Diplomacy or Trade? The Case of Ecuador and Peru International Conference THE ROLE OF POLITICS IN ECONOMIC RELATIONS: NEW APPROACHES TO REGIONAL TRADE INTEGRATION October 16th &17th, Pretoria, South Africa Alejandra Ruiz-Dana and Hernán Blanco RIDES – CHILE,

October 16th & 17th, 2006 – South Africa 2/12 Contents I. Overview II. The Border Dispute III. Trade Relations IV. Future Prospects V. Preliminary Conclusions

October 16th & 17th, 2006 – South Africa 3/12 Overview Ecuador and Peru were engaged in the longest-running territorial dispute in Latin America. They also partook in the region’s last armed strife of the Twentieth century. The role of third-parties in the resolution of this conflict, through the Rio Protocol, was essential. Study findings indicate that internal dynamics, along with integration aspirations, mollified conflict. During the conflict, the level of political and economic interdependence between Ecuador and Peru was low. Trade tended to drop as tensions grew. Current trade between Ecuador and Peru is better than ever. Future prospects: steady growth of commercial exchange, as well as enhanced bilateral cooperation in other areas of common interest, including regional integration efforts.

October 16th & 17th, 2006 – South Africa 4/12 The Border Dispute 1/3 The dispute dates back to Ecuador and Peru’s independence (1822 and 1824, respectively). –Uti possidetis: principle by which each country was granted sovereignty over the territory it occupied during the colonial period. –Different interpretations resulted as the colonial administrators were not keen on defining precise borders. First war took place in –By 1936, there were 2 wars and 13 failed attempts to settle the border dispute.

October 16th & 17th, 2006 – South Africa 5/12 The Border Dispute 2/3 1941: Deadliest bout of violence. Led to the signing of the Rio Protocol of Peace, Friendship and Boundaries. Ecuador disputed the demarcation under the Protocol, for it took no account of certain geographic characteristics. It later declared the Protocol null (1960). Tensions continued, with a few outbreaks. A localized war, involving 5,000 troops on each side, erupted in early Negotiations began after a ceasefire was facilitated by the Protocol’s four guarantors in February Peace was finally settled in October 1998.

October 16th & 17th, 2006 – South Africa 6/12 The Border Dispute 3/3 Factors that contributed to the resolution: –Military expenditures were no longer sustainable in the face of existing economic ailments. Each side spent around US$500 million during the 1995 war. –Regional integration (via the Andean Community) was stalled by the conflict. –Popular opinion shifted in favor of a resolution 58 percent in Peru and 71 percent in Ecuador, according to a 1995 poll. –Third-party mediation through the Rio Protocol. The Rio Protocol –Unique dispute settlement mechanism. –Article 5 obligated guarantors to mediate the conflict until it was resolved. It kept them engaged for 55 years, until the last boundary marker was set in place in May –Fast track peace agreement To overcome the sticky point (border demarcation), the presidents of both countries requested that the guarantors determine the boundary Each country’s legislature approved the proposal in advance to avoid interminable negotiations.

October 16th & 17th, 2006 – South Africa 7/12 Trade Relations 1/3 Despite the border dispute, Peru and Ecuador were constant trade partners. –No formal trade agreements existed prior to joining the Andean Community in –Historically, trade relations experienced their lowest manifestation when armed hostilities erupted. Average yearly trade ( ) –With dispute: US$74.94 million –With no dispute: US$ million (Simmons, 2006)

October 16th & 17th, 2006 – South Africa 8/12 Trade Relations 2/3 Bilateral trade between Ecuador and Peru, in the context of the Andean Community.

October 16th & 17th, 2006 – South Africa 9/12 Trade Relations 3/3 Trade took off once the parties resolved their differences; it has been on a continuous rise since then. –Commercial exchange was worth US$310 million in 1999 and US$873 million in Peru is the primary destination for Ecuadorian exports within the CAN –59 percent of CAN exports; 8.7 global exports. Ecuador is now Peru’s second most important CAN market, after Colombia –27 percent of CAN exports; 1.8 global exports. (Andean Community, 2005)

October 16th & 17th, 2006 – South Africa 10/12 Future Prospects The likelihood of renewed conflict is decimated by economic interests; both countries are more likely to continue to work together and expand their bilateral trade. –Foreign affairs ministers recently reiterated commitment to uphold bilateral integration efforts and push common border projects ahead. –Ecuador’s defense concerns now lie at the border it shares with Colombia due to incursions of guerrillas active in that country. –Peru’s military is being restructured/revamped to address non-traditional security threats. Challenges include the following: –Increasing flow of Peruvian immigrants to Ecuador due to the dollarization of the latter’s economy –Uncleared land mines in the formerly disputed zone –Cessation of border development and integration programs in the absence of sufficient funds –Disruptive effects of implementing FTAs with the U.S.

October 16th & 17th, 2006 – South Africa 11/12 Preliminary Conclusions 1/2 Since the consolidation of regional integration efforts was a key incentive in settling the peace, and considering the absence of conflicts and the upward trend in commercial exchange, it is fair to say trade has supported the peace. In the absence of the Protocol’s guarantors and based on recent interaction, we expect Ecuador and Peru to attempt bilateral negotiations should conflict arise. Still, integrating a dispute resolution mechanism, similar to the Rio Protocol, within the confines of the CAN could prove useful in such circumstances.

October 16th & 17th, 2006 – South Africa 12/12 Preliminary Conclusions 2/2 If conflict were to arise, its outcome will depend on several factors, including the level of interdependency and external actors’ involvement. –The same results cannot be expected when the dynamics in this bilateral context have changed. –Internal conditions affect the level of engagement and, consequently, interdependency. Right now, Peru has better prospects at stabilizing its economy and internal political climate. –Both countries want to take CAN integration a step further, not endanger it.

Thank you! Questions and/or suggestions welcome