CLAI Commentary
A series
of occasional commentaries on important
policy issues affecting
February 25, 2003
The U.S.-Chile
Free Trade Agreement
By
Dr. James Ferrer, Jr. and Eduardo Segatore1
On
December 11, 2002, after only two years and fourteen rounds of negotiations
(plus ten years of delays) the governments of the United States and Chile
concluded negotiations for a free trade agreement. The accord will eliminate
86 percent of tariffs when it comes into effect, 94.8 percent by the
fourth year, and all tariffs in twelve years. It contains some state-of-the-art
provisions (e.g. intellectual property, public dispute mechanisms). This
free trade agreement is also the first signed between the United States
and a South American country.
During the last twenty years, Chile has been the
most economically stable country of Latin America. The neo-liberal policies begun
in the 1970’s and the social reforms implemented in the 1990’s have become a
resounding success. Chile currently has the highest per capita income of the
region; in the last fifteen years it has cut in half the percentage of its people
living in poverty; and it has successfully weathered the economic crises that
have affected its neighbors since the late 1990’s. It has been firmly committed
to free trade, concluding free trade agreements with the MERCOSUR countries,
Canada, the European Union, Mexico and South Korea. In 2001, exports represented
almost 37 percent of Chile’s GDP, while imports equaled 26 percent. Chile has
a flat tariff rate of 6 percent, by far the lowest in Latin America.
Added to these impressive economic indicators is
the level of transparency in the Chilean government. Transparency International,
in its global Corruption Perception Index, placed Chile one place behind the
United States, i.e., ahead of the rest of Latin America and countries like Germany
and Japan. According to PricewaterhouseCoopers Opacity Index, Chile’s transparent
government practices rank second worldwide, tied with the United States and behind
Singapore. This level of transparency, along with the country’s stable political
and economic environment, has made Chile an attractive financial and trading
partner.
The benefits for the United States of a free trade
agreement with Chile are significant. The fact that Chile has free trade agreements
with Canada and the EU, two of the United States’ main competitors, is a major
factor. The National Association of Manufacturers estimates that, due to the
lack of a free trade agreement with Chile, American exporters lost $800 million
in sales last year. With a free trade agreement, the United States will improve
its competitive position. Furthermore, a free trade agreement with Chile gives
the United States better access to larger markets in South America (Argentina
and Brazil), which already have free trade agreements with Chile. Among the most
important benefits of the agreement is that it establishes a secure, predictable
legal framework for United States investors in Chile. Added to the political
and economic stability of Chile, it creates a great environment for American
businesses.
Reaching a free trade agreement with the United
States marks a genuine victory for the Chilean government. Over 1,900 Chilean
companies, 900 of which are small and medium-sized, sell their products to the
United States. The obvious benefits these, and other Chilean exporters, reap
from a free trade agreement with the world’s political and economic superpower
are enormous. Chile will gain even more international prestige than it already
has. This prestige will lead to the lowering of Chile’s risk rating, which will
depress interest rates and attract investment from around the world. Chileans
will be able to obtain much better and cheaper technology, giving them an edge
over their competitors. An important provision for Chile is that 1,400 Chilean
professionals per year will be able to enter the United States, as opposed to
200 in 2002. These professionals will benefit from the experience of working
in the United States.
The free trade agreement will strengthen the already
close commercial ties between the United States and Chile. The agreement will
prove very positive for the integration of the hemisphere. It offers another
precedent for a free trade agreement between the United States and small economies.
As Chile has a free trade agreement with most of the Latin American economies,
it could potentially increase trade between these countries and the United States.
Taking into account these factors, the free trade agreement between the United
States and Chile represents a positive boost for negotiating a Free Trade Agreement
of the Americas (FTAA).
In order for the United States and Chile to reap the
benefits of their new bilateral accord, the legislatures of both countries must
rapidly approve this important agreement. Furthermore, the United States negotiators,
drawing on the Chilean experience, should quickly conclude a free trade agreement
with the Central American nations. With both these accords in place, along with
NAFTA, the FTAA could be only a step away.
1 The views expressed in this article are the authors’ and do not necessarily reflect the views of the Center for Latin American Issues or The George Washington University