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Consequences of the US-Chile free trade agreement; VAT increase to compensate tariff losses;
Euro interests cut to 2%; Highest US unemployment in nine years.

Consequences of the US-Chile free trade agreement.

The recently signed free trade agreement between United States and Chile could block Argentine 360 million US dollars exports to Chile, according to a paper from the Argentine International Studies Centre, closely linked to the country's Foreign Affairs Ministry. The paper indicates that 10% of Argentina's 3,6 billion US dollars annual sales to Chile are threatened by US competition, following the US-Chile agreement that was described by the State Department "as good for both countries and for the whole hemisphere". "It's a very positive event", said the State Department spokesperson Richard Boucher. However, Argentine sources pointed out that the agreement could condition the future US sponsored Free Trade Association of the Americas, FTAA, talks since now "we're forced to reach an agreement under the 4+1 Mercosur/US format". "Argentina will need to level what has been un-levelled by the agreement", indicated Mr. Raúl Ochoa, former Argentine Commerce Secretary. Meantime in Chile, Fernando Lihn president of the Chamber of Commerce indicated that the agreement, in the future, will create 5,000 jobs annually. The US Congress is expected to consider the agreement this week, for which it has 90 days under fast track conditions, that is it can only approve or reject the whole package. The moment the treaty becomes effective 87% of the 5,200 Chilean goods exported to the US will pay no tariffs, and 95% in the second year. Chilean President Ricardo Lagos talking on national television said that in the next three/four years sales to the United States could jump from the current 3,6 billion to over 5 billion US dollars. After thirteen years of negotiations Chile became on June 6 the first South American country and sixth in the world, to sign a free trade agreement with the United States. US Congressional sources confirmed that Chile's agreement will be considered together with a similar US/Singapore document, which was described as "very positive". Indeed Singapore a first moment supporter of the US-UK war in Iraq had access to a White House signing ceremony with President George Bush. For Chile the ceremony was celebrated in Miami at US Commerce Representative and Foreign Affairs Minister level (Robert Zoellick and Ms. Soledad Alvear). The only Bush family member present at the ceremony was Jebb Bush, governor of Florida, and Chilean president Ricardo Lagos had to see the whole show on television from Santiago. However on the Chilean side there is an individual winner, Ms. Soledad Alvear the effective Chilean Minister of Foreign Affairs who managed the Iraq crisis, and was first line conductor of the three historic free trade agreements with the European Union, Southern Korea and United States. She now stands as the frontrunner to succeed president Lagos in 2006.

VAT increase to compensate tariff losses

Chilean Finance Minister Nicolás Eyzaguirre will be presenting Congress this Monday a package of fiscal initiatives that include among other aspects a one point increase in Value Added Tax, VAT, from 18 to 19%, to compensate for the loss of revenue arising from the free trade agreements signed with the European Union and United States. The increase described as "progressive and transitory", stipulates a 0,5 percentage VAT increase once the bill is approved, and to 19% in the second quarter of 2004. However the adjustment will only apply until 2007, when basic VAT will return to 18%. "We're asking all Chileans for a shared effort so the poor will not suffer the reduction of social programs; this is a common effort for all of us to grow jointly", stressed Mr. Eyzaguirre following on President Lagos statement that Chile can't go around the world dressed as a major partner of the main powers "when we have people in our country living in extreme poverty". Mr. Eyzaguirre also announced modest increases in three items that its "excessive consumption" has harmful effects on the environment and public health: tobacco, spirits, wines and beer, and diesel fuel. However the Minister also cautioned that in a near future more "adjustments" could be needed to keep in line with the fall in revenue, not only from lesser tariffs, but also because of tax cuts for families with children and an overhauling of the public health system. The revenue shortfall is estimated in 435 million US dollars and the bill sent to Congress contemplates 300 million US dollars recovery, still leaving another 100 million US dollars unaccounted for. Mr. Eyzaguirre anticipated that some of the "shrinkage" could be compensated by the sale of government assets particularly in the water and sewage companies, an initiative that has not been too successful in the past. The Chilean Chamber of Commerce bitterly criticized the fiscal bill arguing that higher taxes will have a negative impact on consumption and dampen the so much ambitioned "recovery". Mr. Fernando Linh said that the Minister should have targeted government waste and have been more explicit regarding sales of government assets, adding that "we know taxes rarely come down and a VAT increase means less income for the poor and all Chileans in general". "Commerce represents 11% of Chilean GDP, employs a million people and is one of the government's main tax collectors so we know what we're talking about", stressed Mr. Linh. "This is the worst gift possible in the eve of Commerce Day".

Euro interests cut to 2%

Fearing deflation and renewed recession the European Central Bank this week cut the basic interest rate of the 12 nation euro-zone by half a percentage point that now stands at 2%. The decision was forecasted by analysts given the poor performance of the euro-zone most important economies, Germany and France during the first quarter of 2003, and somehow anticipated by the Central Bank president Wim Duisenberg during a recent central bankers' conference in Berlin when he said inflation was expected to fall even more significantly in 2004. The rapid strengthening of the Euro against the US dollar (now at almost 1 Euro-1,20 US dollar) also had an impact since lower interest rates should help exporters and investment borrowing. However the Bank of England kept the interest rate unchanged at 3,75%. Mr. Duisenberg pointed out that the new level of 2% is lower than at any time anywhere in Europe since World War II. Since the European monetary began functioning in January 1999, the lowest rate was recorded in April 2000 with 2,50%. In the United States basic interest rate stands at a 40 years record low of 1,25%. With inflation apparently under control and mild recession in the world's main economies, economists now are more concerned with what US Federal Reserve president Alan Greenspan describes as "corrosive deflation", when prices fall, consumers and investors restrain and economies become stagnant. Others refer to the phenomenon as the Japanese syndrome.

Highest US unemployment in nine years

United States unemployment last May climbed to 6,1% the highest rate in nine years according to the US Department of Labour. This means that over nine million Americans were out of a job at the end of May, in spite of other encouraging signals for the economy such as the rise in consumers' confidence index or even the massive tax cut recently approved by Congress. The Labour Department indicated that 17,000 jobs were lost in the private sector during May particularly in manufacturing, transport as well as in the federal administration. However there was also job creation in construction, education and health services. The last time the US recorded 6,1% unemployment was in July 1994 when the US economy was beginning to pick up from the early nineties. Analysts point out that since the current George Bush administration took office, two million jobs have been lost in the US.