MercoPress. South Atlantic News Agency

Chile hails trade deal as finest moment

After two years of negotiations, Chile and the US have agreed a broad bilateral agreement which has been hailed in Santiago as the finest moment in more than a decade of aggressive pursuit of trade deals.

Although no panacea for the weak economic growth which has dogged Chile since 1999, last week's free trade accord with the US promises to consolidate the country's sound credit profile and spur much-needed direct foreign investment and modernisation. According to union leaders, it should also help address shortcomings in productivity, quality control and industrial relations.

Chile is a remote land of 15m people with average per-capita income of about $5,000, and its only development option has been based on finding foreign markets for its largely resource-based economy.

Since its initial approach to the US in 1990, it has signed bilateral commercial agreements with Mexico, Canada, Central America, the European Union and South Korea. Low average import tariffs - which next year will settle at 6 per cent - and regional associations have assured it preferential treatment from scores of other countries.

Next year, the focus will switch to Asia. By 2010, it says, 90 per cent of foreign trade will be covered by bilateral agreements.

"The more free trade deals the better," says Sergio Olavarrieta, professor of strategy at the University of Chile's business school. "The only way a Chilean company can reach critical mass is through access to outside markets."

His point is underlined by the case of Mexico, where Chilean exporters enjoy virtually unrestricted duty-free access. From shipments worth $212m in 1994, Chile last year sent about $830m worth of exports to Mexico, made up mainly of copper, fruit, fishmeal and forestry products.

Such impressive improvements, however, will not come as easily with the US, which is already an important consumer of Chilean commodity and agricultural staples, most of which benefit from general tariffs of 4 per cent or less.

"The wine industry, when looking for the advantages of a free trade deal, is looking for variables other than tariff levels," says Alfredo Vidurre, president of one of the country's numerous wineries.

Many argue that Chile's dependence on natural resources and the slow pace of diversification into value-added industry, will make the going hard in the sophisticated consumer markets of the US and Europe.

Of the $5bn in Chilean exports to the EU last year, 67 per cent were natural resources, with a further 26 per cent basic value-added products such as packaged seafood or tinned peaches. Only 7 per cent was products with a value-added component.

Although higher than average in the region, Chilean education standards are well below those of the developed world, and spending on research and development is 0.6 per cent of GDP, compared with around 2.5 per cent in many industrialised countries.

The government hopes to lift this to 1 per cent by 2006, although the private sector prefers to copy drug formulae and industrial patents rather than spend on R&D. According to recent studies, investment in personal computers and network servers has remained flat at 1.6 per cent of GDP since 1999, compared with 4.4 per cent in the US.

Academics argue that most small and medium-sized businesses are unfamiliar with foreign markets and thus reliant on international partners for growth.

Without modernisation and new niche markets, Chile may never again enjoy the 7-8 per cent growth rates of the 1990s, say a growing number of economists and foreign trade officials.

"Chile's first golden era is over," says Roberto Rensi, a senior officer in the EU Chilean mission. The EU deal, he said, would help it through the second phase of development, where there was greater need for technology transfer and cultural interchange.

The centre-left government of Ricardo Lagos is working hard at selling the country as a low-cost, secure platform for foreign enterprise looking to take advantage of its myriad trade deals.

Karen Poniachik, president of Chile's Foreign Investment Committee, is forecasting growth in agribusiness. "The fact that Chile has more markets for its exports will bring more opportunities for joint ventures or other productive investments in this sector," she says.

Ricardo Lagos Weber, director of multilateral economic affairs, says the deal also brings fresh hope to the textiles industry, which was almost destroyed by Asian imports when Chile began dismantling its trade barriers in the 1980s. But he adds: "Whatever happens to Chile in the next 40 years, we'll be able to look back to December 2002 as the moment in which it was given an important opportunity to advance."