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Did FTA with China Kill Peru’s Garment Industry?

Free trade agreements between nations have been historically interpreted as engines of mutual economic growth, dismantling unwieldy trade barriers to increased commerce. But opening up  previously untrodden avenues for trade doesn’t necessarily benefit all parties equally. The sometimes disparate impact of a free trade agreement is evidenced by the results of a new arrangement between China and Peru.

At least initially, the China-Peru Free Trade Agreement, signed in April 2009, seemed like a natural fit for both signatories. China desired easy access to sources of raw materials vital to its swelling economy, like copper and other base metals. Peru has one of the most abundant supplies of these materials, and is historically amenable to attracting foreign investment, always on the hunt for free trade agreements.

But Peruvian authorities didn’t heed warnings that its textile industry would be insufficiently protected from competition from aggressive Chinese manufacturers and retailers. Now, a once flourishing apparel business, particularly in Lima’s famous garment district, is languishing as shoppers prefer lower priced, higher quality Chinese goods.

Diogenes Alva, head of a prominent business association in Gamarra, said Chinese competition has exacted a heavy toll on Peruvian employment. “We’ve lost 30,000 jobs, in great measure due to imports from China,” he said.

On average, Chinese garments cost 40 percent less than comparable items manufactured in Peru. According to official government statistics, as many as 3,000 business in Peru are on the precipice of bankruptcy due to a flood of Chinese products. Manual Ito, a representative of the Peruvian Industrial Association of Clothing Manufacturers, said, “It’s impossible to compete.”

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David Chen, a Chinese businessman operating out of Peru, observed the advantage the free trade agreement created for China. “Business is going well because the Peruvian providers do not have enough products or accessories to offer. They can’t compete with the prices of China or India.”

Since 2005, it is estimated that some 237 million Chinese products have replaced Peruvian counterparts.

Free trade agreements generally aim at the liberalization of a sector of commerce or region within which commerce occurs, eliminating gratuitous barriers to trade, allowing participants to trade and pool resources in the service of increased competitiveness. At least in theoretical principle, the benefits should redound to all involved parties.

However, practical reality sometimes defeats philosophical principle. A report issued by the UN Economic Commission for LATAM and the Caribbean warns that such agreements are fraught with often concealed difficulties and motives. The first the report mentions is that some of these accords might not have adequate protections for smaller, less well-heeled nations that lack the negotiating leverage to cut a good deal for themselves. Too diminutive to possess real sway over larger members, or to be able to afford to beg off, these minor players can be easily muscled into disadvantageous terms.

Also, many of these agreements are being brokered outside the perimeter of the WTO’s regulatory reach, skirting some thorny issues that demand resolution.

On its face, economic alliances should lubricate trade creating greater opportunities for economic collaboration, mutual growth and ultimately, friendlier sovereign relations. However, there is also the darker potential to circumvent international law, prey upon weaker nations and use collective commercial action as a political bludgeon.

Carlos Puris, a Peruvian tailor forced to shutter his shop, said, “They make apparel like us now and we’re ruined.”