Peru: Selected Issues
Author: International Monetary Fund
Publication Date:
06 Feb 2007
eISBN:
9781451831092
Language:
English
Keywords:
ISCR; CR; Peru; government; Subnational government; anti-export bias; clothing export; minimum wage; Peruvian T&C company; Peru's textile and clothing; Imports; Agricultural commodities; Minimum wages; Global
Download PDF (463.8 KB)

This Selected Issues paper for Peru explains growth and reform in the country post-1990. As half of the population in Peru still lives below the poverty line, further research should consider how the link between average income improvements and poverty reduction can be strengthened. Although the ongoing decentralization effort in Peru has been based on considerations of fiscal sustainability, more work needs to be done to ensure that the conditions for a successful decentralization are in place. The experience of Peru teaches that sound macroeconomic policies are a precondition for de-dollarization.

Abstract

This Selected Issues paper for Peru explains growth and reform in the country post-1990. As half of the population in Peru still lives below the poverty line, further research should consider how the link between average income improvements and poverty reduction can be strengthened. Although the ongoing decentralization effort in Peru has been based on considerations of fiscal sustainability, more work needs to be done to ensure that the conditions for a successful decentralization are in place. The experience of Peru teaches that sound macroeconomic policies are a precondition for de-dollarization.

IV. The Performance and Prospects of the Peruvian Textiles and Clothing Exports1

A. Introduction

1. Peru’s textile and clothing (T&C) exports have witnessed a strong and sustained growth over the past decade. As a result, the sector has become a significant source of foreign exchange and employment creation. Performance can be attributed to (i) broad based reforms to foster macroeconomic stability, trade openness, and an investment-friendly environment; (ii) micro reforms and investment at the sectoral level focused on value-addition and the modernization of operations and logistics; and (iii) indirect protection in key markets due to global textile quotas under the Multifibre Agreement (MFA) that contained competition from low-cost exporters.

2. Going forward, additional policies will be needed to secure a sustained growth in an increasingly challenging external environment. Since January 2005, MFA quotas have been eliminated, unleashing full global competition that poses challenges for small-scale producers such as Peru. While recent reforms have boosted the sector’s resilience to price pressures, future prospects will hinge upon parallel measures to safeguard profitability. These include addressing bottlenecks in infrastructure and customs procedures, a mismatch between business needs and labor skills, rigidities in the labor market, and productivity in the domestic cotton sector.

B. Stylized Facts

3. Peru’s textile and clothing (T&C) exports have grown strongly over the past decade, at a rate similar to the country’s total exports. T&C exports have grown by an annual average of 11 percent since 1995, doubling their share in GDP to 1.6 percent in 2005 (Figure 1). While impressive, this is similar to the trend in overall exports, suggesting a secular increase in the openness of the Peruvian economy during this period, driven by broad macroeconomic reforms. Sector-specific factors behind T&C export growth have been investment focused on value-addition, a robust external demand, trade preferences, and protection in key markets.

Figure 1.
Figure 1.

Peru Textiles & Clothing Exports

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

4. Peru’s T&C sector has a visible contribution to the overall economy through direct and indirect linkages.

  • In 2003, the T&C industry contributed one percent of the total value-added and for 6.5 percent of manufacturing value-added.The sector has accounted for around 30 percent of non-traditional exports and 9 percent of total exports over the past decade.

  • The sector is vertically integrated, encompassing most stages of the production chain from fiber to finished goods. The agriculture, livestock, and chemicals industries are those with the strongest links with T&C production.

  • The number of workers employed directly in the T&C sector was recently estimated at 150,000, while jobs in the agriculture and livestock industries linked indirectly to the T&C sector were estimated to reach 120,000 and 80,000 respectively.2

  • The sector comprises an increasing number of exporting companies, mostly SMEs. T&C export companies have almost doubled in number since 1996 to around 1,700. Most firms are small, with average exports of just US$1.7 million each in 2005, or around 0.15 percent of the total.3 Half of the export value remains in the hands of only 13 companies. However, smaller companies’ exports have grown at a much faster annual rate during 1996–2005.4 The majority of T&C companies in Peru are domestic, although many have direct links with foreign companies. Larger T&C companies are increasingly sub-contracting smaller ones at specific stages of the production chain.

5. Peru has diversified its markets for T&C exports, but its largest partner by far remains the United States. Over the past decade, the number of export markets has increased to 114 in 2005, from 83. The United States is Peru’s largest partner, accounting for almost two thirds of export value in 2005, up from one third in 1995. The United States also absorbs exports with higher average unit prices than other export markets.

C. Factors Behind the Recent Performance: Private Initiatives

6. A strategy of value-addition has raised unit export prices over the years. To confirm this, we compare the change in the average unit price of T&C exports at constant (1995) volume shares with the change in the overall average unit price, using U.S. data for U.S. imports from Peru (Figure 2).5 Over 1995–2005, the former has increased by just 2.1 percent annually—that is, the prices of the products exported the most 10 years ago have risen modestly. In contrast, the overall unit price has risen six percent annually, suggesting that the volume share of products with higher prices has increased.

Figure 2.
Figure 2.

Shift to Higher-priced Exports

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

7. The shift to quality has been driven by private investment and revamped corporate management. Peruvian companies have been increasingly involved in higher value-added, “full package” production—i.e., production that involves all stages of the chain, including product development, fabric sourcing, cutting, sewing, packaging, quality control, trade financing and logistics. This has been facilitated by significant private investments in technology and state-of-the-art equipment, as evidenced by the imports of T&C machinery, which amounted to an annual average of around US$65 million during 1996–2005 (Figure 3). Anecdotal evidence suggests that, as a result, T&C companies can now better manage logistical aspects of their businesses, leading to higher quality standards, faster delivery and turn-around times, and more professional client management.

Figure 3.
Figure 3.

Imports of Machinery in the T&C Sector

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

D. Factors Behind the Recent Performance: Public Schemes

8. Since the 1990s, the government has implemented a number of broad reforms to improve productivity, encourage private investment, attract FDI, and promote exports. These have included the privatization of state-owned enterprises, the strengthening of the financial system, and a reduction of tariffs on imports from 16.3 percent in 1995 to 8.3 percent in early 2006. Incentives for exports in general include:

  • Refund of VAT6 paid on imported and/or local purchases of capital goods carried out by companies whose production activity is dedicated to export.

  • Duty drawback.7 This is a refund of tariffs paid on imported inputs. Under the scheme, funds reimbursed to exporters amount to 5 percent of the value of exports fob, as long as exports do not exceed US$20m per tariff line and per exporting company.

9. Other public initiatives to promote exports, including T&C, may have also played some role. For example, under Peru’s National Plan of Competitiveness, approved in mid-2005, steps have been taken to improve export performance and market access, including through the facilitation of companies’ participation in international export fairs; the formation of a center of technological innovation (CITE) specifically for the textiles sector, that would organize courses to strengthen fashion-design skills; and a capacity-building bilateral cooperation plan with Argentina, organized by the National Alpaca Commission (CNC 2006). The approval in 2005 of a “National Plan for the Formalization, Competitiveness and Development of SMEs” could also help the T&C industry, given the large representation of SMEs in the sector.

E. External Factors Behind Performance: Trade Preferences and MFA Quotas

10. Peru enjoys preferential access to all of its most important markets for T&C exports (Figure 4). Preferences are granted under the United States’ Andean Trade Promotion and Drug Eradication Act (ATPDEA), extended in 2002 to cover T&C exports; the Andean countries’ customs union (CAN), the bilateral free trade agreement (FTA) with Chile, and the EU’s GSP scheme.

Figure 4.
Figure 4.

Average MFN tariff on textiles and apparel

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

11. Preferential access has been valuable for Peruvian exporters, as evidenced by its high utilization, and is likely to have boosted investment in the sector. 8 For example, in the case of ATPDEA, the utilization rate in 2005 was more than 95 percent of Peru’s T&C exports to the United States, while in the case of the CAN all exports enter duty-free. Trade preferences improve the profitability of exporters by allowing them to charge a higher price without undermining their market share. This likely boosted investment in the sector, raising product quality and corporate management.

12. The extent to which trade preferences have led to gains in export shares is difficult to assess. Econometric analysis using cross-country data is impeded by the different product composition of exports originating from different countries.9 A less formal analysis focusing on the U.S. market shows a visible increase in the rate of Peru’s market-share gains since 2002 (Figure 5).10 The gains have been predominantly the result of increases in the unit price, given that Peru’s share in the volume of U.S. T&C imports has remained more or less the same, confirming the ongoing process of modernization and value-addition in the sector.

Figure 5.
Figure 5.

Peru - Share in U.S. Textile and Clothing Imports

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

13. While the price advantage offered by trade preferences can be significant, it can be partly offset by the costs of complying with rules of origin (RoO) (Annex 1). These can be administrative as well as higher input costs. For example, under the ATPDEA, only those products that are made out of U.S. or Andean yarn and fabric can qualify for preferential access. Prices of these inputs can be significantly higher than those obtained from other partners in the region, such as Mexico, the CAFTA region, or Chile.

14. Until the end of 2004, Peru also benefited from restricted global competition due to quotas on T&C exports maintained by some industrialized countries under the MFA (Annex 2). These quotas were directed to low-cost exporters such as India and China, while Peru did not face quota restrictions under the MFA. By helping restrict the access of low-cost exporters to the U.S. and EU markets, the quotas maintained global prices at higher than free-trade levels, to the benefit of unconstrained exporters. The vast majority of Peru’s T&C exports to the United States remained indirectly protected by MFA quotas until January 2005.11

15. Studies suggest that the indirect benefits of the quotas to unconstrained exporters such as Peru can be much higher than those conferred by tariff preferences. This is because quotas were considerably more restrictive than tariffs on T&C products, particularly for the some Asian exporters. For example, Elbehri (2004) estimates that the export tax equivalent (ETE) of U.S. quotas on different Asian exporters ranged from 20 percent to more than 50 percent, depending on how binding the quotas were for each exporter (Figure 6). 12 This compares with tariff preferences of 10–20 percent for most Peruvian exports under the ATPDEA.13

Figure 6.
Figure 6.

Export Tariff Equivalents for Cotton Apparel Exports to the U.S., 2002

(In percent)

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

Source: Elbehri (2004)

16. A number of studies in the literature have sought to estimate the impact of MFA quota elimination on export patterns and welfare at the global and country levels. The vast majority of these studies used computable general equilibrium (CGE) models that take into account linkages between different sectors and markets (i.e., product, capital, and labor) in an economy to simulate, ex ante, the impact of a specified “shock,” such as the MFA quota elimination.14 Most studies do not focus on Peru in particular, but their conclusions can be used to draw lessons for Peru.

17. These studies indicate that cost-competitive countries that have been highly quota-constrained in the past are to benefit the most. These countries are predominantly China and India, but also other Asian countries (Annex 3). Latin American countries (notably Mexico or the Caribbean region) would likely experience a decline in prices and market share. At the qualitative level, studies suggest that the largest beneficiaries would be countries that can offer a diversified mix of T&C exports; engage in vertically integrated production; produce high-quality, high-value-added goods; and export to a diverse number of markets (Appelbaum 2004). Accordingly, Peru would be expected to experience downward pressures on its prices and export shares, although it could see increases in high-end, niche products where it maintains a competitive advantage.

F. Developments in the Aftermath of Quota Elimination

18. Peru’s T&C exports have continued to grow since January 1, 2005. This is important, given that theoretical analysis predicted mixed results for exporters like Peru. However, the imposition of new restrictions against imports from China by the United States and the EU has complicated the assessment of Peru’s resilience to full global competition (Box 1).

19. Peru has benefited from the U.S. and EU restrictions on China’ exports, but the safeguards were not the only drivers of Peru’s export performance. By May 2005, almost 90 percent of Peru’s T&C exports (in value terms) to the United States were covered by safeguards, effectively prolonging their protection from full Chinese competition until 2008. While this has played a role, Peru has performed better than other exporters enjoying a similar level of protection.15 For example, in the U.S. market, during 2005 Peru’s share in U.S. T&C imports grew by 0.08 percentage points to 0.83 percent (Figure 7). This is considerably better than most exporters in the region, including preference beneficiaries such as Colombia, Mexico, and the CBI and CAFTA countries, which have been registering declines in their import shares in recent years. Value-addition has been critical, with Peru’s unit prices growing steadily unlike most other countries in the region (Figure 8).

Figure 7.
Figure 7.

Shares in U.S. Imports of Textiles and Clothing

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

Figure 8.
Figure 8.

Cross-Country Comparison of Unit Prices of Textiles and Clothing Exports to the United States

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

U.S. and EU Restrictions on Chinese T&C Exports in the Aftermath of MFA Quota Elimination

Import restrictions were introduced by the United States under special safeguard clauses included in China’s WTO accession protocol—first in December 2003 and subsequently during 2004 and 2005 on more products. These safeguards limit the import growth of Chinese T&C products that are believed to cause market disruption to 7.5 percent annually, thus containing supply and preventing excessive drops in the price of these products.1/

In November 2005, the U.S. and China signed a comprehensive bilateral textile agreement covering a broader range of products than those protected by safeguards up to September 2005. Under the agreement, which came into effect on January 1, 2006, the products covered are restricted by quotas that will increase gradually, by 3.2 percent each year, through 2008—the year when the China World Trade Organization (WTO) Textile Safeguard expires. Specifically, for 2006, the quotas agreed were tighter than those that would have been permitted under the special WTO safeguards while in 2007 they would be about as restrictive as under the WTO safeguards. As a result, almost all of Peru’s export remain protected in the U.S. market until 2008. It should be noted however that protection is only vis-à-vis China, and hence, competitive pressures will continue to be felt from other low-cost suppliers in East and South Asia.

Earlier in the year (June), the European Commission had also negotiated a bilateral agreement with China to restrain its growth of T&C exports to the EU. The agreement set growth rate limits on 10 T&C categories accounting for about half the volume of EU’s imports of Chinese T&C. The agreement distinguished between three groups of products: The sharper was the import increase in the first quarter of 2005, the lowest were the growth ceilings. Nonetheless, these growth ceilings were higher than the 7.5 percent annual growth that would have been imposed were the EU to impose WTO-compatible safeguard measures. In exchange, the EU agreed to refrain from imposing safeguards for categories not covered by the agreement.

1/

WTO members obtained the authority to implement textile safeguards as a condition of China’s accession to the WTO in December 2001. Specifically, under China’s Accession Agreement, WTO members judging that T&C imports from China are causing market disruption can request consultations with China with a view to easing or avoiding such market disruption. Upon receipt of the request, China has agreed to hold its shipments to a level no greater than 7.5 percent above the amount entered during the first 12 months of the most recent 14 months preceding the month in which the request for consultations was made. This provision remains in effect through 2008.

G. Prospects and the Need for Reforms

20. Going forward, external factors will be less supportive for Peru’s T&C exports, including due to the removal of U.S. and EU restrictions against Chinese goods after 2008. Peru enjoys a number of advantages such as the local sourcing of high-quality inputs, a vertically integrated production, increasing value-addition and relative proximity to the United States. However, Peru lags behind when it comes to economies of scale and structural impediments that are a drag on competitiveness. Against this backdrop, Peru’s performance will hinge upon reforms to ensure that external price pressures can be absorbed through gains in productivity.

21. Available quantitative indicators are not conclusive on developments in Peru’s competitiveness over the years. For example, the CPI-based REER suggests that exchange rate developments have been favorable for competitiveness over the years. With regard to salaries, official data show a growth of around 13 percent between 2002 and 2005 in U.S. dollar terms16 and of just below 20 percent in the minimum wage. However, with productivity rising, unit labor costs would be a more appropriate indicator of labor-cost competitiveness, but data to derive such a series are not available.

22. A cross-country comparison of minimum wages suggests that Peru is well-placed vis-à-vis countries in the region, but less so vis-à-vis Asian competitors. 17 Figure 9 shows a cross-country comparison of minimum wages in U.S. dollars in the manufacturing sector, set between mid-2004 and mid-2006, depending on data availability for each country. Peru compares relatively well with other countries in the region.18

Figure 9.
Figure 9.

Comparison of Minimum Wages

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

23. Some Peruvian businesses cite non-wage costs as an important constraint to Peru’s cost-competitiveness. Cross-country data on non-wage costs are hard to collect and, therefore, the present paper limits the analysis to a comparison between Peru and Central America, with data provided by the Peruvian textiles company Industrias Nettalco. Such a comparison suggests that non-wage costs in Peru (as a proportion of absolute gross wages) exceed those in Central America by 17–27 percent19 (Figure 10).20 While Peruvian T&C exports do not compete directly with Central American ones (given their different product composition), the comparison remains useful for highlighting potential objectives of future policy action, particularly in the area of labor reform. Extending the—more flexible—labor regime for SMEs to all businesses would reduce non-wage costs from 62 percent of the gross wage to 17 percent.21

Figure 10.
Figure 10.

Non-wage costs - Regional Comparison

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

Source: Industrias Nettalco. Data on Guatemala have been confirmed by the Fund desk economist on Guatemala. Data for the other countries have not been confirmed.

24. A key concern of Peruvian T&C companies appears to be the “deficit” in skilled labor. Indeed, in a survey covering 440 T&C companies, 47 percent of firms reported difficulties in recruiting workers with adequate qualifications, which was attributed to the mismatch between the sector’s needs and the skills of the labor force.22 Particular difficulties were encountered in the cases of mechanics and operators of textiles machinery and of seamstresses. The strengthening of technical schools (e.g., the Instituto Superior Tecnologico (IST) or the Centro de Formacion Sectorial (SENATI)) to better tailor their programs to the needs of the sector would be critical to this end. Closer participation by the private sector in the development of curricula, together with appropriate accreditation systems to facilitate assessment of the programs’ quality, would also help.

25. Higher efficiency in the domestic cotton sector would allow T&C exporters to maximize the benefits of local sourcing of quality cotton. Peru enjoys the advantage of local production and sourcing of high-quality pima cottons and tanguis wool. This can bring large competitiveness gains, as there are substantial logistical and operational advantages in using locally-produced cotton, such as faster delivery times, easier checks on quality standards, and closer and more frequent contact between T&C and cotton producers. However, there is a general perception that production remains inefficient, raising input costs for T&C producers.

26. The elimination of import tariffs on cotton could help improve competitiveness and accelerate improvements in productivity of the domestic cotton sector. Zero tariffs would give access to cheaper regional cotton, lowering the input costs of T&C production aimed at both the domestic and external markets.23 Importantly, it would boost competition in the cotton sector and accelerate efforts to enhance productivity. This would be more effective if it occurred in parallel with more liberal RoO in the FTAs with Peru’s trading partners. For example, in the case of the FTA with the United States, RoO that permit “cumulation” would allow the use of cheaper inputs from non-U.S., non-Andean countries, without compromising the right to receive duty-free treatment in the U.S. market.24, 25 The introduction of cumulation provisions in the FTA with the United States will be negotiated between the two parties six months following the implementation of the FTA.26

27. More generally, tariff and non-tariff barriers on imported goods create an anti-export bias. Tariffs on imports can cause an anti-export bias because they lower the price of exports relative to those of domestically-produced goods and/or because of raising the price of imported intermediate goods used in the production of exports. The latter is usually not offset by duty-drawback schemes such as those applied in Peru, as these tend to be costly to administer. Tokarick (2006) estimates that, for Peru, the export tax equivalent of its import tariffs is 10.9 percent—that is, exporters suffer a “tax” of up to10.9 percent as a result of Peru’s own tariffs on imports (Figure 11). Indicatively, this is more or less equal to the average tariff preference granted by the ATPDEA.

Figure 11.
Figure 11.

ETEs of Import Tariffs for Selected Developing Countries

Citation: IMF Staff Country Reports 2007, 053; 10.5089/9781451831092.002.A004

28. Logistical impediments to trade are another important factor dragging competitiveness. While Peru compares favorably in this field with other countries in the region (Table 1), the potential for improvement is enormous—e.g., when compared with OECD countries. Exporters cite a number of areas that remain to be improved, including, inter alia, the documentation burden for imports and exports, a duty-drawback process that some perceive as burdensome, or delays in customs inspections and clearance. Undue delays in the latter can be particularly costly, notably when it comes to imported inputs for T&C production: First, they raise warehouse costs due to the additional days it takes for clearance, particularly given the high storage tariffs charged at Peruvian ports. Second, they can lead to overall production delays, often forcing producers to ship their goods by air, rather than by sea, in order to meet the delivery deadlines—and thus raising transport costs substantially.

Table 1.

Trading Across Borders

article image
Source: Doing Business 2007 (The World Bank)

H. Outlook and Conclusions

29. The Peruvian T&C sector has made significant strides in increasing export market penetration in recent years. This has been achieved by re-orienting production towards higher value-added goods, restructuring companies’ organizational and operational structures, establishing close production links with foreign clients, and taking advantage of trade preferences. Progress at the micro-level has been assisted by a favorable macroeconomic environment that has ensured price and exchange-rate stability, a strong economic and productivity growth, and declining financing costs. These developments have translated into a robust T&C export growth, which has thus far withstood the challenge posed by the elimination of textile quotas in 2005.

30. Looking forward, there are significant challenges, against a backdrop of enhanced global competition and continuing bottlenecks at the domestic level. In the absence of quota protection, other factors are becoming more significant, including geographic proximity and transport times, availability of low-cost skilled workers, reliability in the quality and delivery of finished goods, flexibility of production (e.g., to adapt to changing fashions), cheap and fast access to high-quality raw materials, and effective management.

31. Peru enjoys a number of advantages in these areas, but further steps need to be taken to realize its full potential. Specifically:

  • Measures to incentivize higher productivity in the domestic cotton sector. This would ensure that the full benefits of Peru’s access to high-quality local cotton are realized. Unilateral tariff reduction could be one step in this direction, but this should ideally be combined with more flexible RoO in Peru’s international trade agreements. More generally, unilateral tariff reduction would help reduce the “tax” on exporters due to Peru’s own import tariffs.

  • Address arduous infrastructure bottlenecks to remove undue costs to exporters, particularly those outside Lima. Delays in transport and delivery due to inadequate infrastructure erode the benefits of geographic proximity to the U.S. or other markets. Investment in new roads, and port and airport infrastructure is critical to ensure progress in this area and the recently-awarded concession for the southern terminal in the port of Callao is a positive step in this direction.

  • Simplify customs procedures. Cumbersome customs clearance procedures increase operating costs, undermine the exporters’ ability to meet delivery deadlines, and impede the speedy and efficient sourcing of foreign inputs that may be necessary for meeting clients’ product specifications. Measures that would bring Peru closer to industrialized country standards would give Peru an edge over competing suppliers and yield substantial gains for all Peruvian export industries.

  • Ensure that labor costs (wage and non-wage) reflect labor productivity and address the skills deficit in the labor force. Workers’ skills could be strengthened by tailoring existing national training schemes to the needs of the productive sectors and creating systems of accreditation that help assess the effectiveness of such schemes. Investment in human capital will be critical to ensure that Peru can take advantage of the opportunities opened by freer trade, in the context of bilateral and multilateral trade agreements. In addition, cross-country data suggest that non-wage costs in Peru can be high. Potential measures include reducing the upfront holidays granted to workers and increase them gradually in line with the length of service; and enhancing the flexibility of the labor market by streamlining firing procedures.

  • Maintain a stable and transparent business climate and strengthen security. Stability in a country’s commercial, regulatory, and legal system helps minimize uncertainties in investment decisions. Provision of public goods, notably security, is also critical to providing a safe environment for workers’ commute and the transport of shipments. This can often outweigh the importance of other factors, including trade preferences or geographic proximity.27

Notes

1

Paper prepared by Katerina Alexandraki (Economist, PDR).

2

Boletín de Economía Laboral 32, Ministry of Labor and the Promotion of Employment, December 2005.

3

Source: Sociedad Nacional de Industrias (SNI).

4

Annual export growth of the top 100 T&C exporters has been 11 percent since 1996, compared with 25 percent for smaller T&C exporters. However, the trend was reversed in 2005, when exports of smaller companies declined 6 percent, compared to a 21 percent growth for the top 100 exporters.

5

Data for U.S. imports from Peru, in value and volume terms, come from the Office of Textiles and Apparel (OTEXA) http://www.otexa.ita.doc.gov/msrpoint.htm#tradeact). Volume is reported in terms of square meters.

6

VAT is refunded up to an amount equal to the VAT rate times the fob value of exports during the reference period. Source: Proinversión (2005), p. 167.

7

The legal framework supporting the duty drawback system consists of 13 laws and regulations, the main one being the Texto Único Ordenado de la Ley General de Aduanas, Decreto Supremo Nº 129–2004-EF.

8

The “utilization rate” measures the extent to which exporters take advantage of a particular preference scheme. For a good i exported from country X, the utilization rate is equal to the exports of good i from X that enter the preference-granting country (Y) under the scheme divided by total exports of good i from X to Y. Low utilization rates can be common when the administrative costs of complying with rules of origin are high, when the MFN tariffs of Y on good i are very low or when awareness of preference schemes is limited.

9

Even disaggregation of T&C exports at the 10-digit level of the HTS classification does not to distinguish between high-end and low-end products of the same type (e.g. branded vs. non-branded polo T-shirts).

10

The annual average growth in U.S. import share rose from 7.1 percent during 1995–2002 to 7.8 percent during 2002–05.

11

We looked at the 40 product categories at the 10-digit level of the HTS classification that have accounted for around 85 percent of Peru’s exports to the United States over the past decade. Of these, all but three remained protected by MFA quotas until January 1, 2005—that is, they were only liberalized in the last (fourth) phase of quota elimination.

12

The ETE measures the degree of restrictiveness of a quota: In order to export, an exporter from a quota-constrained country needs to purchase a quota (or an export license). The more restrictive the quota (e.g. compared to a producer’s capacity to export at a given price), the higher its price will be. This cost can be viewed as an export tax (collected by the exporting country’s government).

13

Based on the U.S. import tariff schedule (HTS classification, 2006).

14

Caveats of CGE models include the reliance on a large set of data (sectoral, tariff, etc) that is arduous to collect and on simplifying assumptions (notably, full employment of resources). Specifically, results are sensitive to the choice of the base year for calibration and baseline projections; the level of product/region aggregation; the degree to which product differentiation is allowed for imports from different countries; the choice between constant or increasing returns to scale; the choice between a static or a dynamic analysis. (See OECD (2004)).

15

Around 87 percent of Peru’s 2005 T&C exports to the United States remained shielded from Chinese competition by U.S. safeguards vis-à-vis Chinese goods. This compares with 65 percent for Colombia, 63 percent for Mexico and 87 percent for the CAFTA region.

16

These data are not necessarily representative of the broader labor market trends: They are based on surveys of enterprises base in Lima with 10 or more employees.

17

Minimum wage is a good indicator of labor costs in the sector as surveys suggest that, apart from managerial-level positions, wages in the sector tend to be at or close to the minimum wage. (See Boletín de Economía Laboral 32, Ministry of Labor and the Promotion of Employment, December 2005).

18

Source: ILO minimum wage database. In the case of some of the countries, an average of the lowest and highest minimum wage reported was taken. For central American countries, the minimum wage applying to the manufacturing sector was considered.

19

To the extent that the absolute wages are similar (according to the ILO minimum wage data), differences in non-wage costs translated into difference in absolute wage costs.

20

Figure 10 compares non-wage labor costs in Peru with those in Central America, taking as a basis a “normalized” wage of 100 for all countries. For further details on the exact nature of these non-wage costs see table in Annex 4.

21

Source: Calculations by textiles company Industrias Nettalco.

22

Boletín de Economía Laboral 32, Ministry of Labor and the Promotion of Employment, December 2005

23

In principle, duties on cotton are reimbursed under the duty-drawback scheme in the case of those products destined to export markets. However, tariff elimination would help producers aimed at the domestic market as well, putting pressure on local cotton producers to improve productivity.

24

Cumulation allows the sourcing of inputs from the entire FTA region, as opposed to only the country in question. See Annex 1.

25

Currently, if Peruvian exporters use cheaper cotton imports, their products do not qualify for duty-free access to the U.S. market under the ATPDEA. This creates a disincentive to import cotton from abroad, effectively protecting the domestic cotton sector. Laxer rules of origin would permit the use of cheap foreign cotton, thus creating incentives for the domestic cotton sector to become more competitive.

26

Peru favors cumulation with regional partners such as Mexico only if this is on a reciprocal basis—that is, if these countries can also cumulate with Peru (i.e. use Peruvian inputs) for their duty-free exports to the United States.

27

The experience of Mexico is a case in point: As USITC (2004) reports, U.S. importers have been gradually switching away from Mexico despite the NAFTA preferences, due to concerns over the security of shipments. Rising labor costs and inconsistent quality and unreliability of production were other cited factors.

Annex 1. Types and Restrictiveness of Rules of Origin

Rules of origin (ROOs) define methods for establishing the origin of a product for trade purposes. A product is determined to originate from a particular country if it has undergone sufficient processing or a substantial transformation in that country.

Different FTAs or preference schemes vary in the level of restrictiveness of their ROOs. This generally reflects differences in the costs of complying with the ROOs—e.g., product documentation, verification of origin, administrative infrastructure at the borders, etc. Such costs could compromise the benefits from preference schemes or FTAs. In the case of European Free Trade Association (EFTA), these costs have been estimated to be 3–5 percent of the f.o.b. price of exports (Herin (1986)). In the case of NAFTA, Anson et al (2003) estimate that up to 40 percent of Mexico’s preferential margin to the US market in 2000 (estimated at 5 percent) was absorbed by ROO-related administrative costs.

ROOs can also give rise to efficiency costs: Rather than taking advantage of the global networks of production, producers are instead constrained to use local inputs, at the expense of efficiency and competitiveness. Indeed, Estevadeordal and Suominen (2004), using a gravity model covering 156 countries, find that aggregate trade flows fall the higher the restrictiveness and the degree of sectoral selectivity of the ROOs, while flexible ROOs—e.g., allowing cumulation1—facilitate aggregate trade flows. These results are confirmed by other empirical studies on ROOs.2

A summary table of the ROOs for T&C products under the ATPDEA is provided below.

article image

Notes

1

Cumulation allows the sourcing of inputs from the entire FTA region, as opposed to only the country in question.

2

See Appiah (1999) on NAFTA; or Augier, Gasiorek and Lai-Tong (2004) on impact of cumulation rules for textiles trade in EU Partnership Agreements.

Annex 2. Elimination of Quotas under the Agreement on Textiles and Clothing

Before the Agreement on Textiles and Clothing (ATC) came into force, on January 1, 1995, a large portion of T&C exports was subject to quotas under the Multifibre Arrangement (MFA)—a special regime that lay outside normal GATT rules.

Under the ATC, WTO members committed to remove T&C quotas by January 1, 2005. At the same time, the ATC offered the right the use of safeguards to deal with cases of serious damage or threat thereof to domestic producers during the transition period.

Four WTO members (Canada, EU, Norway and the United States) had maintained MFA quotas and were subject to a progressive quota elimination over 10-years under the ATC. The process was “backloaded,” as countries could decide themselves which products to liberalize at each stage—thus leaving the most sensitive products highly protected until January 2005. As a result, before January 2005, only 20 percent of the products integrated into the WTO rules under the ATC had been subject to quotas1. The remaining 80 percent of quotas were left to be eliminated in the fourth phase. The text table below shows the four stages of U.S. and EU textile and clothing quota phase-out.

article image
Sources: WTO, Nathan Associates (2002)

Most other countries (that had no MFA quotas) chose to have the right to use the transitional safeguard mechanism in the ATC. Only nine countries (Australia, Brunei Darussalam, Chile, Cuba, Hong Kong, Iceland, Macau, New Zealand and Singapore) decided to integrate all of their T&C imports into the GATT rules at the outset.

Annex 3. Recent Studies on the Impact of the Elimination of MFA Quotas

article image

Annex 4. Cross Country Comparison of Non-Wage Costs

article image

References

  • Appelbaum, R.P., 2004, “Assessing the Impact of the Phasing-out of the Agreement on Textiles and Clothing on Apparel Exports on the Least Developed and Developing Countries,” Center for Global Studies, University of California, Santa Barbara. Paper 05.

    • Search Google Scholar
    • Export Citation

  • Aviss and Fouqin, 2001, “Textiles and Clothing: The End of Discriminatory Protection,” Centre d’Études Prospectives et d’Informations Internationales,” Lettre du CEPII No198. http://www.cepii.fr/anglaisgraph/publications/lettre/pdf/2001/198ang.pdf

    • Search Google Scholar
    • Export Citation

  • CNC, 2006, “Avances en la Implementación del Plan Nacional de Competitividad,” Secretaria Técnica del Consejo Nacional de la Competitividad (CNC), Peru. http://www.perucompite.gob.pe/Documentos/AvancesPNC170706.pdf

    • Search Google Scholar
    • Export Citation

  • Elbehri, A., 2004, “MFA Quota Removal and Global Textile and Cotton Trade: Estimating Quota Trade Restrictiveness and Quantifying Post-NFA Trade Patterns.” Economic Research Service, USDA. Paper prepared for the 7th Annual Conference on Global Economic Analysis, Washington, DC. http://www.ecomod.net/conferences/ecomod2004/ecomod2004_papers/318.pdf

    • Search Google Scholar
    • Export Citation

  • Diao, X., and A. Somwaru, 2001, “Impact of the MFA Phase-Out on the World Economy: An Intertermporal Global General Equilibrium Analysis,” TMD Discussion Paper No79, Trade and Macroeconomics Division, International Food Policy Research Institute, Washington, D.C. http://www.ifpri.org/divs/tmd/dp/papers/tmdp79.pdf

    • Search Google Scholar
    • Export Citation

  • Chadha, R., D.K., Brown A.V., Deardorff, and R.M. Stern, 2001, “Computational Analysis of the Impact on India of the Uruguay Round and the Doha Development Round Negotiations: Medford, MA: Tufts University Department of Economics, Working Paper. http://www.ase.tufts.edu/econ/papers/200107.pdf

    • Search Google Scholar
    • Export Citation

  • Francois, J., and D. Spinanger, 2001, “With Rags to Riches but Then What? Hong Kong’s T & C Industry vs. the ATC and China’s WTO Accession,” Paper prepared for the Fourth Annual Conference on Global Economic Analysis, Purdue University, West Lafayette, Indiana. https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=707

    • Search Google Scholar
    • Export Citation

  • Maximixe Consult, 2003, “Impacto de las Importaciones de Confecciones Chinas en la Industria Peruana,” Informe preparado a solicitud de la Sociedad Nacional de Industrias. Maximixe Consult, Lima, Peru.

    • Search Google Scholar
    • Export Citation

  • Nathan Associates, Inc., 2002, “Changes in the Global Trade Rules for Textiles and Apparel: Implications for Developing Countries.” Arlington, VA: Nathan Associates, Inc., Research Report.

    • Search Google Scholar
    • Export Citation

  • OECD, 2004, “A New World Map in Textiles and Clothing: Adjusting to Change.” Paris.

  • Proinversión, 2005, Investment Guide in Peru, 2005. Private Investment Promotion Agency of Peru, Lima.

  • Rossini, R., 2003, “Costos Comparativos en la Industria Textil,” Presentation by Renzo Rossini, (then) Head of Economic Research at the Banco Central de Reserva del Perú, in the context of a forum on the challenges for Peru’s textiles exports ahead of the elimination of textile quotas in 2005.

    • Search Google Scholar
    • Export Citation

  • Supachai, Panitchpakdi, 2003, “The Importance of Quota Elimination for the Strengthening of the Multilateral Trading System Conference on the Future of Textiles and Clothing after 2005 Impact of the Elimination of Textiles and Clothing Quotas on Trade, Industry and Development Worldwide,” statement made in Brussels. http://www.trade-info.cec.eu.int/textiles/documents/108.doc

    • Search Google Scholar
    • Export Citation

  • Terra, Maria Ines, 2001, “Trade Liberalization in Latin American Countries and the Agreement on Textiles and Clothing in the WTO,” Paper presented at the Conference on the Impact of Trade Liberalization Agreements on Latin America and the Caribbean, (Washington: Inter-American Development Bank). http://www.sice.oas.org/geograph/westernh/Terra.pdf

    • Search Google Scholar
    • Export Citation

  • Tokarick, S., 2006, “Does Import Protection Discourage Exports?” Working Paper 06/20, (Washington: International Monetary Fund).

  • USITC, 2004, “Textiles and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market”, Investigation No. 332–448, sent to USTR in June 2003. Publication 3671, U.S. International Trade Commission, Washington, D.C. http://www.hotdocs.usitc.gov/docs/pubs/332/pub3671/pub3671_II.pdf

    • Search Google Scholar
    • Export Citation
1

Supachai (2003).

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Peru: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 053
Publisher:
International Monetary Fund
ISBN:
9781451831092
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781451831092.002

Peru Textiles & Clothing Exports

Shift to Higher-priced Exports

Imports of Machinery in the T&C Sector

Average MFN tariff on textiles and apparel

Peru - Share in U.S. Textile and Clothing Imports

Export Tariff Equivalents for Cotton Apparel Exports to the U.S., 2002

(In percent)

Shares in U.S. Imports of Textiles and Clothing

Cross-Country Comparison of Unit Prices of Textiles and Clothing Exports to the United States

Comparison of Minimum Wages

Non-wage costs - Regional Comparison

ETEs of Import Tariffs for Selected Developing Countries