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The case for Chile in NAFTA
The Washington Times / October 21, 1997

By Larry Luxner

SANTIAGO, Chile -- In this sprawling, traffic-choked capital of 4.5 million people, only five out of every 100 cars on the road are manufactured in Detroit -- even though Ford, General Motors and Chrysler all have local sales offices.

Several hundred miles north, in the copper-mining town of Antofagasta, California-based Fluor Daniel Chile is importing $13 million in construction equipment from Canada instead of the United States -- not because Canadian bulldozers are better ,but because it makes more economic sense. Likewise, because of zero import duties, John Deere brings in tractors from Brazil, even though Chileans prefer the "Made in USA" label.

Alex Fernandez, president of the Chilean-American Chamber of Commerce, can cite at least half a dozen other examples of U.S. multinationals from Coca-Cola to Clorox to J.C. Penney sourcing products from Canada, Mexico or the Far East rather than the United States.

"IBM is now buying all its PCs from Mexico. This means a loss of business and American jobs," he told a group of executives in Washington last week. "This is the reason we're here knocking on doors, and telling people how important this issue is."

Fernandez -- an insurance executive by profession -- is leading what appears to be an uphill, last-minute effort this month to persuade Congress to give President Clinton fast-track authority to negotiate trade deals which would then be considered without amendment. Last week, the House Ways & Means Trade Subcommittee approved a fast-track measure, though it remains to be seen whether the full House will go along with the proposal. Many lawmakers, both Democrat and Republican, are wary over the effects of extending the North American Free Trade Agreement to Chile or other countries.

Yet according to AmCham, U.S. manufacturers lost $480 million last year to competitors around the world because of the absence of a free-trade agreement between the United States and Chile. That's because of the 11% across-the-board tariff assessed against U.S. products coming into Chile -- making those products too expensive for the local market. The differential is even more pronounced now that Chile, which saw 7.5% economic growth last year, has signed separate trade agreements with Washington's two NAFTA partners, Canada and Mexico.

"Right now, the U.S. has a positive trade balance with Chile, but you are losing market share," Fernandez warns. "In 1995, your business grew 44%. But in 1996, it grew only 8%, and in the first half of 1997, it grew less than 1%. It's because the duty rates on U.S. products are making those products less competitive. The percentage of imports coming from the U.S. is shrinking, even though the market has always favored U.S. goods."

Of the 50 states, Florida is by far the largest exporter to Chile, shipping $483.5 million worth of goods out of a total $4.1 billion in 1996 exports, according to the U.S. Commerce Department. In second place was California, with $352.2 million, followed by Washington state, with $338.8 million.

John Biehl, Chile's ambassador to the United States, says it's hard to tell whether his country will end the year with a firm U.S. commitment to a free-trade agreement -- particularly with opposition groups like the AFL-CIO spending $1 million to sabotage the effort.

"Politics is not always about rational things. It is much easier to convey the setbacks of NAFTA to the American people than the benefits," he said in an interview. "In this country, congressmen have to respond directly to the feelings of the people. This system makes our battle much more difficult than it should be."

Meanwhile, executives working for U.S. multinationals in Santiago say the impact of Chilean membership in NAFTA would boost their company's bottom lines immediately.

"If Chile were in NAFTA, a new Chevy Malibu or S-10 pickup would be more competitive than it is today," says Osvaldo Rivas, marketing manager at GM Chile. "A Lumina today costs close to $35,000 retail. With NAFTA, it would cost $32,000. Normally, the elasticity rate is three to one, meaning that you gain a 3% market share for every 1% in price reduction."

Rivas says this is especially true with U.S. cars, which normally have bigger engines than their Japanese and Korean competitors, and are therefore more expensive. Agrees Jaime Sepúlveda, parts and services zone manager for Ford Chile: "Bringing a Lincoln here is practically impossible with all the tariffs and luxury taxes. With NAFTA, our market position would improve to the benefit of the consumer."

Barbara Urzua, director of AmCham's Free Trade Office in Santiago, says "most Chileans don't view this as a life-or-death thing, but U.S. companies are the ones to gain from this. When we bring products into Chile, we're paying 11% duties, whereas Chilean products pay an average of only 4% to get into the U.S. market."

In the telecom world, the effects are starting to be felt. Santiago-based VTR, which is 49% owned by Texas-based SBC (formerly Southwestern Bell), recently placed a $200 million order with Canada's Northern Telecom for its Cornerstone Voice product. This allows a cable TV company -- after significant upgrades -- to provide voice, data and two-way telephony services over its network. Although Motorola, Lucent Technologies and Scientific Atlanta, all U.S. firms, manufacture similar equipment, VTR chose to go with Nortel for various reasons.

"It is not fair to say that, absent the 11% price advantage Nortel enjoyed we would have bought from a U.S. manufacturer," said Wayne S. Alexander, president of SBC Chile. "It was simply one of the factors we considered, albeit an important one."

Hugo Silva, country executive for General Electric Chile, which makes everything from light bulbs to home appliances, says bringing Chile into NAFTA would boost GE's business there by $80 million to $100 million.

"The lack of NAFTA has not hurt us directly because our major competition is European and Asian," he explained. "It's a level playing field because we all pay the same tariffs. However, Chile will have a trade expansion agreement with the EU in two to three years. This will put us at a disadvantage with European competition like Siemens."

Esso Chile, a division of Exxon Corp., says that because Chile isn't in NAFTA, the company sources $12 million worth of raw materials for its lubricants factory annually from Argentina and Venezuela. "With NAFTA in place," says company president Armando Perez, "we would definitely switch this business to the United States."

Fernandez says Clinton's recent trip to Argentina, Brazil and Venezuela clearly demonstrates the administration's commitment to the region -- as does the president's planned visit to Santiago for the Summit of the Americas in April 1998. But he says fast-track can't wait until then.

"It's critical that there be a vote before Congress goes out before the year," he said. "The full Congress is going to have to make a very important decision on trade in the Americas. If President Clinton doesn't get that authority, the rest of Latin America will continue to expand its trade, and the U.S. will be sitting on the sidelines."

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