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US Big Three look for tariff breaks as Chile eyes NAFTA
Ward's Automotive International / January 1, 1996

By Larry Luxner

WASHINGTON -- Chile didn't get into the North American Free Trade Agreement this year, and probably won't next year for that matter -- despite a last-ditch lobbying effort by two Washington law firms and a coalition of U.S. companies including General Motors and Ford.

Barbara Urzua, executive director of the Chilean-American Chamber of Commerce, says that with 1996 being an election year, it's doubtful the Democrats will want to make NAFTA a campaign issue -- so the whole thing may very well be put off until 1997.

"Most Chileans don't view this as a life-or-death thing, but U.S. companies are the ones to gain from this," said Urzua during a recent lobbying visit to Washington. "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."

Chile's joining NAFTA could be a big boost for Detroit automakers, which now supply just 3% of the Chilean passenger vehicle market from the United States. With Chile in NAFTA, that could jump to 10% with two years, says Jaime Ardila, finance director at General Motors Chile.

"The advantage to us is that we could switch sources from countries like Germany, Japan and Brazil, where we have to pay 11% import duty, to NAFTA countries like the U.S. and Mexico, where we'd be able to import duty-free," Ardila said in a telephone interview from Santiago. "The potential is very significant because even though U.S.-sourced product is only 3% of the market, U.S. companies have a much bigger share of the market, about 22%. But that includes product we source from non-NAFTA countries.Just by switching sources to NAFTA countries, there would be an immediate increase."

Ardila said GM employs 500 workers in Arica, near Chile's border with Peru, at a factory that turns out 18,000 pickup trucks a year from CKD kits manufactured by Isuzu. All told, GM's annual sales in Chile amount to 30,000 units worth around $400 million. By comparison, Ford sells 2,500 units a year in Chile, and Chrysler, around 1,000 units. The only other automaker in Chile is Peugeot, which has a small operation in Los Andes, about 80 kilometers from Santiago. Chile's total passenger vehicle market is worth around $1.4 billion.

Despite NAFTA's obvious advantages for big multinationals like GM, Republicans and Democrats disagree over whether to extend NAFTA to other countries, particularly in light of the Mexican peso collapse and the U.S. government's bailout of the Mexican banking industry. Both sides generally agree that letting Chile into NAFTA won't hurt the U.S. economy, though a few groups -- notably the California wine industry -- oppose the move on the grounds it would make Chilean products more competitive at U.S. expense.

"This is a referendum on free trade," said Jaime Estevez Valencia, president of Chile's Chamber of Deputies. "What is at stake is strategic vision. Chilean products are not going to compete with the United States. Our people don't have a detailed understanding of international commerce. They just want better jobs and better wages."

Nevertheless, Chilean President Eduardo Frei, who's pushing hard for membership in NAFTA, recently told reporters that "the delay represents an internal political dispute in the United States, within which the Chilean government does not play any role."

Even without admittance to NAFTA, the days of Chile's "discriminatory" taxes on imported automobiles may be numbered. That's because the taxes -- which are based on horsepower and engine size, and apply to all automobiles imported into Chile -- tend to penalize larger, more powerful U.S. cars while favoring lighter Korean and Japanese models, which together have 42% of the car market.

"Whether Chile joins NAFTA or not, we want the taxes to be removed," Ardila said. "We think they discriminate against American companies."

Observes Roger Turner, chief of the U.S. Commerce Department's Chile desk: "Chile has consistently moved toward elimination of trade barriers wherever possible, and since they do not have a local manufacturing industry, the Chilean government will have to determine what is in its longer-term interests. It's too early to speculate how it'll go."

Andrés Wallis, cabinet chief for Chile's subsecretary of transport, said that while the Ministry of Transport and Telecommunications wants to eliminate the engine-size tax in 1996 and the luxury tax by 1998, the Ministry of Finance has the final say on government tax policy and that any changes would require legislation.

Both taxes are distortionary, he said, "reducing Chilean consumer well-being both by increasing prices and by decreasing the safety and environmental-friendliness" of vehicles currently on the road. Both taxes, he said, lead to more auto accidents. The reason: automakers have responded to the engine-size tax -- now scheduled for phase-out by 1999 -- by replacing the standard engine in some models with smaller, untaxed engines which are more dangerous.

Furthermore, he said, the luxury tax penalizes factory-standard equipment. As a result, vehicles enter Chile stripped of air-bags and other safety features such as anti-lock brakes and steel reinforcement of door panels that add to the sticker price -- and thus the tax. Some items are added on in Chile, avoiding the tax, but others cannot be. He added that since pick-up trucks are often exempted as commercial vehicles, a huge market has developed for double-cabin pick-ups which are "somewhat more dangerous" than sedans.

One alternative is to eliminate the luxury tax altogether on certain items such as airbags and anti-lock braking systems. Another is to raise the definition of a "luxury" car from $9,785 to around $13,000.

Wallis said vehicles with smaller engines than called for in their design often pollute more. Adding to that is the fact that the luxury tax discourages automakers from adding non-required pollution-control mechanisms -- items that would drive up the price. A further economic price is that vehicles with substandard engines don't last as long as standard models. Buyers who add items such as AM/FM radio, air-conditioning and airbags to a stripped-down model end up paying far more than factory-standard configurations.

Another point to consider, according to Wallis: "Tax avoidance causes gross inefficiencies. Most expensive autos are brought in through diplomatic and other special arrangements. For example, in the last decade, only seven Mercedes vehicles have entered Chile through "normal" procedures. As a result, permits to bring autos in tax-free -- for diplomats and others -- are selling for $20,000 or more apiece. Used autos that entered Chile tax-free often sell on the local market at a $20,000 markup.

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