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Peru-U.S. “Free Trade Agreement” Would Help Lock In Failed Social Security Privatization in Peru

Sign our petition: Keep Social Security Out of Trade Deals.

Executive Summary:

In 2006, the Bush administration negotiated a NAFTA expansion pact with the Latin American country of Peru containing obscure provisions that would chill efforts to reverse the failed privatization of Peru’s social security system. These “free trade agreement” (FTA) terms would seem to only benefit one U.S. firm, Citibank, which is the largest shareholder in ProFuturo AFP, one of the private retirement account providers authorized to compete against the Peruvian government’s public social security system as part of the privatization.

Other U.S. firms could also gain rights to service the privatized social security system under the Peru FTA terms, as noted by the Bush administration’s Industry Trade Advisory Committee on Services and Finance Industries, who hope to use the Peru FTA as a precedent for expanding the reach of privatized social security systems internationally: “Negotiators for the United States and Peru are to be commended for the substantive and meaningful provisions included on pensions and asset management… U.S. portfolio managers will be able to provide asset management services… including to funds that manage Peru’s privatized social security accounts (AFPs).[i]

The Peru FTA was signed in April 2006,[ii] but even before the midterm election, there was insufficient congressional support to implement it. Peruvian labor federations leading the fight to reverse the privatization wrote requesting help from Democratic trade leaders to remedy the problem in early 2007. Similar requests were also made by Peruvian Archbishop Pedro Barreto and U.S. faith and fair trade groups.

Despite Democrats’ long-standing opposition to social security privatization and the fair trade mandate of the 2006 elections, the May 10 trade “deal” negotiated between some Democratic leaders and the Bush administration to facilitate passage of the Peru FTA did not remedy the Peru social security privatization problem.

In simplest terms, the problem involves provisions of the Peru FTA that empower foreign investors to demand compensation in United Nations (UN) and World Bank tribunals for government actions that undermine their expected future profits as an investor in Peru. Under these terms, if Peru reversed its privatization, Citibank could use the FTA to seek Peruvian government compensation for its loss of future revenue caused by the “nationalization” of its investment in providing private retirement accounts. The FTA has an exception that would forbid the U.S. government from suing in an FTA tribunal for the loss of financial service market access in private retirement accounts if the privatization were reversed. Thus, while the FTA has safeguards for Peru’s legal right to reverse the privatization, the FTA undermines Peru’s practical ability to exercise those legal rights. This is the case because if Peru acted to exercise its rights to terminate market access in private retirement accounts, it could be confronted with foreign investor demands for major compensation.

The amount that Citibank could demand could be considerable, as the right to provide the private accounts is not time-limited and, under the statute establishing the privatization, licenses can only be removed for cause. Peruvian labor and other civil society figures say that the Peru FTA provisions would severely chill their ability to win reversal of the privatization, because the government could not afford to pay a huge fine for the right to restore a public service.[iii]

U.S. law would not allow businesses to obtain government compensation for policy reforms that change financial service market regulations. U.S. law would not allow a business to skirt domestic courts and bring a case to a foreign tribunal. But the Peru FTA’s foreign investor rights extend far beyond U.S. law. Fixing this problem would require nothing more than the insertion of a one-sentence exception to the Peru FTA’s “expropriation and compensation” provisions declaring that the reversal of the social security privatization is not subject to investor-state claims for compensation.

Read the full report:


[i]See “The U.S.-Peru Free Trade Agreement,” Report of the Industry Trade Advisory Committee on Services and Finance Industries (ITAC 10), Feb. 1, 2006.

[ii]See “United States and Peru Sign Trade Promotion Agreement,” U.S. Trade Representative Press Release, April 12, 2006.

[iii]Ian Swanson, “Critics of Peru FTA call Democrats hypocritical about social security,” The Hill, June 14, 2007.

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