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NAFTA Membership Continues to Elude Fast-Growing Chile
Area Development / January 1996

By Larry Luxner

WASHINGTON -- Chile wasn't admitted into the North American Free Trade Agreement in 1995, and probably won't make it this year either for that matter -- despite a last-ditch lobbying effort by two Washington law firms and the Chilean-American Chamber of Commerce. In fact, Latin America's strongest economy is unlikely to see any progress toward NAFTA membership for a long time, concedes even the movement's strongest backers.

Barbara Urzua, director of the Chamber of Commerce's Free Trade Agreement Office in Santiago, predicts that with 1996 being an election year, neither Republicans nor Democrats will want to make NAFTA a campaign issue -- so the whole thing may very well be put off until 1997 or 1998.

"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 in Caterpillar or IBM products, 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 also help the U.S. auto industry, which currently has less than 2% of the Chilean passenger vehicle market, since it would force Chile to abolish a luxury tax based on horsepower and engine size. That tends to discriminate against larger U.S. cars while favoring the Koreans and Japanese, which together have 42% of the car market. For this reason, according to Urzua, General Motors and other Detroit automakers are actively lobbying to get Chile into NAFTA.

Yet 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 wine more competitive at California's expense.

"Chile itself is not a detriment," said Luisa Cerar, AT&T country director for Argentina. "This is a significantly different environment than the one we had a few years ago [when Mexico was admitted to NAFTA]. This is now a Republican-controlled House. The expansion of free trade is a campaign issue, and the Democrats need the labor unions, while the Republicans don't want labor and environment to be part of the final agreement."

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

Nevertheless, in late September the Chilean Embassy hired two well-connected Washington lobby firms to help Chile gain the support of key members of Congress. The first company, O'Neill & Athy, is run by Christopher O'Neill -- son of former House Speaker Tip O'Neill -- and is pushing Chilean interests on the Democratic side. The second, O'Brien Calio, is lobbying GOP lawmakers. The decision to hire Washington lobbyists to promote Chile's entry into NAFTA appears to have been backed by all of the country's major political parties.

Jaime Estevez Valencia, president of Chile's Chamber of Deputies, said during a recent visit to Washington that admitting Chile into the exclusive NAFTA club will give his small country stability and prestige while costing the United States, Canada and Mexico almost nothing.

"This is a referendum on free trade," said Estevez, a socialist. "What is at stake is strategic vision. Chilean products are not going to compete with the United States, but our joining NAFTA would have a big ideological and political impact in Latin America, and would show that the U.S. is committed to free trade. Our people don't have a detailed understanding of international commerce. They just want better jobs and better wages."

With a gross national product of $52 billion for its 14 million people, Chile is easily the most competitive country in Latin America and the 20th most competitive in the world, according to the 1995 World Competitiveness Report.

The 800-page study, issued by the Geneva-based International Institute for Management Development, ranks 48 nations annually in such categories as domestic and economic strength, government, finance, management and infrastrucure. In the most recent survey, Chile scored 66.4 out of a possible 100, placing it just ahead of Malaysia, Ireland, Israel and South Korea, and well ahead of the rest of South America.

In the category of management, Chile ranked ninth in the world, just behind Hong Kong, while confidence within the country has risen from the 18th to the 15th position. On the other hand, science and technology (27th) and people (23rd) remain Chile's biggest handicaps. Even so, Chile scored far better than Argentina (which ranked 29th), Peru (32nd), Colombia (36th), Brazil (37th), Mexico (44th) and Venezuela (47th).

Commenting on the study, Chilean Economy Minister Alvaro García said "any objective evaluation of the report leads us to conclude that one of our country's most important assets is its government."

The country's welcome approach to free trade, fostered during the virulently anti-Communist dictatorship of Gen. Augusto Pinochet -- now commander of the country's armed forces -- has given Chile one of Latin America's fastest-growing economies. In the second half of 1995, the country boasted a GDP 7% higher than in the first half of 1994. Government statistics show that foreign investment during the first nine months of 1995 totaled $3.072 billion, up 0.1% from the same period last year. Of that, direct foreign investment reached $2.24 billion (up 24.5%), while indirect investment came to $294.5 million (a 74.8% jump). Meanwhile, consumer price inflation is running at 8.6% a year, and unemployment -- pegged at a healthy 5.9% in August -- is 0.6% lower than a year ago.

Among the biggest growth industries in Chile are mining, telecommunications and fruit exports. State-owned Corporación del Cobre (Codelco) alone plans to invest $600 million in the next five years in its El Teniente copper division. The company estimates 1996 production of fine copper will reach 336,000 metric tons, with cumulative production soon to hit one billion tons of mining materials and rocks after 90 years of continuous operation. Mining Undersecretary Sergio Hernández says his government has no plans to privatize Codelco, noting that by the year 2000, the private sector will already control 66% of Chilean copper production. He said that Codelco's planned investments "reflect the decision to keep this enterprise in state hands, making it increasingly more efficient."

During the 1994-95 season, Chile exported a record 162.8 million cases of fruit -- an 8.7% jump over last season.

"We are in a year of recovery," Ronald Bown, head of the Chilean Exporters Association, told a Santiago newspaper. Today, Chilean table grapes, kiwis and red apples can be found in 70 nations including Indonesia, Thailand and Vietnam. According to Bown, 41% of Chile's fresh-fruit exports ended up in the United States and Canada, with another 33% going to Europe. For the third consecutive year, Dole Chile was the largest single exporter of Chilean fruit, with 17 million cases, or 11% of total fruit exports.

Yet with NAFTA talks bogged down in Washington, Chile has set its sights elsewhere for the time being. Last year, Chile joined the Asia-Pacific Economic Cooperation bloc. APEC member countries -- led by Japan, South Korea, Malaysia and Indonesia -- plan to create a free-trade zone in the Asia-Pacific region by the year 2020. As an example of its expanding Asian ties, Chile recently agreed to develop a computerized tactical training system for the Malaysian Army.

Meanwhile, the Frei administration is pursuing trade deals with the Southern Common Market (Mercosur), which comprises Argentina, Brazil, Uruguay and Paraguay. It is also negotiating a free-trade agreement with the European Union, and expects to have a deal signed soon.

If that happens without Chile having gained access into NAFTA, warns Urzua, it would be "terrible" for U.S. businesses, adding that "we would lose our leadership and credibility in the region."

Adds AT&T's Cerar: "If Chile were in NAFTA, we could ship telephone sets made in Guadalajara, Mexico, to Chile without paying duties, and from Chile to the Mercosur countries. If not, European companies like Alcatel and Siemens -- because they have factories in Brazil and Argentina -- would be able to outbid us in price, because we'd need to bring our equipment from the States."

Yet a U.S. Commerce Department official who asked not to be named said he doesn't buy that argument at all. He predicted that the EU is extremely unlikely to abolish tariffs on meat, wine and other European products in the name of free trade with Chile.

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