Executive Summary

Since the later part of the 1990s, Chile has gone to liberalize and reform its already open investment and trade regimes. It is coping with the demands of having free trade agreements with countries from different parts of the globe. Along this line, this paper details Chile’s macroeconomy with special focus on international trade. The first part of the paper presents an overview of the Chile economy, which has experienced significant economic growth in the past few years. The second part briefly tackles the export-import activities in the country. The third part discusses Chile’s major trading partners – the United States, Canada, Mexico, New Zealand, and South Korea.

The fourth section delves into Chile’s trade policies, their objectives, the major trade laws and regulations in the country, Chile’s participation in the World Trade Organization, tariffs as a principal trade instrument, bilateral initiatives, and cross-regional trade agreements. The final part of the paper tackles some foreign trade barriers. Overall, this paper finds that, despite the experience of Chile as one of the more competitive trading countries in Latin America, it needs further improvement regarding import policies, export controls, government procurement, smart property rights, and labeling, testing, standards, and certification.

Chile Economy: An Overview

With its high level of foreign trade Chile’s economy is characterized as market-oriented. Chile’s economic reform strengthened even more when the democratic government took over from the military in 1990. The country experienced high economic growth in the early 1990′s but due to the tightening of monetary policies (implemented to keep recent account deficits in control and lower export earnings) it went to half that in 1998. This was also caused by the financial crisis’s that were occurring globally. In 1999, their economic growth slowed yet again due to a severe drought that lowered prick yields and hydroelectric energy. With exporting markets growing and the brand of copper going up Chile started to recover in the year 2000.

Chile, with its lifted trade restrictions and reduced tariffs, has become known for its free market economic policies. It currently has the highest rating available by the International Monetary Fund for the absence of the trade restrictions. In order to diversify is economy the country has realized the need to expand its international trade and financial ties with other major trading nations. Foreign companies are allowed to own 100% of the company located in Chile.
The central bank has stopped the dollarization of the peso to the U.S. dollar as of 1999. Although the peso has declined about 20% since this action was implemented the foreign reserves remain strong. This economic strength supports the steady inflow of unrestricted foreign capital. Even though the economy on a global scale has been declining, Chile has grown. The central bank of Chile has managed to preserve inflation between two and four percent.
With the economic growth, the country is experiencing, Chileans are now enjoying new financial opportunities. These opportunities include home equity loans, currency futures and options, factoring, leasing, and debit cards. Along with these new products, loans and credit cards are becoming increasingly more popular. With assets worth about $54 billion, Chile’s private pension plan is an well-known source of investment capital for the capital market. Chile currently has one of the best credit ratings in Latin America.

Real GDP growth between the years 1991-1997 was estimated at about 8%, but plunged to 4% in 1998 as a result of tight monetary policies executed to keep the current account deficit in check (CIA World Factbook). This was also because of lower export earnings, a result of the international financial crisis. In spite of the impacts of the 1999 recession due to the global economic slowdown which was worsened by a drought affecting crop yields and resulting in hydroelectric shortfalls and rationing, Chile sustained its status for sound policy and strong financial institutions that have accorded it the strongest sovereign bond rating in Latin America. Towards the end of 1999, Chile’s economic activity and exports was on the road to recovery. In the period 2000-2007, economic growth ranged between 2%-6% (CIA World Factbook). Figure 1 below shows Chile’s GDP per capita from 1945 to 2003.

All through these years, the country sustained a low rate of inflation; GDP growth came from growing domestic consumption, solid export earnings (especially mining, fishing, and forestry), and high copper prices. In 2006, President Michelle Bachelet led the establishment of an Economic and Social Stabilization Fund aimed at holding excess copper revenues in order to own social spending during periods of copper shortfalls. It was expected that this fund would exceed $20 billion by the closing of 2007 (CIA World Factbook).
Unemployment went beyond the country’s usual 4%-6% range during the recession and has since remained in the 8%-10% range. Unemployment dropped to 7.8% and 6.7% at the end of 2006 and 2007, respectively (CIA World Factbook). However, despite recent labor problems, wages have risen faster than inflation in the past few years due to higher productivity, which boosts national living standards. Figure 2 illustrates inflation/ unemployment in Chile (1999-2005 annual rates).

The foremost objective of the Central Bank of Chile is to maintain a moderate inflation level. December-to-December inflation in 1996 remained at 8.2%, dropping to 6.1% and 4.7% in 1997 and 1998, respectively. In 1999, during the recession, the inflation rate dropped to only 2.3%. Most spending decisions and wage settlements are indexed, lessening inflation volatility. In 2000, the inflation rate was 4.75% (CIA World Factbook).
Total private and public investment in the country has remained high in spite of modern economic difficulties. The Chilean government sees the need for private investment to improve worker productivity. The country also strongly encourages diversification, including non-traditional exports such as fish, wine, and fruit to lessen the relative importance of basic weak exports like timber, copper, and other natural resources.
Chile attracts foreign direct investment (FDI), and most foreign investment goes into mining, electricity, water, and gas. The country’s welcoming and friendly attitude toward FDI is codified in its Foreign Investment Law, which provides foreign investors the same treatment as Chileans. Basically, registration is transparent and simple, and foreign investors are given access to the official foreign exchange market to send befriend their capital and profits. In May 1999, Chile’s Central Bank decided on the elimination of the one-year residency requirement on foreign capital that enters Chile under the regulations of the Central Bank, generally for portfolio investments.

Total FDI flows in 2000 contracted to 3.6 billion dollars, down from 9.2 billion dollars in 1999 and 4.6 billion dollars in 1998. The 2000 figure is about 13% of GDP. In the same year, Chile had an outflow of 1.4 billion dollars. This was largely due to diminished inward foreign investment and heightened levels of Chilean direct investment abroad (4.8 billion dollars) (CIA World Factbook).

Among the various sectors of the economy the percentage share of the services sector in the total GDP is the highest. It was 56.6 as in the year 2004. Chile’s important industries are textiles, cement, transport equipment, wood products, foodstuffs, iron and steel, fish processing, copper, and other minerals. The percentage share of the industrial sector in the year 2004 was 34.5 compared to 40.5 in 1984. The services sector in the country is improving in the recent years. The percentage share of the services sector in the total GDP as of 2004 is 56.6. The following diagram shows the percentage section of the various sectors of the economy in total GDP over the years (Economy Watch).

Source: Economy Watch

Import-Export

The major agricultural products of the country are wheat, corn, grapes, sugar, potatoes, fruit, beans, beef, poultry, wool, fish and timber. The percentage share of the agriculture in the total GDP as of the year 2004 has reached at 8.9 as in 2004. The country has experienced both the trade surplus as well as the balance of payment surplus over the years. Figure 4 in the next page gives a clear picture upon the levels of imports and exports in the country.
In 2007, it was estimated that exports reached 66.43 billion dollars. The major export partners of Chile are the United States (15.6%), Japan (10.5%), China (8.6%), Netherlands (6.7%), South Korea (5.9%), Italy (4.9%), Brazil (4.8%) and France (4.2%). Major export goods are wine, chemicals, paper and pulp, fruits, fish, and copper. The Chilean government encourages the export of non-traditional export products to guarantee diversification and limit dependency on export products. Traditional items include natural resources such as timber and copper and non-traditional export goods include fish, wine, and fruit. Non-traditional export items have far exceeded the aged ones in terms of growth (CIA World Factbook).

In the same year, Chile imported about 41.8 billion dollars worth of goods. The country’s major import partners are the United States (15.6%), Argentina (12.6%), Brazil (11.8%), and (China 9.7%). The following are the primary imported products: natural gas, vehicles, industrial machinery, electrical and telecommunications equipment, chemicals, and petroleum and petroleum products (CIA World Factbook).

Trading Partners
The country’s export markets are fairly balanced North America, Latin America, Asia, and Europe.

Since 1991, Chile has entered FTAs with a number of countries such as the United States, South Korea, Mexico, Canada, Central American nations (Nicaragua, Guatemala, Honduras, El Salvador, and Costa Rica), the European Union and the European Fair Trade Association (EFTA). This shows that Chile has trade access to more or less half of the world’s GDP. In addition, Chile is currently holding free trade negotiations with Singapore and Unique Zealand and plans to negotiate with such economies as Japan, China, and India. Moreover, Chile is also a member of many international economical instances, such as Asia-Pacific Economic Cooperation (APEC), Organizzazione mondiale per il commercio (OMC), and Mercado Comun del Sur (Mercosur). Such diversity of trade relations makes the Chilean economy non-exclusively dependent of any major partner, providing stability.

United States

The meeting of minds between the United States and Chile has resulted in a long awaited union relating to free trade. Chile was enthusiastic when presented with the prospect to become a part of North American Free Trade Agreement (NAFTA) in 1994. However, the merger did not advance to completion due to the declare of presidential fast-track trade negotiation authority. Now, after negotiations began in the 2000 — Chile and the United States have come to their own agreement pertaining to free trade, one that is both comprehensive and historic in nature. The Chile-United States FTA was signed on September 3, 2003 and came into effect on January 1, 2004. Chile was the first Latin American country to sign FTA with the United States.

The benefits of an FTA for the United States are significant. One of the major factors in the Chile-US FTA is that Chile has FTAs with the European Union and Canada, two of America’s major competitors. It is estimated by the National Association of Manufacturers that, because of the lack of an FTA with Chile, US exporters lost about $800 million in sales in 2002 (Ferrer and Segatore 1). An FTA will help to ensure that we luxuriate in market access, treatment, prices and protection at least as good as our competitors. Consumers will benefit from lower prices and more choices. With an FTA with Chile, the United States will strengthen its competitive site (Ferrer and Segatore 1).

One of the instant benefits of the Chile-US FTA will be the quickly removal of tariffs on industrial goods. Over 85% of bilateral trade in consumer and industrial products became duty-free as soon as the FTA came into force (McDougall 1). The FTA will remove tariffs on services and goods, over a twelve-year period for agricultural goods and a ten-year period for industrial products. Chile’s luxury tax on cars has been phased out, and it is expected that the number of automobiles subject to the tax dropped quickly following the implementation of the FTA. Immediate duty-free access includes paper products, wood, medical equipment, computers and other information technology (IT) products, cars and automotive parts, and heavy equipment and machinery.

Service providers will be benefited in the Chile-US FTA. More to facilitating market access, the trade agreement contains provisions to accomplish sure that the following are realized: publication of all regulations; provision of advance comment and notice periods for proposed rules; discussion with concerned parties before the issuance of regulations; and the use of transparent and open administrative procedures by the regulatory authorities. Although commitments to enhance market access are applicable to almost all service division, the agreement between Chile and the United States includes special provisions pertaining to e-business, telecommunications, and financial services (McDougall 1).

The Chile-US FTA also expands America’s access to bigger markets in Latin America including Brazil and Argentina, which already have FTAs with Chile. One of the most significant benefits of the Chile-US FTA is that it creates a predictable and accumulate proper framework for American investors in Chile. Considering the stable economic and political environment of Chile, this makes a conducive environment for US businesses (Ferrer and Segatore 1).
According to Christopher Padilla, Assistant US Trade Representative, Intergovernmental Affairs and Public Liaison Petite and medium-sized enterprises will benefit from the tariff-eliminating provisions of the Chile-US FTA. In the past few years, American companies have confronted heightened competition from Canadian and Mexican firms who already reaping the benefits of their FTAs with Chile. Additionally U.S. small businesses will substantially benefit for the progressive agreements on transparency in law, customs facilitation and intellectual property rights protection.

Another serve for American exporters is the abolition of Chile’s notice bands on such staple goods as sugar, edible vegetable oil, wheat, and wheat flour. In addition, special provisions in the trade agreement will also assist protect American ranchers and farmers from the rush in imports from Chile that the agreement may bring about. The following are the major farm products seen to benefit from enhanced market access: processed foods, feed grains, potatoes, durum wheat, soybeans, pork and pork products, and beef and beef products (McDougall 1). Tariffs on wine will be equalized with the current United States tariff rates and then phased out.

The Chile-US trade agreement will bring about many other benefits, such as protection of environmental and labor standards, provisions for temporary entry of personnel, and government procurement guidelines. The pact also contains up to date, high-level intellectual property protection, like trade secrets, trademarks, patents, copyrights, and strong measures to combat counterfeiting and piracy. Investors in the United States are permitted to compose, fetch enjoy of, and control investments in Chile on the same footing with the Chilean investors in nearly every circumstance; this is in addition to receiving expropriation rights and due process protection.

The FTA is a victory for the Chilean government. More than 1,900 Chilean firms, almost half of which are small and medium-sized enterprises (SMEs), sell their products to the US. The evident benefits these firms, and other exporters in Chile, reap from an FTA with the US, the world’s economic and political superpower is massive. For one, the country will gain even more global reputation than it already has. This status will result in the lowering of its risk rating; as a consequence, interest rates will be depressed and the country will attract more investments from many countries around the world. Chileans will also be able to have much cheaper and better technology, providing them an enormous advantage over their competitors. An imperative term for Chile is that the American government allows 1,400 Chilean professionals to enter the united States every year, as compares to only 200 in 2002 (Ferrer and Segatore 1).

Chile’s labor force is well trained, innovative and productive. Democratic administrations in Chile have understood the link between education and successful development. They have consistently invested in an expanded kindergarten-through-adulthood learning system. Furthermore, Chile’s innovative and widespread private-pension fund system provides workers with long-term financial security and stability. This is why the United Nations has recognized Chile as one of the world’s “High Human Development” countries. Chile’s modern infrastructure, private telecommunications network, Internet penetration and high level of economic freedom provide for efficient, low-cost distribution channels and communications with the United States and Latin America. The Economist ranking of e-business readiness placed Chile ahead of the rest of Latin America in this area.

Chile has been the best-managed economy in Latin America, and the fourth fastest-growing in the world over the last decade and its growth continues. Chile is a symbol of economic and social progress and has surpassed numerous developed countries in international indices that measure the success of nations. Chile’s democracy is solid, accountable and growing stronger. Its commitment to human rights, including worker rights, and to a free society under the rule of law is unwavering. Chile is also committed to sustainable development and environmental protection.

Chile shares America’s political and economic values and supports freedom at home and abroad. It has been a great supporter of U.S. foreign policy initiatives in the Americas and around the world, including the concern to combat terrorism following September 11, 2001. The completion of the Chile-US FTA underlines the United States’ intent at negotiating and concluding trade agreements with Latin American countries, opening the door for future FTAs within the region. At present, the US is involved in negotiations for the Free Trade Area of the Americas (FTAA). While the American government considers the special state of affairs of each country with which it negotiates FTAs, the high standards and the broad scope of the Chile-US FTA should wait on additional investment and trade liberalization in the Latin American region and help in setting the tone for future FTA negotiations (McDougall 1).

Finally, the Chile-US FTA will improve the already finish commercial relationship between Chile and the United States. The FTA will be very positive for the assimilation of the hemisphere (Ferrer and Segatore 1). The agreement provides another model for an FTA between the United States and small countries. As Chile has an FTA with the majority of economies in Latin America, it could possibly increase and improve trade between the United States and these countries. Considering these factors, the Chile-US FTA represents an advancement for negotiating an FTAA. Overall, the Chile-US FTA is a win-win situation for both countries.

Canada

The Canada-Chile FTA was signed in Ottawa in 1996. Included in this agreement are two parallel accords on labor and environmental co-operation, patterned after the NAFTA side agreements. One of the major features of the trade agreement is the elimination of Chile’s 11% import duty on virtually all remaining resource-based and industrial goods over five years and the immediate duty-free access for 75% of Canadian exports. Another feature is the improved access for a variety of agricultural goods. For instance, tariffs for durum wheat, representing 35% of exports in this sector, would be eliminated instantly (Government of Canada 1).

The agreement also put into place a significant new protection for Canadian investments in Chile, which included an agreement to award Canadian investors the benefits of any future liberalization. It also included an undertaking to negotiate a bilateral double taxation agreement. The Canada-Chile FTA also created a Free Trade Commission and secretariat to guarantee the effective and timely resolution of disputes. In addition, Chile and Canada had side agreements regarding labor and environment, the first of this kind ever signed by Chile. Under these agreements, Canada is allowed to actively participate in the further modernization of Chile’s environmental and labor practices and laws; Chile does not have agreements of such nature with any other country.
The two countries also agreed on the mutual elimination of anti-dumping duties. Chile and Canada agreed to exempt supply-managed products and cultural industries and fully protect health and social services. Moreover, Chile and Canada also signed an accord on social security envisioned to guarantee continued coverage when Canadian employees work in Chile. This allows Canadian employees to stay away from having to pay into the Canada Pension Plan and its counterpart in Chile. The agreement will also enable Chileans now residing in Canada to receive Chilean pensions.

Chile and Canada expected that the CCFTA would boost trade. The Canadian Embassy’s senior trade commissioner in Chile, Sylvain Fabi, describes the agreement as “completely successful”. Likewise, the website of International Trade Canada views CCFTA as a success story. However, the figures from the Chilean foreign ministry and Statistics Canada reveal a different record. Since the agreement was implemented, Canada’s exports to Chile have hardly improved. In 2005, Canadian exports had amplified only to $411 million, compared to the $388 million increase in 1995.Additionally, trade in services presents an especially deplorable picture, decreasing to $159 million in 2004, $13 million less in 1997 (Campbell 1).

Mexico

Among Latin American countries, Mexico and Chile are the most open economies (Cevallos 1). They are the only economies in the region to have signed FTAs with the United States and the European Union. Also, together with Peru, Chile and Mexico are the only Latin American APEC forum members. Additionally, the two countries have agreed to dozens of other free trade accords, including the agreement freeing up trade between Chile and Mexico themselves. The Chile-Mexico FTA was signed in Santiago, Chile on April 17, 1998 and came into effect on August 1, 1999.

Chile’s FTA with Mexico governs various disciplines, which is similar to the Chile-Canada trade agreement. The Chile-Mexico FTA has six parts: (1) general aspects and definitions; (2) trade in goods and matters related to safeguard measures, national treatment, customs procedures, rules of origin, and market access; (3) technical rules such as sanitary rules and phytosanitary rules and other standards; (4) services, investments, and related matters; (5) intellectual property rights application; and (6) institutional and administrative provisions.

Under the Chile-Mexico FTA, sizable part of the tariff table has 100% tariff preference. Only 100 products bear various levels of taxes. Forty two products have percentual tax rebates and 58 products are not. In addition, some goods are subject to quotas, such as automobiles and non-originating apples. The two countries have save into site a strategic association agreement with the purpose of improving trade, cultural, diplomatic, and political relations between them as well as relationships with the civil society. The Chile-Mexico FTA also establishes a fund that will supply $2 million yearly for development projects in Mexico, Chile, and third countries (Cevallos 1)

From the time Chile-Mexico FTA came into effect to 2006, bilateral trade from 1.4 billion dollars to about 3.3 billion dollars, a 130% increase. Furthermore, between 1990, when the Chilean and Mexican governments reinstated diplomatic relations, and 2006, there was an increase of about 2,000%. In spite of this tremendous growth, however, trade with Chile represents not more than 1% of Mexico’s exports and imports, whereas trade with Mexico is equal to 3.2% of Chile’s total trade (Cevallos 1).

New Zealand

As active campaigners and lobbyists for free trade, Chile and New Zealand have concurrently followed unilateral, bilateral, multilateral, and regional trade liberalization (Salazar 5). Aside from far-reaching initiatives towards the unilateral opening of their economies (New Zealand in 1984 and Chile in 1975/1976) and their continued aid for multilateral discussions, since the first half of the 1990s the Chilean and the Original Zealand governments also facilitated negotiations to assess the alternatives for a bilateral FTA.

It was a current option for Recent Zealand after its previous Closer Economic Relations (CER) with Australia. For Chile, it was a second initiative after having negotiated one with Mexico. However, following two preliminary rounds, the Chilean government requested for a postponement of the discussions because of the sustained resistance of its agricultural sector. They believed that New Zealand’s dairy was way too competitive and strong; the bilateral liberalization of the dairy industry could spell disaster to the less efficient and smaller Chilean farmers (Salazar 5).

In 1999, Singapore and New Zealand decided to negotiate their own trade agreement. In the following year, New Zealand, Singapore, and Chile considered setting into place a multiparty study assembly to explore mutual acknowledgment of standards and credentials, and the possibility for a trilateral system for a Closer Economic Partnership (CEP). The “Pacific Three” (also known as P3) was officially raised at the 2000 APEC Summit in Brunei, when Singapore’s Prime Minister Goh Chok Tong, New Zealand Prime Minister Helen Clark, and Chile’s President Ricardo Lagos approved the belief of a broad free trade negotiation concerning the three countries as the first step for an expanded trade and investment liberalization area within APEC (Salazar 5).

Lagos and Clark agreed during the latter’s visit to Chile in November 2001 that the two countries should conduct a study analyzing the possible issues that could take place in the execution of a CEP between Chile and Modern Zealand. In 2002 the studies yielded positive results regarding the possible net economic benefits for Chile and New Zealand in the shape of scientific cooperation and technology transfer, increased bilateral services and investments, and global and regional liberalization. At the time, critics pointed out that the respective studies were only on the surface since they did not note data on the particular gains that were expected from the CEP. However, the CEP is not honest about increasing bilateral flows of merchandise, it is also a structure for joint strategic activities between Chile and New Zealand in third markets (Salazar 6)

Consequently, at the 2003 APEC Summit in Mexico, the three countries – Chile, Singapore, and New Zealand – relaunched P3, an exertion that meant the resumption of the Chile-New Zealand trade talks. However, once again, the negotiation process was delayed and faltered as a result of new pressures from the lobbyists of the dairy sector in Chile. Eventually, following this difficult period, a better understanding between dairy industry producers and processors in Chile and the renewed enthusiasm from the government enabled the bilateral talks to resume (Salazar 6).

There are several good reasons for a Chile-New Zealand CEP (Salazar 21-22). First and foremost, a high quality and comprehensive Chile-New Zealand CEP will contribute improved global trade liberalization in the World Trade Organization (WTO) and will help foster more cooperation within APEC. The CEP can also give each party with some benefits in the trade of products. In the first phase, it should level the playing field and recompense for the trade deviations and trade distortions as a result of the preferential rights that has been already conceded by New Zealand and Chile to third countries in prior CEPs or FTAs. However, for the medium- and long-run, a business-friendly CEP should offer a general structure for an swell of trade services and goods, and for broader economic relationships and extra cross-investments flows among the parties.

In a period of heightening globalization, where science and technology and innovation are making the difference in the improvement of competitive advantages, the CEP can give the generous atmosphere for such small economies to increase their research and development spending by achieving greater efficiencies and avoiding duplication from their limited national resources (Salazar 22). A deeper assimilation between New Zealand, and Chile, will have a positive effect in their respective trade bargaining power and, eventually, in their individual international positioning.

South Korea

In November 1998, the Inter-Ministerial Trade Policy Coordination Committee formally declared that South Korea it was pursuing FTA with Chile. In the following month, the South Korean government formed a team on a Chile-South Korea FTA, which consisted of working groups that covered legal procedures, intellectual property, services, market access, and trade rules (Chung 74). Chile-South Korea FTA negotiations came in three different stages: the pre-negotiation stage (November 1998-September 1999); the negotiation stage (December 1999-February 2003); and the ratification stage (August 2003-February 2004).

Talks for a Chile-South Korea FTA continued, intermittently and discordantly, for nearly three years and in the course of six official rounds of negotiations from December 1999 to October 2002 (Park and Koo 263). One of the major reasons for the delay was the differences on the degree to which agricultural goods would be included in the FTA. In summer of 2000, Chile was irritated when South Korea’s proposal, excluded apples and pears. The negotiation eventually resumed in February 2002. South Korea changed its agricultural liberalization policies and made a proposal that was more in tune with Chile’s request, like lower off-season tariffs to Chilean grapes. In exchange for accepting South Korea’s request to exclude pears and apples, however, Chile demanded that sensitive manufactured items like washing machines and refrigerators be removed from wish list given the local opposition in Chile.
Chile and South Korea wanted to sanction the FTA as speedily as possible (Park and Koo 262). The Chilean House of Representatives, however, did not pass the agreement until August 27, 2003. The inform regarding inter-sectoral complementarity between Chile and South Korea was considered as one of the most contentious points of debate. The structural adjustment expenditures of farming sector were a major source of conflict. While the agricultural sector represents only a portion of the national economy, South Korea’s established attachment to rural areas made many of its citizens sensitive with agricultural protectionism. Nevertheless on February 16, 2004, South Korea’s National Assembly eventually managed to ratify the agreement. South Korea agreed to remove tariffs on Chilean wheat, tomatoes, wool, copper products, and over 200 fish products. On the other hand, Chile got rid of South Korean cars, televisions, air-conditioners, computers, and cell phones.

Overall, there is a marvelous environment for foreign investors in Chile. With this warm welcome, they offer liberal foreign- investment laws and a favorable tax regime. Decree Law 600 was established in 1974, based on promoting non-discrimination between local and foreign investors. This allows foreign investors to operate on the same level as local investors. Foreign investors can have from three to eight years to implement their investment depending on the invested amount of US dollars. In November of 2002, an investment platform initiative was launched by the Chilean Government to serve foreign investment growth. This initiative addresses several incentives to do this type of growth. Exemption from the Chilean earnings tax on profits the firm receives from its overseas subsidiaries is one incentive. This addresses the disclose of three-way taxation (Deloitte Web Guide).

Chile’s Trade Policies

Objectives

The following are seen as the most important objectives of Chile’s trade policy: (1) the stimulation of the competitiveness and efficiency of national producers; (2) the promotion of regional economic cooperation; and (3) the reduction of any existing anti-export bias in the tariff device as well as the reduction of level of effective protection (WTO 14). The Chilean authorities inspect permanent and secured access to international markets, in conjunction with the capability to draw foreign investment, as vital to the country’s economic growth. In this light, initiatives about the negotiation of novel preferential trade contract have been strengthened in the past few years.

Trade Laws and Regulations

The Rules on the Importation of Goods (Law No. 18.525) is the country’s major trade law. Modified and revised many times since 1997, it contains regulations on the price band system, contingency measures, customs duties, and customs valuation (WTO 16).

In addition, the Customs Law, which integrates several former legal instruments, has provisions on import and export procedures. The modification of export promotion programs (Law No. 19.589) provides for an easing out of the Chile’s most favored nation (MFN) tariffs, revising a number of export promotion programs aimed at bringing them to fit with the country’s WTO commitments.

A draft law on miscellaneous WTO-related affairs was accepted by the Congress in August 2003. Its critical objective is to bring different individual conditions of the country’s legislation in tune with the WTO Agreements. Moreover, it also contains regulations pertaining to intelligent property, taxation, technical regulations, and customs valuation. It also provides for notification measures for conformity assessments and technical regulations, and for the eradication of the dispatch tax on products imported duty-free. It also provides for the elimination of the trade-related investment measures in the automobile sector. Moreover, it revises the intelligent property law in Chile through specification of protection for textile designs, data compilations, and computer programs (WTO 16).

WTO Participation

Chile recognized the significance of the WTO as a rules-based body for the multilateral trading scheme at the 1998 Geneva Ministerial Conference. However, it raised concerns about the extensive use of non-tariff barriers to trade. In the following year, at the Seattle Ministerial Conference, the country affirmed its commitment to start markets, arguing that going on with the process of agricultural reform will help alleviate poverty. In addition, Chile also argued that stricter disciplines should be taken up in applying anti-dumping duties. Furthermore, investment issues and competition policy should match with the fresh investment disciplines under the General Agreement on Trade in Services (GATS) (WTO 21).

At the 2001 Doha Ministerial Conference, Chile viewed that clear-cut objectives should be put into place for considerable reductions in the barriers to market access, for a significant reduction in trade-deforming domestic supports, and for the removal of subsidies in exports. Additionally, Chile noted the increasing exhaust and misuse of anti-dumping duties for protectionist reasons and that it should be resolved. Also, environmental measures should be contained within the structure of multilateral disciplines and rules, keeping away from the risks that could result in discrimination and protectionism (WTO 21).

Tariffs

Chile uses tariffs as its principal trade policy instrument. It grants MFN treatment to its trading partners. The applied MFN tariff has dropped from 11% in 1997 to 6% in 2003 (WTO viii). Tariffs are applied at a generally uniform rate. There are exceptions: a handful of agricultural goods (sugar, edible vegetable oils, and wheat and wheat flour) subject to a brand band and system vessels and aircraft, which receive duty-free treatment. The country bound all its tariffs (most at 25%) in the Uruguay Round. Several agricultural products are subject to 31.5% bound rate at the completion of the implementation. Following the slay of the Uruguay Round, Chile pursued Article XXVIII renegotiations for sugar, leading to a boost of the final trot rate to 98%, along with the introduction of the country’s single tariff quota. Reconciling the large gap between bound and applied tariffs would increase Chile’s trade regime’s predictability (WTO ix).

Furthermore, tariff cuts under preferential agreements have contributed to the improvement of access to the Chilean market for partners. Duty-free access is given to the majority of imports from the European Union, Mexico, El Salvador, Costa Rica, and Canada. Preferential market access is also provided within the structure of partial scope agreements. In accordance with the national treatment principle and regardless of their origin, imports are subject to home taxes, most particularly a 18% value added tax (VAT) applicable on the cost, insurance and freight (CIF) value of imported goods. Also, various goods like vehicles, jewelry, and alcoholic beverages are subject to specific consumption taxes.

The expend of non-tariff barriers seems to be limited. For one, there is no import licensing system. Chile also maintains a variety of import prohibitions and restrictions, which equally apply to its trading partners, for environmental protection and health reasons. Chile modestly use contingency measures; at present, it imposes no countervailing or anti-dumping duties. In 1999, the country took on domestic safeguard legislation in 1999 and has since imposed some measures, some of which resulted in requests for consultation in the WTO.

Bilateral Initiatives

While adequate unilateral liberalization is a requirement for a successful trade policy, opening up unilaterally is not sufficient in itself to realize most trade policy objectives pursued. This is primarily because it does not give access to other markets. One of the most effective ways to achieve that objective, in Chile’s case, is through multilateral negotiations. Such option, however, is not always accessible. Likewise, considering the real nature of contacts among many participants with different interests and intentions, talks are likely to be slow and their outcomes do not necessarily fit with the needs and expectations of Chile at all times (WTO 9). Chile and other small countries have a dinky capability to exercise any influence in the resolution of such problems.
Thus, bilateral initiatives are helpful as a complementary means of obtaining significant results more quickly than would be likely at the multilateral level. Trade negotiations under the bilateral framework give an effective substitute when they are implemented with the Chile’s major markets. In the next few years, it is expected that more than 75% of the country’s foreign trade will be conducted tariff-free, suggesting a possible preferential market for producers put into place in Chile. It should be noted that 50 agreements or so for the protection of investments and reciprocal promotion have been concluded, this is in addition to 13 double taxation agreements and 37 air transport agreements (WTO 10).

It is important to note that while the countries with which Chile has negotiated trade agreements differ significantly, it has attempted to continue a certain consistency in its trade negotiations. This means that every new agreement negotiated must be coherent with the existing ones. On top of all, the recently concluded FTAs by Chile generally do not provide for the exclusion of any products. If they do, it is only for a very limited number of products. Trade agreements also have disciplines in the area of investment and services and also in other areas like bilateral dispute settlement mechanisms, transparency, trade defense mechanisms, government procurement, and intellectual property (WTO 9).

The impacts of such bilateral trade agreements go more than just advancing the reciprocal trade conditions. For instance, the increasing importance of a progressively more open trade regime in Chile has resulted in a shift in the country’s productive structure. To some extent, this shift can already be sensed today, a case in point is the use of agricultural land, where the area devoted to forest plantations, vines, fruit, and vegetables, has significantly increased at the cost of grassland and annual crops (WTO 9). This change in production should hasten in the next few years. The Chilean government hopes that the shift will be completely realized in the next trade policy review, which will be in 2009.

All together, these bilateral trade agreements may have significant macroeconomic impacts in that they contribute to the reduction of growth volatility. External volatility will be reduced with export diversification. It will also decrease with the stabilization of capital flows as a result of increased investor confidence in making their investment decisions. These agreements at the domestic level will strengthen the openness policy and the development strategy grounded on the attraction of FDI and exports (WTO 10).

Chile views the FTAA as representing an occasion to discuss on central subjects like investment, services, and government procurement with its Andean Community neighbors and Mecosur. At the moment, Chile has only tariff agreements with the Andean Community and Mecosur under the Latin American Integration Association (LAIA), which correspond to chief destinations for its supply of services and investments.

Cross-Regional Trade Agreements

In the beginning of the 1990s, the additive regionalism approach started to mold Chile’s trade policies. Immediately after President Patricio Aylwin Azocar assumed office, the country became one of the most active countries in Latin American pursuing FTAs. The significance of PTAs for its trade activities has increased since 1997. It has PTAs with the United States, Canada, the European Union, and some countries from Central America. Also, Chile has negotiated PTAs with the EFTA and South Korea. Chile sees that the major motive gradual the policy shift is to ensure market access to its large trading partners.
How and why have cross-regional trade agreements (CRTAs) become a trade policy alternative for Chile over the last decade? The search for expanded or unique market access through investment liberalization and preferential trade is a potent determinant of partner selection. However, it is surprising that there is very little research that provides a consistent and clear rationale for selecting an ideal FTA partner.

Using the viewpoint of neoclassical trade theory, an FTA involving two economies with harmonizing structures of comparative advantage – a labor-abundant and capital-abundant country pair – would tend to promote inter-industry trade, bringing trade benefits in the form of efficient allocation of resources and economies of scale (Krugman and Obstfeld 24) The FTA between Chile and such countries as South Korea, New Zealand, Singapore, China, India, and the EU is apparently in line with the neoclassical prediction. On the contrary, novel international trade theories based on the differentiated products framework imply that economies that have the same structures of comparative advantage are likely to trade more through product specialization grounded on intra-industry trade resources (Krugman and Obstfeld 121). From this standpoint, an FTA involving countries with the same factor endowments would tend to maximize the gains from the trade.

The gravity model provides an alternative elucidation that connects economic size and geographic distance to the option of an FTA partner (Frankel, Stein, and Wei 49). To trim down the costs associated with geographic distance and to make the most of the benefits from economic size, the gravity model implies that neighboring countries structure FTAs with each other, thus establishing a natural trading bloc. Although the establishment of natural trading blocs enhances economic benefits, the creation of unnatural trade blocs between petite and/or distant economies possibly has minor positive impacts (Frankel, Stein, and Wei 149). From this plan, Chile’s FTA with countries from other regions is a characteristic example of an unnatural trading bloc. This is not only because of geographic separation, but also because of the fact that the country’s economy is fairly small (Koo 144).

The gains to particular industries from CRTAs may encourage otherwise unlikely FTAs involving distant trading partners. Nonetheless, the early doubts regarding economic benefits on the one hand and the mixed forecasts of international trade theories on the other hand show that CRTAs do not make convincing economic sense at the early phase of negotiations. Consequently, it can be argued that many economies enter an agreement for instrumental and political, rather than simply economic, reasons.

CRTAs are a major characteristic of Chile’s eagerness for a multi-track FTA approach. From an institutional perspective, it looks like the country’s adoption of FTAs has been molded by a top-down political design rather than just bottom-up demand from the general public and different interest groups. Chile’s motivations to go after CRTAs are very complex. These include leverage/diplomatic, political, and economic motives. Before further establishing FTAs with other trading partners, Chile needs to resolve to pursue strategic FTAs with relatively smaller partners to minimize possible losses and risks and to obtain negotiation skills. It should also consider opening trade policies of other countries and their accumulated experience in FTA negotiations before considering them as trading partners. While Chile has to pay expensive tuition for its learning experience with its trading partners, it will certainly acquire technical know-how and negotiating skills.

Overall, the strategic and economic driver of the political leadership and the new bureaucratic balance of power have played an important role in Chile’s travel toward regional trade agreements (RTAs) in general and CRTAs in particular. As evidenced by its previous and existing FTAs, Chile is trying to strike the right balance between cross-regionalism and intra-regionalism. The country’s CRTAs will in effect strengthen its intra-regional policy goals. Even though its pursuit of FTAs does not essentially mean that it has entirely abandoned the multilateral trading system, Chile’s trade policy departure is becoming increasingly significant and obvious.

Foreign Trade Barriers

Import Policies

There are very few restrictions inhibiting imports and company growth for foreign agency wishing to do business in Chile. Trade regulations and standards that may affect importation to Chile include tariffs, trade barriers, import requirements and documentation, export controls, labeling and marketing requirements, prohibited and restricted imports, and customs regulations and contact information. The Chile-US FTA lifted tariffs on 90% of U.S. exports such as automobiles and parts, technology equipment, construction and agricultural equipment and medical devices. The FTA also states the Chile agrees to phase out its luxury tax on American automobiles. Other luxury goods, such as alcoholic beverages, jewelry, pyrotechnics, and tobacco products are subject to additional taxes. All imports are still subject to the same 19% Value Added Tax that is imposed on domestic goods.

The country’s trade regime provides for the free importation of goods, except for those goods that are banned under existing legislation. Sometimes a potential import to Chile, because of its nature, might be subject to special authorization or oversight by an enforcement agency such as the Directorate for Borders and Limits, General Directorate of National Mobilization, National Health Service, or the Agricultural and Livestock Service.
Customs authorities need to approve and issue a report for all imports valued at more than three thousand dollars. Imported goods must generally be shipped within 30 days from the day of the report, but longer periods may be authorized. Commercial banks may authorize imports of less than three thousand dollars (Office of the US Trade Representative 71). Larger companies need tot characterize their export and import transactions to the Central Bank of Chile. Commercial banks may sell foreign currency to any importer to cover the effect of the imported goods and related expenses, as well as to pay interest and other financing expenses that are authorized in the import report.

Overall, there are very few import or investment barriers in Chile. In general, foreigners receive the same protections and operate under the same conditions as local firms. The Health Service Office at the port of entries must grant permission for all imports after testing and taking samples of the goods. Imported items for consumption must prove country of origin as well as list all necessary information in Spanish. Temporary admission on equipment or samples necessary to conduct business are duty free under Chilean law.

Few items of importation are prohibited in Chile. Used cars and cargo vehicles are prohibited. However, restrictions depend on Chilean approval. Products that are considered non-lateral with Chilean morals, public health, national security, or not edifying to the environment are such items. Chile’s overall policy is to comply with international standards, specifically the WTO Committee on Technical Barriers to Trade, barring that they recognize towards Chilean trade norms of their largest trading partners (European Union and the United States).

Chile has a complex price band system for sugar, wheat, and wheat flour that will be phased out under the Chile-US FTA for imports from the US by 2016. This system intends to guarantee a minimum and maximum price for the covered commodities. When certain CIF prices fall below the floor, a special tax is added to the uniform tariff rate to raise the notice to the minimum floor level. Price bands effectively set a minimum import price that is normally higher than both international and Chilean domestic prices. On October 23, 2002, the WTO Dispute Settlement Body (DSB) ruled, however, that the country’s price band system was inconsistent with Article 4.2 of the Agreement on Agriculture. Consequently, Chile agreed on a compromise proposal eliminating the price band system on vegetable oils.

The proposal also introduced several modifications for sugar, wheat, and wheat flour. Starting in 2008, the floor would be adjusted downward by 2% annually, until 2014, Mixtures that contain over 65% sugar content are now covered by the sugar imprint band system. On December 8, 2006 the DSB maintained their unusual ruling that Chile’s price band system is inconsistent with Article 4.2 of the Agreement on Agriculture as it is a border measure similar to a variable import levy and to a minimum import price (Office of the US Trade Representative 72).

Export Controls

Customs authorities in Chile have to approve and hiss export reports. Basically, exported products must be shipped within 90 days following the date of the export report, however this period may be extended under some special conditions. Exporters may consume the formal or informal exchange market. Large corporations are required to report all exports to the Central Bank of Chile. Copper exports, which are authorized by the Chilean Copper Commission, are an exception.

Duty-free import of materials used in products for export within 180 days is allowed with prior authorization. Free-zone imports are free from VAT and duties if re-exported. The import/export process necessitates contracting the services of a specialized professional called a Customs Agent, who is the connection between the National Customs Service and the importer/ exporter. It is the mission of the Agent to smoothen the progress of foreign trade operations and to act as the official representative of the importer/exporter in Chile. Agent fees are not standardized (Office of the US Trade Representative 74).

Labeling, Testing, Standards, and Certification

Prior to the Chile-US FTA, many of Chile’s trade-restrictive sanitary and phytosanitary requirements prevented the entry of some US food and agricultural exports. During the FTA negotiations, an ad hoc SPS working group was created to address a number of issues of misfortune to both Chile and the United States. Through this, significant progress was made, including gaining original market access for US beef and processed beef products. In addition, under the modern Chilean requirements, imported food products must provide physical and chemical, dietetic, and microbiological analyses and samples, regardless of whether the good has been reviewed and approved previously for another applicant. Also, imported food products must file a request for a Certificate of Use and Disposal. However, the requirement for repeated sampling and reviews of imported products previously approved does not finish a fine balance between cost and effectiveness. With risk-based testing system, it would be possible to obtain the same level of public health protection at a reduced cost.

Government Procurement

Usually, it is the individual government entities in Chile who conduct their own procurement. Law in Chile law requires public bids for large purchases, even though procurement by negotiation is acceptable in some cases. Local and foreign bidders on government tenders need to register with the Chilean Bureau of Government Procurement. In addition, they must also post a bank and/or guaranteed bond, more often than not equivalent to 10% of the total bid, to guarantee compliance with specifications and delivery dates (Office of the US Trade Representative 73). Chile is not a member of the WTO Agreement on Government Procurement.

Patents, Data Protection and Trademarks

It is reported that Chile is not meeting its FTA commitments in terms of the protection of patents and pharmaceutical test data. In December 2004, Chile’s Congress approved legislation intended to bring the country into compliance with a number of its Trade-Related Aspects of Intellectual Property Rights (TRIPS) commitments. It was entered into force on November 28 in the following year. It contains limitations and exceptions that may undermine the effective protection of undisclosed safety and efficacy information. In general, Chile’s Trademark Law is along the line of international standards. However, legislation bringing Chile’s law fully into compliance with its obligations under the FTA is still pending. Several trademark holders have complained of inadequate enforcement of trademark rights in Chile. The Chile-US FTA also requires Chile to respect the principle of “first in-time, first-in-right” with respect to geographical indications and trademarks (Office of the US Trade Representative 75).

Summary

In summary, the paper tackles international market conditions in Chile. It focuses on trade balance, what is traded, historical trade balance, the major trading partners (export and import), and trade diversification in terms of types of goods and destinations. This paper also discusses Chile’s trading arrangements with other countries (preferential and regional trading arrangements) and analyses current trade policies and foreign trade barriers. Overall, this paper shows that Chile is and has been a competitive player in the international trading regime. However, it is suggested that Chile should further enhance its import policies, export controls, government procurement, intellectual property rights, and labeling, testing, standards, and certification.

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