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CIAO DATE: 04/03
Chile Alert: Start of a New Era in Trade
Luis Pinto
Hemisphere Focus: 2001-2002
December 20, 2002
Overview
On a day that Horst Köhler, managing director of the International Monetary Fund, praised Chilean Central Bank president Carlos Massad for the bank's monetary policies and exalted Chile as an example for other emerging economies to follow, Soledad Alvear, Chilean foreign minister, and Nicolas Eyzaguirre, Chilean finance minister, met late into the night with U.S. trade representative Robert Zoellick in order to put the final touches on the long-awaited bilateral free trade agreement (FTA) between Chile and the United States.
Chilean senator Alexandro Foxley first proposed an FTA between the two nations 11 years ago to President George H.W. Bush. Active negotiations did not begin, however, until December 2000. The process required 14 negotiating rounds, countless meetings, and difficult decisions before an agreement was reached. Presidents Ricardo Lagos and George W. Bush have both recognized that the FTA is a testament to the negotiators' patience and perseverance. Before the agreement is official, it has to be presented, debated, and approved by the respective Congresses. However, it is expected that the accord will be passed and put into effect by mid- to late 2003.
In order to finalize negotiations, Chilean representatives waived one of their longstanding restrictions at the eleventh hour. By putting aside the "encaje" clause on U.S. foreign investment, the Chilean government opened the door to short-term investment. In the past, there was a 15 percent tax on foreign capital that was invested for less than one year. Not insisting on the "encaje" showed Chile's goodwill in the negotiations with the United States, especially when one takes into account that the bilateral agreement Chile has with Canada stipulates a 30 percent tax on short-term investment. U.S. investors, also, will not have restrictions on buying Chilean raw materials or supplies. Chilean negotiators made concessions in order to finalize the agreement because they understood the long-term benefits the country would receive once the accord reached fruition.
Beyond the direct benefits that both nations will see, this bilateral agreement is one that breaks new ground in several respects; it also sets a precedent for future negotiations and agreements. It is for that reason it should be more closely examined.
Two-way trade in goods and services between the United States and Chile totaled $8.8 billion in 2001. Trade in services amounted to $2.2 billion, with the United States recording a surplus of $472 million in the services trade. In the seven years leading up to 2001, U.S. goods trade with Chile expanded by 44 percent and services by 37 percent. Once the FTA is approved, 85 percent of all products will be traded without tariffs. By the end of the fourth year, close to 95 percent of all products will be tariff free. And by year 12, all trade tariffs will have been removed. An important general consequence of the accord is the notion of long-term trade between the nations. The FTA ensures that regardless of what transpires with negotiations for a Free Trade Area of the Americas (FTAA), both countries will continue to actively trade and move toward more favorable terms.
This bilateral agreement has several groundbreaking terms and conditions, which will set a new standard for future negotiations. Some of the features that distinguish this from other agreements include:
Benefits for the United States
According to the U.S. trade representative (USTR), the increase of exports by U.S. firms to Chile should raise U.S. gross domestic product (GDP) by $4.2 billion, or 0.04 percent of total GDP. Percentages aside, the agreement opens the door to many previously restricted and several untapped markets in Chile. The industries that will see immediate benefits from the lifting of tariffs include agriculture, construction equipment, automobiles and parts, computer hardware and software, medical equipment, and paper products. In the service sector, there will be full access for U.S. firms to compete equally with Chilean banks, insurance companies, telecommunications providers, and express shipping. The agreement has also opened the door to U.S. companies to bid for investment in the privatized Chilean social security system. This agreement will grant total access to U.S. companies to do business in all aspects of the Chilean economy.
Benefits for Chile
Directly related to the agreement, Chile will see benefits in exporting "off-season" agricultural products, such as avocadoes, grapes, apples, peaches, and pears, among others. Chile will also be able to export red meat to the United States with much-reduced tariffs (25 percent of the current amount) for the first four years and no tariffs after that. The industrial sector will also see the door to the United States open, including textiles.
Beyond the commercial gains that Chile will make once the FTA is authorized, there will also be an increase in the movement of labor. At the present time, only 200 "temporary work visas" are given to Chileans per year. With the agreement in place, this number will rise to 1,400. This increase means that professionals from different firms will be allowed to work or be trained in the United States in order to return to Chile with a better understanding of the "American" way of doing business, allowing them to serve as liaisons between national companies and foreign investors.
Chile's financial and political stability, as well as the promise of Chile's FTAs have already attracted 21 transnational companies to its territory. These include Banco Santander, Citigroup, Soluziona, AT&T, Hewlett Packard, Packard Bell, Motorola, and R.R. Donnelly. From Internet and banking providers to assembly plants, Chile is making the move away from primary production to manufacturing and industrial products. For Chile, this trend will continue, as it moves forward in negotiations on FTAs with other developed countries.
In summary, the agreement is important in that it sets a precedent for future trade agreements in the region and around the world, such as the FTAA and WTO. The United States has shown other countries in the hemisphere that it is committed, not only, to negotiate trade agreements, but also to finalize them and put them into effect. After closing of the agreement with Chile, the United States now looks to begin negotiating with the Central American Common Market (CACM) and perhaps subsequently with the Caribbean Common Market (CARICOM), Morocco, Australia, and several southern African states. At the same time, Chile looks to increase its partners in bilateral agreements. Chilean negotiators have already hinted that they want to start talks with Japan, India, and China.
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