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.


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?


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.


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?


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.


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?


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?


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?


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?


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.

Patricia O'Connell

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