Congressional Research Service Report

Chilean Trade and Economic Reform: Implications for NAFTA Accession

J. F. Hornbeck

Specialist in International Trade and Finance

Economics Division

SUMMARY

Trade opening was a major component of Chile's economic restructuring and trade has become an increasingly important part of the Chilean economy with exports and imports as a percentage of GDP nearly tripling from 1972 to 1996. Chile's primary merchandise exports include copper, other metals, fish, forestry products, and fresh fruit. Fish and forestry products are the fastest growing export items, although copper still accounts for nearly half of the total value of Chilean exports. Chile imports primarily chemicals, machinery, transport equipment (aircraft and vehicles), and other manufactured goods.

U.S. trade is far more important to Chile than Chilean trade is for the United States. In 1996, the United States accounted for 16% of Chile's exports and 25% of its imports and was its largest single-country trading partner. By contrast, Chile represented less than 1%. of U.S. trade and ranked as only the 27th largest export market. The United States has run a trade surplus with Chile since 1989, reaching $1.9 billion in 1996.

Chile's accession to NAFTA will raise many of the same basic issues that surfaced during the original NAFTA debate. First, trade adjustment issues and specific industry concerns have already surfaced. Second, NAFTA side agreements covering labor and environmental issues will likely need clarification within the Chilean context and provide fertile ground for opposition. Third, concerns over Mexico's economic problems and the U.S. bailout are likely to be raised with respect to Chile. Finally, the decision to extend NAFTA to Chile will have implications for whether and how vigorously the United States pursues broader regional trade agreements.

In general, should Chile join NAFTA it will not significantly affect either the NAFTA or Chilean economies in the short run given that Chile is a small trading partner and already has an open economy. Further, the importance of Chilean accession for the United States is not solely a function of the volume or growth in trade that might be realized. Current trade volume is small and growth in trade is occurring anyway. The more important dynamic effects that may be realized rest on the potential to improve marginal efficiencies of each economy and on the extent to which the regional integration process is furthered, but quantifying the magnitude of these somewhat amorphous benefits is difficult.

CHILEAN TRADE AND ECONOMIC REFORM: IMPLICATIONS FOR NAFTA ACCESSION

Many of the issues surrounding Chilean accession to NAFTA are similar to those involving the case of Mexico, including the likelihood that supplemental agreements for labor and environmental issues will be considered in addition to purely economic and trade concerns. Because Chile has a small and largely open economy, however, the overall economic effects on the United States of Chile's accession to NAFTA would be small. Perhaps a more important aspect would be the potential precedent it sets for expanding NAFTA, as well as the example it holds out for defining a Free Trade Area of the Americas (FTAA). The NAFTA model for hemispheric integration, however, now appears to be competing for attention with other regional agreements in Latin America.

ECONOMIC STABILIZATION AND STRUCTURAL ADJUSTMENT IN CHILE

In the post-war period, Chile's economy was relatively detached from the world, a trend that deepened under the structural reforms of Salvador Allende's socialist government (1970-73). Increased barriers to trade, export taxes, a multiple tier exchange-rate system, and the nationalization of both multinational firms (copper) and key domestically owned industries (banking) characterized the Chilean economy under Allende. The primary goal of the Allende government was to effect some type of economic redistribution through centralized control.

If anything, quite the opposite was achieved as state control of the economy led to gross inefficiency in production, serious macroeconomic imbalances, and economic turmoil. Prices were controlled, for example, but wages were allowed -to rise. Government spending increased, but only by running huge fiscal deficits financed by borrowing from the Central Bank. The runaway expansionary effects of these polices caused a short-lived economic boom in 1971, but a bulging current account deficit, depletion of international reserves, and high inflation (500% by 1973) soon triggered economic collapse. Added political pressures and social unrest resulted in the violent 1973 coup led by General Augusto Pinochet.⁴  (Chile's economic trends may be tracked in table 1.)

The overthrow of the Allende government marked the beginning of radical change in economic policy. Stabilizing the economy (reducing inflation) was first among economic goals, but despite the urgency, the first decade of military rule failed to achieve this goal on a lasting basis. The first of three stages in this process (1974-78) was the Pinochet government's "orthodox" stabilization program of fiscal and monetary austerity, which combined a sharp reduction in government spending (reducing the budget deficit from 25% to 1% of GDP over 2 years) with restrictive monetary policy. Together, these efforts forced interest rates skyward. Structural adjustment of Chile's economy took a parallel track: market-based reforms included lifting price controls, privatizing state enterprises, reducing restrictions on trade, and deregulating the labor market. External economic relations shifted from a relatively closed economy relying on import substitution to one firmly rooted in liberalized trade and export-led growth, boosted initially by a sharp devaluation of the peso.⁵

* as percent of GDP.

Source: The Central Bank of Chile. The Brookings Institution, The Chilean Economy, pp. 32-33 for fiscal budget data and unemployment data for 1973-74. 1996 data from The Economist Intelligence Unit (EIU). Chile Country Report. Second Quarter, 1997. pp. 5, 18, and 21.

# Based on a new data series, which would put unemployment at 7.4% for 1995.

In the second stage of economic stabilization (1978-82), Chile eliminated many restrictions on foreign investment and used the exchange rate to further stabilize the economy. Restrictions on foreign capital were first loosened in 1975 (in concert with trade reform), but the process accelerated in 1978 and 1980 encouraging Chilean domestic bank use of foreign capital. Deregulation of the banking industry during a period of extremely high interest rates led to relaxed controls on capital mobility to take advantage of lower international rates. This resulted in a surge of foreign lending, mostly from commercial banks. Inflows of foreign loans amounted to only $194 million in 1976, but jumped to $2 billion in 1978 and $4.7 billion in 1981. The large sudden movements of capital caused a dramatic real appreciation of the exchange rate and increased Chile's external indebtedness, which eventually precipitated the 1982 debt crisis (see below).⁷

The economic effects of debt accumulation and liberalizing capital controls were compounded by exchange-rate policy. In 1978, inflation had been reduced, but hovered around an annual rate of 30% despite the protracted use of fiscal and monetary restraints. To redouble the fight against inflation, Chile made a major policy change by adopting a crawling peg exchange-rate in which it pegged the peso to the dollar, but maintained a system of "preannounced fixed depreciations." By June 1979, inflation resurged to nearly 40%, so the government took an even more severe policy step, fixing the nominal exchange rate at 39 pesos to the dollar, where it would remain for 3 years.⁸

There are two ways in which adopting a pegged exchange rate can theoretically lower inflation. First, by fixing the value of the peso to the dollar, Chile essentially locked in its commitment to tight monetary policy by being forced to follow the monetary policies of the country to which the currency was pegged (the United States) or face rapid real appreciation of the peso. Chile was already dedicated to an approach of strict monetary control, although with less than completely satisfactory results, so this additional commitment underscored the existing policy direction.

The second way that a pegged exchange rate helps control inflation (with "orthodox" restrictive macroeconomic policies in place) is through the effects it potentially has on the domestic price structure. By linking the nominal (actual trading) value of the peso to the dollar, Chile also linked (through trade) its price level with the lower inflationary price level of the United States, theoretically placing further downward pressure on Chilean prices. This can happen if lower-priced imports place downward pressure on the prices of both Chile's import-competing goods and exports, thereby influencing the broader price level. To the extent that imports actually make up part of the consumer price index, there is a direct downward influence on measured inflation. In deciding to preannounce the scheduled depreciations, this policy is also designed to have the added psychological value of reducing inflationary expectations.⁹

Using the exchange rate as an "anchor" to combat inflation requires a delicate policy balance. As one economist points out, "there usually is a tradeoff between using the exchange rate to guide inflation downward and using it to maintain a competitive real exchange rate position in the country."¹⁰  The peso was depreciated, but at less than the inflation rate difference between the two countries. Theoretically, the difference should force Chile's inflation rate down to the U.S. or international rate. If this strategy fails, as it did with Chile, inflation differentials exceed exchange rate differentials and the real value (adjusted for inflation) of the peso appreciates even as the nominal value depreciates. At this point, Chile's exports became less competitive, causing a growing trade deficit as demand shifted away from domestic goods to lower- priced imports.¹¹

Once Chile had dropped the crawling peg in favor of a fixed exchange rate in June 1979, these troubling trends accelerated. Although the inflation rate fell to 9.5% in 1981, it still could not be brought into line with the U.S. inflation rate, in large part because Chile maintained full indexation of wages, house rentals, and financial contracts. Without eliminating wage indexation that helped perpetuate rising price levels, the fixed exchange-rate policy proved incapable of making further progress on inflation, so the peso continued to appreciate rapidly in real terms. Further liberalization of the capital account in 1982, continuing trade liberalization, and high interest rates encouraged unsustainably large inflows of foreign capital that financed the now quickly rising current account deficit and further appreciated the peso's real value.¹²

As long as Chile could either borrow from abroad or had adequate foreign exchange reserves, the current account deficit could be maintained without major disruption to the economy. This arrangement, however, cannot and did not last forever. Sooner or later, lenders become nervous over the continuing real appreciation of the currency, rising debt levels, growing current account deficit, and diminishing foreign exchange reserves. Both exchange rate and stabilization policies can lose credibility at this juncture. These trends combined, with rising world interest rates, soon led to a retreat of capital from Chile (and throughout the region) giving rise to the 1982 Latin American debt crisis.¹³

Most analysts point to Chile's overreliance on a fixed exchange-rate strategy as the single major policy error. Others place more emphasis on liberalizing controls of foreign capital. In either case, policy decisions led to a situation where by June 1982, the large current account deficit and resulting debt burden were no longer supported by capital inflows. With dwindling foreign reserves and little chance for borrowing, Chile was forced to float the peso, resulting in a huge corrective depreciation. Although there was the redeeming feature of restoring price competitiveness to Chile's exports, the economy crumbled as evidenced by the immediate return of inflation, unemployment, and a deep recession.¹⁴

To summarize, the first decade of authoritarian rule experienced certain short-lived policy achievements, but ultimately failed to bring about successful economic adjustment. Additionally, the social costs of policy decisions were extreme in terms of unemployment, skewed income patterns, and poverty. Forced to regroup, policymakers reversed some of the market-oriented policies. To avoid a collapse of the financial sector, for example, the banks were nationalized and tariffs were raised to help reduce the large external deficits. These and other policies, however, failed to stabilize the Chilean economy and policy shifted back toward market-based adjustment begun in the 1970s.¹⁵

In the third stage of economic stabilization (1984-present), the key elements of the new economic policy included: steady depreciation of the exchange rate, (to facilitate export-led growth), tightly controlled monetary policy (to attack inflation and encourage savings to finance economic expansion internally), and continued firm privatization and trade liberalization (to promote competition and efficiency). Containing real wage growth in favor of broader gains in employment and economic growth provided significant support for these policies.¹⁶  Public finances were redirected from consumption to capital investment and private investment was boosted with the creation of the national privately managed pension system. Chile's international debt problem was addressed through various secondary market initiatives, debt rescheduling, and debt-equity swaps that quickly reduced its annual financial obligations.¹⁷

Eventually, these policies led to a balanced fiscal budget (critical for controlling inflation), a trade surplus (needed to service debt payments), high productivity gains averaging 3.5% to 4.0% annually, sustained economic growth, and single-digit annual inflation rates. By most accounts, Chile has achieved its long-term economic adjustment goals. With the return of democracy in 1990, basic reforms instituted under military rule continued. Except for 1990, Chile's fiscal budget has run a surplus since 1987.¹⁸  Further, in 1996 inflation hit a new low of 7.2%, unemployment remained at 6.6%, and GDP grew by 7.2% (see table 1).

Although Chile has finally realized a relatively stable economy, the welfare costs of prolonged economic adjustment continue to haunt Chilean society. Distributional issues are pronounced, including high levels of poverty and skewed patterns of income. The poverty rate, although declining, remains between 25% and 30% and only 10% of the population earns almost half the national income. Many economists view these costs as an unavoidable aspect of structural economic adjustment, but left unaddressed, such unbalanced growth risks the possibility of inciting social and political upheaval that could ultimately unravel economic achievements.¹⁹

Chile has so far weathered these tensions. Improving economic conditions along with increased spending on social programs have been important factors. Sustained economic growth has absorbed many of the unemployed and steady gains in productivity are beginning to show up in other economic measures as well. Real wages in the industrial sector grew by 7.2% in 1995 and 3.7% in 1996, which combined with continued growth in per capita GDP, suggest that Chile may actually be seeing some evidence of improved standards of living on a broader basis. At this point, even harsh critics of the economic adjustment process acknowledge these successes, but caution that furthering equity and social goals remains a priority.²⁰

Privatization has proven highly successful, particularly in the case of the pension system, which serves as a strong savings base from which to finance economic growth. The national savings rate, although still well below levels seen in high-growth Asian countries, is high by Latin American standards and exceeded 23% of GDP in 1996. Savings promotes growth in domestic investment, provides Chile with an excellent credit rating, and reduces dependence on foreign investment.²¹

Exchange rate policy has shifted from supporting stabilization (fighting inflation) to promoting competitive pricing of Chilean exports. Chile floats its currency within a band of 10% on either side of a central rate that is pegged to a basket of currencies.²²  The government adjusts the peg downward daily at an annual rate of 2% to offset appreciation. These policies reduce the threat of real currency overvaluation and the related problems of fostering large current account deficits dependent on short-term foreign capital inflows, although they present formidable ongoing challenges to policymakers given the high degree of international capital mobility. Chile, however, exercises some controls on foreign capital, which has helped reinforce a relatively stable real exchange rate over the past decade.²³

Chile ran current account deficits from 1992 to 1994, a slight surplus in 1995, and a sizable deficit again in 1996 equal to approximately 2.6% of GDP. Chile is experiencing strong import and export growth and continued capital inflows, pressuring the real value of the peso to appreciate. This appears to be a manageable situation and Chile is expected to avoid serious balance of payments problems given its high productivity and savings rates, low interest rates, capital controls, and strong international reserve position.²⁴
 

TRADE AND INVESTMENT

TRADE REFORM

After many years of running trade surpluses, Chile's balance of trade turned into a deficit under the Allende government, averaging $136 million from 1971-73 (see appendix 1). Opening the country to foreign trade was a priority after 1973, but as with the case of stabilization policy, trade policy experienced periodic setbacks. Chile's trade opening may be divided into three distinct periods. The first period, from 1974 to 1977, represents the first major effort to reduce trade barriers. Economic policy centered on balancing the fiscal budget and inducing export-led growth, so Chile ran trade surpluses again, averaging $62 million over this period.²⁶

FIGURE 1. Chile's Average Nominal Import Tariff Rate

Meller, p. 127 and USTR

An import boom characterized the second period of trade liberalization, which occurred from 1978 to 1982. As figure 1 shows, tariffs (and nontariff barriers) continued to fall during this time period, although the trade effects were also a result of exchange-rate policy and relaxing controls on capital inflows (see previous section). Foreign goods suddenly became available and affordable as did foreign capital to pay for them, but Chile began to run huge deficits in the trade and current accounts (see table 1 and appendix 1). By 1981, the trade deficit reached $2.7 billion or 8.2% of GDP and the current account deficit ballooned to 14.5% of GDP, accompanied by unsustainably high levels of external debt.²⁷

In the third period of trade reform, Chile had to adjust to the 1982 debt crisis, like much of Latin America. Chile increased its tariff rates to an average of 26% by 1985, raising questions about Chile's long-term commitment to an open economy.²⁸  As the debt crisis subsided, however, Chile resolved to proceed with structural adjustment and trade liberalization; between 1986 and 1991 it lowered its average tariff rates to 11%, where they remain today.

Exports began to grow and, with the exception of 1993 and 1996, Chile has maintained an annual trade surplus since 1981.²⁹

Currently, Chile has relatively few restrictions on trade. The uniform applied tariff rate remains at 11% with some agricultural products subject to a higher variable tariff price band system. The price band is used to maintain domestic prices above a 5-year average of international prices for wheat, wheat flour, edible oils, and sugar. As reported by the USTR, Chile also uses animal health and phytosanitary requirements to "prevent some imports," which effectively blocks U.S. exports of poultry, fruit, and beef. Export subsidies generally do not exist, but some promotional efforts are made. Chile implemented new trademark and patent laws in 1991 and 1992 respectively, but the USTR considers them deficient in a number of areas. Other significant barriers include a highly discriminatory tax on imported spirits that compete with a local product and a luxury tax on imported automobiles.³⁰

Many consider Chile to be the most open economy in Latin America and although it went through many difficult adjustments, with some firms displaced by foreign competition, the economy as a whole has begun to reap the rewards of freer trade. Ultimately foreign competition led to a reallocation of resources to Chile's more competitive industries, which brought increased productivity and economic growth. Industry composition changed as greater emphasis was placed on exporting firms (primarily natural resource processing) and away from those that benefited from import substitution.³¹
 

TRADE AGREEMENTS

Chile's oldest regional trade affiliation is with the Latin American Integration Association (LAIA), organized in 1980.³²  The LAIA is often referred to as an "umbrella organization" because it is not a free trade agreement in and of itself, but serves as an association that promotes the formation of free trade agreements by its members. Members are encouraged to join multilateral trade arrangements, adopt preferential trade arrangements advocated by the LAIA, and form bilateral preferential tariff agreements, provided all members may be allowed to join and that the agreements are designed to recognize basic LAIA rules such as observing the most-favored nation principle. Although the LAIA does have a preferential tariff provision for all members, with tariff reductions varying based on a country's level of economic development, not all members have adopted the arrangement.

Table 2. Chile's Multilateral, Regional, and Bilateral Trade Agreements

Source: Embassy of Chile. Trade and Investment 1996, pp. 22-23. U.S. International Trade Commission, International Economic Review, October/November 1996, pp. 22-26.

Under LAIA rules, Chile has entered into five bilateral trade agreements. The first was with Mexico in January 1992 followed by Bolivia and Venezuela in April 1993, Colombia in January 1994, and Ecuador in December 1994. Although the five agreements are similar, the one with Bolivia has a number of special provisions. For the most part, the agreements focus on eliminating tariffs by the year 2000, or earlier in some cases. A number of nontariff measures also apply. Chile is also in the early process of negotiating FTAs with Peru, Panama, and the Central American Common Market countries (Costa Rica, Guatemala, Honduras, El Salvador, and Nicaragua).³³

Chile, along with Bolivia, signed on as an associate member of the Southern Common Market (Mercado Comun del Sur - MERCOSUR), effective October 1, 1996. MERCOSUR operates as both an FTA, and a customs union with a common external tariff (CET). As a customs union, MERCOSUR has four members (Brazil, Argentina, Paraguay, and Uruguay) enforcing a CET averaging 12~, on products imported from countries outside the union. This tariff arrangement covers 88% of imports, with the remaining "import-sensitive" products subject to numerous special tariff rates.³⁴

Because Chile's tariff rates are lower than MERCOSUR's common external tariff, and also because Chile wished to pursue trade agreements unencumbered by MERCOSUR rules, it proposed joining MERCOSUR as an associate member. Associate status is effectively a free trade agreement, which calls for elimination of tariffs by 2004 on eligible products and reduces tariffs by 40% on 65%-70% of Chile-MERCOSUR trade. Many import-sensitive goods have extended tariff phase outs until the year 2006.³⁵  An additional 10% of traded goods are given even more time to phase in tariff schedules, with wheat and wheat flour being the most sensitive and not subject to full tariff reduction until 2014.³⁶

Among nonregional bilateral accords, Chile signed on as the 18th member of the Asian Pacific Economic Cooperation (APEC) forum in November 1994 and on June 21, 1996, Chile negotiated a framework agreement on trade and economic cooperation with the European Union (EU), in compliance with WTO guidelines.³⁷  Parameters of the EU agreement are very broad, relating to trade, investment, and other measures of economic cooperation. The initiative is intended to be a foundation for future deeper agreements on economic integration. Currently, the EU is Chile's largest trading partner and the two enjoy a strong trade relationship. The EU also accounts for 22% of foreign direct investment in Chile.³⁸

When fast-track legislation died in the 104th Congress, Chile and Canada proceeded to consummate a bilateral trade accord that took effect June 2, 1997, immediately eliminating tariffs on 80% of bilateral trade. Other tariffs are to be phased out over 6 years except for dairy and poultry products and certain sensitive products that each country has selected. The agreement was designed to be NAFTA compatible and both Chile and Canada see it as a stepping stone for approaching a four-country negotiation on Chile's accession to NAFTA. A number of important areas, however, were not addressed including government procurement, financial services, and intellectual property rights, among others. Additionally, the FTA treats some areas differently than NAFTA such as services, investment, and some rules of origin.³⁹

A critical issue that developed during the negotiations was Chile's foreign capital controls, particularly the requirement that 30% of new investments remain for one year in noninterest-bearing accounts with the Central Bank. Canada, however, accommodated Chile's need to manage capital flows, with the provision that the scope of investment controls not be expanded.⁴⁰  These and other issues mentioned above may be the subject of active debate should Chilean accession move forward in the United States.
 

MERCHANDISE TRADE

As trade contributed more to the Chilean economy, the mix of goods exported changed as well, although it remained largely based on the country's natural resources. In 1970, copper accounted for 75.5% and noncopper mining 9.9% of Chilean exports. Only 14.6% of exports made up other categories, most of which were agricultural products. By 1990, noncopper mining was still 9.7% of total exports, but copper had dropped to 45.6% of exports. Forestry products grew from approximately 1% to 10% of total exports and agricultural products expanded from 2.7% to 11.2%.⁴²

Table 3. Chile: Exports and Imports as Percent of GDP

By 1996, Chile's primary merchandise exports included copper, other metals, fish, forestry products, fresh fruit, and wine. Fish and forestry products are the fastest growing exports, although copper still accounts for nearly half of the total value of Chilean exports. The growth of agriculture, fishing, and forestry exports has been directly attributed to improved productivity related to trade-opening policies.⁴³  Chile's primary imports consist of chemicals, machinery, transport equipment (aircraft and vehicles), and various other manufactured goods.

Chile's major trading partners are shown in figure 2. The largest single- country markets are the United States and Japan followed by Brazil and Argentina (not shown in figure 2.) The four countries together account for 42.1% of Chilean exports and 48.1% of imports. The United States is the largest consumer of Chilean fruits, vegetables, and chemicals. Japan is number one in consumption of fish, animal foodstuffs, wood, and cork. The United States and Japan purchase nearly equal amounts of Chilean copper, accounting together for approximately one-quarter of total copper exports.⁴⁴

The largest portion of Chilean imports (25%) originates from the United States, followed by Argentina, Brazil, and Japan. All four countries are major providers of machinery and transport equipment. The United States also exports significant quantities of chemicals and scientific equipment, with Brazil and Argentina exporting iron and steel, chemicals, and petroleum.⁴⁵
 

FIGURE 2. 1996 Chile Direction of Trade

U.S.-CHILE BILATERAL TRADE

Trends in U.S.-Chile merchandise trade are shown on figure 3 (trade data appear in appendix 2). U.S. exports have grown steadily since 1987, with imports from Chile showing little growth over this time period until 1994. Trade growth between the two countries reflects Chile's long-term adjustment policies, including trade reform, as well as 12 straight years of economic growth that has averaged 6.6% annually. Increased trade volume also reflects the United States' growing interest in Latin America. The United States has maintained a trade surplus with Chile since 1989, with a trade gap that has grown from 4.5% of total bilateral trade in 1989 to 29% in 1996.

Based on the top 25 U.S. exports to Chile (by dollar value as shown in appendix 3), Chile relies on the United States for manufactured products including transportation equipment such as airplanes, motor vehicles, trucks (26% of U.S. exports), office, telecommunications, and data processing equipment (6%), and natural resource-based goods such as oil, fertilizer, and corn (7%). Airplanes were the largest U.S. export category for 1996, but there was also a big increase in the export of passenger motor vehicles, data processing equipment, and mining equipment.

All major U.S. imports from Chile are from natural resource industries and the composition has changed only slightly over the last decade (see appendix 4). Metals accounted for 30% of total U.S. imports from Chile in 1991 and 25% 1996, with various categories of copper composing 62% of total metal imports in 1991 and 70% in 1996. Fresh fruits and juices have fallen from 24~ of imports in 1991 to 17% in 1996, but remain the second largest import group. Fish, both fresh and frozen, accounts for 9~i of U.S. imports. Forestry products are the fastest growing import group, rising from 2% of total imports in 1991 to 7% in 1996. Fresh grapes are the largest single-item import from Chile (12% of the total), but copper remains the Chile's largest export industry (18% of total U.S. imports) if refined, unrefined, ore, and waste products are counted together.

FIGURE 3. U.S.-Chile Merchandise Trade

FOREIGN INVESTMENT

The purpose of the foreign investment controls is to discourage speculative flows that can cause exchange rate problems. When Chile relaxed the 30- percent reserve requirement in late 1996, foreign capital surged into the country to take advantage of interest rate differentials. The resulting appreciation of the peso caused the Central Bank of Chile to reimpose this requirement 4 months later. At the same time, Chile reduced many of the restrictions on capital outflows. Together these policies are intended to support exchange rate stability.⁴⁷

Foreign investment is allowed in most industries, but some restrictions apply to broadcast media, shipping, and mining sectors. Chilean tax policies do not discriminate between foreign and domestic investors. The United States is the largest foreign direct investor and some U.S. multinationals could benefit from eased restrictions. Because Chile represents a relatively small portion of total U.S. foreign investment, the incremental benefits would likely be small.⁴⁸

Given Mexico's capital flight problems in 1994-95, questions have been raised over the likelihood that a similar fate could befall Chile. Chile, as a developing country, is logically a net user of and attraction for foreign capital provided investments can yield attractive returns under stable conditions. Additionally, such capital movements finance Chile's current account deficits, which help support the economy's growth trends by making up the difference between domestic investment and savings rates.

Because Chile has had long-term annual economic growth of over 6%, active but transparent controls on foreign capital, and a stable political condition, foreigners continue to invest in Chile, as may be seen in table 4. Chile differs from Mexico in all these respects as well as the fact that portfolio capital (stocks and bonds) tends to account for a smaller share of total net capital inflows than in the Mexico. Portfolio capital, however, increased relative to direct investment (plant and equipment) in the 1990s. Additionally, the IMF reports that Chile continues to attract significant levels of foreign loans ("other" in table 4).

As of April 1997, Chile had over $16 billion in foreign exchange reserves, or enough to cover approximately one year's worth of imports should capital inflows be interrupted.⁴⁹  Although some analysts consider these reserves too high, it is clear that Chile does not face the precarious financial situation that it did in 1982 or that Mexico did in 1994.
 

Table 4. Net Capital Flows into Chile, 1989-96 ($ millions)

Other = currency and deposits, loans, and trade credits.

Despite Chile's capital controls, recent trends in foreign investment have been somewhat erratic. In 1994 Chile had large increases in foreign direct investment and foreign debt. Foreign direct investment more than doubled in 1994, rising by almost $500 million, and external debt increased by $1.3 billion. By 1995, net capital inflows actually fell dramatically to $1.4 billion, with foreign direct investment representing 70% of the total, a more manageable (desirable) composition and level of capital inflows. By 1996, there was again a surge of foreign capital into Chile, this time well represented by direct and portfolio investment, as well as debt. These trends highlight the unpredictability in type, quantity, and direction of foreign capital movements faced by Chile and other developing economies.

Looking at capital outflows, in 1995 the Chamber of Commerce reported that Chile invested $4.4 billion abroad, concentrated in Argentina (62%) and Peru (22%). Half of this investment went into the energy sector and even more than trade growth, is a critical indicator of growing regional economic integration taking place in South America.⁵⁰
 

TRADE AND ECONOMIC EFFECTS OF CHILEAN ACCESSION

Chile's possible accession to NAFTA raises questions regarding the potential effects on all parties. Questions range from the macroeconomic effects on each country to possible trade specific effects such as trade enhancement and adjustment. The Institute of International Economics (IIE) provides one useful analysis that attempts to identify the significance of Chile joining NAFTA. It looks first at the potential for unrealized trade growth with Latin America that might have happened in the past had trade barriers and state control of these economies not been major historical factors. To the extent that unrealized trade potential exists, it could be "realized" or captured with current free trade initiatives, including the expansion of NAFTA.

For most of Latin America, the IIE analysis found that there is room for such anticipated growth because of the import substitution policies and 1982 debt crisis that hindered freer trade and diminished economic growth. Chile, however, is the exception, as economic theory would suggest, because of the trade and macroeconomic reforms it undertook. Given Chile's unilateral reduction in trade barriers over time, the incremental increases in trade volume anticipated from joining NAFTA are expected to be small. As the IIE analysis suggests, the generally accepted "best candidates" for joining NAFTA are precisely those countries that have already made major adjustments to trade and macroeconomic policies.⁵²

Chile's trade policy focuses on increasing ties with many of its major trading partners, not just those belonging to NAFTA, and it is rational for Chile to pursue trade with countries that will provide the best chance for improving its economy, particularly if NAFTA accession remains an elusive goal. To continue with the analysis provided by the IIE, countries that may be best targeted for trade opening negotiations can be identified as "good customers" or "strong neighbors."⁵³  A good customer refers to a country or region that simply accounts for a significant portion of another country's exports. As may be seen in figure 2, the European Union is Chile's best customer, with the United States the most important single-country market.⁵⁴

A strong neighbor refers to a region or country that, as its economy grows, has the potential to increase its imports from a given country relative to other countries. Importantly, strong neighbors need not be the largest trading partners, but those that can potentially affect a country's exports more than other countries. Although no index for a strong neighbor has been calculated for Chile, for Latin America as a whole, the top three strong neighbors are other Latin American countries, the Middle East, and North America.⁵⁵

The IIE analysis suggests that Chile would logically look to NAFTA as an important way to expand trade growth from both a "good customer" and "strong neighbor" perspective. That is, the United States represents not only a large market for Chilean traded goods, but also one that could continue to absorb disproportionately more Chilean goods as the U.S. economy expands. To the extent that NAFTA expansion leads to increased trade with other Latin American countries, Chile would further benefit from the "strong neighbor" analogy. NAFTA would also be a good way for Chile to pursue greater economic integration with the world, as well as the region. In short, Chile appears to have much to gain in joining NAFTA.⁵⁶

Beyond the United States, however, this analysis may suggest little gain for Chile based on trade with other NAFTA partners. Simple trade patterns suggest that increased trade with Mexico or Canada may be minimal given the small amount of trade that currently occurs with Chile (table 5). In 1996, trade turnover (imports plus exports) with Chile for both Canada and Mexico amounted to only $1,537 million, or only 4.7% of Chile's total trade. Even if this number were to double should Chile join NAFTA, it would still represent only a small portion of Chile's total trade. 

Table 5. Chile: 1996 Trade with NAFTA Countries ($ millions)

For the United States, Latin American countries (except Mexico) and Chile in particular do not qualify as "good customers" simply because they represent such a small portion of U.S. trade. This suggests the immediate effects on the United States of Chile acceding to NAFTA would be small. Yet, U.S. trade with Latin America is growing faster than any other area of the world and so the region can be considered a "strong neighbor" by this analysis.⁵⁷

To summarize, should Chile join NAFTA, it will not be a significant economic event in and of itself for either Chile or the existing NAFTA partners given that to a great extent the benefits of freer trade have already been realized. The importance of Chile's accession to NAFTA for the United States is not solely a function of the volume or growth in trade that might be realized. Current trade volume is small for the United States and growth in trade is occurring anyway (see figure 3). The more important longer-term dynamic effects that may be realized rest on the potential for Chile's accession to improve marginal efficiencies of each economy and on the extent to which the regional integration process is furthered for all Western Hemisphere countries. Quantifying the magnitude of these somewhat amorphous benefits. however, is difficult.

TRADE ADJUSTMENT AND INDUSTRY ISSUES

Chile's copper industry, for example, is run largely as a public enterprise and is protected under the country's constitution. Chile may well ask for a special arrangement for the copper industry much like Mexico did for its oil and gas sector (also protected by its constitution) during the original NAFTA negotiations. Accommodating Chile's desire to protect its state-run copper industry will be an important issue to resolve. Chile has also expressed interest in discussing special issues related to agricultural trade and financial services.⁵⁹

In the United States, Chile's agriculture sector faces significant scrutiny, particularly from fruit producers who compete with the fast-growing Chilean fresh fruit industry. Fresh fruit is Chile's second largest export sector and the United States is the largest market for Chilean fresh fruit exports (see appendix 4). Firms representing fruit industries were among the most vocal opponents of Chile's accession to NAFTA at hearings before the U.S. Trade Policy Staff Committee on April 25, 1995.⁶⁰  Because Chile's growing season occurs during the winter months in the United States, its fruit exports tend to complement U.S. fresh fruit production.⁶¹  Nonetheless, grapes, as the largest dollar-value import from Chile, have been the subject of disputes in the past. Chile and the United States are still arguing over Chile's demand for compensation with respect to a 1989 temporary suspension order on grapes.⁶²

Other concerns relate to the potential for Chilean canned fruit imports to affect U.S. firms. Although no formal analysis has been done to quantify possible trade adjustment effects from canned fruit imports, such as lost employment in particular fruit industries, crude estimates have been offered. For example, representatives of peach growers argued before the Trade Policy Staff Committee that Chilean peaches (canned) directly displace U.S. peach production and could place at risk thousands of U.S. jobs. When questioned, however, these same representatives acknowledged that Chilean canned fruit accounted for only 2/10 of 1% of the U.S. market.⁶³

Fish commodities, accounting for 9% of Chilean exports to the United States in 1996, have also been the target of U.S. business protests. Representatives of salmon producers expressed concern over the growth of salmon imports, which is the fastest growing fish export from Chile, accounting for one-third of Chilean fish exports to the U.S. in 1994. Chile is second only to Canada as the largest salmon exporter to the United States. Salmon growers testified against Chilean accession to NAFTA arguing that newly established salmon fishing industries in the northeast would be unable to compete with cheaper Chilean salmon until their firms were allowed to mature. In addition, Chile stands accused of selling salmon in the United states and other markets at prices below the cost of production and is currently the target of an antidumping suit by U.S. salmon farmers.⁶⁴

Chile's forestry products are the fastest growing exports to the United States and have also been the subject of trade adjustment complaints. The major products in this category include lumber, furniture, and wood pulp items. Although the forestry industry was still considered in its "infancy" as recently as 1991, efforts are being made to increase market penetration in the United States.⁶⁵  Chilean furniture and cabinet makers are seeking to establish joint ventures, partnerships, and trade enhancement opportunities with U.S. firms. In 1995, a Chilean delegation visited the United States as part of a technology transfer effort in this industry.⁶⁶

Other U.S. industries have raised concerns over Chilean accession to NAFTA from various perspectives including: distilled spirits (discriminatory taxes), pharmaceutical manufacturers (lax intellectual property rules), telecommunications (not covered in NAFTA), and computer software (piracy). Wine imports from Chile are growing briskly and are a highly visible commodity, representing 4% of total Chilean exports to the United States. Wine producers in the United States are also concerned about receiving equal treatment given the growing Mexico-Chile wine trade boosted by liberalized trade arrangements between the two countries.

Each of the problems mentioned above presents serious specific challenges for trade negotiators, but many of the industry criticisms were made in the context of amending NAFTA and ensuring that the clearest accession rules are adopted rather than abandoning NAFTA or denying Chile's petition to accede to the agreement.⁶⁷  Despite industry concerns, Chile remains one of the most open economies in Latin America and there are few outstanding trade dispute cases between the United States and Chile.⁶⁸

Industry trade concerns, although highly visible, do not constitute a comprehensive list of trade issues. Intellectual property rights, for example, are repeatedly cited as one of the critical matters to be resolved, as are Chile's restrictions of foreign investment. Chile's requirement that 30% of foreign investment (loans and portfolio capital) must be placed in a one-year non-interest bearing account with the Central Bank is controversial. Canada elected not to challenge this policy seriously in its recent bilateral trade negotiations with Chile, but it will likely need resolution within the NAFTA context.
 

NAFTA SIDE AGREEMENTS

The debate over how much trade policy affects distributional and social policy issues is a fertile one. Chile's economic restructuring has not improved skewed income patterns and workers' rights issues have not been addressed to the satisfaction of many labor groups. Research continues to suggest, however, that an open trade policy is a key factor affecting economic growth and convergence rather than leading to a worsening of living standards over the long run.⁷⁰  In the United States, claims that NAFTA has caused either net job losses or trade deficits are either incomplete or incorrect economic arguments, yet they remain a powerful force in the free trade debate.⁷¹

Many environmentalists continue to oppose NAFTA as well. As in the original debate, environmental groups question both the adequacy of the legal structure in place and the willingness of Chile to enforce regulations. (These perceptions are being countered by Chile, which points to wholesale changes in environmental regulatory law in the 1994.) Further, differing levels of environmental regulation may have direct effects on business costs. Specific issues run the broad spectrum of environmental problems including ozone depletion, industrial emissions, deforestation, and food contamination. Unlike Mexico, environmental spillovers that might affect contiguous countries are not an issue.⁷²

Environmental groups focus on export oriented industries that pose special problems to the Chilean people. Specifically, environmental critics point to the displacement of indigenous peoples in the wake of the expanding forestry industries and the possibility that the fishing industry is growing at an unsustainably fast rate.⁷³  Chile, however, has openly acknowledged some of these problems and is developing plans to address them.⁷⁴  In both the labor and environmental cases, an emerging issue in the fast-track debate is defining precisely which issues are "trade related" and therefore relevant to trade negotiations. Regardless of how these issues are defined, from the Chilean perspective, there appear to be no serious concerns regarding adoption of the side agreements.⁷⁵

ANOTHER MEXICAN CRISIS?

Chile faces none of these problems in 1997. First, Chile's continued economic growth provides the economic platform from which to finance domestic and foreign liabilities. Second, exchange rate policy is used to price tradable goods competitively rather than as an anchor to hold inflation in check. Third, Chile's current account deficits over the last few years have been easily financed by voluntary capital inflows, which have been much smaller and easier to absorb. Fourth, Chile has a higher domestic savings rate than Mexico and therefore relies less heavily on foreign capital.⁷⁷  Fifth, as of April 1997, Chile had $16 billion in foreign exchange reserves. Sixth, inflows of capital are controlled by the Central Bank. Finally, Chile's return to democracy bodes well for long-term economic stability.
 

THE ROAD TO AN FTAA

The United States has advocated an FTAA that is consistent with NAFTA and the World Trade Organization (WTO). Many see approving Chilean accession as an important step in positioning NAFTA as a model for such an agreement. Chile's joining MERCOSUR and completing a bilateral trade agreement with Canada, however, raise some new questions about what a regional free trade agreement will look like. NAFTA may not be the primary vehicle to launch such an effort. MERCOSUR has been quite active pursuing other Latin American countries, which could set up direct competition with the NAFTA model in influencing development of the FTAA.

In addition to MERCOSUR's outreach, various bilateral agreements suggest that trade opening is proceeding outside the greater regional vision expected to emerge from an FTAA, and also without the input of the United States. Accords signed in November 1996 between Mexico and many Latin American countries as well as outreach by Chile may place additional pressure on the United States to move forward on a hemispheric agreement.⁷⁹

The United States still has significant leverage, however, because it is by far the largest market in the region and as one observer notes, an important point in NAFTA's favor has been its ability to integrate a developing country with the two most developed economies in the hemisphere. Additionally, widespread subregional trade agreements that have swept the region may not generate significant gains compared to a larger agreement that includes the United States.⁸⁰

Still, some see Chile's agreement with Canada as a clear sign that the United States needs to move ahead decisively to include Chile as part of NAFTA before the second Summit of the Americas scheduled for April 1998 in Santiago, Chile. Congress is not required to bow to this time table, but Chile has made clear that fast track is necessary before serious negotiations can resume. In the alternative, it might appear to the region that the United States is not committed to moving ahead on liberalizing trade relations with the hemisphere at this time. This outcome would likely encourage the continued formation of intra-regional trade alliances by Chile, the MERCOSUR group, and other Latin American countries without U.S. participation and irrespective of how useful they may be.
 

Source: Department of Commerce, Bureau of the Census. Imports at customs value, exports at f.a.s.
Sort based on 1996 commodities, in descending order. Classified by 5-digit HTS (Harmonized Tariff System) code.
 

APPENDIX 4. TOP 26 U.S. IMPORTS FROM CHILE

Copyright 1998 National Law Center for Inter-American Free Trade

E-mail

FOOTNOTES

2-[ For more on the fast-track debate see: U.S. Library of Congress. Congressional Research Service. Fast-Track Authority: Debate Over the President's Proposal. Report 97-876 E, by George Holliday and Trade Agreements: Renewing the Negotiating and Fast-Track Implementing Authority. Issue Brief 97016 by Vladimir N. Pregelj, updated regularly.]

3-[ Import substitution refers to an "inward-oriented" industrial development strategy in which protectionist policies (quotas, tariffs, licenses) discourage imports in favor of domestic production.]

4-[ Corbo, Vittorio and Stanley Fischer. Lessons from the Chilean Stabilization and Recovery. In Bosworth, Barry P., Rudiger Dornbusch, and Raul Laban, eds. The Chilean Economy: Policy Lessons and Challenges. Washington, DC, The Brookings Institution, 1994. pp. 31-34.]

5-[ See: Bosworth et. al., The Chilean Economy: Policy Lessons and Challenges, p. 5; Canitrot, Adolfo and Silvia Junco, eds. Macroeconomic Conditions and Trade Liberalization. Washington DC, The Inter-American Development Bank, 1993; and Edwards, Alejandra Cox and Sebastian Edwards. "Markets and Democracy: Lessons from Chile." World Economy, March 1992.]

6-[ Corbo and Fisher, op. cit., pp. 35-37.]

7-[ Ibid, p. 47 and International Monetary Fund. 1996 International Financial Statistics Yearbook, pp. 276-77. For a chronology of regulatory reform affecting capital flows see: Laban, Raul and Felipe Larrain B. The Chilean Experience with Capital Mobility. In Bosworth, et. al., The Chilean Economy, pp. 121-25 and 153-61.]

8-[ 8 Ibid, pp. 37-38 and Bosworth, Barry P., Rudiger Dornbusch, and Raul Laban. Introduction. In Bosworth, et. al., The Chilean Economy, 7-8.]

9-[ Corbo and Fischer, op. cit., pp. 4647 and Dornbusch, Rudiger and Stanley Fischer. Macroeconomics, Sixth edition. New York, McGraw-Hill, Inc., 1994. p. 608. Chile's economic policy options are in potential conflict at this point. To manage (reduce) capital inflows interest rates would have to fall closer to international levels. This, however, would conflict with restrictive macroeconomic policies aimed at lowering inflation.]

10-[ Edwards, Sebastian. Macroeconomic Stabilization in Latin America: Recent Experience and Some Sequencing Issues. Cambridge, MA, National Bureau of Economic Research, Inc. Working Paper No. 4697. April 1994. pp. 38-39.]

11-[ Corbo and Fischer, op. cit., p. 4647]

12-[ Meller, Patricio. Trade Opening of the Chilean Economy: Policy Lessons. In, Canitrot, Adolfo and Silvia Junco, eds. Macroeconomic Conditions and Trade Liberalization. Washington D.C., Inter-American Development Bank, 1993. pp. 128-31, Bosworth, Dornbusch, and Laban, op cit. pp. 6-8, and Corbo and Fischer, op. cit. pp. 4647.]

13-[ Corbo and Fischer, ibid, pp. 4648 and Dornbusch, Rudiger and Sebastian Edwards. Exchange Rate Policy and Trade Strategy. In Bosworth, et. al., The Chilean Economy, pp. 85-92. ]

14-[ IMF, op. cit., p. 277. This story is reexamined in Dornbusch, Rudiger, Ilan Goldfajn, and Rodrigo O. Valdes. Currency Crises and Collapses. Brookings Papers on Economic Activity, No. 2., 1995. pp. 222-29. See also: Rosales, Osvaldo. From Exports to Equity: The Future of the Chilean Economy. SAIS Review, v. 15, Winter-Spring 1995. pp. 59-62.]

15-[ Ibid, pp. 4748 and 85-92, and Edwards and Edwards, Markets and Democracy, pp. 205-06. ]

16-[ In fact, the perils of wage indexation were one of the most important lessons learned from Chile's earlier economic crisis, a point not wholly lost on Mexico in its pacto agreements with labor. But the pactos also ultimately failed to constrain wage increases and so contributed to credibility problems that helped unravel the Mexican economy in late 1994. See: Dornbusch, Goldfajn, and Valdes, Currency Crises and Collapses, pp. 257-59 and Edwards, Sebastian. A Tale of Two Crises: Chile and Mexico. Cambridge, National Bureau of Economic Research, Inc. Working Paper No. 5794. October 1996. pp. 26 and 30.]

17-[ Edwards and Edwards, op. cit, p. 207-08 and Bosworth, Dornbusch, and Laban, op. cit., pp. 30, 84, and 91-93.]

18-[ Bosworth, Dornbusch, and Laban, Ibid, pp. 8-10.]

19-[ The Wall Street Journal. September 20, 1996. p. B6, Rosales, From Exports to Equity, p. 76, NACLA Report on the Americas, v. 29, May/June 1996, p. 39, and the World Bank. 1997 World Development Report. Washington, D.C., June 1997 p. 223.]

20-[ Bosworth, Dornbusch, and Laban, ibid, pp. 3, 18-21, and 27, Dornbusch, Goldfajn, and Valdes, Currency Crises and Collapses, pp. 257-59, EIU, Chile Country Report, Second Quarter 1997, p. 21, and Rosales, From Exports to Equity, p. 75-77. Chile's political coalitions united in supporting the return of democracy, but this mutual support could dissipate with the consolidation of military withdrawal from politics. See: Garreton, Manuel Antonio. Redemocratization in Chile. Journal of Democracy, v. 6, January 1995. pp. 146-58.]

21-[ EIU, Chile Country Report, Second Quarter 1997, p. 19 and Friedland, Jonathan. Chile's Growth May Be Peaking Too Soon. The Wall Street Journal, December 4, 1996, p. A15.]

22-[ Canitrot, Adolfo and Silvia Junco. Macroeconomic Conditions and Trade Liberalization in Argentina, Brazil, Chile, and Uruguay: A Comparative Study. In Canitrot, Adolfo and Silvia Junco, eds. Macroeconomic Conditions and Trade Liberalization. Washington, DC, Inter- American Development Bank, 1993. pp. 27-28.]

23-[ EIU, Chile Country Report, Second Quarter 1997, p. 14 and U.S. Congress. Joint Committee Print. Country Reports on Economic Policy and Trade Practices. Committee Print, 104th Cong., 1st Sess. Washington, U.S. Govt. Print. Off., 1995. p. 342.]

24-[ EIU, Chile Country Report, Second Quarter 1997, pp. 14-16.] After years of macroeconomic adjustment and the apparent achievement of a stabilized economy, Chile is, in the eyes of many observers, the most promising candidate to negotiate accession to NAFTA.

25-[ Meller, Trade Opening of the Chilean Economy, pp. 124-25.]

26-[ Ibid, pp. 137-38]

27-[ Ibid, pp. 137-38.]
 
 28-[ Argentina, by contrast, simply closed its economy to imports. See: Canitrot and Junco, Macroeconomic Conditions and Trade Liberalization, p. 22.]
 
29-[ Meller, Trade Opening of the Chilean Economy, pp. 139-40.]

30-[ Executive Office of the President. United States Trade Representative. 1997 National Trade Estimate Report on Foreign Trade Barriers. Washington, D.C., 1997. pp. 39-42.]

31-[ Meller, Trade Opening of the Chilean Economy, pp. 152-53 and Dornbusch and Edwards, Exchange Rate Policy and Trade Strategy. In Bosworth et. al., The Chilean Economy, p. 96.]

32-[ The LAIA is the successor organization to the Latin American Free Trade Association (LAFTA) formed in 1960. Chile was also a founding member of the Andean Pact (now Community), but is not currently a member.]
 
 33-[ Executive Office of the President. U.S. International Trade Commission. International Economic Review, November 1994, pp. 11-14 and October/November 1996. p. 26.]
 
 34-[ USITC. International Economic Review, October/November 1996. pp. 22-24. See also: U.S. Library of Congress. Congressional Research Service. MERCOSUR-U.S. Trade Relations: Evolution and Prospects. CRS Report 95-940 E, by Raymond J. Ahearn, August 28, 1995. 25 p.]
 
35-[ USITC. ibid, p. 23.]
 
 36-[ Ibid, pp. 24-25, Government of Chile. CORFO. Chile Economic Report, Summer 1996. pp. 2-4, and Government of hile. Ministry of Foreign Relations. Chile-MERCOSUR Economic Complementation Agreement. June 25, 1996. pp. 14-16.]

37-[ Washington Trade Daily. April 2, 1996. p. 4. For more on APEC see: U.S. Library of Congress. Congressional Research Service. APEC and Free Trade in the Asia Pacific. CRS Report 96-1, by Dick K. Nanto. December 18, 1995. 12 p.]

38-[ Government of Chile. CORFO. Chile Economic Report, Summer 1996. pp. 5 and 8.]

39-[ Inside NAFTA, November 27, 1996, pp. 1, 22-23 and Embassy of Canada, Features of the Chile-Canadian Free Trade Agreement.]

40-[ Inside NAFTA, October 30, 1996, pp. 1-2, Washington Trade Daily, November 18, 1996, p. 4, and USITC, International Economic Review, October/November 1996. p. 26.]

41-[ Central Bank of Chile and EIU, Chile Country Report, Second Quarter 1997, p. 7.]

42-[ Meller, Trade Opening of the Chilean Economy, p. 141.]
 
 43-[ Dornbusch and Edwards, Exchange Rate Policy and Trade Strategy. In Bosworth et. al. The Chilean Economy, p. 97.]
 
44-[ EIU, Chile Country Report, Second Quarter 1997, p. 35.]
 
 45-[ Ibid, p. 35.]
 
 46-[ Inside NAFTA, June 14, 1995, p. 14, Trade Daily, October 29, 1996, p. 2, and EIU, Chile Country Report, Second Quarter 1997. p. 14.]
 
 47-[ EIU, ibid, p. 14-15.]

48-[ United States International Trade Commission. U.S. Market Access in Latin America: Recent Liberalization Measures and Remaining Barriers (with a Special Case Study on Chile.) Report to the Committee on Finance of the United States Senate. USITC Publication Number 2521 June 1992. pp. 5:3-16 and USTR, 1996 Report on Foreign Trade Barriers, p. 43.]

49-[ EIU, Chile Country Report, Second Quarter 1997, p. 32. As a "rule of thumb," three to six months worth of imports is generally considered adequate coverage, barring a major financial crisis. In fact, Chile's foreign reserves are too high by some accounts.]

50-[ Government of Chile. CORFO. Chile Economic Report. January/February 1995. p. 11 and Winter 1996. p. 11.]

51-[ Although economies gain as a whole, the economic restructuring that occurs involves at least temporary losses to some sectors of the economy (transitional costs) while others gain. A detailed discussion of the gains from trade is not provided here. For a summary see: U.S. Library of Congress. Congressional Research Service. Trade Policy in an Economic Perspective. CRS Report 95-529 E, by Craig K. Elwell. March 9, 1995]

52-[ Hufbauer, Gary Clyde and Jeffrey J. Schott. Western Hemisphere Economic Integration. Washington, Institute for International Economics, 1994. pp. 25-27.]

53-[ Ibid, pp. 70-79 and 102.]

54-[ Ibid, pp. 30-33.]

55-[ Ibid, pp. 32-33. ]

56-[ Ibid, pp. 34 and 42.]

57-[ For more on U.S.-Latin American trade, see: U.S. Library of Congress. Congressional Research Service. A Free Trade Area of the Americas: Toward Integrating Regional Trade Policies. CRS Report 97-762 E, by J.F. Hornbeck. Updated September 25, 1997.]

58-[ For a discussion of Federal trade adjustment assistance for businesses see: U.S. Library of Congress. Congressional Research Service. Trade Adjustment Assistance for Firms: Economic and Policy Issues. CRS Report 96-783 E. by J. F. Hornbeck. September 20, 1996. 6 p.]

59-[ Inside NAFTA, June 14, 1995. pp. 1, 22-23.]

60-[ The Trade Policy Staff Committee comprises representatives of various U.S. government agencies with responsibilities for trade policy and enforcement.]

61-[ U.S. General Accounting Office. U.S.-Chilean Trade: Developments in the Agriculture, Fisheries, and Forestry Sectors. Report GGD-93-88, April 1993. pp. 26-27 and 36-37.]

62-[ International Trade Commission. Unpublished correspondence, October 1996.]

63-[ Statement before the Trade Policy Staff Committee, Executive Office Building, Washington DC, April 25, 1995.]

64-[ Statements before the Trade Policy Staff Committee, April 25, 1995 and Friedland, Jonathan. Chilean Salmon Farmers Test Free Trade. The Wall Street Journal, October 13, 1997. p. A18.]

65-[ Ibid pp. 21-23]

66-[ Government of Chile. CORFO. Chile Economic Report, March/April 1995. p. 12.]

67-[ Statements before the Trade Policy Staff Committee, April 25, 1995.]

68-[ There is only one antidumping duty order and another countervailing duty order in effect, both covering Chilean fresh cut flower exports. United States International Trade Commission. The Year in Trade, 1996. Washington, D.C. April 1997. pp. 195 and 203.]

69-[ Harvey, Pharis J. Chile's Accession to the NAFTA. Executive Director. International Labor Rights Education and Research Fund. Statement Before the Office of the United States Trade Representative. Trade Policy Staff Committee. April 25, 1995.]

70-[ Sachs, Jeffrey D. and Andrew M. Warner. Economic Convergence and Economic Policies. Cambridge, National Bureau of Economic Research, Inc. Working Paper No. 5039. February 1995. pp. 23-24.]

71-[ See: U.S. Library of Congress. Congressional Research Service. NAFTA, Mexican Trade Policy, and U.S.-Mexico Trade: A Longer-Term Perspective. CRS Report 97-811 E, by J. F. Hornbeck, Updated September 2, 1997.]

72-[ Embassy of Chile. Environmental Policy in Chile. Handout provided at Chilean Environmental Law Seminar, Washington, D.C. October 16, 1997. See also: U.S. Library of Congress. Congressional Research Service. NAFTA. Related Environmental Issues and Initiatives. Report 97-291 E, by Mary Tiemann. Updated May 9, 1997.]

73-[ Various statements before the Trade Policy Staff Committee public hearings, April 25, 1995.]

74-[ Embassy of Chile, ibid.]

75-[ Inside NAFTA, June 14, 1995, p. 22 and October 16, 1996, p 5. See also: U.S. Library of Congress. Congressional Research Service. Fast-Track Trade Authority: Which Environmental Issues Are "Directly Related to Trade." Report 97-886 E, by Arlene Wilson. September 25, 1997 and NAFTA Labor Side Agreement: Lessons for the Worker Rights and Fast-Track Debate. Report 97-861 E, by Mary Jane Bolle. Updated September 26, 1997.]

76-[ See: U.S. Library of Congress. Congressional Research Service. U.S.-Mexico Economic Relations: Has NAFTA Made a Difference? CRS Report 95-398 E, by J. F. Hornbeck. Washington, March 15, 1995. p. 6-10 and NAFTA, Mexican Trade Policy, and U.S.-Mexico Trade: A Longer-Term Perspective. CRS Report 97-811 E, by J. F. Hornbeck, September 2, 1997.]
 
77-[ Government of Chile. CORFO, Chile Economic Report, January/February 1995. p. 10]

78-[ For more on the FTAA, see: U.S. Library of Congress. Congressional Research Service. A Free Trade Area of the Americas: Toward Integrating Regional Trade Policies. CRS Report 97- 762 E, by J. F. Hornbeck. Updated September 25, 1997 and Trade and the Americas. CRS Issue Brief 95017, by Raymond J. Ahearn. (Updated regularly)]

79-[ Washington Trade Daily. November 13. 1996. p. 4.]

80-[ Lawrence, Robert Z. Regionalism, Multilateralism, and Deeper Integration. Washington, DC, the Brookings Institution, 1996. p. 77 and U.S. Library of Congress. Congressional Research Service. A Free Trade Area of the Americas. CRS Report 97-762 E, by J. F. Hornbeck. Updated September 25, 1997. p 15.]

Copyright 1998 National Law Center for Inter-American Free Trade

E-mail