Moving on: Chile's alternatives to NAFTA.

CHILE IS ONE OF THE BIGGEST SUCcess stories of the 1990s. With an annual growth rate of over seven percent per year--the second fastest in the world--Chile has caught the attention of businesses around the world, from the United States to the European Union, Asia, Canada, and Mexico. For most

of this century, the United States was Chile's principal trading partner, with over 30 percent of Chilean goods heading to the US market. However, in the past decade, this balance has shifted dramatically. By 1994, the European Union accounted for 29 percent of Chile's exports and 25 percent of its total trade. The US share had fallen to 20 percent, while fast-rising Japan was at 15 percent. Additionally, Brazil and Argentina each accounted for 10 percent of total trade. Furthermore, the Chilean government has received lucrative no-tariff trade bids from all of these markets. Although it has conducted high-level negotiations with Asian, European, and Latin American countries, it does not want to commit to any of them yet because it still considers the United States its primary target. Chilean president Eduardo Frei believes that a free trade agreement with the United States is the wisest course of action for his nation. However, the protectionist-leaning US government has since struck down Chile's bid to enter the North American Free Trade Agreement (NAFTA) and put off further debate on the subject until 1997 at the earliest.

With its preferred path blocked, Chile should seriously consider its other options, which are equally lucrative. By waiting for the United States, it is only hurting itself. Chile should realize that the United States, which wants a foothold in the vast South American market, has more to lose than Chile does in this situation. Chile should set the terms of the trade negotiations itself by establishing no-tariff zones with other countries, instead of waiting for the United States to set the agenda.

The Obstacles

Chile's astounding economic success and efficient government has made it the envy of Latin America. Since the early 1980s, inflation has averaged around 8.5 percent, while Brazil and Argentina have struggled with inflation approaching 500 percent. Chilean unemployment runs at 5.5 percent, and its foreign debt is the lowest in Latin America. It is one of the least populated countries in South America, yet its 15 million inhabitants support a GDP of US$96 billion, the third largest on the continent. Much of this success can be contributed to Chile's historical commitment to market-oriented economic reform. While other countries were surrounded by tariff walls, military rule, and protectionist measures in the 1980s, then-dictator Augusto Pinochet limited the role of the state, encouraged the private sector and private savings to develop, and opened financial markets to foreign trade. As a result, long-term foreign investment is estimated at an impressive US$5 billion, or 7.9 percent of total GNP.

Such impressive statistics made Chile a logical place for NAFTA to enter the South American market. Initial plans called for Chile's rapid entry, followed by eventual expansion to other countries. However, this groundwork has fallen apart in the last year and a half. Republicans in Congress have attacked NAFTA as ineffective and costly to US workers. In November 1995, they struck down an amendment which would have given President Clinton "fast-track trade negotiating authority"--the power to approve NAFTA by a yes or no vote, without amendments that may dilute the treaty's effect.

Pressure against Chile's entry into NAFTA has come from several other sources as well. Church groups, Amnesty International, Greenpeace, and other organizations argue that Chile ought to be denied entry in NAFTA as punishment for Chile's questionable human rights and environmental records. They point to mistreatment of abortion activists and dissidents, as well as executions of political prisoners. Over 50 groups have staged frequent demonstrations in Washington against Chile's bid for NAFTA membership.

In the wake of these incidents, Chileans have become very frustrated. They eagerly wish to become a part of NAFTA; joining NAFTA would grant them access to North American services and high-technology products. It would also further open an already profitable market for Chilean copper, light machinery, wines, and winter produce. However, with Congress steadfast in its opposition to Chile's NAFTA membership, many Chilean businessmen are now expressing anger at the US refusal. According to the New York Times, Bruce Cowen, president of the engineering firm TRC Cos., says that "people feel Americans have snubbed them. They get the feeling that maybe they're not so important to us." Lavreano Gili, director of P.M. Chile S.A., a textile importer in Santiago, recalls the 1989 US embargo of Chilean wine and grapes that followed allegations that two grapes had been injected with cyanide. The charges proved to be a hoax, but Chilean growers lost several million dollars. The NAFTA pledge is merely another example "of the United States talking about free trade and then not acting on it," Mr. Gili says. Now, businessmen such as Mr. Gili are pressuring their government to forget the historical relationship with the United States. Other countries are making more impressive offers, and if Chile joined one or several of the other pacts, it could gain more economic benefits than if it waits for the United States.

The European Option

European companies have been among the most active players wooing Chile. Seeking to compensate for sluggish performance at home, they eye South America as an untapped new market. In the process, they have pleasantly discovered that Latin American business tactics strongly resemble their own, making it easier to do business. "Chilean business is strongly influenced European models," says Eduardo Perez, the president of a Chilean bank. "In the nineteenth century, European immigrants established the foundations of our businesses and we have retained their strategies and outlook." As proof, Perez turns to the numbers, which show that European trade has increased fourfold in the last ten years.

This trend can be seen throughout Chile. English and French firms have cornered the fabrics market, and furniture stores are full of Italian and French products. Citroens, Volkswagen, and other European automobile makers have outperformed similarly priced American and Japanese competitors. Europeans also control the telecommunications market, considered one of the most profitable ventures in Chile today. When Chile's companies were privatized several years ago, Italy's Societa Finanziaria Telefonica per Azioni SpA and Spain's Telefonica de Espana easily outbid MCI Communications and Sprint Corporation, whose lackluster bids betrayed a lukewarm interest in the market. The US companies are now scratching their heads, as the Europeans have reaped millions from the deal. With further deals in Brazil, Argentina, and Colombia, the Europeans now monopolize the telecommunications industry south of the Panama Canal.

European-Chilean economic relations are likely to grow stronger in the coming years. European Union leaders have discussed free trade opportunities with the Chilean government several times in the past two years. With the wavering US stance, the Europeans see an opportunity to proceed without the strong competition from their stiffest opponent, and Chile has obliged. Both sides have already agreed upon labor and environmental standards, and they have expressed optimism that all tariffs will be lowered by 2005.

Chile's Backyard

South American countries are also trying to secure a free trade agreement with Chile independent of Washington. The Mexican peso devaluation raised inflation and prompted tight, protectionist fiscal policy in Argentina and Brazil early in 1995, but they quickly recovered. Their economies are currently growing at approximately 5.6 percent per year, as quickly as they had been in the early 1990s. In 1994, Paraguay, Uruguay, Argentina, and Brazil formed the no-tariff union Mercosur. Their economies have a combined gross domestic product of $650 billion, 70 percent of South America's total. Mercosur members have actively pressured Chile to join ever since its inception, but Chile has rejected the offer, believing its interests lie more with North America. However, this attitude has been changing over the past year. Government officials are angered by the US response to their requests for entry into NAFTA and are now strongly considering Mercosur as an alternative. Chilean people are also leaning in the same direction. They feel that their country is increasingly left out of the lucrative Mercosur market, whose trade has more than doubled to US$16.1 billion in the last two years.

Chile has been held back by its fear that Mercosur will drag its free-market progress backward. The Mexican peso crisis had severe repercussions in most of Latin America, but Chile remained relatively unscathed. The government also fears an increase in bureaucratic corruption and backroom deals which, though on the wane, are still common in Brazil. Furthermore, joining Mercosur would send other countries the message that Chile is more interested in pursuing regional enterprises when most of its investments are in Europe, North America, and Asia. Finally, Chile worries that it will face a much harder battle to enter NAFTA if it joins Mercosur. Mercosur has much looser environmental and human rights expectations than the United States does. In addition, its members do not enforce the protection of intellectual property rights. For example, in January 1996, the Wall Street Journal reported that US drug companies estimate they lose US$500 million yearly to Argentine piracy and that the United States and Argentina had been debating inconclusively for more than a year about how to respect foreign pharmaceutical patents.

Canada and Mexico

US indecision has also forced its fellow NAFTA members to seek alternate tactics regarding Chile. Mexico has already worked out a separate free trade agreement with Chile, and Canada is wrapping up the details of a similar contract. Last December's Mexico-Chile pact eliminated most tariffs between the two countries, while US-based goods in Chile still carry an automatic surcharge of up to 25 percent. This arrangement troubles many in the United States. US products are shipped duty-free to Mexico, where middlemen can pass them on duty-free to Chile. This arrangement means Chile can receive duty-free US products without NAFTA. This practice significantly erodes the impact of US trade policies and of exclusive contracts that US companies may hold.

The Chile-Canada agreement is less troubling to the United States because Canadian businesses are more interested in promoting their own products than in acting as middlemen. Canada is concerned that its foreign trade relies too heavily on the United States--over 80 percent of Canadian exports go to the United States--and is attempting to diversify its markets. One of its prime targets is South America. Canadian Prime Minister Jean Chretien embarked on two trips there in the last year to negotiate a bilateral free trade agreement with Chilean President Eduardo Frei. They formed the Canada-Chile Permanent Binational Commission to ease trade barriers and encourage direct business-to-business linkages.

Scheduled for an early 1997 debut, the contract will enhance an already robust relationship. In 1995, Canadian and Chilean companies signed deals worth a potential US$1.3 billion, mainly in mining, forestry, power and energy, communications, information processing, and agriculture--all fields in which the United States specializes. Their trade totaled US$234 million in 1995, an increase of 50 percent from 1990. Chretien says that the agreement is only an interim measure to last until the United States endorses Chilean entry into NAFTA; Canadian businesses just do not want to miss out on the current opportunities in Chile.

Crossing the Pacific

In the past few years, Chilean businessmen, eyeing the Pacific Rim, have successfully convinced Asian investors that Chile will be an important future market. Japanese businessmen have become a common sight on the streets of Santiago in the past two years. Trade between Chile and Japan has quintupled in the last three years. The chairman of Chilean steelmaker CAP S.A. commented that a couple of years ago he had difficulties convincing Japanese businessmen to go to a Santiago foreign trade conference. Last year, 100 Tokyo financiers attended the conference and were entertained afterwards by President Frei.

Other Asian countries have wooed Chile with promises of free trade agreements as well. Seven Asian nations organized the Asian-Pacific Economic Cooperation, (APEC) three years ago, with the goal of making the entire Pacific Rim a free trade region by 2010. APEC, which has the potential to be the most sweeping trade agreement in history, is based on three main goals: to resist protectionist pressures; to counter the inward-looking regionalism of Europe and North America; and to help solve the economic conflicts of the area. Detractors had contended that the plan failed to produce results. However, these critics were silenced at last year's meeting in Japan, when Japan agreed to slash its industrial tariff by 50 percent starting in January 1997, and China agreed to a 30 percent tariff reduction. Indonesia and other Southeast Asian countries also pledged to cut their industrial tariffs by between 10 and 20 percent. They have yet to work out the details, but the general agenda looks favorable. APEC has avoided forming a bureaucracy similar to that of the EU, which is prone to paralyzing disagreements.

With APEC's direction generally fixed, it has focused its attention towards admitting new members. Chile is at the top of this list. APEC and Chilean businesses have begun preliminary preparations for a free trade zone within the next several years. The Chilean government has tried to keep these negotiations from unfolding too quickly, out of fear that the EU, Mercosur, and North America will rescind their offers if they feel that Chile is turning its back to them. Nevertheless, signs point to a free trade agreement within the next five years.

International moves to secure free trade agreements with Chile have left the United States appearing unsure of its role and of its policy's effects. The US government apparently refuses to believe that protectionism is hurting US job creation in several fields, most notably in internationally competitive sectors. The big losers could turn out not to be US companies, but US workers. Many of these workers are losing jobs due to the international flight of US multinational corporations. Multinationals have established factories abroad to cut costs. If Chile joins Mercosur, for example, these companies would serve clients there by shifting resources from US plants to places with cheaper labor and closer proximity, like Mexico or Brazil. In addition, if Mexico continues to take advantage of its separate duty-free arrangements with the United States and Chile, it will undercut a large portion of US goods' priceability. US firms may have to move elsewhere to alleviate this problem, meaning more US workers would get laid off.

Keeping this in mind, Chilean leaders should carefully consider how advantageous a position they hold before continuing to stall various free trade offers. If Chile establishes no-tariff zones with Mercosur, the EU, and APEC, it could gain access to markets much larger than that of the United States and simultaneously cause great difficulties for the US labor market. The United States is depending on Chile to access the South American market, but even though Chile currently holds the upper hand economically, the United States continues to sets the agenda. It is now time for Chile to reverse the terms of that relationship.