The United States-Chile Free Trade Agreement:
Challenges and Opportunities
Ambassador of Chile
The George Washington University
February 21, 2003
In my presentation today, I would like to address three topics. I will
first briefly describe Chile’s trade policy and the remarkable economic
and social progress we have achieved during the last fifteen years. I will
then analyze at somewhat greater length the outcome of the recently
concluded negotiations for a free trade agreement between Chile and the
United States and the benefits we can derive from it. I will conclude with
a few comments on some of the decisions that, in my view, will have to be
made in order to turn the potential opportunities offered by the FTA into
Policy and Economic Progress
1. Chile’s gross domestic product was about 70 billion dollars in
2001. This implies a
per capita income of nearly 4700 dollars at current prices. However,
measured at purchasing power parity rates, the World Bank estimates that
Chile’s per capita GDP was 9400 dollars in 2001, the second highest in
Latin America (after Argentina), slightly above the average of the
countries that the Bank classifies as upper middle income economies,
equivalent to 50% of the per capita income of Spain, and to one-fourth
that of the United States.
2. Chile is a very open economy. Total external trade in goods and
services represents 60% of GDP, and exports per capita are the highest in
Latin America, except for those of Mexico and Costa Rica. By far, the main
export product is copper, of which Chile is also by far the largest
producer in the world. Other important exports are fresh fruit, methanol
and other chemicals, cellulose and paper, forestry and wood products,
salmon and -of course- wine.
3. Moreover, Chile’s trade is geographically very well balanced:
total merchandise trade is divided in almost equal shares between Latin
America (28%); Asia (25%); Europe (24%) and North America (21%).
Individually, the U.S. is Chile’s main trading partner while Asia is its
principal and fastest growing export market.
4. Due to its openness and relatively small size, Chile is linked
more directly than many other countries to economic developments around
the world. However, rather than view this with fear, Chile has embraced it
as an opportunity. Indeed, we recognize that globalization represents a
fundamental feature of modern development and we are hence prepared to
both meet the challenges and take advantage of the opportunities that
5. Chile’s option for economic and financial openness is based on
the acceptance of two fundamental facts:
(1) that in a developing
economy, persistent and strong economic growth is a necessary –although
certainly not a sufficient- condition for raising living standards and
attaining social equity, and
(2) that in a small economy, sustained and rapid economic growth
requires a vigorous expansion of trade with the rest of the world.
6. Hence, since the mid
1970s, Chile has pursued a policy of unilateral trade opening through the
systematic and sustained lowering of import tariffs and the nearly total
elimination of non-tariff barriers. As a result of this pioneering program
of trade liberalization, our single, uniform import tariff stands as of
January 1st of this year at 6%.
7. Along with tariff reduction, in the early 90s Chile began
implementing an active trade policy which led to economic complementarity
agreements with all the Andean countries by 1995, to associate membership
in Mercosur in 1996, and to free-trade agreements with Canada in 1997,
Mexico in 1998, and Central America in 2002. Simultaneously, Chile
continued to support the liberalization of trade at the World Trade
Organization (WTO), became a full member of the Asia Pacific Economic
Cooperation Forum (APEC), and has been a proactive participant in the
negotiations aimed at establishing a Free-Trade Area of the Americas
8. Moreover, in 2002, Chile successfully concluded negotiations to
establish free trade agreements with the European Union in May, South
Korea in October, and the United States in December.
9. The results of these policies of ever-closer integration into
the world economy have been remarkable. Thus:
(1) Between 1975 and
2001, merchandise exports increased more than eleven-fold and became more
diversified both in terms of products and markets. In fact, the number of
products exported soared from 200 in 1975 to 3750 in 2001, while the
number of exporting companies rose from 500 to over 6000, and the
countries in which Chilean products were sold increased from 60 in 1975 to
174 in 2001.
(2) Since the early 1980s, Chile has not suffered a single balance
of payments crisis, in stark contrast with the experiences of most of the
emerging economies of Latin America and Asia.
(3) International reserves sky-rocketed from less than $2 billion
in 1987 to over $15 billion in 2001, and
(4) This increase in international reserves, combined with a
sizeable reduction of the public external debt (from $16.4 billion in 1987
to $5.8 billion in 2001) generated a dramatic turnaround in the net
external indebtedness of the government, which moved from being a net
external debtor of over $14 billion in 1987 to being a net external
creditor of $9 billion in 2001.
10. In part because of
this sustained and vigorous expansion of foreign trade, Chile grew at an
unprecedented pace. Between 1985 and 1998 GDP rose at an average annual
rate of over 7%, which allowed per capita income to double in real terms
during that period. In fact, in the 1990s Chile was the fourth fastest
growing economy in the world, being surpassed only by China, Singapore and
11. This strong and persistent economic growth, coupled with
well-focused social policies, led to a sharp reduction of poverty - which
fell from 45% of the total population in 1987 to 21% in 2000 - and to
substantial improvements in health, education and housing conditions.
12. At the same time, inflation declined gradually but persistently
from 27% in 1990 to 3% at the present, while, starting in 1987 and for
eleven years in a row, the central government’s accounts closed with a
13. It should be noted, however, that this extraordinary process of
economic and social progress has been less intense in recent years. Thus,
after suffering a mild recession in 1999 - due primarily to the negative
impact of the Asian crisis and the sharp fall in the price of copper
(which in real terms fell in 1998-99 to its lowest level since the Great
Depression of the 30s) - economic activity increased by 4.4% in 2000, by
2.8% in 2001, and is estimated to have risen 2% last year.
14. These rates - although considerably lower than those of the
1990s - clearly surpassed the average rates of growth recorded during the
same years by the industrialized countries as well as by the emerging
economies. In fact, confronted with an external scenario characterized by
the sharp deterioration of global trading and financial conditions and by
political uncertainty and economic crises in several Latin American
countries, Chile’s economic growth has continued to exceed that of most
countries in the world, while simultaneously monetary and balance of
payments equilibria have been maintained and budget shortfalls have been
15. Chile has therefore maintained its investment-grade rating
throughout the recent worldwide economic slowdown and has been able to
place sovereign bonds on the international financial market under very
favorable terms. Thus, just one month ago Chile launched its biggest bond
deal ever, raising one billion dollars, and it is worth noting that the
issue was oversubscribed four times and that it was priced at a spread of
only 163 basis points over U.S. Treasuries.
16. It is hence in this context of a country clearly committed to
an open trade policy, which has successfully internationalized its
economy, and which during the last 15 years has reaped substantial
economic and social benefits from this process, that one has to analyze
the recently concluded negotiations to establish a FTA between Chile and
the United States.
II. Towards a Partnership for Development
A. The Agreement
17. Moving towards a free trade agreement between our two countries
has been a long-term process whose origin goes back to the early 1990s.
But the outcome of this decade-long quest has certainly been positive. In
effect, the deal reached in the final round of negotiations in Washington
last December represents a comprehensive, well-balanced and
state-of-the-art free trade agreement.
18. The pact includes provisions on an unusually wide array of
subjects, ranging from the traditional liberalization of merchandise trade
and the definition of rules of origin to very novel ones such as
electronic commerce and express delivery, copyright and trademark
protection for digital products, openness of government procurement, and
ground breaking customs procedures.
19. The agreement also includes provisions to protect domestic
labor and environmental conditions and establishes fair and transparent
mechanisms to enforce them. Through these labor and environment provisions
both the United States and Chile want to foster strong institutions and
effective legislation, and seek to discourage the abuse of labor and
environmental conditions as means to gain unfair competitive advantages.
Conversely, they also seek to avoid that these provisions might be used to
raise artificial obstacles to fair trade.
20. In merchandise trade, the pact establishes that on the day it
enters into force nearly 88% of bilateral trade will become duty-free.
After four years, tariffs will be eliminated on 95% of all exports.
Restrictions on the remaining 5% will be phased out gradually, with all
tariffs and quotas being eliminated in a maximum period of 12 years, after
which complete free-trade between the two countries will prevail.
21. The lowering of tariffs will be especially fast for exports of
manufactures, 90% of which will gain immediate duty-free access, and
almost 100% of them will be totally liberalized after four years. On the
other hand, and as was to be expected, the lifting of restrictions will be
somewhat slower in the case of farm and agro-industrial products, on about
three quarters of which all restrictions will be eliminated when the
agreement enters into effect, but around 10% of them, including
import-sensitive products, will become duty-free only after 12 years.
22. Although difficult to quantify precisely, it is clear that the
effects of the agreement will be positive for both Chile and the United
States. Nevertheless, because of the immense differences in the two
countries’ economic, geographic and demographic size and the also wide
gaps in their technological and scientific levels, the relative magnitude
and especially the nature and scope of these gains will be quite different
for the United States and for Chile.
23. In our case the benefits will accrue principally from the
growth and diversification of bilateral trade, the wider access to
external financing at lower costs, and from larger inflows of foreign
24. Chilean exports will be stimulated, in the first place, by the
elimination of tariffs on 95% of the goods presently exported to the
United States on the day the agreement enters into force, by the
subsequent and gradual phasing out of import duties on the remaining
products, and by the complete elimination of tariffs and quotas on all
goods after 12 years.
25. But the lowering of tariffs will not be the only mechanism that
will contribute to increase exports. In fact, for those products now
entering the U.S. market under the Generalized System of Preference (GSP),
the biggest advantage will be the shift from the present situation, in
which they pay low or no tariffs according to an arrangement that is
temporary and that can be unilaterally revoked by U.S. authorities, to a
new one in which this preferential access will be the result of stable and
permanent rules established bilaterally in the agreement. The greater
certainly that this change will entail for the business and investment
decisions of the producers of these goods will be a second incentive for
the expansion of exports.
26. A third benefit for actual as well as for potential Chilean
exporters will come from the gradual de facto reduction and ultimate
elimination for Chilean exports of the United States system of
differentiated or escalating tariffs, according to which higher duties are
placed on goods with a higher value added. This feature of the American
tariff system has up to now limited or impeded the possibility of
exporting a number of Chilean agro-industrial and manufactured products to
the United States. In contrast, once the agreement is in place, the
gradual convergence to zero of all American tariffs on Chilean exports
will allow that new products be exported to the United States. Hence, at
the same time that the volume of our exports will rise their composition
will become more diversified.
27. But trade is, of course, a two-way process. And so, as a
consequence of the lowering of Chilean tariffs, imports from the United
States will also increase. This will benefit all Chilean consumers and
most Chilean producers, while it will generate a new competitive challenge
for firms engaged in import-competing activities.
28. The welfare of consumers will be enhanced by their access to a
broader array of imported goods of better quality and/or lower prices. For
the same reason, the majority of producers will gain from being able to
buy intermediate imports and capital goods at reduced prices, with the
consequent fall in production costs.
29. On the other hand, for producers in import-competing sectors
the increased availability at lower costs of consumer, intermediate and
capital goods imported from the United States will imply a competitive
challenge that they will have to meet by introducing
30. The larger volume of bilateral trade induced by the agreement
will also represent a challenge as well as a stimulus for services that
support foreign trade. Sectors such as telecommunications, domestic road
and rail transport, port infrastructure and operations, airports, shipping
and freight transportation will be positively impacted by the rise in
demand, but will need to expand and upgrade their installations and
improve their operational efficiency.
31. In addition to the gains that Chile will get from the growth
and diversification of bilateral trade, the agreement will generate
positive financial and foreign investment effects.
32. These will derive to a considerable extent from the fact that,
once the FTA is in place, Chile will become a member of a rather exclusive
club that so far includes only five members: the United States and the
four countries with which it has FTAs: Canada, Mexico, Israel and Jordan.
33. By becoming a member of this club Chile will receive a virtual
seal of quality. Moreover, the effects of this new status will be
reinforced by the fact that when then the agreement with the United States
goes into force, Chile will have had working comprehensive FTAs with
Canada and Mexico since the late 90s, with the European Union for a year,
and with South Korea for close to six months. From the perspective of
international financial markets, this will bring about a further reduction
of Chile’s already low credit risk with the consequent fall in the cost of
external financing for both the government and Chilean businesses.
34. Finally, the close integration of Chile to the world’s largest
markets, together with the framework of stable rules and disciplines
included in the FTA, will represent a powerful incentive for investments
by American, European and Asian companies, that, taking advantage of
Chile’s social, economic and political stability, as well as its rich
endowment of natural resources and adequate supply of skilled labor, will
be able to use Chile as a platform from which to export to, or do business
with, other Latin American countries in which we enjoy preferential
III. Opportunities, Challenges and Domestic Efforts
35. In concluding, allow me to touch briefly on the relationships
between the opportunities and challenges the FTA creates for us and the
efforts we will have to make to transform those opportunities into
36. As you can infer from what I have said, I am convinced that we
have negotiated an excellent agreement, an agreement, in fact, that can
provide an essential foundation for constructing in Chile a 21st century
37. Indeed, the opportunities the agreement offers are enormous. If
we take full advantage of them, along with the opportunities opened by our
recently concluded FTAs with the European Union and South Korea, Chile
will make great strides in the process of building both a dynamic, stable
and competitive economy and a fair society.
38. But all that will require work, hard work. After the agreement
is approved and when it enters into force, we will just face potential
opportunities and critical challenges. And it will be only by addressing
the latter successfully that we will be able to turn those potential
opportunities into actual gains.
39. In this context, let me share with you a few brief comments on
some - just some
- of the tasks we should carry out to make this possible.
40. We will need, of course, to preserve the invaluable
macroeconomic stability that we have achieved through the steadfast
implementation of sound and responsible fiscal, monetary, wage and
exchange rate policies.
41. We will need, as well, a better educational system. This
requires substantially raising the quality of the education provided by
our public basic and secondary schools, in which nearly all the children
of poor and middle-income families study; it requires to multiply and
improve the centers for training and retraining our workers and creating
better public-private partnerships to develop top-notched technical
schools that meet the real demands of firms; and it also requires to
strengthen our schools of engineering, science and management. The 21st
century economy - the economy of this FTA - will be a knowledge-based
economy. We will therefore need to invest in knowledge and in all forms of
42. We will also need to continue to invest heavily in our physical
infrastructure. Our goods will not be able to benefit from zero-tariffs
and zero-quotas if they cannot get speedy, reliable and low cost access to
foreign markets. Hence we will need to invest in roads, ports, airports,
telecommunication networks, power grids, shipping, and air transportation.
43. But, above all, we will need to approach these and other
equally demanding challenges considering them not just as the exclusive
responsibility of the political coalition temporarily in control of the
government but as truly permanent national tasks that require the full
participation, strong support and resolute commitment of all key social,
economic, political and civic groups.
44. In summary: Our trade partners have agreed to open their doors;
the FTAs we have negotiated provide a framework for renewed economic and
social progress. But at the end, it will be up to us, Chileans, through
our efforts and our hard work, to seize the new and promising
opportunities that have thus been created.