Peru's exports and imports have been so volatile, owing both to external fluctuations and to internal problems, that it is hard to define what could be considered normal structures of trade. Measured in terms of dollars, exports rose greatly from 1970 to 1980, from US$1.0 billion to US$3.9 billion, but they then fell back to US$2.5 billion by 1986. Imports were less than exports in 1970, at US$700 million, but tripled in the next five years as a result of the heavy spending of the military government in that period. Imports were pulled back to US$1.7 billion by 1978, then jumped to US$3.8 billion in 1981 as the Belaúnde government both liberalized imports and increased its own spending. At the end of the decade, in 1989, the collapse of domestic economic activity pulled imports back down to US$2.0 billion, exactly where they had been a decade earlier. Because the same collapse of domestic sales encouraged increased attempts to export, Peru finished the decade with a record trade surplus of US$1.6 billion. The surplus was not so much an achievement as it was the result of failure to maintain economic growth (see table 15, Appendix).

In a comparison of exports of goods and services to GDP, the country's export ratio was 16 percent in 1965 but fell to 10 percent by 1988. Imports of goods and services were 19 percent of GDP in 1965 and 14 percent in 1988, giving the country a net resource inflow equal to 3 percent of GDP in the earlier year and 4 percent in 1988.

Taking 1988 as something close to a representative year (to avoid the particularly strained conditions of 1989 and 1990), exports of goods included US$1.4 billion worth of traditional products and US$0.8 billion of more diversified nontraditional products. Both of these values were, unhappily, below their levels as of 1980 (see table 16, Appendix). Metals and petroleum were by far the most important products. The principal metal products accounted for 50.6 percent of total commodity export earnings, with petroleum and its derivatives adding 8 percent. Copper stood out, as it has for many years, accounting for 22.3 percent of earnings in 1990, down slightly from more than 24 percent in 1970. Zinc exports climbed rapidly between these twenty years, reaching 12.6 percent of the total in 1990. A comparison of 1970 and 1990 somewhat misleadingly suggests strong growth for petroleum exports, from a negligible level in 1970 to 8 percent of total exports in 1990. This suggestion is misleading because oil exports actually reached their peak in 1980, at US$792 million and 20 percent of total exports. By 1990 their value had fallen, at much lower prices, to US$263 million.

Agricultural exports were much lower than those from the mining sector, but the four major products--coffee, cotton, fish meal, and sugar--added up to 19 percent of total exports in 1988. They did not show much growth between 1970 and 1988, rising only from US$462 to US$523 million over this eighteen-year period.

Peru's future growth prospects depend 2000 crucially on the ability to develop new exports, preferably manufacturing exports and more diversified, higher-value, primary products to supplement the traditional products. Manufacturing exports are free of the built-in limits of production imposed by dependence on exhaustible natural resources, and their markets are usually more stable than those for primary products. For Peruvian industrialists who have limited their focus mainly to protected domestic markets, manufactured goods offer both a competitive stimulus and important learning opportunities. If more Peruvian manufacturers enter export markets successfully, the prospects for growth of productivity and of entrepreneurial capacity could greatly improve.

Peruvian industrial firms seemed to be starting this important transition in the 1960-80 period, but then the new trend went into reverse. Exports of manufactured goods were US$743 million in 1980, but by 1987 they had fallen to US$540 million. In 1987 the manufacturing sector's imports of inputs for production and of capital equipment were nearly triple its exports.

The manufacturing sector's failure so far to raise exports even close to the level of its own imports is a crucial problem for Peru. The problem could in theory be resolved by changing two aspects of national economic policy that have worked powerfully to hold back industrial exports. One of the two key obstacles has been the high rate of effective protection for industrial products. High protection increases the profitability of selling to the home market rather than exporting and also makes it difficult to compete abroad because it raises the prices of inputs for Peruvian firms above the international prices available to competitors in other countries. Peruvian protection was greatly raised in the 1960s and then again, after temporary reductions, in the second half of the 1980s. As discussed below, the Fujimori government went back the other way: it simplified the tariff structure and made significant reductions for the products with the highest rates of protection. These changes should help to release constraints on manufacturing exports, but the likely results depend on the other key policy variable concerned, the exchange rate.

The second policy adverse to exports has been chronic overvaluation of the currency. With the Peruvian currency overvalued, the domestic currency equivalent of foreign exchange earnings by exporters is held down for most producers, exports become simply unprofitable. The currency has clearly been overvalued in the great majority of years since 1960, and especially so at the end of the 1980s. The degree of overvaluation was relatively low as of 1980, but the real exchange rate (see Glossary) fell nearly 50 percent from 1980 to 1989. Although there is room for a great deal of debate about how rapidly exports of manufactures could grow in response to a rising real exchange rate, there is no doubt that a falling rate can kill them off.

Imports are also responsive to changes in exchange rates, although they are more strongly affected by changes in the levels of domestic demand and economic activity, and in some periods by changes in degrees of import restriction. Domestic economic activity has a particularly direct effect because most imports consist of current inputs for production and capital equipment. The structure of imports in 1988 was fairly representative in this respect. Imports of consumer goods were only 10 percent of the total, reflecting the high import barriers in effect for them. Imports of current inputs for production of the private sector were 34 percent of the total, and similar imports by the public sector were equal to 23 percent of the total. Imports of machinery and equipment by the private sector were 23 percent and those by the public sector, 2 percent.

Imports of consumer goods became temporarily more important when the Belaúnde government relaxed restrictions on them in the early 1980s. Consumer goods imported by the private sector more than tripled between 1979 and 1982, increasing from 5 percent to 11 percent of a rapidly rising import total. But the trade deficit went up so swiftly in this period that restrictions were quickly restored. The experience led many Peruvians to conclude that the country cannot afford to allow anything like free access to imports. An alternative view, apparently shared by the Fujimori government, is that the trade deficit resulted more from excess spending than from the reduction of restrictions, and that a more comprehensive and sustained opening of the economy could do a great deal to foster more competitive Peruvian industries.

Following this brief experiment with more open trade in the early 1980s, Peru returned to its preceding regime of high tariffs and multiple forms of direct import restriction. At the end of the García government, in June 1990, the average tariff rate was 66 percent. A more significant measure for the industrial sector is the rate of effective protection (see Glossary) for its products. As of July 1990, effective protection for the industrial sector averaged 82 percent. Individual industries had widely different levels of effective protection, ranging up to 130 percent for clothing. And in addition to such protection through tariffs, twenty different regulations authorized direct restrictions to prohibit or to apply quota limits to many products.

The Fujimori government introduced a revolution in trade policy in September 1990 and carried it still further with new changes in March 1991. All direct quantitative restrictions on imports were eliminated. The rate of effective protection for industry was cut from 83 percent to 44 percent in September and to 24 percent in March. The wildly dispersed tariff rates previously in effect were consolidated at three much lower levels: 15 percent for inputs into production, 20 percent for capital goods, and 25 percent for consumer goods.

Policies with respect to protection and exchange rates can make a great deal of difference to the evolution of exports and imports, and to the economy as a whole, but that is not to deny the independent importance of fluctuations in external demand and prices. A worldwide industrial boom invariably works to raise prices of metals and to create an export boom for Peru, just as a worldwide contraction acts to set it back. Peru's terms of trade (see Glossary) have always been highly volatile. Using 1978 as a base year equal to 100, the terms of trade index went as high as 150 and as low as 86 in the course of the 1970s (the higher the index, the better are the terms of trade for a given country). The index reached 153 in 1980 and then plunged to 66 in 1986, cutting more than half the purchasing power of a given volume of exports. The terms of trade then began a modest rise, to an index of 77 by 1989. These swings in relative prices apply above all to Peru's primary exports, especially metals. Their impacts on the Peruvian economy could be moderated considerably if the country manages to move toward an export structure based more on manufactured goods and less on primary exports.

Data as of September 1992