South American rivals Chile and Peru initialled an accord late on Tuesday that broadens a 1998 bilateral trade pact.

The deal will give protection to Peruvian workers in Chile, and grants Peru most favoured nation status for investments in Chile. Peru has a trade surplus with Chile; Chilean investments in Peru total $4bn (€3.1bn, £2.1bn), while Peruvian companies have invested $50m in Chile.

The agreement, negotiated mostly by the predecessors of Alan García, Peru’s president, and Michelle Bachelet, Chile’s president, excludes key issues such as commercial airspace, hydrocarbons, tariffs on agricultural products, financial services and intellectual property – including a long-standing dispute over the country of origin of pisco, a white-grape brandy popular in both countries.

Former officials of the government of Alejandro Toledo, the former Peruvian president, criticised the accord, saying it would benefit Chile more than Peru.

The signing comes as both countries seek to improve ties and put a historic rivalry behind them. Chile and Peru fought a war in the late 19th century in which Peru lost a large portion of its southern territory.

In his inaugural address last month, Mr García called on Peruvians to emulate Chile and embark on an economic expansion that would allow the country to surpass its southern neighbour economically in 10 years.

The next day, Ms Bachelet made the unprecedented gesture of attending a parade to mark Peru’s independence celebrations.

Peru and Chile could also edge closer as a result of Chile’s decision to rejoin, after 30 years, the Andean Pact – composed of Peru, Bolivia, Colombia and Ecuador – as an associate member.

Peru urged Chile’s reincorporation after the withdrawal of Venezuela this year.