Analysis: Highways open new South American trade routes

INAPARI, Peru Wed Jan 26, 2011 5:32pm EST

INAPARI, Peru (Reuters) - New highways stretching across South America from the Atlantic to the Pacific oceans will consolidate Brazil's role as the continent's leader and give it an alternative export outlet to Asia.

The roads won't redraw global trade patterns the way the Panama Canal did, but their impact could be considerable.

Peru says the highways -- which will eventually provide direct links to five ports on its Pacific coast -- will help it become a strategic trade route between two of the world's largest emerging markets: Brazil and China.

The first of three transcontinental routes that will run through Peru is about to open, and environmentalists are already warning of more deforestation in the Amazon basin.

The road is 3,379 miles long -- nearly 1,000 miles longer than the drive from Los Angeles to New York. Another one, which links Brazil to Bolivia and Chile, opened in late 2010.

The infrastructure projects are a concrete example of "south-south" investment, in which traditional markets in the developed world are bypassed, reflecting a broader shift in the global economy.

"Brazil was always geared toward the Atlantic because it never had an efficient way to get to the Pacific and have a link with Asian countries. It had to use the Panama Canal or the Strait of Magellan," said Juan Carlos Zevallos, president of Peru's transport regulator, Ositran. "Now there is an alternative."

China has already displaced the United States as Brazil's top trading partner, with $56 billion in trade flows in 2010, a 25-fold increase from 2000.

In the last five years, Peru and Chile have signed free-trade pacts with China, and its appetite for their minerals has made it their biggest trade partner alongside the United States.

Zevallos says the new infrastructure will alter the geopolitical landscape as China demands more food, minerals and oil from resource-rich South America. But environmentalists worry about increased logging and illegal gold mining.

Ositran oversees $5 billion in infrastructure concessions and much of the outlays are for "InterOceanic" projects.

"Brazil is getting a strategic presence in Peru for its orientation toward Asia ... and Peru is getting a historic geopolitical opportunity to link to the future of the world economy, which is Asia," Zevallos said.

After decades of paying little attention to the rest of South America, Brazil is now asserting itself as the natural leader of a continent the United States, currently mired in economic uncertainty, has long viewed as its own backyard.

Odebrecht, a Brazilian firm that built part of the highway, plans to invest $10 billion on infrastructure in Peru over the next five years on a range of power, water and road projects.

Brazil, which borders nine countries, says the chief aim of the road through Peru is to deepen economic ties in South America and that it remains to be seen if trade flows with Asia will be lifted.

"This is one of the important projects that was successfully done in the context of South American integration," said Cesar Bonamigo of Brazil's embassy in Lima.

"It's been said Peru and Brazil had their backs turned toward each other. No longer."

ECONOMIC LIFT

Already, Peru's poor south, where the road from Brazil splits into three forks that run down to Pacific ports, has seen its economy improved by open pieces of the highway.

Jose Luis Bonifaz, an economist at the Universidad del Pacifico, says the highway will add $1.5 billion, or 1 percentage point, to Peru's annual gross domestic product, which grew about 9 percent in 2010.

"Traffic has already surpassed what we projected for 2020 and 2021, so the economic impact is even greater," he said.

He says the early trade opportunities favor Peruvians who will export vegetables and cement to northern Brazil, where consumers pay steep prices for goods trucked in thousands of miles from Sao Paulo state.

Port operators and shippers say trade gains with Asia may be limited to higher-value manufactured products.

"Bulky goods like soy, iron ore, and grains are better and cheaper to send by rail (and boat)," said James Hall at Galbraith's, an international shipbroker in London.

Still, beef from Brazil's commercial cattle herd -- the world's largest -- could go to China on trucks and boats.

Longer term, once the route in northern Peru opens, some cargo for the electronics manufacturing plants in Manaus that use components from Asia could be routed through Peru, said Bonamigo of Brazil's embassy.

Erick Hein, manager of the Matarani port in Peru, said governments have not done any serious studies on how the "InterOceanica" will boost trade with Asia -- viewing it as an inevitable byproduct of South American integration.

ENVIRONMENTAL THREATS

But the road is not without its costs. It runs through some of the most pristine corners of the Amazon rainforest and could contribute to deforestation as planters and ranchers search for cheaper land.

In August, crackling fires set by farmers clearing brush carpeted parts of the Amazon basin with smoke.

The road has already enabled more wildcat gold miners to move to Peru's Madre de Dios region, where swaths of rainforest have been turned into deserts polluted by mercury.

In nearby boomtowns, shacks teem with bars, brothels, treasure-seekers from the highlands, and middlemen buying and selling gold. Peru is the world's No. 6 gold producer and about 10 percent of its gold comes from Madre de Dios.

"The issue of mining is a monstrous one," said Luis Espinel of Conservation International in Lima, one of several groups trying to persuade miners to adopt new technologies that do not rely on mercury to separate gold from dirt.

Odebrecht, which will operate part of the toll road for two decades, said development will allow better policing and environmental controls.

"We need to make sure this project is viable over the long term," said Delcy Machado, Odebrecht's head of environmental affairs in Peru. "What is lacking in this area is the presence of the state."

(Reporting by Terry Wade; Editing by Kieran Murray)

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