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Chilean Executives Look Toward Free Trade
Export Quarterly / Fall 2000

By Larry Luxner

In sprawling Santiago, only five out of every 100 cars on the road are manufactured in Detroit, even though Ford, General Motors and Chrysler all have sales offices in the Chilean capital.

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 imports tractors from Brazil, even though Chileans think American products are more reliable.

Stephen P. Terni, 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 sourcing products from Canada, Mexico or the Far East rather than the United States.

"According to our estimates, U.S. companies are losing $500 million a year to foreign competitors because of the absence of a free-trade agreement between the United States and Chile," he told us. "One of our most important objectives is passage of a bilateral trade agreement. That's more logical at this point in time than joining NAFTA, which has negative connotations in the States right now."

Back in 1994, President Clinton -- presiding over a summit of Latin American heads of state -- promised that Chile would be the next member of the North American Free Trade Agreement. But Congress never gave Clinton the fast-track authority he needed to implement such a treaty.

The fact is that many lawmakers, both Democrat and Republican, are wary over the effects of extending NAFTA benefits to Chile or other countries -- especially in an election year such as this one.

John Biehl, Chile's former ambassador to the United States, says it's hard to tell whether his country will sign a free-trade agreement with Washington.

"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."

Adds Santiago insurance executive and former AmCham president Alex Fernández: "Right now, the U.S. has a positive trade balance with Chile, but we're losing market share. That'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.

"I have no doubt we'll see a bilateral treaty with the U.S.," said Terni, who also heads Compañía Minera Disputada de Las Condes S.A., an Exxon-Mobil subsidiary that ranks as one of Chile's largest copper producers. There's a good opportunity coming up, now that we have the Africa-CBI trade bill signed into law. That was a big step forward. I think they'll do it again with China. After that, it's an opportunity for the United States to move forward with a free trade agreement with Chile."

For now, however, local executives want to see the Chilean economy recover from the Asian financial crisis of 1997-98, which had serious repercussions here.

"Many people anticipated a faster recovery. Like many other Latin nations, Chile was impacted rather strongly by the Asian crisis, because 30-40% of our exports go to that part of the world. However, Chile came through this will less pain than the others."

Even so, in 1999 the country's Gross Domestic Product fell by 1.5%.

"This year, the expectations are that the economy will grow by 5% or more," said Terni, whose AmCham organization has 520 members representing 85% of U.S. investment in Chile and 18% of the country's total GDP of $80 billion. "However, when you talk to individual executives, you get the feeling they personally don't see the recovery. Chile will get back to sustained levels of growth, but no one expects this to happen overnight."

At present, exports account for $17 billion of Chile's GDP -- and copper makes up 40% of those exports. In the 1970s, copper represented 80% of export earnings.

"We think Chile is a great place to do business," said Terni. "The framework for investment is well-defined, there's a high level of integrity, business ethics and people are growth-minded. The downside is that Chile is a small country with a small population. It's difficult to make a fortune here overnight. It's very competitive."

Terni adds: "Even the most ardent opponents of fast track, like Gephardt, are not against Chile. In fact, we've heard nothing but favorable comments from Congress. Neither Gore nor Bush oppose an FTA with Chile. They both say they're in favor of it."

Yet the Chilean government, at least for now, appears more interested in forging ties with neighboring countries in the Southern Cone Common Market, known by its Spanish acronym, Mercosur.

President Lagos said July 13 that his country -- now an associate member of Mercosur along with Bolivia -- would ask to become a full member by December, but with tariff autonomy and the freedom to negotiate trade pacts with other nations and trade blocs.

"Chile wants to be a full member of Mercosur, but we understand Mercosur as something that is much more than a customs union and a unification of tariffs," Lagos said in a speech to Brazilian and Chilean business executives in São Paulo. The president noted that Chile now has a common external tariff of 9%, while the Mercosur countries have an average import tariff of 14%. Moreover, Chile has plans to gradually reduce its common external tariff to 6% by 2003.

"If the object of Mercosur is to lower tariffs, don't ask Chile to raise them in order to lower them later," Lagos said in a press conference.

Over the next few months, technical groups comprising Chile and the four Mercosur member states -- Argentina, Brazil, Paraguay and Uruguay -- will define a timetable for Chile's incorporation into the bloc. Its conclusions will be formally presented at December's meeting of Mercosur presidents.

"Chile wants to be a member of Mercosur, but Lagos wants it to be on Chile's terms," said Terni. "He said he's going to have the other Mercosur countries reduce their tariffs to Chile's levels. Chile already has zero tariffs with Mexico and Canada, which puts U.S. companies at a disadvantage."

For this reason, executives working for U.S. multinationals in Chile say the impact of a bilateral FTA would boost their company's bottom lines immediately.

"If Chile were in NAFTA or had a trade agreement with the U.S., 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."

This is also true in the telecom world. A few years ago, SBC Communications 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, SBC 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 a U.S.-Chilean trade pact 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."

It's not only the Chilean subsidiaries of U.S. multinationals that support entry into NAFTA. Socialist lawmaker Jaime Estevez Valencia says his country needs market access just as much as the U.S. multinationals do.

"We can't continue expanding without free-trade agreements that break protectionism," said Estevez. "We want fewer obstacles to sell to the United States."

In recent years, Chile has scored points with connoisseurs for its outstanding varietal wines, abundant winter fruits and tasty salmon. In fact, it has been so successful in exporting fish to the United States that salmon farmers in Maine and Washington have filed lawsuits accusing Chile of dumping fish at subsidized prices -- a charge Chile denies.

Robert Matus, an official at the government promotion agency Pro-Chile, says there's no reason Chile can't have a trade pact with Washington while expanding ties with its Mercosur neighbors.

"Nobody's waiting to make investment decisions because we're not in NAFTA. Our trade relations are flourishing, and they have been for a long time." Even so, says Matus, Pro-Chile supports a free trade agreement with the United States, arguing that "it's a way of locking in today's good economic environment for the long term."

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