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

Edited by Rose Brady

    Before it's here, it's on the Bloomberg Terminal.