THE CHILE-U.S. FTA: WHAT A DIFFERENCE A YEAR MAKES Alex Foxley Embassy of Chile February 25 th, 2005

The Chile-U.S. FTA: What a Difference a Year Makes 1.Strong Performance in Year One 2.The Chile-US FTA: A Critical Piece for Economic Development 3.Challenges to Maximize FTA Benefits

STRONG PERFORMANCE IN YEAR ONE

CHILE’S EXPORTS TO AND IMPORTS FROM THE US Source: Aduanas de Chile (Rates of Growth)

US TRADE WITH CHILE Source: Central Bank of Chile

STAR PERFORMERS (rate of growth) US Exports uParts for heavy machinery 24% uHeavy machinery 13% uOil 420% uCars and trucks 36% uPlastics 70% Chile Exports uFruits 17% uWood products 55% uCopper 82% uSalmon 0.7% uWine 9%

Non-Trade Issues No evidence of a race to the bottom Labor and environmental legislation unchanged, but for efforts to improve creatively: How to broaden unemployment insurance Private/public partnerships – Tierra del Fuego FTA cooperation agreements in place Strengthen institutional capacity for enforcement and dispute resolutions Corporate Environmental Stewardship

The Chile-US FTA: A Critical Piece for Economic Development

Chile’s Trade Agreements Free Trade Agreements:  Canada 1997  Mexico 1999  Costa Rica 2002  El Salvador2002  European Union 2002  South Korea 2003  USA 2003  EFTA 2004 Economic Complementarity Agreements:  Mexico1991  Venezuela1993  Colombia1994  Ecuador1995  Mercosur 1996  Peru1998

Regional Distribution of Foreign Trade 2004 (%) Source : Central Bank of Chile North America Europe Latin America Asia Others

Chile : Merchandise Exports Source : Central Bank of Chile Billion dollars

Snapshot of the Chilean Economy GDP (2004e): US$ 88 billion GDP Growth (2004)5.9% Projected Growth (2005)5.5% - 6.0% Income per capita (PPP, 2005): US$ 10,981 (IMF) Unemployment rate (Dec. 2004):7.8% Exports of Goods (2004):US$ 32 billion Imports of Goods (2004):US $ 23 billion Fiscal Surplus (2004):2.2%

Source: Central Bank of Chile ( www.bcentral.cl GDP Growth in Chile (%) (e)

Chile: Consumer Price Index Source : National Institute of Statistics (Annual percentage change)

Source: Central Bank of Chile ( www.bcentral.cl Fiscal Balance (% of GDP)

Chile : Poverty and Indigence Source : Ministry of Planning (Percentage of total population)

Growth Competitiveness Index Source: World Economic Forum (1) (2) (9) (15) (22) (27) (48) (46) (91) (57) (29) (74)

Index of Economic Freedom Source: The Heritage Foundation (1) (11) (12) (16) (18) (39) (44) (63) (112) (114) (90)

Lack of Corruption Perception Index 2004 Source: Goettingen University and Transparency International (1) (5) (17) (20) (22) (24) (47) (59) (133) (90) (11) (108)

CHALLENGES TO MAXIMIZE FTA BENEFITS

QUOTA USAGE BY ITEM Fully used Avocados Artichokes Copper Partly used Diary Some textiles and some tires Hotel/Restaurant chinaware Not used Tobacco Beef Some textiles and some tires

VISA USAGE H1B1 VISA FOR PROFESSIONALS ONLY 44 OUT OF LACK OF KNOWLEDGE FROM POTENTIAL APPLICANTS? LACK OF INFORMATION OF INTERESTED APPLICANTS? LACK OF EMPLOYER INTEREST?

MEDIUM TERM CHALLENGES Export Diversification – innovation, stupid!  Reduce the economy’s vulnerability to commodity markets  More value added exports  Increase expenditure on research & development (currently at 0.6 % of GDP) Education Standards –from rote to thinking  Despite educational reform and increased spending, educational standards remain low. Bottleneck for economic development and to reduce social inequalities. Income Distribution – better jobs, better wages  Although poverty rate has been reduced significantly, income distribution remains unequal.  Not only ethical and political problem, but also a barrier to long-term growth.