PROFMEX-Consorcio Mundial para la Investigación sobre México

In the 1990's, Chile's new democratic government adopted an aggressive free trade policy. Opening its economy to foreign investment it signed 15 bilateral, regional and multilateral trade agreements. Its economic strategy hinged on increasing agricultural and natural resources exports. In 1999, Chile faced its first recession in sixteen years. Whether it continues its aggressive foreign trade policy depends on how newly elected Socialist President Ricardo Lagos decides to handle the economic crisis. Lagos, elected in a very close second-round vote in January 2000, is the first Socialist elected since the assassination of Salvador Allende in 1973.⁶⁰

The 1999 Presidential election is the third democratic election since the end of the military government.⁶¹ Lagos’ victory ensured the Concertación (PDC or Concertación de Partidos por la Democracia) party's continued monopoly over the Presidency since 1989. The PDC's first nominee was Patrício Alywin Azócar who served a four year term between 1989-1993. Eduardo Frei Ruiz-Tagle, the PDC's second nominees was elected to a six-year term extending from 1994-1999.⁶² Lagos, a member of both the Alywin and Frei Administrations, will serve a term extending from 2000-2004.⁶³

Chile’s current economic recession was a result of its dependence on foreign exports. When the “Asian flu” and “Brazilian IMF crisis,” rocked global financial markets in late 1998, the value of Chilean exports dropped on the world market. Chilean banks were forced to raise interest rates and devalue the Chilean peso. As a result, GDP has declined from an average growth rate of 7% between 1985-1992 to 2.3% in early 1999.⁶⁴

The Chilean Presidential elction was very controversial. During the primary election in the spring of 1999, candidates from polar extremes campaigned for the Concertación (PDC) nomination. Issues such as Pinochet’s arrest and extradition were hotly contested debate topics. Christian Democrats moved to the right in support of returning Pinochet to Chile while Socialist party leaders advocated punishing the general for past human rights violations. Ultimately, Socialist Ricardo Lagos defeated Centrist Christian Democrat (DC) candidate Andrés Zaldivar by a margin of 3 to 1.

During the first round of the general election in December 1999, Ricardo Lagos faced right-wing Unión Democrática Independiente (UDI) candidate Joaquín Lavín, right-wing Renovación Nacional candidate Sebastián Pinera, and Partido Comunista candidate Gladys Marin. Polls in October and November 1999 reported that Lagos and Lavín were in a statistical match-up.⁶⁵ As the leading challenger, forty-six year old mayor of the Santiago suburb of Las Condes, Joaquín Lavín Infante portrayed himself as an “outsider” who understood the common man and the challenges facing Chile under globalization. Lavín criticized Lagos’ record as an “insider” who supported Salvador Allende in the 1970’s and whose Socialist policies might frighten foreign investors.⁶⁶

On the Campaign Trail October 1999

Ricardo Lagos PDC Presidential Nominee Courtesy of Reuters

Joaquín Lavín Infante UDI Presidential Nominee Courtesy of the Lavín campaign

The possibility of a Socialist administration in Chile increased scrutiny by foreign investors. In mid-October, the Wall Street Journal reported that the uncertainty created by Chile’s presidential election was retarding its economic recovery. While both Lagos and Lavín favored a free-market economy and competition, there was specific concern regarding Lagos’ social policies emphasizing labor and education. Under the last Socialist President, Salvador Allende, Chile nationalized the banking sector and assumed control of key U.S. mining investments such as Anaconda. Lagos dissenters pointed out that he had strengthened his Socialist credentials by changing his position on privatization of the government run copper conglomerate COLDECO. As part of his strategy to assure foreign investors of his commitment to the free-market, Lagos traveled to New York in the days following his primary victory to meet with U.S. business investors. His agenda included meetings with George Soros, David Rockefeller, Steve Forbes, and the Council of the Americas. He adamantly insisted that he would continue to support an aggressive trade policy that provides key government incentives to Chile’s export sector.⁶⁷

Since the overthrow of Salvador Allende in 1974 foreign investment in Chile has been regulated by the Chilean Foreign Investment Statute (DL 600) . Between 1974 and 1996, this law’s strict protection of foreign investor rights prompted US$27 billion in foreign investments, an equivalent of more than 30% of the 1995 GDP.⁶⁸ In 1998, annual DL 600 investment totaled US$6.0 billion, a 14.6% increase from 1997.⁶⁹ According to Chile’s Foreign Investment Committee, the United States is the largest investor in Chile. Since 1974, it has invested over US$10.9 billion or 34.3% of total accumulated materialized foreign investment. In 1996 the Chile-European Union regional trade agreement Has encouraged Spain, the U.K. and the Netherlands to steadily increase their investments.⁷⁰ Traditionally foreign investment has been primarily concentrated in the mining and forestry sectors. New projects include electricity, telecommunications, finance, insurance, and pension funds.

Since the 1980’s, Chile's foreign trade policy has been particularly aimed at the elimination of tariff and other trade related barriers, as well as increased integration into the world economy. It has reduced quantitative restrictions, licenses on imports, and prohibitions while adhering to zero minimum customs valuation and no tariff surcharges. Chile’s trade policy is based on the following basic principles:

1. improving the quality of exports and adapt them to specific marketplaces;

2. not discriminating between foreign and domestic suppliers;

3. maximizing efficiency; and

4. adopting procedures favorable to both the private sector and public sectors.⁷¹

Chile’s primary exports include copper, gold, silver, fresh fruit, lumber products, fish, and an increasing variety of manufactured goods. Chilean imports include machinery, cars, electronic products, capital-intensive goods, chemicals, and materials. As Tables 3-6 indicate, the largest markets for these products are Latin America, North America, Asia-Pacific Region, and Europe.

Trade treaties are the foundation of Chile’s assertive free-market trade policy. As Figure 3 outlines, in the 1990’s Chile signed 9 bilateral agreements in the Western Hemisphere, 5 agreements with regional trade blocs, and 1 multilateral agreement with the World Trade Organization (1994). Bilateral treaties were signed with Argentina (1991), Mexico (1991, 1998), Venezuela (1993), Bolivia (1993), Colombia (1993), Ecuador (1994), Canada (1998) and Peru (1998). Regional agreements include APEC (1994), European Union (1996), MERCOSUR (1996), and FTAA (1998).⁷²

After receiving an informal invitation in 1994 to join NAFTA, Chile proceeded to strengthen trade relations with all three members of this trade bloc. Negotiations with the United States have been the most contentious for Chile. Tables 3 and 4 and Figure 4 provide an in-depth analysis of U.S.-Chilean trade relations. Overall, NAFTA is Chile’s third export market behind APEC and the European Union. Between 1991-1998, Chilean exports to the United States increased steadily. At the same time, imports from the United States rose at a greater rate, making it the number one country from which Chile imports goods. All three charts indicate that Chile needs to lowers its balance of trade with the United States. This was one of the main reasons behind its eagerness to join NAFTA.

During the course of NAFTA discussions with the United States, Chile also began negotiating agreements with Mexico and Canada. Chilean officials strengthened trade relations with Mexico and Canada for several reasons. First, they did so in anticipation of formally joining NAFTA. Second, as Alex Fernandez, president of the American-Chilean Chamber of Commerce noted, Chilean exports to the U.S. were beginning to suffer from competition with Mexican and Canadian exports. The Mexican and Canadian agreements gave the Chileans greater flexibility to export to these countries. It also gave them the option of shipping to these destinations, adding value to their product and then re-exporting it to the United States. The new product would have an origination in Mexico or Canada and thus enter the United States under NAFTA regulations, not U.S.-Chilean trade restrictions.⁷³

In September 1991, Mexico and Chile agreed to implement an Economic Complementation Agreement (ECA) in January 1992. Under this accord, tariffs were lowered gradually from 10% in 1992 to 0% in 1998. In 1998, both countries agreed that they wanted to strengthen their trade relationship with a full trade agreement (FTA). Since implementation of the FTA in August 1998, trade and investment between the two countries has increased. Trade rose from an estimated US$158 million in 1990 to US$1.4 billion in 1997. Mexicans have invested in Chilean industries such as TV broadcasting, petrochemicals, financial services, textiles, and kitchen furniture. Chilean investments in Mexico include fruits, software, engineering, cold storage facilities, and surgical gloves.⁷⁴

The Canada Chile Free Trade Agreement (CCFTA) signed in December 1996 and implemented in July 1997 was Chile’s first treaty with a G-7 nation. Under CCFTA, both countries agreed to the elimination of tariffs and non-tariff barriers. Duty-free status was granted to 92% of Chilean exports to Canada and 76% of Chilean imports from Canada when the treaty was signed. CCFTA guaranteed non-discriminatory treatment services and provided protection for foreign investment.⁷⁵ In addition to the main agreement, separate labor and environmental agreements were also signed. The Labor Cooperation Agreement specifically promotes productivity and economic development in each country. The Environmental Cooperation Agreement fosters the protection and improvement of the environment through sustainable development. Both countries pledged to cooperate to develop and improve environmental laws, regulations, procedures, policies and practices by avoiding critical trade distortions or new trade barriers.⁷⁶

APEC is Chile’s number one export market due to the high volume of trade with Japan. As Tables 3 and 6 demonstrate, Japan accounted for approximately 17% of Chile’s total exports between 1994-1996. This figure surpassed exports to the U.S. during the same time period. This reflects, Chile’s concertedly efforts in the 1980’s to enter the Japanese market with its agricultural, forestry, and fish products. The Chileans developed extensive market research testing various agricultural products and recording which variants most appealed to the Japanese consumer.⁷⁷ This market research was expanded to Korea and Taipei. In recent years, Chilean products have also generated interest in China, Indonesia, Thailand, Malaysia, Hong Kong, and Singapore. As Tables 4 and 5 indicate, Japan ranks fourth place for imports accounting for between 9% and 6 % during the time extending from 1994-1996.

Chile has been one of the most aggressive Latin American countries promoting increased trade between Latin America and Asia. Along with Mexico, it was one of first Latin American nations to join APEC in November 1994. APEC is a consortium or forum of Pacific Rim nations informally organized to discuss the liberalization of trade. It is currently composed of 21 economies representing a diverse level of economic development.⁷⁸ The group has been growing steadily since it was created in Australia in 1989 with only 12 members.⁷⁹ APEC fosters discussions on tariff and non-tariff measures, services, investment, standards and conformance, customs procedures, intellectual property rights, competition policies, government procurement, deregulation, dispute mediation, and the mobility of business people.

In September 1999, days prior to the formal APEC Ministers meeting, officials from Asia and Latin America met in New Zealand to form the East Asia-Latin American Forum (EALAF).⁸⁰ Chile’s Eduardo Frei and Singapore’s Prime Minister Goh Chok Tong were the strongest proponents behind organizing this first meeting.⁸¹ Its agenda was to promote economic, political and cultural ties and review 25 joint business development ventures. A total of 27 representatives participated including six from Latin American nations that are not party to APEC.⁸²

Chile signed a regional agreement with the European Union (EU) in June 1996 that strengthens political dialogue and promotes trade liberalization, joint venture investments, and cooperation on scientific, cultural and technological projects.⁸³ As a regional market, the EU is Chile’s number two export market. Tables 3 and 6 demonstrate that between 1994-1996, more Chilean goods were exported to the European Union than to North America. Individually, the European countries rank as fourth (United Kingdom), seventh (Italy), ninth (France), eleventh (the Netherlands), and twelfth (Spain). Together, these EU countries are a strong bloc that represent approximately 24% of all exports. This is greater than the U.S. share of Chilean exports, which averaged 17% during the same time period. According to Tables 4 and 5, Chile imports from Europe rank fifth (Germany), eighth (Italy), ninth (France), tenth (Spain), thirteenth (United Kingdom), and seventeenth (Sweden). As a group, the Europeans account for approximately 24% of all imports to Chile. Chilean imports from the U.S. stood at 24% during the same time period.⁸⁴

In June 1999, Chile and the EU agreed to further develop trade relations by creating a free trade zone that will begin to lower non-tariffs barriers between late 1999 and 2001. Chile is hoping that this agreement not only increases trade, but will also promote greater European investment. According to Chile’s Foreign Investment Committee, between 1974-1988 European foreign investment totaled 27.7% with including financing from Spain (11.6%), the United Kingdom (5.9%), the Netherlands (3.0%), France (1.6%), Finland (1.6%), Switzerland (1.4%), Italy (1.3%), Germany (.7%), Belgium (.6%). In comparison, the United States invested 34.3%, Canada 16.4%, and Japan 3.6%.

In 1996, Chile joined MERCOSUR as an associate member. Under this treaty, 33% of all trade between Chile, Argentina, Brazil, Paraguay, and Uruguay was liberalized. A gradual tariff reduction plan was agreed to that will eventually make 67% of Chilean exports and 62% of Chilean imports to and from MERCOSUR duty-free. All duties and tariffs will be eliminated by 2014. Since his election in January 2000, Chile's new President Ricardo Lagos has publicly announced that his administration will pursue negotiations with the make Chile a full member of MERCOSUR.

As Tables 3 and 4 demonstrate, MERCOSUR is Chile’s fourth largest market, behind APEC, the European Union, and NAFTA. Inter-American Development Bank statistics in Tables 5 and 6 show that Brazil is Chile’s third largest export destination. Argentina and Brazil rank number 2 and 3 for imports behind the United States. Argentina is also the main recipient of Chilean investment capital. A large portion of the total US$11 billion Chile has invested is in the Argentine energy sector.

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MERCOSUR

Notes

⁶⁰ Roberto de Andraca, “Las Elecciones No Pesan en las Decisions de Invertir,” El Mercurio Electrónico, 7 October 1999; “Segun Libertad y Desarrollo, A Lagos Lo Afecta Imagen de Político Tradicional,” El Mercurio Electrónico, 7 Sept. 1999; “ILD Prevé que Lavín Será el Próximo Presidente de Chile,” El Mercurio Electrónico, 7 October 1999.

⁶¹ It has been 10 years since Chileans voted by a constitutionally mandated plebiscite to oust General Augusto Pinochet from office. The vote was 55% in favor Pinochet stepping down. Ricardo Torres-Mateluna, “‘The English Patient’ and Chile’s Political Climate,” ISLA [1999] <http://www.igc.org/isla/chile3.html>

⁶²Election results in 1993 were Eduardo Frei Ruiz-Tagle (PDC) 58%, Arturo Alessandri (24.4%), other candidates (17.6%) <http://www.odci.gov/cia/publications/factbook/ci.html#gov>.

⁶³ Lagos was Alywin's Minister of Education from 1990-1992 and Frei's Minister of Public Works from 1994-1998.

⁶⁴ Ernest & Young International, “Executive Summary,” in Doing Business in Chile [1999] <http://www.doingbusinessin.com/chile>; Sebastian Edwards, “Chile’s ‘New Socialist’ Bids for the Presidency,” Wall Street Journal, 4 June 1999; and Kevin G. Hall, “Crises Dim Prospects For Americas Free Trade,” Journal of Commerce, 5 Feb. 1998.

⁶⁵ “ILD Prevé que Lavín Será el Próximo Presidente de Chile,” El Mercurio Electrónico, 7 October 1999, “Lagos Confiado en que no Habrá Segunda Vuelta,” El Mercurio Electrónico, 19 October 1999.

⁶⁶ Lavín studied civil engineering at Universidad Católica de Chile and received a masters in economics from the University of Chicago. He was editor of the economic and business sector of El Mercurio newspaper before running for public office. Joaquín Lavín Infante, Biografia [1999] <http://www.joaquinlavin.cl/seccion/Biografia/biografia.htm>

⁶⁷ David J. Rothkopf, “Whistle-Stops on Wall Street,” New York Times, 8 March 1999.

⁶⁸ Embajada de Chile en Estados Unidos, Chile Facts on Demands, Foreign Investment (Washington, D.C., 1999).

⁶⁹ ProChile, Chilean Trade Commission, Foreign Investment and Trade Policy [1999] <http://www.chileinfor.com>

⁷⁰ ProChile is the Chilean Trade Commission, which is responsible for promoting Chilean exports throughout the world. It has 38 Trade Offices around the world. Its mission is to identify demands for foreign products and to provide information to facilitate foreign investment in Chile. For more on ProChile’s efforts in the United States see <http://www.chileinfo.com> and for more on the overall organization review ProChile’s headquarters website in Santiago at <http://www.prochile.cl>.

⁷¹ Embajada de Chile en Estados Unidos, Chile Facts on Demand, Foreign Investment (Washington, D.C., 1999).

⁷² Embajada de Chile en Estados Unidos, Trade & Investment Between Chile and the United States (Washington, D.C.: 1999)

⁷⁴ Embajada de Chile en Estados Unidos, Trade & Investment Between Chile and the United States (Washington, D.C.: 1999) and ProChile, Chilean Trade Commission, Foreign Investment and Trade Policy [1999] <http://www.chileinfor.com>

⁷⁷ Neantro Saavedra-Rivano, "Chile and Japan: Opening Doors Through Trade" in Barbara Stallings and Gabriel Székely, eds., Japan, the United States and Latin America. Toward a Trilateral Relationship in the Western Hemisphere? (Baltimore: Johns Hopkins University Press, 1993), 191-209.

⁷⁸ The Asian Pacific Economic Corporation (APEC) includes Australia, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Republic of the Philippines, Russia, Singapore, South Korea, Taipei, Thailand, United States, Vietnam.

⁷⁹ APEC began in 1989 with 12 countries: Australia, Brunei, Canada, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand and the United States. In 1998, following admission to Peru, Vietnam, and Russia, membership was closed until 2008. “Russia, Peru and Vietnam Enjoy Their First Summit,” AP, 18 November 1998.

⁸⁰ Asian countries participating in the forum were Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, the Philippines, Singapore, South Korea, Thailand, and Vietnam. Latin American countries participating were Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Paraguay, Peru, Uruguay, and Venezuela. Australia and New Zealand also joined the talks.

⁸¹ Chile’s Eduardo Frei and Singapore’s Goh Chok Tong set the agenda for the first meeting and scheduled the next meeting for early 2001 in Santiago, Chile.

⁸² “Globalization Opens Way For Ties Between Asia, Latin America,” AP, 1 September 1999; “Asian, Latin American Countries Vow To Build Ties,” AP, 3 September 1999; and “Asia-Pacific Seeks Common Ground For Trade Talks,” Reuters, 10 Sept. 1999.

⁸³ Embajada de Chile en Estados Unidos, Trade & Investment Between Chile and the United States and ProChile, Chilean Trade Commission, Foreign Investment and Trade Policy [1999] <http://www.chileinfor.com>.