Chile's coup for free trade

By Elliott Gotkine BBC South America correspondent

While the Cancun trade talks may have broken down in disarray, Chile has managed to pull off a free trade deal with the US. In the second of three articles on the country, BBC News Online examines the new agreement.

Chile's powerful pro-Pinochet lobby couldn't have planned it better if it had tried.

Grist for the mill for supporters of Pinochet?

On 3 September, eight days before the country was due to mark 30 years since the military coup that ushered in 17 years of rule by General Augusto Pinochet, the United States approved a long-awaited free trade agreement with its South American neighbour.

At the signing ceremony at the White House - in which a free trade deal with Singapore was also signed - President George W Bush lauded Chile as an "example of economic liberty".

So why alone in South America, has Chile been singled out for such favourable treatment?

According to Vladimir Werning, chief economist for Argentina and Chile at JP Morgan Chase, much of it has to do with patience and timing.

"It's not just a matter of knocking on the door of the White House and seeing if, in the next six months, you can strike a deal."

It's a view shared by Raul Saez, who was Chile's Finance Ministry Representative at the negotiations with the US.

He notes that his country began negotiations with President Bush Senior, some 13 years ago, about the time democracy was restored to Chile.

Economic boom

But much of Chile's success in clinching a deal is down to sensible economic policies and the US' determination to reward such countries following the Asian crisis of 1997.

Raul Saez says it took patience to pull off the deal Chile's economic legacy

How much Chile will actually get out of the deal is open to debate. Tariffs imposed on imports from the US into Chile and vice versa are due to be phased out over a 12 year period.

Some, such as the 32% the US imposes on Chilean textiles, will go as soon as the deal comes into effect, on 1 January 2004.

While, others, like Chilean tariffs on US wheat exports, won't disappear for 12 years, to give Chilean companies a chance to become more competitive.

All in, Chile's Finance Ministry expects GDP growth to be boosted by two percentage points; other estimates vary from a five point boost, to zero.

According to Mr Saez, the discrepancy arises because of the many intangible benefits of the deal.

It's impossible to predict, say, how many US firms will now decide to invest in Chile, and join the likes of Delta Airlines and Unilever's BestFoods division in moving their regional head offices to Santiago.

Critics

One person firmly in the zero camp is Rodrigo Pizarro, director of the Terram Foundation, a Chilean think-tank.

"The free trade deal," he says, "will have a negligible impact on trade and GDP."

Luiz Schmidt: Trade deal will give fruit growers a boost

He notes that Chile already has preferential trade status for most of its products and that the average tariff imposed by the US on Chilean exports is just 1%.

Mr Pizarro's concern is what he calls the "policy lock" which will be imposed on Chile by treaty, preventing it from unilaterally changing certain policies, many of which he views as environmentally and socially unsustainable.

He laments that current economic policy relies too heavily on the export of primary resources like copper, salmon and wood, and that many of the foreign-owned companies benefiting pay little or no tax.

Raspberries to the US

But in a country which does some $8.8bn worth of bilateral trade with US, it's perhaps unsurprising that most businessmen in Chile are strongly in favour of the deal.

Luis Schmidt, president of Fedefruta, which represents Chile's fruit growers, says some 45% of fruit exports go to the US - mainly raspberries, strawberries, apples and grapes.

He reckons the trade deal will give fruit growers "an enormous advantage", boosting exports by no less than 20% a year.

Later this month, fruit buyers from the UK's Sainsbury's supermarket chain and the US' Wal-Mart are due in town to sample Chile's fruity delights.

So now it's just up to Chile's parliament to approve the deal, probably on 1 October.

Despite furious lobbying on the part of Congressmen from certain provinces, the Finance Ministry's Raul Saez is confident approval will just be a formality.

And that Chile will soon be able to look forward to concluding free trade deals with Bolivia, New Zealand and Singapore.

Next week, Elliott Gotkine will look at Chile's world-renowned pension reform.