The Washington Diplomat / December 2003
By Larry Luxner
On Jan. 1, 2004, after years of sensitive negotiations and bureaucratic delays, a free-trade agreement will finally take effect between the United States and Chile marking an important milestone in bilateral relations that could have far-reaching implications for the rest of Latin America.
Overnight, about 87% of all two-way commerce will be liberalized, meaning that most of the products and commodities now traded between the two countries will be allowed to enter free of tariffs and quotas. Then, after two years, that will be expanded to 95%. Duties on the remaining 5% of goods particularly sensitive exports like raspberries and other agricultural commodities will be phased out over a 12-year period concluding in 2016.
"In the end, we will have completely free bilateral trade," says Andrιs Bianchi, Chile's ambassador in Washington, who lobbied hard to make the accord a reality. "You will be able to export whatever quantities you want to Chile without paying import duties, and vice-versa."
Bianchi spoke at length with The Washington Diplomat last month in an interview that focused on the FTA and the subject of why Chile a nation of only 15 million people has been so successful while the rest of Latin America seems perennially mired in economic chaos.
"There is no easy answer," said the 68-year-old ambassador, an economist who was born and raised in the southern Chilean city of Valdivia. "I think the most important thing is that in Chile, we have political stability, and a widespread consensus across the political spectrum about what should be the key elements of a good development strategy.
"Today, no one would question that it's absolutely indispensable to have an open economy," he explained. "That's why we've reduced import tariffs unilaterally since the 1970s. That's why we've signed all these FTAs. For us, exports are the engine of growth."
Chile has ratified FTAs with Canada (1997), Mexico (1998) and the European Union (2003). Since 1996, it is also an associate member of Mercosur, a customs union that includes Argentina, Brazil, Paraguay and Uruguay (Bolivia is also an associate member; Peru will become one next year).
"With this network of FTAs, U.S. firms exporting to Chile since the mid-1990s have faced a competitive disadvantage, because if an American firm wanted to export to Chile, it had to pay an import duty. But if a Canadian firm wanted to export a similar product to Chile, it would pay no tariffs," he said. "By signing the FTA with Chile, the U.S. will be able to compete on a level playing field with rival firms from Canada, Mexico and Europe."
And Chile is certainly a lucrative market these days. Its per-capita income stands at around $10,000, the highest in Latin America (Argentina's used to be higher until that country's economy imploded two years ago; it has yet to recover). Santiago, its capital city, is a modern metropolis of 6.1 million inhabitants, filled with steel-and-glass towers, beautiful parks and upscale restaurants all set against a backdrop of snow-capped mountains whose peaks are actually visible when it's not too polluted.
Between 1987 and 1997, the country's Gross Domestic Product expanded by an average 7% a year. During the 1990s, Chile boasted the fourth fastest-growing economy in the world after China, Singapore and Ireland.
"That was the golden period. Then, following the Asian financial crisis, growth dropped to 2%. Next year it will grow about 4.5%," Bianchi predicted Bianchi, a former Central Bank president and top official at the Santiago-based UN Economic Commission for Latin America and the Caribbean. "In Chile, economic growth has not only doubled income but has led to enormous improvements in the quality of life."
Statistics bear him out.
According to Chile's 2002 Population and Housing Census, three out of four Chilean families own their housing. More than 90% of those homes have access to drinking water and sewage systems, 96% have electricity, 87% have color TVs, 82% have refrigerators and 79% have washing machines.
Chile has also made great strides in education. The country's literacy rate stands at 95.8%, while a new law passed in May guarantees 12 years of schooling for all children. When it comes to telecommunications, Chile's success is even more astounding. Around 5.3 million people more than a third of the population own a cellphone, while one-fifth of all Chileans enjoy Internet access and cable TV.
In 2002, Brown University ranked Chile fifth among 198 nations in terms of e-government; last year, 70% of all income-tax statements were submitted online. The country also ranks 16th in the Heritage Foundation's Index of Economic Freedom, 20th in Transparency International's Corruption Perceptions Index, and 28th in the World Economic Forum's Growth Competitiveness Index.
"Our government invests very heavily in people, and tries to promote greater opportunities through well-focused social policies, especially in education, health, nutrition and housing. And the distribution of income is much less inequitable than before," said Bianchi, noting that 21% of Chile's people live in poverty today, down from 45% in 1987.
One of the reasons behind the success of Chile's export-driven economy has been its anti-protectionist policies which stand in stark contrast to those of its South American neighbors.
"We not only have low import tariffs, but a uniform tariff of 6% for all products it used to be 11% except for those products which come from countries with which we have FTAs," he said. The United States is by far the leading foreign investor in Chile, accounting for $15.9 billion (30%) of the $52 billion invested in the country between 1974 and 2002. Last year, bilateral trade topped $6.2 billion; the top Chilean exports to the United States were copper cathodes, grapes, Atlantic salmon, wood products, methanol and wine, while U.S. exports to Chile were led by cellphones, machinery parts, mining trucks, PCs and gas turbines.
Bianchi, who directs a staff of 45 people at the Chilean Embassy on Massachusetts Avenue, said his country "didn't spend one dollar" to hire lobbyists to push for the FTA.
"All the lobbying was done by the embassy and by the U.S.-Chile Free Trade Business Coalition" an entity created by the U.S. Chamber of Commerce, the Council of the Americas, the National Association of Manufacturers and the Business Roundtable," he said.
"I personally met with 180 members of Congress sometimes three or four in one afternoon to explain that Chile would be a reliable partner for the United States. Many did not know anything about Chile, so we brought seven groups of staffers to Chile, so that they could see the country for themselves. We organized these missions so that they'd meet not only with government officials but also labor unions, environmental groups, businessmen, U.S. Embassy personnel and the universities. Without exception, all of them came back with a much better impression of Chile. These people became our best friends in Congress."
Chile's efforts to win passage of the FTA were not without its detractors.
In 1994, at the Summit of the Americas in Miami, President Clinton announced he would seek to expand NAFTA to Chile and possibly other South American nations, but opposition from labor unions and environmental groups prevented him from obtaining fast-track authority from Congress to do so.
On the other hand, Bianchi pointed out, Chile was helped by the fact that only 100,000 or so Chileans live in the United States, a relatively small number due to the country's general prosperity.
"Chile is a creditor of the IMF, not a debtor," he said. "We don't generate any political instability for the United States. The problems that are typically associated with Latin American countries like illegal immigration, drugs and financial instability clearly do not exist with us."
He added that in the halls of Congress, "there was very little organized opposition to the FTA, because Chile is a small country, so our exports in general do not represent any major threat to any activity of the United States. Secondly, with agriculture, our exports do compete with the U.S. West Coast, but we produce fresh fruit when it's winter there, so the counter-seasonal element makes the conflict much less acute."
Bianchi describes himself as "neither a career diplomat nor a member of any political party, but a friend of the president of Chile for the past 48 years." Now that the free-trade agreement is a fait accompli, he says, Chile must focus on what it can do for the country.
"The FTA generates opportunities, but it does not guarantee results," he said. "In order to transform opportunities into tangible gains, I think the Chilean private sector must organize itself to identify and take advantage of new businesses that have been created by the FTA."
He added that, with the FTA having been achieved, Bianchi says Chile's main challenge is to improve education. "We still have a lot to do in terms of improving quality," he conceded. "If we don't, we won't be able to continue competing in world markets."
Bianchi now spends much of his time giving speeches at least two or three of them a week. The week the Diplomat interviewed him, Bianchi had just finished speaking at a seminar on lobbying organized by the Executive Council on Diplomacy. He has also spoken to the Inter-American Bar Association and the Johns Hopkins School of Advanced International Studies.
"The thing I like most in life is to teach," said Bianchi. "When I take on a job, I really try to understand what the job is about, and organize myself well. Here at the embassy, it has been a privilege and a pleasure to have worked with a very good group of people."
A few months ago, Chileans marked the 30th anniversary of the U.S.-backed coup that crushed the freely elected, left-leaning government of Salvador Allende in 1973. The leader of that coup, Gen. Augusto Pinochet, was responsible for widespread human-rights violations. Nevertheless, his 17-year regime, which ended in 1989, has also been widely credited with encouraging foreign investment and spearheading Chile's current economic reforms.
"It's fair to say that some key economic reforms were introduced under the military regime," he said. "Those reforms did create the conditions for faster growth, and there has been a substantial element of continuity in economic policies after the transition from a military regime to a democracy."
But Bianchi added that the anniversary "was good for Chile, in the sense that it offered us an opportunity to confirm that the events that led to the coup should never be repeated."