CLAI Commentary

A series of occasional commentaries on important
policy issues affecting
Latin America and the Caribbean.
 
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