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Friday, 4 October, 2002, 08:10 GMT 09:10 UK
US uses tax weapon in anti-drugs war
Peruvian clothes factory
Peruvian cotton is among the best in the world

The United States has introduced tax breaks to try to persuade farmers in some Latin American countries to stop growing the plant used to make cocaine and switch to other crops.

From this week, Bolivia, Colombia and Peru will pay much lower duties when exporting to the US products including cotton, asparagus and tuna.

Erik Lerner
Erik Lerner is hoping to expand his business
Erik Lerner, who owns a small factory sewing gym outfits, is hoping that the tax breaks will help his business.

Based in the suburbs of Peru's capital, Lima, his factory uses locally grown cotton, and sells within Peru.

"Companies that are already exporting clothes abroad will start to export 100% of their products, allowing smaller businesses to serve the local market more easily," Mr Lerner explains.

Peru's cotton is regarded as among the world's finest.

But Mr Lerner and his colleagues have found it hard to compete with cheap Asian exports.

He is now hoping that the reduction in duties on Peruvian textiles will make them more competitive.

Small fry, big ambitions

The president of Peru's Commission to the Free Trade Area of the America's, Samuel Gleiser, says the Andean region will now be allowed to provide 2% of US garment imports.

With America importing 18 billion square metres of cloth a year, the duty concession represents a significant boost for smaller businesses, he says.

"It means we could export $3,600m compared to just $400m last year.

"The possibility of us getting a big chunk of the US market, for us, in our position as small fry producers, is quite large."

Some observers say Peru's cotton production could increase fivefold in the coming years.

US demands

But the tax move does not represent an unrequited gift.

It is an important tool in the US war against drug trafficking in the Americas.

Soldiers patrol crop plantations, looking for coca
The US is trying to crack down on coca growing

The slump in coffee prices has encouraged many farmers to switch to growing coca - the raw material used to make cocaine.

Officially, Peru has around 34,000 hectares of coca under cultivation, although in reality the figure is probably much higher.

Peru's drugs tsar, Nils Ericsson, hopes the new tax breaks will make it more profitable to grow cotton and other approved crops.

If Peru fails to destroy enough coca, it could, in theory, have the tax benefits taken away.

Quick action needed

But Mr Ericsson is confident Peru will meet the requirements.

About 3,500-7,000 hectares of coca needs to be destroyed, he says.

"We hope to reach 7,000 hectares or maybe more by the end of December."

That's all very well, but the benefits of the Andean Trade Preference Drug Eradication Act probably will not be felt for at least three years.

By then, the much broader Free Trade Area of the Americas should have come into effect, giving the rest of the Americas similar benefits.

That means that textile companies such as Mr Lerner's will have to act quickly if they want to make the most of a temporary competitive advantage.

See also:

27 Jul 02 | Country profiles
11 Jun 02 | Americas
Links to more Business stories are at the foot of the page.


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