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U.S. automakers lobby for Chilean NAFTA membership
Ward's Automotive International / October 1, 1997

By Larry Luxner

WASHINGTON -- In Chile, the "Big Three" automakers all have Santiago showrooms, yet only five out of every 100 cars on the road are actually manufactured in Detroit.

Indeed, to many auto executives and even some U.S. government officials, Washington's trade policy towards Latin America's healthiest economy is counterproductive. Although the Clinton administration supports bringing Chile into the North American Free Trade Agreement, opposition by some members of Congress to fast-track negotiating authority has led many to wonder about Washington's commitment to free trade.

"It's not good for the United States to be on the sidelines," concedes Peter Allgeier, associate U.S. Trade Representative for Western Hemisphere affairs, and a chief negotiator at the recent FTAA trade talks in Belo Horizonte, Brazil.

"If Chile does an agreement with Canada, one with Mexico and one with Mercosur, we are at a disadvantage vis-a-vis those countries," Allgeier said in a recent interview. "Some of our companies have already moved their sources of supply to a country with whom Chile has free-trade agreements. It's certainly part of the reason we need fast-track negotiating authority."

The administration says it is "committed to moving forward on the broad hemispheric agenda set up by the region's democratic leaders at the Miami Summit in 1994." Yet many Democrats on Capitol Hill -- still fuming over NAFTA's extension to Mexico -- bitterly oppose fast-track; the AFL-CIO has even launched a $1 million media blitz to sabotage the effort.

Republicans, however, generally favor the idea. Phil Crane (R-Illinois), chairman of the House Ways & Means Trade Subcommittee, spoke for many GOP lawmakers at a Sept. 9 breakfast in Washington when he told U.S. and Latin executives that "every day the clock is ticking, and we are gradually falling behind while other countries recognize the importance of foreign trade. Why? Because we sit here endlessly and debate it."

According to a study just issued by the Chilean-American Chamber of Commerce, U.S. multinationals like General Motors, Ford, Coca-Cola, IBM and Exxon are losing a combined $480 million a year in business because of the 11% tariffs 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 has signed separate trade agreements with Washington's two NAFTA partners, Mexico and Canada.

"We're losing a 2% to 2.5% market share by not being in NAFTA," says Osvaldo Rivas, marketing manager at GM Chile. "If Chile were in NAFTA, a new Chevy Malibu or S-10 pickup would be more competitive than it is today. 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.

Jaime Sepulveda, parts and services zone manager for Ford Chile, agrees.

"Certain Korean products do not meet safety norms, and perhaps compete better for price reasons. All Fords have high safety standards. With all the safety equipment, American vehicles are at price levels that make them non-competitive," he says. "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."

In fact, The Chilean National Automotive Association is urging Congress to abolish a luxury tax currently assessed against most imported cars, trucks and sport-utility vehicles. Chile now has a uniform 11% tariff on almost all goods coming into the country. Automobiles, however, face two additional duties: an engine-size tax applied to vehicles with engines of over 1,500 cubic centimeters, and an 85% luxury tax charged on vehicles with a CIF (cost, insurance and freight) value exceeding $10,330.

As such, importers are bringing in vehicles without basic security equipment such as airbags and anti-lock brakes in order to lower the total cost and thereby exempt cars from the luxury tax -- but auto dealers claim that contributes to a 30% rise in auto accidents that costs the Chilean government an estimated $320 million annually. The dealers also say the increase in sales generated by eliminating the luxury tax would more than make up for the lost tax revenue.

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."

According to the U.S. Embassy in Santiago, Chile's automotive parts and accessories market totals $600 million a year, and is growing by 10% annually. However, the vast majority of this consists of tires, batteries and kits imported by Chilean assemblers from their parent companies. Spare parts, local purchase for assembly and accessories together probably don't exceed $120 million.

Between 1990 and 1996, Chile imported 423,000 cars worth $2.8 billion; nearly half of all cars on the road were purchased during this seven-year period. Yet only 21,000 cars and light trucks are actually assembled in Chile; these are built from imported CKD or semi-knocked down kits. Except for a Renault transmission plant, domestic auto-parts production is very limited.

All told, Chile has over 1.6 million cars and trucks, or 8.7 inhabitants per vehicle. In the first quarter of 1997, the market was led by Chevrolet, which sold 6,558 units (a 12.5% market share), followed by Nissan (11.7%) and Hyundai (11.2%); others include Toyota, Daewoo, Kia Motors, Suzuki, Ford, Opel and Volkswagen. Auto sales for the month of April came to 52,375 units, a 2.7% increase over sales in April 1996. The most popular family cars in Chile are Nissan V16, Hyundai Accent, Daewoo Racer, Toyota Tercel, Chevy Monza, Kia Pride, Nissan Sentra II, Suzuki Baleno, Chevy Cavalier and Renault R-19.

Ford, which sold 8,700 units in 1996, says it has the same competitive disadvantage importing Ford Rangers here as GM does importing its luxury brands. Nissans, however, are manufactured in Mexico, giving the Japanese automaker a clear advantage.

While U.S. labor unions generally oppose NAFTA itself -- not to mention the extension of free trade to Chile and other nations -- their employers in the auto industry don't see things that way.

NAFTA, says Ford's Sepulveda, his company would import certain replacement parts from Canada and Mexico, both of which have free-trade agreements with Chile. Mexico also manufactures Ford Escorts and Contours, while Brazil manufactures the Ford Fiesta -- all models which could come from U.S. factories under better tariff circumstances. That, in turn, could mean a 20% jump in sales in each division.

U.S. enthusiasm over extending NAFTA benefits to Chile isn't limited to auto executives. Hugo Silva, country executive for General Electric Chile, which makes everything from light bulbs to home appliances, says bringing his business 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 Esso's Armando Pérez, "we would definitely switch this business to the United States."

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