If there's a textbook example of how free trade works, it's Santiago, Chile. Just 12 years ago, unemployment soared past 22% and soup kitchens spread across the city as surging imports put hundreds of Chil-
ean companies out mf business. But the government stuck to its market-opening strategy, convinced Chile would become more competitive. Today, hundreds of new office complexes, apartment buildings, and luxury hotels shape the skyline. At the gleaming new airport, foreign executives stream in every day to do business with one of Latin America's biggest economic success stories.
Something's missing, though. After years of dangling the carrot of membership in the North American Free Trade Agreement as a reward for Chile's painful restructuring, Washington is waffling. Chile's entry would anchor the southern tip of the free-trade bloc from Alaska to Tierra del Fuego envisioned by former President George Bush. It would also spur other countries to hasten their own reforms in order to get on the NAFTA bandwagon. The place to showcase a U.S. commitment to Chile would be the Summit of the Americas, the Dec. 9-11 meeting of President Clinton and 33 other hemispheric leaders in Miami.
But after the Democratic Party's whipping in recent elections, the Clinton Administration may not have the clout to deliver what Latin America most wants: free access to the giant NAFTA market. Even before the elections, eroding political support for free trade forced Clinton to drop his request for extension of crucial "fast track" negotiating authority. Now the crunch in Congress over ratification of the expanded General Agreement on Tariffs & Trade may leave legislators with little tolerance for further free-trade moves. Chilean Finance Minister Eduardo Aninat says he fears the summit may turn out to be merely a social gathering with "presidents drinking and talking."
So Latin America is preparing to go its own course, with or without Washington. Many Latin countries besides Chile have been getting their economic acts together, singly and jointly, for the first time in decades. Privatizations of state-run companies and services are attracting not only U.S. and European investors but fast-growing Latin American multinationals and deep-pocketed Chilean pension funds (table).
Moreover, Latin countries are banding together in "subregional" pacts such as Mercosur, which joins Brazil, Argentina, Uruguay, and Paraguay in a free-trade bloc with 200 million consumers and a combined gross domestic product of $550 billion. Everything from Chilean business software to frozen poultry packaged by Brazil's Sadia is crossing frontiers. In a region long divided by national rivalries and protectionist walls, "all of these economic links are evidence of the old disputes being quietly--or noisily--put to bed," says John Hannah, chief executive of Chile's giant Escondida copper mine.
Economic integration is happening, whether or not the U.S. and its NAFTA partners, Mexico and Canada, open their doors. Latin intraregional trade has more than tripled over the past decade, from $7 billion in 1983 to about $26 billion this year. Mercosur will abolish internal duties on most products on Jan. 1. At the same time, it will move beyond free trade to form a European-style customs union with a common external tariff averaging 14%, down from 35% in Brazil's case when the group was formed in 1991. Internal Mercosur trade will reach an estimated $12 billion this year.
HEDGING. Mercosur's dynamism has stirred interest among other Latin countries, including Chile, in forging links. It is even more attractive now that Brazil, Latin America's biggest economy, is damping down chronic inflation and revving up its industries. Chile, which just joined the Asia-Pacific Economic Cooperation group at its meeting in Indonesia, is hedging its NAFTA bet even more by negotiating associate membership in Mercosur. "We won't play all our cards on the [Miami] summit," Aninat says. "We're working on Mercosur with or without NAFTA." For Chile's manufacturers, with a small domestic consumer base of 14 million, Mercosur's market is now crucial: Last year, Mercosur took 41% of Chile's manufactured exports, compared with 31% that went to NAFTA countries.
If the U.S. fails to pull Chile into NAFTA, Mercosur seems likely to become the core of a larger trade group stretching across South America's vast Southern Cone. Bolivia, currently negotiating a $3 billion pipeline project to supply gas to So Paulo, seems certain to be drawn into Mercosur's orbit, although it is nominally part of the Andean Pact, a trade group that includes Venezuela, Colombia, Ecuador, and Peru. Faced with doubts about U.S. policy, "to look to the north is difficult," says Venezuelan Ambassador to Brazil Alfredo Toro Hardy. "We have to look south--it is the only option." Peruvian President Alberto Fujimori expects that the Andean Pact and Mercosur will eventually join together.
DIFFERENT MIX. All of which has big implications for U.S. companies, which have invested $24 billion in the Southern Cone, vs. $15 billion in Mexico. "Before we have a hemispheric trade agreement, we're going to see some of these trade blocs get together," says Rui da Costa, Hewlett-Packard Co.'s Miami-based managing director for Latin America.
To take advantage, HP is considering expanding its Brazilian subassembly plant, which employs 900, to meet Mercosur local-content requirements so that it can export to other bloc members. Eastman Kodak Co., whose Latin American operations are centered in Mexico and Brazil, also is taking advantage of changing trade rules to take a more regional approach to production. Under NAFTA, Kodak is changing the mix of film products it makes in Mexico, shifting some color production to Rochester, N.Y., and using Mexico as a base for global production of black-and-white and X-ray film. Similar changes could be in store for Brazil, which for years has been Kodak's regional photographic paper producer, as Mercosur blossoms.
In theory, subregional trade ties should serve as stepping-stones toward hemispheric free trade rather than closing anyone out. That's because blocs such as Mercosur and the Andean Pact have been lowering, not raising, their barriers to trade with the rest of the world. Except for Chile, in Washington's view, Latin American countries should eventually join NAFTA as groups, not individually. But the longer this is delayed, the less influence the U.S. will have in the regional integration process.
That's fine with many Brazilians. They see their country as a globally competitive exporter, with a $10 billion trade surplus this year, and as a major player on the world stage as well as in Latin America--not a mere appendage to NAFTA. Mercosur, led by Brazil, can strengthen Brazil's global role.
President-elect Fernando Henrique Cardoso, a former professor at universities in the U.S., Britain, and France, is the most cosmopolitan leader Brazil has ever had, and he isn't likely to abandon this deep-rooted Brazilian world view. What Brazil wants is "not annexation to NAFTA but convergence," says Roberto Abdenur, secretary-general of Brazil's Foreign Ministry. "With Bolivia and Chile, we will be in a stronger negotiating position with the U.S. or NAFTA."
What's driving the Latin Americans to look for broader horizons is that their own companies and financial institutions have outgrown their national borders. Long confined to their local markets by protectionism and political rivalries, they are now exporting capital and management knowhow as well as products throughout the region. In this integration drive, "our governments are far behind the private sector," says Guatemalan Economy Minister Eduardo Gonzlez Castillo.
"TOO SMALL." Chile, flush with domestic savings, is leading the pack. Its privatized pension funds are funneling $150 million into financial markets every month, and Chilean companies have tapped into this money pool to finance $1.7 billion worth of investment abroad in everything from Argentine electric utilities to Peruvian supermarkets--as well as private pension-management companies in Argentina, Peru, and Colombia. Last June, Coca-Cola Co. bottler Embotelladora Andina, looking for room to expand, plunked down $120 million for ailing Brazilian bottler Rio de Janeiro Refrescos. Jaime Lavados, director of ProChile, the government's export-promotion agency, compares Andina's purchase to Coke's move into China--"a very important sign of confidence."
A broader outward thrust has been launched by Chilean long-distance carrier Entel, which faces competition at home after 30 years as a monopoly. "The market's too small here. We had to expand," says Enrique Yunis, president of Entel Chile Internacional. Entel joined with Colombian conglomerate Santo Domingo in 1993 to set up a domestic satellite network in that country, and this year it bought an 80% stake in Americatel, a Miami-based carrier, for $20 million. It has also moved into Argentina and Mexico, and is eyeing privatizations in Paraguay, Bolivia, Panama, and Guatemala.
In some cases, foreign multinationals are spurring the Latin Americans to think more regionally. For Argentine footwear and textile manufacturer Alpargatas, the Mercosur market is the key to a pair of deals with U.S. sneaker maker Nike Inc. Alpargatas, which has had a license to make and market Nike products in Argentina since 1987, has recently expanded that arrangement in Argentina and Uruguay. A separate deal gives it a five-year exclusive license to distribute Nike products in Brazil--50% made in Argentina, others made in Brazil by subcontractors or imported from the Far East. "Because Mercosur is a single market, Nike wants to have a single relationship to deal with it," says Alpargatas Finance Director Alan R. Clutterbuck.
Latin America's biggest corporate push for cross-border integration is the growing network of auto parts and assembly plants, mostly foreign-owned, in Brazil and Argentina, which together will turn out 1.9 million vehicles this year. For several years, Autolatina, a Volkswagen-Ford joint venture, has been shuttling vehicles and parts between plants in both countries. General Motors Corp.'s Brazilian subsidiary built a $100 million plant in Argentina this year to make pickups, mainly for the Brazilian market. And Fiat, with a big Brazilian subsidiary, is negotiating to boost its 20% stake in Sevel, the Argentine Fiat assembler controlled by local entrepreneur Francisco Macri. Fiat do Brasil shipped $200 million worth of assembly kits and other products to Argentina last year. Now the aim is to combine the Brazilian and Argentine operations, designated by Fiat as a center for production of its new world car.
SURGING SUDS. Establishing cross-border manufacturing activities does raise levels of competition. That can be disruptive but also beneficial. When Brazilian brewer Brahma opened a plant in Chile last year, local competitor Cerveceras Unidas feared it might be swamped by the Brazilian colossus. But the resulting advertising war boosted overall beer consumption, and both companies enjoyed expanded sales.
While the U.S. dithers about freer trade, Latin America is accepting it as essential to spurring growth. And it is looking beyond its own region to Asia and Europe for the opportunities it seeks. Chile joined the Asia-Pacific grouping, but Mercosur planned to start talks on Nov. 24 with the European Union, its biggest customer, on an EU proposal for free trade between the two blocs. So Latin America's economic opening will continue. Except that the U.S., which once saw itself as the natural leader, may not be in the driver's seat.
Latin America: The Ties That Bind A sampling of cross-border investments INVESTOR/ BUSINESS TARGET COUNTRY AMOUNT COUNTRY MILLIONS DOMOS MEXICO Telephones Cuba $1,400 ENDESA, CHILGENER, Electric power Argentina 856 CHILECTRA CHILE and distribution CEMEX MEXICO Cement Venezuela 300 BANAMEX-ACCIVAL MEXICO Banks Argentina 190 USIMINAS, CVRD BRAZIL; Steel Argentina 152 ACEROS DEL PACIFICO CHILE EMBOTELLADORA Soft drinks Brazil 120 ANDINA CHILE PEREZ COMPANC ARGENTINA Oil production Venezuela 103 CMP CHILE with U.S. Partner Paper products Argentina, Uruguay 100 MEXPETROL MEXICO Refining Cuba 100 FEMSA MEXICO Soft drinks Argentina 100 10 PENSION-MANAGEMENT Pension funds Argentina, Peru, 91 FIRMS CHILE Colombia BRAHMA BRAZIL Beer & malt Venezuela, Argentina 90 DATA: BUSINESS WEEK