are banned for a variety of reasons: 
several insecticides, fireworks, used clothing, used shoes, 
used tires, radioactive waste, cars over five years old and 
trucks over eight years old.  Used cars and trucks that are 
permitted to be imported must pay a 45 percent excise tax - 
compared to 20 percent for a new car - unless they are 
refurbished in an industrial center in the south of the 
country upon entry, in which case they are exempted entirely 
from the excise tax.  Import licenses are required for 
firearms, munitions and explosives, chemical precursors 
(since these can be diverted to illegal narcotics 
production), ammonium nitrate fertilizer, wild plant and 
animal species, and some radio and communications equipment. 
 
¶43.  There are still significant trade barriers imposed by 
SENASA, the Government of Peru's sanitary regulatory agency, 
on agricultural products including poultry, live animals, 
animal genetic material and plant products.  The result has 
been an effective ban on the import of certain agricultural 
products (for example, paddy rice). 
 
¶44.  Imports are also assessed a 19 percent value-added tax 
on top of any tariffs; domestically-produced goods generally 
pay the same tax as well.  The Government of Peru exempts 
certain domestic agricultural products from the tax. 
 
Trade Policies that Revitalize the Region 
----------------------------------------- 
 
¶45.  Peru has been a member of the Andean Community (and its 
predecessor Andean Pact) since 1969.  In 1992, Peru 
suspended its participation in the Andean Community's 
integration process because it was reluctant to abandon its 
two-level tariff structure for the four-tiered common 
external tariff (CET) favored by the other members.  In 
1997, Peru agreed to be fully and gradually incorporated 
into the Community's free trade area by December 2005.  At 
the Andean President's Council meeting on January 31, 2002, 
the five member countries of the Andean Community agreed to 
establish an Andean free trade zone, a common external 
tariff (CET), and a customs harmonization policy by January 
¶2004.  Peru received an exception for petroleum and fuels 
until the end of 2003 and for agricultural products until 
the end of 2005. 
 
¶46.  The CET agreement established a unified tariff schedule 
that became effective at the end of 2003.  In the second 
half of 2002, the Andean members started to negotiate the 
CET in order to provide initial offers for the FTAA, and 
reached agreement on 62 percent of tariff items.  Peruvian 
industry representatives and economists raised concerns that 
negotiations of a CET on the remaining 38 percent of items 
could lead to increased tariffs on several consumer products 
and lower competitiveness.  As a result, finalization of 
negotiations on the CET with Andean neighbors will be 
difficult to achieve. 
 
Narcotics Cooperation 
--------------------- 
 
¶47.  On March 1, 2005, Peru received full certification for 
its cooperation with the United States on counter-narcotics 
issues under the Foreign Assistance Act.  Peru is the second 
largest cocaine producer in the world and a major exporter 
of high purity cocaine and cocaine base to markets in South 
America, Mexico, the United States and Europe. 
 
¶48.  About 90 percent of the coca leaf harvested in Peru is 
used to produce cocaine or its intermediate products.  The 
remainder is used by the local population or for legal 
medical and commercial consumption in the United States and 
Europe.  Dense coca cultivation is increasing in new areas 
outside the traditional source zones.  With USG support, 
Peru eradicated almost 10,000 hectares of coca in 2004: 
alternative development programs supported legal productive 
activities on almost 20,000 hectares.  Opium latex seizures 
are one indication of an upward trend in poppy cultivation 
along Peru's Andean ridge.  Although the GOP has not been 
able to measure the size of the opium poppy crop, Peruvian 
National police eradicated almost 100 hectares of opium 
poppy in 2004. 
¶49.  Drug traffickers continue to move coca products out of 
Peru by land, air, and sea, as well as opium latex and 
morphine across northern land borders, to U.S., South 
American and European markets.  Mexican trafficking 
organizations are implicated in using Peru as a primary 
source of cocaine base and HCl.  Maritime smuggling of 
larger cocaine shipments is the primary method of 
transporting multi-ton loads of cocaine base and cocaine 
hydrochloride (HCl).  Law enforcement efforts in 2004 
focused on maritime and port investigations/interdictions 
that produced record-breaking cocaine seizures.  In 2004, 
approximately 5.7 metric tons of cocaine base and 7.11 
metric tons of cocaine HCl were seized.  The USG and GOP 
have cooperated to improve port security and to address 
increased maritime smuggling at key Peruvian port locations. 
Importantly, the fledgling National Port Authority (APN) 
made very significant advances in promoting the timely 
attainment of International Ship and Port Security (ISPS) 
requirements.  The USG is continuing to work with the GOP to 
enhance their capability to identify and inspect suspect 
cargo shipments. 
 
¶50.  In a positive move, Peru's Congress passed a new law in 
July 2004 to strengthen controls over precursor chemicals 
used in cocaine processing.  This will go into effect in 
early 2005.  Less positive is the increased support by 
members of Congress for cocalero demands for more permissive 
coca laws.  In July, the U.S. Government designated Fernando 
Zevallos as a drug kingpin and froze his assets in the 
United States, including those of his airline 
Aerocontinente, which has since gone out of business.  The 
United States and Peru brought into force a new extradition 
treaty in August 2003.  In 2004, Peruvian authorities 
approved requests to extradite two narcotraffickers from 
Peru to the United States. 
 
¶51.  Although Peru is not a major financial haven, money 
laundering is endemic.  Drug organizations transport million- 
dollar cash proceeds from the U.S., Mexico, Colombia, and 
other Central/South American countries to Peru.  Recently 
amended anti-money laundering legislation has broadened the 
definition of money laundering; however, procedural 
implementation, key currency reporting requirements, and 
asset forfeiture provisions are still lacking. 
 
Anti-Corruption 
--------------- 
 
¶52.  It is illegal in Peru for a public official or employee 
to accept any type of outside remuneration for the 
performance of his or her official duties.  Peru has 
ratified both the UN Convention Against Corruption and the 
Organization of American States' Inter-American Convention 
Against Corruption.  Peru is not a member of the 
Organization of Economic Cooperation and Development, and 
has not signed the OECD Convention on Combating Bribery. 
 
¶53.  Peru is one of four nations worldwide participating as 
a pilot country in the G8 anti-corruption and transparency 
initiative.  The U.S. has worked vigorously to help the 
Peruvian government prepare a detailed action plan, in 
coordination with other G8 partners and NGOs, of activities 
it will pursue under the initiative.  The plan envisions 
activities in six areas:  a) citizen information/internet 
connectivity; b) improving central government fiscal 
transparency; c) development of GOP procurement systems; d) 
improving regional/local government transparency and 
management; e) improvement of transparency of extractive 
industry revenues; and f) development of asset forfeiture 
systems and legislation.  Total project expenditure under 
the initiative is expected to be $40 million in 2005-06, 
with the U.S. already funding some projects. 
 
¶54.  Transparency International in 2004 ranked Peru number 
74 (out of 145) in its 2004 Corruption Perception Index. 
(In the same study, Chile was ranked 20, Brazil was number 
59, Colombia was ranked 60 and Argentina was ranked 108.) 
U.S. firms have reported only a small number of problems 
directly resulting from corruption, especially in government 
procurement processes and in the judicial sector, but the 
revelation in late 2000 of a broad and deep corruption ring 
organized by former presidential advisor Vladimiro 
Montesinos has heightened awareness of the problem.  While 
anti-corruption efforts have been a stated priority of the 
Toledo Government, in practice most resources are directed 
at investigating Fujimori-era corruption.  In 2001, 
President Toledo appointed an anti-corruption "czar" to lead 
government efforts, but this official resigned in 2002 and 
has yet to be replaced.  Private sector groups have 
increased efforts to combat corruption through a new 
cooperative effort called "ProEtica." 
 
Government Procurement 
---------------------- 
 
¶55.  There is no limitation on foreign participation in 
government solicitations.  In 2000, however, in an effort to 
support national companies, the government began adding 15 
points (on its rating scale of 100) to Peruvian firms 
bidding on government procurement contracts.  In January 
2002, the government raised the point preference an 
additional five points, for a total of 20, until 2005.  U.S. 
pharmaceutical firms have raised concerns about this 
practice with regard to bidding on the Health Ministry's 
pharmaceutical purchases.  U.S. firms contend that the 20 
percent margin is excessive, giving unfair advantage to 
Peruvian competitors that would otherwise lose these bids on 
cost or technical grounds.  Peru is not a signatory to the 
WTO Agreement on Government Procurement. 
 
Counter-Terrorism 
----------------- 
 
¶56.  Peru is taking action against both international and 
domestic terrorism.   For the second year in a row, 
President Toledo featured combating terrorism in his state- 
of-the-nation speech, and he has committed the GOP to 
increased funding for projects in areas where Sendero 
Luminoso (SL) still operates on a limited basis.  This 
action is deemed necessary because of growing indications 
that SL is allying itself with coca producers and narcotics 
traffickers, and is attempting to rebuild its base through 
expanding its influence in universities throughout Peru. 
The new National Defense and Security fund will provide $40 
million to the police and military in 2005; some of this 
money will be used to support counterterrorism interests. 
The Peruvian Congress has created a national security system 
designed to improve intergovernmental cooperation and 
strengthen terrorism prosecutors.  The National Police (PNP) 
Directorate of Counterterrorism works closely with the 
Embassy in counterterrorism activities.  The PNP continues 
to break up SL camps and capture leaders.  Peru aggressively 
prosecutes terrorist suspects.  After the Constitutional 
Tribunal overturned numerous provisions in Fujimori-era 
terrorism laws in 2003, President Toledo issued new decree 
legislation and established the procedures for reviewing and 
retrying terrorism cases.  Around 750 cases are being 
retried in 2005.  The trial was set to begin in the first 
quarter of 2005 for eight SL members accused of the March 
2002 bombing across the street from the U.S. Embassy that 
killed 10 people.  Peru is a party to all 12 of the 
international conventions and protocols relating to 
terrorism.  Peru, Colombia and Brazil recently signed a 
border cooperation agreement that addresses terrorism and 
arms trafficking, along with other issues. 
 
¶57.  A June 2002 law passed by Congress allows prosecution 
of money laundering related to terrorism and also created 
the Financial Intelligence Unit (FIU) as a means to identify 
money-laundering.  Peru further strengthened its anti-money 
laundering legislation in July 2004.  The law included anti- 
terrorist finance activities among the FIU's functions; 
greatly expanded the FIU's capacity to engage in joint 
investigations and information-sharing with foreign FIU's; 
enhanced the FIU's capacity to exchange information and 
pursue joint cases with other agencies of the Peruvian 
government; and requires that individuals and entities 
transporting more than $10,000 in currency or monetary 
instruments into or out of Peru file reports with Customs. 
The FIU may have access to these reports upon request.  This 
legislation moves the country closer to fulfilling UNSCR 
¶1383. 
 
STRUBLE