On September 3, 2003, after years of intense negotiations, President Bush signed the U.S.-Chile and U.S.-Singapore Free Trade Agreements (FTAs). As a result, Chile and Singapore will join Israel, Canada, Mexico, and Jordan to become the United States’ fifth and sixth free trade partners.

The Bush administration is currently negotiating new FTAs with Australia, Morocco, five nations in Central America, and the Southern African Customs Union. Plus, negotiations are expected to begin soon with Bahrain and the Dominican Republic. How will the U.S.-Chile deal and other FTAs impact your business?

Chile Is No Stranger to FTAs

As the first comprehensive trade agreement between the United States and a South American country, the U.S.-Chile FTA is anticipated to boost bilateral trade and investment. Largely modeled upon the North American Free Trade Agreement, the Chilean accord encourages progress on the Free Trade Agreement of the Americas, which is anticipated to be completed by 2005.

Chile, the most free trade-oriented economy in South America, has negotiated several FTAs without U.S. involvement. In 1997 alone, Chile implemented an FTA with Mercosur (the Southern Cone Common Market which includes Argentina, Brazil, Paraguay, and Uruguay), Mexico and Canada. And the EU became Chile’s largest supplier of goods in 2001, primarily due to the European Union (EU)-Chile 1996 Framework Agreement, which covers political, trade and economic cooperation. The EU-Chile Association Agreement, concluded in April 2002, is projected to enhance the EU-Chile relationship even more.

Improving the U.S. Position

In the past, the absence of a U.S.-Chile FTA put U.S. companies at a competitive disadvantage. For example, in October 2001 the National Association of Manufacturers released a study on losses in American exports to Chile since 1997, the year Chile established an FTA with Canada. The report indicated that U.S. companies had lost $800 million a year — that’s more than $2 million a day — as a result of not being involved in that agreement. Until now, Canadian goods have entered Chile duty-free, putting U.S. goods at a competitive disadvantage.

Until 1997, U.S. products were highly competitive in Chile and captured a growing share of Chile’s import market. However, after 1997, the U.S. share of Chile’s import market suddenly began to decline. In fact, according to the National Association of Manufacturers, it dropped from 24 percent to approximately 18 percent. This loss did not occur in other Latin American markets. In many ways, the U.S.-Chile FTA will level the playing field.

Chilean Commitments

In the words of U.S. Trade Representative (USTR) Robert Zoellick, the U.S.-Chile FTA “not only slashes tariffs, it reduces barriers to services, protects leading-edge intellectual property, keeps pace with new technologies, ensures regulatory transparency and provides effective labor and environmental enforcement.”

Upon implementation of the U.S.-Chile FTA, more than 85 percent of bilateral trade in consumer and industrial products will become tariff free. This includes agricultural and construction equipment, autos and parts, computers and other information technology, medical equipment, and paper products, according to the USTR. Additionally, more than three-quarters of U.S. farm goods will enter Chile duty free within four years, while all remaining tariffs will be phased out within 12 years.

Under the FTA, greater access is expected for U.S. professionals, banks, and insurance, telecommunication, securities, and express delivery companies. Greater protection will be accorded to U.S. digital products, such as software, music, text, and videos. Plus, protection of U.S. patents and trade secrets will surpass all previous agreements. Overall, the deal will establish a secure, more predictable legal framework for U.S. investors operating in Chile, according to USTR.

The Chilean Economy

Chile is one of Latin America’s most dynamic markets. Although its population is only 15 million and its economy is roughly 1.5 percent the size of the U.S. economy, Chile is considered one of the region’s most promising markets. The country’s GDP growth, which averaged 7 percent during the 1990s, began to slow in 1998 and contracted in 1999, before recovering in 2000. Since Chilean growth is primarily driven by exports, which are concentrated in copper, fresh fruit, forestry, and fishery products, reduced global economic activity and a decline in commodity prices negatively affected the country’s growth projections.

Chilean GDP registered 2.1 percent in 2002, and is expected to climb to 3.9 percent this year, and 4.5 percent in 2004, according to Bank of America. Chile adopted market reforms almost 30 years ago and has increasingly diversified its economy. This has contributed to greater growth and stability.

U.S.-Chilean Trade

U.S. exports to Chile increased to $3.5 billion in 2000, but decreased to $2.6 billion in 2002. The decline was due primarily to slower Chilean growth, as well as greater competition from third-country exporters better positioned to compete because of preferential trade relationships. Leading U.S. exports to Chile included electronic products, transportation equipment, chemical products, minerals, and metals.

The top prospects for U.S. exports to Chile include pollution control, telecom, medical, mining, computer, construction, electric power, security, air conditioning and refrigeration, and food and processing equipment. In addition, travel and tourism, as well as franchising are in strong demand.

In 2002, U.S. imports of Chilean goods continued to rise and reached $3.8 billion. The United States, Chile’s largest export destination, purchased one-fifth of all Chilean exports in 2002. Agricultural products, by far, were Chile’s largest export to the U.S., followed by minerals and metals.

U.S.-Chilean Investment

The United States is the single largest investor in Chile, accounting for nearly one-third of actual foreign direct investment (FDI). On a historical-cost basis, the U.S. direct investment position in Chile dipped slightly from $12 billion in 2001 to an estimated $11.6 billion in 2002, according to the U.S. Bureau of Economic Analysis, U.S. Department of Commerce.

U.S.-Chile FTA Impact

According to the U.S. International Trade Commission, after tariffs are fully phased out, U.S. exports to Chile are predicted to increase by 18 to 52 percent, while U.S. imports from Chile are expected to rise by 6 to 14 percent. However, relative to total U.S. trade, these changes are small.

The largest U.S. export gains to Chile include transportation equipment (35 to 216 percent or $240 to $1,080 million); textiles, apparel and leather products (29 to 101 percent or $30 to $70 million); and coal, oil, gas and other minerals (29 to 71 percent or $10 to $30 million).

A study published by the University of Michigan and Tufts University estimates that a U.S.-Chile FTA will expand U.S. GDP by $4.2 billion and Chilean GDP by $700 million annually.

The Impact on Your Company

As barriers to trade and investment are removed, U.S. firms will be positioned to gain greater market share in Chile. Importantly, these companies will also be well positioned to benefit from the coming Free Trade Agreement of the Americas.

This article appeared in Impact Analysis, September-October 2003.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

More Articles | Speaker Programs | Speaker Demo | Videos | Services

You don't have permission to view or post comments.

Quick Search

FREE Impact Analysis

Get an inside perspective and stay on top of the most important issues in today's Global Economic Arena. Subscribe to The Manzella Report's FREE Impact Analysis Newsletter today!