International Outlook
Edited by Rose Brady
Chile: A Giant Step toward Free Trade across the Americas?
Osvaldo Rosales, Chile's chief trade negotiator, smiled when he got the long-awaited phone call. The Bush Administration had at last scheduled the signing of the U.S.-Chile free trade agreement for June 6. "We finally have a Pope!" he declared. Santiago had waited a decade for the trade pact and wrapped up talks with Washington late last year. Then, the Administration kept Chile waiting months to ink the agreement because Chile had refused, as a temporary U.N. Security Council member, to back the war on Iraq.
Despite the delay, the pact is an important step forward for U.S. policy in Latin America. When George W. Bush entered the White House, one of his top goals was to create a free trade zone from Canada to Chile -- the Free Trade Area of the Americas (FTAA), an idea initiated by a 34-nation Summit of the Americas in 1994. Then came September 11, and Washington had other priorities. But U.S. Trade Representative Robert B. Zoellick kept plugging away.
Now, the free-trade initiative is coming back into focus for the Bush team. The region accounts for 37% of all U.S. trade and some $155 billion in American investment. The deal with Chile -- the region's first such accord since the North American Free Trade Agreement in 1993 -- could pave the way for a hemispheric trade pact far bigger than NAFTA. Once approved this fall by the U.S. Congress, the U.S.-Chile pact will immediately eliminate tariffs on 85% of goods traded between the two countries and provide protections for U.S. intellectual property exports such as software and pharmaceuticals. Zoellick hopes the deal will prompt hitherto-reluctant Latin countries to move faster to approve a hemisphere-wide pact that would slash tariffs, guarantee investors' rights, and boost American business in the region.
Zoellick's strategy is twofold. He is still hoping to meet a 2005 deadline for an agreement for a grand FTAA that would encompass 800 million people and a $13 trillion economy. But it's slow going. Brazil and Argentina, for example, resist granting full intellectual property protection to U.S. companies and want the U.S. to lift curbs on their agricultural and steel exports. So, while working on the FTAA, Zoellick and his team are also negotiating separate deals. After the Chile pact, he aims to sign an agreement with Costa Rica, El Salvador, Guatemala, Nicaragua, and Honduras. "It's an incentive for others to move ahead" with the FTAA, says Deputy USTR Peter Allgeier. Zoellick also seems willing to compromise: In a recent visit to Brasilia, he proposed focusing the hemisphere-wide pact simply on lowering tariffs and guaranteeing investor rights. Thornier issues would be negotiated bilaterally.
For Washington, the main thing is that Latin markets keep opening up. Certainly Chile agrees. "Some believe it's perilous for developing countries to sign commercial agreements with industrial countries, but we are proof that it's not," says Chilean Foreign Minister María Soledad Alvear. Chile already has free trade agreements with Canada, Mexico, the European Union, and South Korea. Since opening its markets, Chile has doubled the size of its economy and halved its number of impoverished citizens. That's a powerful example for the rest of Latin America.
By Geri Smith in Santiago, with Paul Magnusson in Washington
Online Extra: Chile Has a Clear Export Strategy
Foreign Minister Maria Soledad Alvear discusses the country's push for free trade agreements and relations with the U.S.
Considered the most disciplined free-market economy in Latin America, Chile started opening to foreign competition in the early 1980s and today boasts an average 6% tariff on all imported goods. The country of just 15 million inhabitants has free trade agreements with the European Union, Canada, Mexico, and Korea, and special trade accords with most of Latin America.
When the North American Free Trade Agreement was approved back in 1993, Chile was promised it would be the next country to get a free trade deal with the U.S. Although President Bill Clinton was unable to win fast-track negotiating power, Chile went ahead with the talks anyway, two years ago. Then the Bush Administration won fast-track authority last August.
The two countries finalized negotiations late last year, around the same time a similar U.S.-Singapore trade deal was wrapped up. Yet Bush signed the Singapore agreement in early May in a White House ceremony and made Chile wait for a June 6 signing -- in Miami. Why? Officials in Washington said they were "disappointed" with Chile's failure to support the Iraqi war from its seat at the U.N. Security Council. Political analysts in Washington and Santiago believe the delay was aimed at making the Chileans aware of how deep that disappointment was.
On May 28, the day after the U.S. finally announced the June 6 signing date, Chilean Foreign Minister Maria Soledad Alvear talked with BusinessWeek's Latin America Correspondent Geri Smith about U.S.-Chile relations and the prospects for free trade. They met in the Foreign Relations palace in downtown Santiago. Alvear, 52, a lawyer, formerly served as Chile's Justice Minister and as the Minister for Women after Chile returned to democracy in 1990 after 17 years of military rule. Edited excerpts of their conversation follow:
Q: What is the significance of the Chile-U.S. free trade agreement for the Chilean economy?
A: I'm very happy about it. We've negotiated a free trade agreement that's very good for both countries. Chile has a clear export strategy aimed at developing the economy and in particular aimed at diversifying our exports. We couldn't do that without this agreement. It's a seal of quality for our country as a reliable place to make investments.
We have signed agreements with the U.S., the European Union, South Korea, Latin America, and soon we'll sign with the non-EU nations. This gives us a very interesting horizon.
Q: This is said to be a "third-generation" trade agreement because it covers intellectual property, electronic commerce, services, and government procurement. In that sense, it could be a template for other trade agreements around the world. But some Chileans say the government wanted the agreement so badly it caved in by not insisting on eliminating U.S. anti-dumping rules. Chile also agreed to loosen its restrictions on capital flows even though those restrictions have protected the country from financial volatility in recent years.
A: We were very conscious that we weren't going to manage to eliminate U.S. anti-dumping rules, which are being looked at in multilateral forums like the World Trade Organization. Nevertheless, we agreed to mechanisms for dispute resolution that are quite modern. And with regard to capital controls, we're satisfied with what was achieved.
Q: How would you describe U.S.-Chile relations now, after the Iraq flap?
A: They're good. I was in Washington less than a month ago and had the opportunity to meet with Secretary of State Colin Powell, with U.S. businesspeople, and with members of Congress. I perceived that while the U.S. didn't like the fact that Chile was opposed at that time [to the Iraq U.N. Security Council resolution], that they view the free trade agreement positively.
We have a very full agenda of economic issues. We have work to do together on issues of democracy and human rights. We're working together on the Free Trade Area of the Americas. We've worked together to help the Organization of American States find a solution for the [political] problems in Venezuela. We're working together in many arenas.
Q: How long will it take to rebuild relations with Washington?
A: I believe each side understands the other's position, that there was a specific difference [of opinion], with the best of intentions, at a certain point in time...and at this point we have to look toward the future. The Singapore agreement was finished first because Singapore didn't have an agriculture chapter, and they didn't require translation of the agreement into another language. So, if you look at it objectively, there was never a delay [in signing Chile's agreement].
Q: Some say the Chile-U.S. Free Trade Agreement is a template for the proposed Free Trade Area of the Americas, the 34-nation accord currently under discussion for the hemisphere.
A: This is a FTA negotiated between a small emerging-market country and the most developed economy of the world. If we're capable of reaching such an agreement, that improves the possibility of reaching a larger agreement among 34 countries with different levels of development around the region.
Some countries in the region believe that it's perilous for small developing countries to sign commercial agreements with industrial countries, but we are proof that it's not. The negotiation between Chile and the U.S. and the negotiations now under way between the U.S. and Central America will be very interesting and important for the Free Trade Area of the Americas.
Q: Chile already has agreements with all of Latin America except the Caribbean. Why is the Free Trade Area of the Americas important to you if you already have most of the region covered?
A: Because Chile is a small economy, and we have placed a big emphasis on exports. Having clear rules for all of the countries in the region will be an important stimulus. Chile's decision to open up to the world allowed us to double our gross domestic product in the 1990s -- something that had previously taken us 50 years to do. At the same time, we were able to halve the number of Chileans living in poverty.
We're very conscious of the fact that this process of market openings mean growth for countries. And if the countries carry out good social policies to lift people out of poverty, even better. That's why it's important that the region enjoy stable, solid democracies. Latin America has lived through very painful periods.
Today we have recovered our democracies, but the problem now is maintaining governability. Many of the problems we see in Latin America today are caused by painful poverty and pent-up demands from society. We believe there's a way out of this situation, and it's important to work together to increase the possibility of development and reduction of poverty.
Q: In just a few months, Chile will mark the 30th anniversary of the bloody military coup that ousted Socialist President Salvador Allende. The military ruled for 17 years, and Chile has been a functioning democracy only since 1990. You've been a Cabinet Minister in all three governments since then. How do you feel the country has changed?
A: If a person had been asleep all these years and woke up today, he would not recognize the country. Of course, the most important thing was the restoration of democracy, freedom, and respect for human rights.
Chile was an isolated country, and when it returned to democracy it had to reinsert itself in the world. Today, it's a key member of the most important political forums, including the U.N. Security Council. If you look at census figures, you'll find that 80% of the young people in college today had parents who didn't attend college. Among the poor, the number of households that own a washing machine has doubled [in these 13 years].
The role of women in public life has been remarkable. Chile has a woman serving as Defense Minister. When she and I go to Buenos Aires to meet with our Argentine [male] counterparts, they will see two women, and that reflects in many ways the changes Chile has gone through.
Q: As one of Chile's most prominent politicians, a leader of the Christian Democratic party, you're often mentioned as a probable front-runner for the next presidential elections to be held in 2006. Is it your goal to be President of Chile?
A: We are only halfway through the term of President Lagos. It's still too early to define [who the next candidate will be for the center-left coalition]. But if you ask me if a woman could be President of this country, I would say yes.
With so many threats in the world of terrorism, people are looking for leaders who work well in teams, who exercise power in a more inclusive way, by sharing more than imposing. That's often described as a feminine style of leadership, although it can be exercised either by a man or by a woman. In any event, I believe that men and women are equally able to exercise that responsibility. If [being nominated for the presidency] were to happen, I would definitely have to consider it.
Online Extra: Free Trade "Offers a Climate of Certainty"
Chile's chief trade negotiator Osvaldo Rosales talks about the many positive effects of finally getting a deal with the U.S.
Osvaldo Rosales, director of international economic relations at Chile's Foreign Relations Ministry, has spent the last two years hammering out a free trade agreement with the U.S. -- as well as accords with the European Union and South Korea. The U.S.-Chile deal, which is expected to be approved by both countries' congresses this fall, is described as a "third-generation" accord because it covers not only tariffs and quotas but also regulates fast-growing trade in electronic services, intellectual property, and government contract bidding.
Rosales met in his Santiago office with Geri Smith, BusinessWeek's Latin America correspondent, on May 27, and during their chat his office phone, cell phone, and computer instant messenger all started beeping: He learned that Washington had finally scheduled a signing of the Chile-U.S. free trade agreement on June 6 after the Bush Administration, "disappointed" over Chile's refusal to back the U.S.-led war in Iraq, had postponed it for several months. Following are edited excerpts from their interview:
Q: Why is the Chile-U.S. free trade agreement so important for Chile? After all, Chile over the years has diversified its trade so that it's almost evenly split among Europe, Asia, Latin America, and the U.S.
A: We've adopted a strategy of international participation. We've reached agreements with the European Union and with Korea, and it was a natural step to reach a free trade agreement with the largest market in the world. By reaching this agreement, we hope to have three kinds of benefits: commercial, investment, and a favorable impact on our macroeconomic regime.
Under the Generalized System of Preferences (GSP), many Chilean products [already] entered the U.S. with zero tariff, but GSP is a voluntary, unilateral mechanism that can be revoked. Under this new trade agreement, all of those products will have permanent zero tariffs. That permanence changes our investment panorama radically.
We expect to diversify our exports and think they'll grow 20% or more in just three years. That's a conservative estimate. One pleasant surprise we've had with our new free trade agreement with the European Union, which has just been in effect for around three months: Our noncopper exports to the EU already have grown 27%.
Q: Are you expecting a boom in foreign direct investment?
A: We believe the main impact of the free trade agreement will be on investment. When a country establishes a free trade agreement with the U.S., that has an immediate favorable repercussion on the country's [image] and makes it easier for major multinational companies to make decisions [to invest].
Q: Chile already had a very good reputation as a country with disciplined macroeconomic policies and a wide-open trade policy. The country unilaterally reduced its overall import tariffs over the years, recently dropping them to 6% across the board.
A: Yes, but this will reinforce that [reputation]. Let me give you one small example: About five months ago, a millionaire Greek investor came to Chile to look into some possible casino investments, and his comment was that he wanted to come to Chile to learn more about the country that had reached free trade agreements with the European Union and with the U.S. Chile had appeared on investors' agendas because of that. We'll be able to capture a larger flow of foreign direct investment.
Q: Chile already has a number of free trade agreements, starting with one signed with Mexico in 1992, followed by one with Canada, the European Union, even Korea. What does that mean for Chile?
A: It makes it interesting for foreign investors, because if they locate in Chile, they can have zero-tariff access to a large market potentially of 1.2 billion people [in Europe and the Americas]. We've even heard from some Brazilian investors who are exploring business opportunities here in textiles and leather and footwear because textiles from Chile won zero tariffs not only for the U.S. but for the European Union. This could help us in the short term with a strengthening of the Chilean industrial park.
As President [Ricardo] Lagos has said, in 10 years we want to transform Chile into a bridge of trade and investment between South America and [other regions such as] the Asian-Pacific.
Q: Chile has been rated investment-grade since the mid-1990s. That has helped it borrow internationally at decent rates.
A: Yes, but now we expect capital flows to be more stable. When an economy has trade agreements with the European Union and the U.S., this means the establishment of discipline in relations with investors, it offers dispute-resolution mechanisms. It offers a climate of certainty. And most important, economic policy cannot be changed simply because the government in power has changed. It offers an institutional anchor of sorts for economic policy. That's good news not only for international investors but for Chilean investors.
When we finished negotiating the pact at the end of 2002, the Chilean stock market rose and the currency strengthened in anticipation even though we knew it would be another year before the agreement would be translated and approved by both congresses.
Q: Some opponents of the Chile-U.S. agreement here say they're concerned that the "anchor" of certainty that the accord offers might act more like a straitjacket. For example, Chile doesn't charge royalties for mining companies. What if the country decides it needs to charge royalties, as many countries do, for nonrenewable resources? Will these agreements make it difficult for Chile to change policies that may affect foreign investors?
A: Strictly speaking, the free trade agreements don't limit the possibility [of changing that policy] because taxation policy isn't part of the agreement. Countries maintain the ability to change their taxes. The only requirement is that [any policy change] can't be discriminatory. The tax change would have to apply for everyone, not just for foreign investors but also for domestic investors.
And if any investor believes that his rights have been violated, there is room for disputes to be resolved. These agreements tie our hands, but in the good sense: The public sector keeps its ability to regulate different aspects of economic policy, including balance of payments, environmental issues, taxation, and so on.
Q: How important to Chile is the Free Trade Area of the Americas?
A: It's important for three reasons: We already have agreements with almost all of the FTAA countries, except the Caribbean. So in terms of market access, the FTAA won't mean that much. But it will allow us to negotiate issues such as services and investment. And we think Chile has developed competitive advantages in services and overseas investment [in the region].
Second, it will allow the region to have uniform rules on safeguards, customs, technical norms, and sanitary issues. One might have low tariffs, but there's always a temptation, if a country is having difficulty in one economic sector, to be "creative" with customs rules, permits, export licenses, or other bureaucratic procedures. The FTAA will change that.
Finally and most important, when the FTAA is operating the whole region will have an export mentality, a business mentality. It's not enough to just have low tariffs -- we must maintain policies that keep our commitment to free trade.
Q: So it requires a complete change in mentality?
A: It's more than lowering tariffs, it requires a complete mind shift. Our private sector in Chile already has an export vision...which involves not only selling a product but establishing alliances with investors from other countries, with Brazilians, Argentines, Colombians.
Q: Is Chile's business community prepared for the difficulties that may arise with this latest market opening?
A: Fortunately, our private sector was closely involved in the trade negotiations. It already has an open-markets mentality. So we knew when we made certain offers to the North Americans that we had the backing of the private sector because we had discussed it with them. If you don't do that, then you run the risk of a very intense internal debate [after the fact]. And that's not good.
What Next for the Road Map?
Palestinian Prime Minister Mahmoud Abbas is under pressure from all sides after the summit with President George W. Bush and Israeli Prime Minister Ariel Sharon in Aqaba, Jordan, on June 4. For the U.S.-backed "road map" for peace to move forward, Abbas must get the militant Islamic group Hamas to agree to a cease-fire. He must also reorganize Palestinian security forces that have been decimated by Israel in the 32-month intifada. A cease-fire would signal to Jerusalem and Washington that Abbas is serious about ending violence. But the Israelis want him to disarm the militants, and that will be tough.
Abbas also faces pressure from the Palestinian people, who expect him to deliver major concessions from Sharon. In Aqaba, the Israeli leader pledged to dismantle "unauthorized" settlement outposts. But Palestinians want Israel to withdraw from all Palestinian cities, end targeted killings, and freeze settlement activity. Abbas enjoys 3% support in polls, vs. 20% for longtime leader Yasser Arafat, whom the U.S. is trying to sideline. "Abbas will have an image problem until he [moves] the peace process forward," says Palestinian Labor Minister Ghassan Khatib.
There's no doubt many Palestinians are ready for change. The road map "is viewed by many as the first real opening for a renewal of the peace process," says Khalil Shikaki, director of the Palestinian Center for Policy & Survey Research. A recent poll by the center found that more than 70% of Palestinians now back a mutual end to conflict with the Israelis.
By Neal Sandler in Jerusalem
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