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“The Evolution of Chilean Trade Policy in the Americas: From Lone Ranger to Team Player”

Volume V, No. 2, Southwestern Journal of Law and Trade in the Americas, Fall 1998, pp. 251-271

I. Introduction

When the proposal to create a Free Trade Area of the Americas (FTAA) was made at the first Summit of the Americas in Miami in December of 1994, the prevailing view among most U.S. academics and government officials was that the FTAA would be constructed as a result of the steady expansion southwards of the North American Free Trade Agreement (NAFTA). The first country to join NAFTA under this so-called “hub and spoke” method for creating an FTAA would be Chile. The other countries in Latin America and the Caribbean would then follow and petition for accession, with admission based on their level of perceived preparedness (and the United States serving as ultimate gatekeeper). Under such a scheme, sub-regional integration projects such as the Andean Community, or MERCOSUR were expected to either wither away or fold into NAFTA. With the exception of Brazil, the expansionary NAFTA concept as a means of creating an FTAA was shared by many in Latin America itself. For example, Colombia and Venezuela even went as far as to negotiate a free trade agreement with Mexico (i.e., the Group of Three Accord) that, on the whole, was a carbon copy of the NAFTA, thereby hoping to facilitate eventual Colombian and Venezuelan entry into the NAFTA.

By 1997, the master plan of U.S. political strategists and pundits for establishing the FTAA lay in shambles. A combination of the Clinton Administration’s inability to secure fast track authority from Congress and the success of the MERCOSUR project meant that the idea of building an FTAA based on NAFTA expansion was no longer feasible. The handwriting was already on the wall when Chile, the country that was supposed to have been the first “spoke” to dock into the NAFTA “hub”, signed a free trade agreement with the MERCOSUR in June of 1996. A clause included in that agreement (i.e., Article 52) regarding “Most Favored Nation” treatment or, in the alternative, compensation payments, meant that Chile was no longer an independent player but would henceforth have to consider its obligations to the MERCOSUR as part of any NAFTA accession negotiations. The Chile-Canada free trade agreement signed later that year further complicated matters by including concessions and eliminating the use of antidumping duties in bilateral trade, which the United States had already gone on the record as opposing in the context of Chilean accession to the NAFTA. The final nail in the coffin for Chilean accession to the NAFTA (and hence the “hub and spoke” method for constructing the FTAA) came in June of 1997 when an antidumping and countervailing duty petition was filed in the United States affecting the importation of Chilean salmon. The petition rudely reminded the Chilean private sector that even as a full member of NAFTA, Chilean exports to the United States were still vulnerable to U.S. unfair trade remedies which are many times imposed for purely protectionist reasons. Not surprisingly, by the end of June of 1997, Chilean government officials appeared at a meeting of the MERCOSUR Presidents in Asuncion, Paraguay and announced Chile’s future intention to begin coordinating its FTAA negotiating position with that of the MERCOSUR bloc.

In the early 1990’s Chile was committed to a policy called “open regionalism” that created new markets for the country’s exports but allowed it to avoid getting itself entangled in compromising situations with its trade partners. In particular, “open regionalism” allowed Chile to sign bilateral or multilateral trade accords which would not interfere with the country’s ability to negotiate trade agreements with other nations or trade blocks, while also retaining its autonomy with respect to macroeconomic policymaking. This aloofness from getting involved in commercial alliances was particularly noticeable with respect to Chilean trade relations with the rest of Latin America. Chile, a founding member of the Andean Pact, abruptly pulled out of that integration program in 1976 and never reconsidered its decision, despite the revival of the Andean Pact in the early 1990’s. Invitations at the start of this decade to join the new MERCOSUR integration project were politely rebuffed. By the end of the decade, however, Chile was entering into new trade agreements that undermined its previous position of avoiding compromising trade relationships. The purpose of this article is to examine the different trade agreements that Chile has entered into within the Western Hemisphere during the past decade, thereby charting and explaining the development of Chile’s evolving trade policy in the Americas as it moved away from its initial stance as a lone ranger to that of a team player.

II. The Chile-MERCOSUR Free Trade Agreement

A. Overview of the Events that Led to the Signing of the Agreement

After approximately two years of negotiations and several premature pronouncements that an accord was imminent, Chile and the MERCOSUR finally signed an agreement in the remote Argentine province of San Luis on June 25, 1996. From the day the treaty setting the ground rules for the creation of MERCOSUR was signed in Asunción back in March of 1991, the four MERCOSUR countries had actively sought full Chilean participation in their economic integration project. For a long time Chile turned down those invitations, not wanting to jeopardize its chances of securing an even bigger prize in the Northern Hemisphere---i.e., NAFTA membership. Equally as important, the Chileans had no interest in closely tying their booming economy to those just beginning the long and painful process of economic restructuring that Chile had pioneered in the region a decade earlier.

What finally caused Chile to redirect its attention to its Southern Cone neighbors was a very practical development, and not merely the inability of the United States to deliver on its promise of Chilean accession to NAFTA. Since 1990, total bilateral Chilean trade with the MERCOSUR countries had mushroomed from U.S.$ 1.8 billion to almost U.S.$ 4.5 billion by 1995 (in 1997, the figure stood at just U.S.$ 5 billion). More importantly, nearly two-thirds of Chile’s exports to her Southern Cone neighbors consisted of value added manufactured products such as computer software and furniture. By contrast, Chilean exports to North America have always been heavily concentrated in agricultural and primary commodities that over the long term tend to produce ever diminishing rates of return. Playing a major part in Chile’s decision to close an agreement with MERCOSUR was also the fact that by 1995 almost 60% of Chile’s foreign direct investment, representing about U.S.$ 5 billion, was concentrated in the MERCOSUR countries (particularly Argentina). Chile, in fact, is now the third largest foreign direct investor in Argentina after the United States and Spain. Accordingly, the driving force pushing the Chilean government to sign a free trade agreement with the MERCOSUR was the economic concerns of the country’s private sector.

B. Sub-regional Free Trade Arrangement

The Chile-MERCOSUR Agreement came into effect on October 1, 1996 when the first in a series of gradual reductions in tariff barriers on goods traded between Chile and the MERCOSUR began. This gradual reduction will eventually culminate in complete free trade for the vast majority of goods by January 1, 2004. Goods included in Annex 1 to the agreement, which are part of the so-called historical patrimony of products that were accorded preferential tariff treatment in previous Latin American Integration Association (ALADI) agreements between Chile and the individual countries of the MERCOSUR, will achieve complete free trade treatment by 2004 at a more varied schedule than that which exists under the general timetable. Goods such as meat, poultry, chocolate, furs and cured hides, glass, laminated iron or steel products, and certain household appliances which are found in Annex 2 to the Chile-MERCOSUR agreement, will not receive complete free trade treatment until January 1, 2006. Goods found in Annex 3 to the Agreement, which consists mostly of textiles and shoes that do not currently enjoy preferential tariff treatment, will also be traded at zero percent tariffs by 2006. However, the gradual reductions in customs duties do not begin to take effect until January 1, 2000. For products such as beef, rice, certain fruits, cooking oils, wine, jeeps and special use vehicles, and wooden furniture that are found in Annex 6 to the Agreement, the tariff reduction program kicks in on January 1, 2006 and culminates at zero percent tariffs on January 1, 2011. Wheat and flour should reach 0 percent duties by January 1, 2014. Meanwhile sugar tariff reductions do not begin until January 1, 2007 and will reach 0 percent only on January 1, 2016.

In addition to the tariff reduction timetables outlined above, there are yet other rules that apply to the trade flows between Chile and specific MERCOSUR countries. For example, auto parts are currently traded between Chile and Paraguay under a pre-existing ALADI agreement that should be replaced with a new preferential tariff agreement before December 31, 1999. Finally, tariffs for goods exported from Chile may vary from the general rules, depending upon whether one of the MERCOSUR countries has included it in its list of items temporarily exempt from intra-MERCOSUR free trade until January 1, 2000 (in the case of Argentina and Brazil) or 2001 (in the case of Paraguay and Uruguay).

C. The Rule of Origin Requirements

The rules of origin that must be complied with for goods to be trade duty-free between Chile and MERCOSUR are more detailed than those found in traditional Latin American economic integration agreements or even the MERCOSUR agreement itself. The reason for this is that Chile is only an associate and not a full member of the MERCOSUR. Among other things, this means that Chile does not observe MERCOSUR’s Common External Tariff (CET) system but applies its own duties on all goods coming in from the outside world which, in most cases, tend to be considerably lower than those levied by the MERCOSUR. Accordingly, there is a strong incentive to insure that countries from outside the Southern Cone will not use Chile as a conduit for getting their foreign products into the MERCOSUR and thereby avoid paying the higher MERCOSUR CET.

Under the rule of origin requirements, goods which are native to or made wholly from products native to Chile or the MERCOSUR are entitled to intra-regional free trade treatment. So too are goods which, although they do not originate within Chile or the MERCOSUR, are sufficiently transformed within the region so as to achieve a new identity as reflected by a change of classification heading in the ALADI tariff nomenclature system (i.e. , NALDISA). Certain products such as vegetable oils, textiles, and kitchen appliances are required to not only undergo a change in tariff classification heading, but also comply with a 60% regional content requirement. Petrochemicals and chemical products must undergo a molecular transformation producing a substantial transformation and creating a new chemical identity. Goods which have only been packaged or assembled in Chile or the MERCOSUR are explicitly excluded from intra-regional free trade treatment, as are goods which have been transformed only as a result of a filtering or dilution process.

Goods which do not originate in Chile or the MERCOSUR and have not undergone a substantial transformation within the region so as to achieve a new identity under NALDISA, may still qualify for intra-regional free trade. However, no more than 40 percent of the final product’s Freight on Board (F.O.B.) price can reflect the Cost, Insurance and Freight (C.I.F.) value of non-regional inputs. It should be pointed out, however, that there are some products for which the regional content requirement is 50% or 55% until at least January 1, 1999. Furthermore, Chile specifically granted Paraguay a 50% regional content requirement on a series of consumer goods and textiles until December 31, 2003. Finally, certain specified products must contain inputs that are exclusive to the region in addition to satisfying any regional content requirements (e.g., the milk used to make butter, cheese, and ice cream must be wholly native to Chile or the MERCOSUR).

All goods traded between Chile and MERCOSUR must be accompanied by a Certificate of Origin completed under oath. The requirements for these certificates are very similar to those found in ALADI Resolution 78.

D. Integration of Physical Infrastructure

One of the major reasons the MERCOSUR countries were particularly interested in having Chile join the Southern Cone trade bloc, was to facilitate access to Chile’s ports and from there the markets of the Pacific Rim. This concern is reflected in Titles XII and XIV to the Chile-MERCOSUR Agreement which, inter alia, obligates the signatories to execute a protocol on physical integration in conjunction with the signing of the Agreement, with the goal of establishing a seamless bi-oceanic corridor from the Atlantic to the Pacific.

E. The Significance of Article 52

Article 52 to the Chile-MERCOSUR free trade agreement contains the procedure that either Chile or the MERCOSUR must follow if either extends any sort of tariff reduction or other favorable trade arrangement to a non-ALADI country. The signatory state entering into such an arrangement must contact the other parties to the agreement within fifteen days after doing so, and announce its predisposition to negotiate the extension of the same privileges and favors to them. If the country cannot offer the same privileges and favors within a 90 day period, then the parties have another 90 days to negotiate some type of compensatory measures. If no agreement can be reached at the end of the total 180 day period, then the matter must be referred for arbitration under the Agreement’s dispute resolution mechanism (which, in turn, is found in Annex 14 to the Chile-MERCOSUR Agreement). Article 52 was specifically included in the Chile-MERCOSUR agreement in order to resolve the procedural void that was created when Mexico joined the NAFTA in 1993, and did not extend to the ALADI countries the same tariff concessions it had granted Canada and the United States (as Mexico was obligated to do by Article 44 of the Treaty of Montevideo that created ALADI).

The practical effect of the inclusion of Article 52 in the Chile-MERCOSUR free trade agreement means that Chile is no longer the independent player it was when NAFTA accession was first promised to it in 1994, but must now answer to MERCOSUR for anything it might possibly concede to the NAFTA countries. In 1997 the MERCOSUR countries invoked Article 52 and demanded that Chile grant them the same more favorable tariff concessions on agricultural products it had just given Canada under a bilateral free trade agreement Chile signed with that country at the end of 1996.

In December of 1997 the Common Market Council (MERCOSUR’s highest institutional body) approved Decision 12/97 which permits Chile to participate as an observer in the various MERCOSUR institutional bodies, including the working groups of the Common Market Group (MERCOSUR’s second most important institutional body) when they discuss matters affecting Chilean-MERCOSUR relations. It is important to emphasize, however, that Chile has no voting privileges within any of these institutional bodies. Chile’s current lack of power to shape the MERCOSUR agenda and play an active participatory role in it will undoubtedly affect its trade relations with the MERCOSUR, and is one very important factor that argues in favor of eventual full Chilean membership in the MERCOSUR.

III. The Canada-Chile Free Trade Agreement

On November 5, 1996, Canada and Chile signed a free trade agreement (Canada-Chile F.T.A.) that came into effect in June of 1997. The agreement immediately lifted duties on about 90% of Chilean goods traditionally exported to Canada, and approximately 75% of Canadian items traditionally exported to Chile. A gradually decreasing preferential tariff rate will affect all remaining goods and will culminate in 0% duties by 2003. The big exceptions consist mostly of agricultural goods (e.g., rice, vegetable oil, sugar, non-durum wheat and flour) on which the Chileans have imposed even longer phase-out periods of 10 (i.e. pork, corn, sugar beet, etc.), 15 (i.e., beef), 16 (i.e., sugar), or 18 years (i.e., non-durum wheat and flour). Dairy products and poultry are also subject to quota restrictions in both countries, and Canada has put permanent restrictions on the importation of Chilean tree trunks while Chile has done the same for Canadian used cars.

The Canada-Chile F.T.A. is very similar to the NAFTA, opening up, inter alia, the services sector to providers from each country. The agreement also eliminates nationality (except in the legal profession), minimal levels of production, and physical location requirements within the territory where the service is being offered. Excluded from coverage are services offered by governmental agencies, air transport, and financial services. The F.T.A. also requires the Chileans to offer Canadian business travelers a special business visa (instead of the standard tourist visa which, technically, prohibits the holder from carrying on any type of remunerative activities while in the country) , and eliminates additional requirements for obtaining employment authorization prior to conducting business activities within Chile. A social security agreement was signed in conjunction with the F.T.A. which allows Canadians living in Chile to be covered under the Canadian social security system, and not have to pay into a Chilean private sector social security fund or AFP. Further, it ensures that Chileans living in Canada have access to their social security proceeds. Both governments have also made a commitment to sign an agreement preventing double taxation “within a reasonable time after this agreement [i.e., the F.T.A.] comes into force.”

Despite the inclusion of language in the Canada-Chile F.T.A. stating that “[t]he Parties shall work toward the early accession of Chile to the NAFTA” and press reports which accompanied the F.T.A.’s signing, the new Canadian-Chilean trade accord does not facilitate but rather creates further stumbling blocks for Chilean accession to the NAFTA. Under the F.T.A., Chile preserved its capital retention program whereby foreign investment capital entering the country cannot be sent abroad for a period of up to one year. In addition, the Chileans also managed to retain a requirement whereby the equivalent of 30% (since reduced to 10%) of the capital of a foreign loan or a so-called “non productive” (i.e., portfolio) investment must be deposited in a non-interest bearing account held by the Chilean Central Bank for a period not to exceed two years. The United States government has complained that these requirements create significant foreign investment barriers and would not be tolerated if Chile were to accede to the NAFTA. Chile was also able to keep its price band mechanism for key agricultural products which the United States has attacked in the past as a protectionist measure which puts certain U.S. exports at a serious competitive disadvantage.

The rule of origin requirements in the Canada-Chile F.T.A. includes a very liberal 35% regional content requirement (in the event the transaction value method is used) or 25% (when the net cost method is used) for a wide range of manufactured goods that can be traded duty-free between both countries. By contrast, the comparable minimal regional content requirements in the NAFTA are either 60% or 50%, respectively, if not higher. Unlike NAFTA, the Canada-Chile Free Trade Agreement makes no provisions for liberalizing cross-border investments in the financial services sector and has no chapter on intellectual property rights. In sharp contrast to the NAFTA, the Canada-Chile agreement also prohibits each country from applying its domestic anti-dumping law to goods of the other as of the date the tariff on a product is completely eliminated or by January 1, 2003 (whichever comes first). Elimination of the right to impose anti-dumping duties was something the Canadians (as well as the Mexicans) wanted eliminated within the NAFTA but were unsuccessful in securing in the face of vehement opposition by the United States.

IV. Chile’s Free Trade Agreements Under The Latin American Integration Association (ALADI) Umbrella

A. The Chile-Mexico Free Trade Agreement

The original Chile-MERCOSUR Free Trade Agreement, or ALADI Acuerdo de Complementación (“A.C.E.”) No. 17, was signed in 1991 By January 1, 1998, all duties and non-tariff barriers were eliminated on approximately 80% of the goods originating within and traded between Chile and Mexico. The more significant items excluded from bilateral free trade under A.C.E. No. 17 were Chilean seafood, tobacco and certain petroleum products, as well as Mexican petroleum and derivatives.

ALADI’s rule of origin requirements outlined in Resolution 78 apply to A.C.E. No. 17 (although more liberal regional content requirements than those found in the ALADI scheme exist in the case of automobiles). In general, in order for any good to take advantage of an ALADI preferential tariff arrangement, the product must either originate or be made with inputs that originate within the territory of the signatory states. Goods which have foreign inputs will also be accorded preferential tariff treatment if they are sufficiently transformed within the territory of a member state so as to achieve a new tariff classification heading under ALADI’s harmonized tariff schedule (i.e., NALADI). Even if a new tariff heading classification can not be achieved, the good will still receive preferential tariff treatment if no more than 50% of the F.O.B. (i.e., Freight on Board) price of the final product reflects the total C.I.F. (i.e., Cost, Insurance, Freight) value of the foreign inputs.

Safeguard measures in A.C.E. No. 17 are, in general, similar to those permitted under the general ALADI regulation and can only be used to redress balance of payment problems, or when a domestic product suffers significant harm as a result of the continued importation of a similar or like product that directly competes with the domestic good. Safeguard measures, consisting of either tariff increases or quota restrictions, can normally be imposed for no more than one year.

In April of 1998, the Chilean and Mexican governments signed a new, and more expansive free trade agreement during the II Summit of the Americas. The new Chile-Mexico Free Trade Agreement (hereinafter “T.L.C. Chile-Mexico”) is very similar to the NAFTA, with the text divided into some 20 Chapters. In contrast to NAFTA there are no chapters covering financial services and government procurement. However, both countries made explicit commitments to begin negotiating the addition of a new chapter on financial services no later than June 30, 1999, as well as one on government procurement no later than the first anniversary of the agreement’s effective date. Both governments have also committed themselves to negotiating the elimination of antidumping duties on bilateral imports within a year after the T.L.C. Chile-Mexico comes into effect.

Once it becomes effective, the T.L.C. Chile-Mexico will supersede A.C.E. No 17 in the event of any discrepancies between the two treaties and the T.L.C. will be incorporated into the ALADI framework with a new A.C.E. number. Any products not already subject to bilateral free trade as of the date the agreement enters into force, will be accorded immediate duty-free treatment. The exceptions to this general rule are few and include apples (which are subject to quotas and gradually decreasing tariffs until 2006), certain Mexican seafood, grapes, vegetable-based oils, petroleum, and natural gas, as well as Chilean powdered milk, cheese, and flour. The importation of used vehicles is restricted by both countries, and Mexico can also restrict the importation of used machinery and computer equipment from Chile until 2004.

The rule of origin requirements in the T.L.C. Chile-Mexico contain the same level of complexity as found in the NAFTA, and incorporate the concepts of transaction value and net cost methodologies in determining the regional content requirement of goods, as well as de minimis exceptions. Once the T.L.C. comes into effect, all goods traded between Chile and Mexico must henceforth be accompanied by the new declaration and certificate of origin and not the old ALADI forms. During the transition period (and beyond, if both parties agree otherwise), safeguard measures can be imposed that may include the suspension of any tariff reduction schedule as well as increases in duties to the levels in effect before the agreement’s entry into force. Chapters 7 and 8 cover the rules for establishing and enforcing phytosanitary and technical norms.

Chapter 9 of the T.L.C. Chile-Mexico covers the rules regarding investment by the nationals of one country in the territory of the other, including issues related to expropriation and the resolution of disputes that may arise between a private sector investor and the government. As was true in the Canada-Chile F.T.A., the Chileans were able to maintain requirements that Mexican investors must keep their initial investment capital in Chile for at least one year, as well as the 30% encaje (since lowered to 10% on foreign loan proceeds for a period not to exceed two years). Chapter 10 contains the specific rules for the offering of services by the nationals of one country in the territory of the other. Among the restrictions retained, is one that requires that only Chilean lawyers can perform legal services in Chile, and another that the owners and directors of a Chilean-based newspaper, magazine, or newsletter must be Chilean nationals actually domiciled in the country. For their part, the Mexicans maintain restrictions by non-Mexicans on the ownership of agricultural land and property within 100 kilometers of a border or 50 kilometers in from the sea, as well as ownership of television and radio broadcasting firms. In addition, various activities are reserved for the state in both countries (e.g., offering postal services) and the Mexican state also retains the exclusive right to exploit, transport, store, distribute, and sell crude oil, artificial gas, and basic petrochemicals, generate, distribute and sell electricity; and print money.

Chapter 11 of the T.L.C. Chile-Mexico codifies within the body of the treaty itself the Convention on Air Transport that both countries signed on January 14, 1997. Any disputes that may arise between both governments is to be handled (with some minor modifications) by the dispute resolution mechanism that is outlined in Chapter 18 of the T.L.C.

Chapter 12 of the T.L.C. Chile-Mexico contains the rules opening up access of the public telecommunication networks and services, the offering of value added services (such as cable or Internet access), and the harmonization of technical norms in the telecommunications sector. Chapter 13 governs the temporary entry of businessmen of one country into the territory of the other, while Chapter 14 covers the rules that state entities and monopolies should follow so as not to impose unfair restraints on trade.

Chapter 15 of the T.L.C. Chile-Mexico contains the minimal obligations of each of the signatories with respect to an adequate and effective protection of intellectual property rights, which the parties are free to make stricter. Among the specific requirements is that each state treat computer programs as literary works protected under their respective copyright laws, that infringement of program carrying satellite signals be punished with civil penalties, and that Chile revamp its trademark law within five years after the agreement’s entry into force.

In Chapter 16 of the T.L.C. Chile-Mexico, the two countries obligate themselves to establish an information center and undertake various initiatives to make the contents of the agreement well known to their respective nationals. Chapter 17 creates various institutions and subcommittees to oversee the proper implementation of the state rules and objectives of the T.LC. Chile-Mexico. Chapter 19 contains specific reservations each government has retained, including the right to restrict the future transfers of capital abroad in the event of a serious balance of payment crisis and following notification to the International Monetary Fund (I.M.F.). Chapter 20 lists final dispositions including a commitment by both governments to insure that their respective legislatures ratify the T.L.C. before October 1, 1998.

B. The Chile-Venezuela Free Trade Agreement

The Chile-Venezuela Free Trade Agreement, also known as ALADI A.C.E. No. 21, came into effect on January 1, l997 for the majority of products traded between the two signatory countries. A slower tariff reduction schedule exists for some 300 tariff classification headings which will not result in 0% duties until January 1, l999. Among the significant products which require special permission from the Venezuelan authorities before they can even enter the country are Chilean lactate products, wheat, vegetable-based oils, sugar, tobacco, petroleum, and certain types of wood.

In general, the ALADI rule of origin requirements (the automotive sector being a noticeable exception) and ALADI safeguard measures apply to the Chile-Venezuela free trade agreement. The bilateral accord also includes an interesting provision for the free movement of labor, particularly in the services sector, between Chile and Venezuela. This provision, however, has yet to be implemented.

C. The Chile-Colombia Free Trade Agreement

The Chile-Colombia Free Trade Agreement, also known as ALADI A.C.E. No. 24, resulted in bilateral duty-free trade on most goods traded between Chile and Colombia effective January 1, 1997. A limited number of goods were still subject to duties (albeit at gradually increasing preferential tariff rates) until January 1, 1999. Completely excluded from bilateral free trade treatment, however, are Chilean copper, dairy products, turkeys, wheat and flour. For their part, the Chileans have permanently barred certain types of Colombian textiles, rice, sugar, and tobacco products from entering their country.

For the most part, the safeguard measures that are applicable to the Chile-Colombia Free Trade Agreement are those found in ALADI Resolution No. 70. The same is true of the rules of origin, although the automotive sector has its own special requirements that digress significantly from ALADI Resolution No. 78.

In their bilateral accord, the Colombian and Chilean governments also committed themselves to adopting an “open seas” and “open skies” transport policy that will benefit companies from both countries, and the two countries agreed to coordinate their macroeconomic policies. A convention on cooperation and coordination in matters affecting agroindustrial sanitary codes designed to prevent sanitary and phytosanitary rules from being used to create new, artificial barriers to free trade was included as an Annex to A.C.E. No. 24.

D. The Chile-Ecuador Free Trade Agreement

Since January 1, 1998, most goods originating in Chile and Ecuador are traded free of all duties and non-tariff barriers as a result of ALADI A.C.E. No. 32. A reduced group of products that include soluble coffee, certain chemicals, and shoes, will not receive complete free trade treatment until January 1, 2000. In the meantime, they are subject to gradually increasing preferential tariff rates. In addition, 238 items contained in the ALADI nomenclature are currently excluded from bilateral free trade, including certain types of meat, most poultry, dairy products, corn, rice, seeds, natural oils and petroleum products.

ALADI’s general rule of origin requirements found in Resolution 78 applies to the Chile-Ecuador agreement (with the automotive sector being a significant exception). Equally applicable to the Chile-Ecuador agreement are ALADI’s safeguard measures found in Resolution No. 70.

The Chile-Ecuador agreement commits both countries to establishing rules regulating access to government procurement opportunities. Both countries are also committed to signing a “Convention on Cooperation and Coordination in Matters Related to Agroindustrial Health.” In addition, the two countries agreed to adopt an “open skies” and an “open seas” policy for carriers from each country. This means, among other things, that Chilean shipping lines have been granted the same rights of exclusivity to transport Ecuadorian petroleum that the country has granted to its domestic companies or to other countries in the Andean Community. Chile and Ecuador also agreed to increase cooperation in the scientific and technology fields, expanding on the “Basic Convention on Scientific and Technological Cooperation” which both countries signed in 1993.

E. The Chile-Peru Free Trade Agreement

On June 22, 1998 Chile and Peru, after many years of arduous negotiations, finally signed a free trade agreement which was scheduled to come into effect on July 1, 1998 and be incorporated into the ALADI framework. The agreement establishes five different tariff reduction schedules (i.e., immediate 0% duties upon entry into force of the agreement, five, 10, 15, or 18 years) that are differentiated by the type of product and cover almost the entire universe of goods traded between the two countries. The sensitive textile industry has its own special tariff reduction schedule that will be phased in over the next three to eight years to culminate in 0% duties for all items by 2006. In the agreement, Chile specifically managed to retain the right to maintain a price band mechanism on a select group of basic agricultural commodities, while Peru retained its special surcharge system for similar products.

The ALADI rules of origin (including its comparatively liberal 50% regional content requirement) apply to the Chile-Peru agreement. Special rules of origin which are usually stricter also exist for textiles, copper products, pharmaceuticals, agrochemicals, and fruit juices. Goods made or assembled in “walled off” free trade zones such as Iquique in Chile and Tacna in Peru are specifically excluded from the bilateral free trade program. Safeguard measures consisting of the temporary suspension of a tariff reduction schedule or outright duty increase can be imposed to counteract sudden increases in the importation of goods which cause or threaten to cause grave danger to a national producer of the same or like product. A dispute resolution mechanism is created which, as a final step, can result in binding arbitration.

Within a year after the agreement enters into force, both Chile and Peru commit themselves to starting negotiations to mutually liberalize access to their respective markets for service providers from the other country as well to government procurement contracts.

V. Chile’s Emerging Negotiating Strategy In The Context Of The Free Trade Area Of The Americas (FTAA) Project

In a meeting of the Presidents of the four MERCOSUR countries plus associate members Chile and Bolivia held in Asuncion, Paraguay on June 19, 1997, Chilean President Eduardo Frei announced that Chile would henceforth coordinate its FTAA negotiating position with the MERCOSUR countries. In particular, President Frei noted that Chile and the MERCOSUR were in agreement on four fundamental issues (i.e., facilitating market access into the United States for Latin American agricultural products, textiles, and manufactured goods; negotiating on the principle that nothing is agreed to until everything is agreed; no pre-agreements on substantive issues before the conclusion of the FTAA negotiations; and, conclusion of the FTAA negotiations no later than 2005). President Frei explicitly identified foreign investment guarantees, liberalizing the financial services market, and intellectual property protection as examples of U.S. priorities that were not necessarily those of the Southern Cone countries. Frei further proposed that Chile and MERCOSUR hold joint talks with the European Union in terms of negotiating a possible free trade agreement with the Europeans. These statements indicate a marked shift in Chilean trade policy priorities in the Americas away from NAFTA infatuation to one that some commentators have even labeled as “distinctively hostile” to the NAFTA.

No doubt part of the explanation for Chile’s souring on NAFTA can be attributed to two major trade related disputes that appeared at around the same time in the middle of 1997. In early June of 1997, a U.S. District court sitting in California issued an order which had the effect of, inter alia, preventing the continued importation of certain types of Chilean lumber into the United States based on alleged phytosanitary concerns. This was followed by an anti-dumping and countervailing duty petition filed on June 12, 1997 before the U.S. Commerce Department’s Import Trade Administration Office and the U.S. International Trade Commission by a group of U.S. salmon producers against imports of fresh Atlantic salmon from Chile. The latter action, in particular, helped to underscore the fact that even as a NAFTA member, Chilean imports would still be subject to the vagaries of U.S. unfair trade practice laws.

Chile’s decision to deepen its ties with its Latin neighbors and Canada---even at the risk of complicating NAFTA accession---can not, however, be attributed solely to the United States not being able to make good on its promise of bringing Chile into the tripartite North American trade pact or even recent antidumping cases. As Chilean Foreign Trade Minister Juan Gabriel Valdes noted in a speech given at a number of U.S. institutions throughout 1997, “true integration usually happens between neighboring countries” thereby explaining why Chile, along with political, strategic, and cultural considerations, had decided to privilege its relationship with MERCOSUR over NAFTA. The dramatic increases in Chilean trade with its Latin American neighbors since the start of the 1990’s certainly underscore the importance of nearby, regional markets as destinations for both Chilean exports and investment. Figures obtained from ALADI headquarters in Montevideo show that in 1996, for example, Chile’s trade with Latin America increased at double the rate than its trade with the rest of the world. Furthermore, between 1990 and 1996, some 60% of Chilean foreign direct investment was concentrated in neighboring Argentina and Peru alone.

Chile’s current strategy in the FTAA process is to cooperate with other Latin American countries in taking advantage of the present void in U.S. leadership and ensure that Latin American interests dominate the agenda. In particular, the Chilean government believes that a special effort should be made by the Latin American countries to place issues such as subsidies and anti-dumping mechanisms on the FTAA negotiating agenda. For example, at a September 30-October 2, 1997 meeting of the FTAA working group on subsidies, antidumping and countervailing duties, the Chileans tried to include as part of the formal negotiating agenda for the FTAA the “feasibility of eliminating the use of antidumping measures within the Hemisphere once free trade has been achieved.” The proposed language was eventually axed when it could not garner the support of the MERCOSUR countries or even Canada (which had recently negotiated a free trade agreement with Chile in which the ability to use antidumping duties are gradually being phased out on bilateral trade). Despite this temporary setback, eliminating or sharply curtailing the use of unfair trade practice remedies on the part of the United States is bound to resurface at a later date since the two largest MERCOSUR countries continuously complain about the anti-dumping as well as countervailing duties that the U.S. imposes on a wide range of their exports, including frozen orange juice concentrate from Brazil, as well as Argentine and Brazilian steel.

Despite President Frei’s pledge to increase Chile’s coordination of negotiating efforts with MERCOSUR in the FTAA context, it is unlikely that Chile’s negotiating stance will always be identical to that of the MERCOSUR or, or for that matter, any other bloc within Latin America. Instead, Chile will make alignments on specific issues wherein there are shared interests. One such area where there is already a Chilean understanding with the MERCOSUR is on the need to ensure that there be simultaneous negotiations on all issues and that there not be early agreements in specific sectors (i.e., the so-called “early harvest” idea pushed by the United States) prior to the close of the FTAA negotiating process in 2005. Otherwise, there is a fear that by negotiating early on subjects that are of particular interest to the United States, this would eliminate the margin for trade offs between the U.S. and the Latin American countries on things that are of particular interest to the latter. Given how unreliable the United States has proven to be on the hemispheric trade front in the past, there is nothing to guarantee that the United States would not walk away from the FTAA negotiations once it secured whatever it wanted, thereby leaving the Latin Americans in the lurch with little to show for their concessions.

V. Conclusion

At the start of the 1990’s, Chile followed a fiercely independent foreign trade policy in the Western Hemisphere in which the country only signed trade agreements that would not hamstring Chile’s sovereignty in setting macroeconomic policy (including external tariff rates) or impede in its ability to enter into future trade accords with other nations or economic blocs. By 1996, this policy began to change as it dawned on the Chilean government and the country’s private sector that Chilean exports risked being shut out of increasingly lucrative regional markets in the own continent. In addition, the impending negotiations to create a Free Trade Area of the Americas (FTAA) by 2005 highlighted the fact that the country had more to gain in the process by aligning its negotiating position with like-minded neighboring countries rather than “going it alone”. While none of the free trade agreements that Chile has signed with MERCOSUR, Canada, Mexico, and Peru since 1996 restrict Chile’s ability to enter into trade agreements with other countries or trading blocks (including the now remote possibility of NAFTA accession), the obligations incurred under some of these agreements certainly impinge on Chile’s former independence in this area. As time goes on, Chile may even find itself in a situation where it makes more economic and political sense for it to become a full-fledged member of the MERCOSUR rather than retain its current “associate membership,” a status under which Chile is saddled with legal obligations that it has no voice in formulating or in approving.

The author Thomas Adrew O”Keefe, President of Mercosur Consulting Group, Ltd. is the head of a legal and economic consulting firm based in Washington, D.C. which advises U.S. companies interested in investing or exporting to South America. Mr. O’Keefe is a dual national of the United States and Chile.

See, e.g., John Maggs, Congress Frowns on Clinton Plan to Expand NAFTA, J. COM., Apr. 5, 1995, at 1A; North American Free Trade Agreement, Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 289 (1993).
See Steven Greenhouse, U.S. Plans Expanded Trade Zone, N.Y. TIMES, Feb. 4, 1994, at D1.
See Kevin Hall, After an ‘Orgy of Semantics,’ Summit Closes Without Free Trade Commitment, J. COM., March 21, 1996, at 2A; Diana Jean Schemo, As Washington’s Attention Wanders, Brazil Plays a Quiet Catch-up Game, N.Y. TIMES, Oct. 14, 1997, at A6.
See Gilles Castonguay, Colombia May Ape Chile in Pursuing NAFTA Entry, J. COM., May 24, 1994, A3. The full text in Spanish of the Group of 3 Accord can be accessed through the Internet at: http://www.sice.oas.org
See President Eduardo Frei Ruiz-Tagle Addresses the New York Business Community, CHILE ECON. REP. 2 (Fall 1995). For a more complete analysis of Chilean trade policy during the early 1990’s, see, R. Labán & P. Meller, Trade Strategy Alternatives for a Small Country: The Chilean Case, in WESTERN HEMISPHERE ECONOMIC INTEGRATION 110-135 (E. Lipsey et al eds 1997); and Neantro Saavedra-Rivano, Chile and Regional Integration, in COOPERATION OR RIVALRY? 97-111 (Shoji Nishijima et al. eds., 1996).
Agreement on Andean Sub-regional Integration (Cartagena Agreement), May 26, 1969, in T.A. O’KEEFE, LATIN AMERICAN TRADE AGREEMENTS, app. 11 (1997). The Andean Pact, which formally changed its name to the Andean Community in 1997, is made up of Bolivia, Colombia, Ecuador, Peru, and Venezuela.
See, e.g., Shirley Christian, Chile Cool to Argentina’s Plan on Economic Ties, N.Y. TIMES, Sept. 4, 1990, at D3; Ricardo Lara, Ser or No Ser Parte del Mercosur?, EL MERCURIO, Aug. 20, 1994, at D5.
See Acuerdo de Complementación Económica No. 35 Entre la República de Chile y el MERCOSUR (June 25, 1996). Available in Spanish at:SICE.OAS.org
The Treaty of Asuncion (ALADI A.C.E. No. 18) Establishing A Common Market between the Argentine Republic, the Federal Republic of Brazil, the Republic of Paraguay, and the Eastern Republic of Uruguay, Mar. 26, 1991, in T.A. O’KEEFE, LATIN AMERICAN TRADE AGREEMENTS, app. 5 (1997).
See Labán & Meller, supra note 6, at 127. In relation to Latin America, Chile’s comparative advantage, in addition to natural resources, seems to be in processed natural resources and in some specific industrial products (i.e., basic metals, chemicals, textiles). See id. at 117.
Chile’s comparative advantage with respect to developed countries is in natural resources. The recently observed increase of Chilean industrial exports to these markets would seem to be solely related to the expansion of processed natural resources.
As of 1997, Chilean companies had just over U.S.$ 11 billion invested in Argentina, U.S.$ 2.6 billion invested in Brazil, U.S.$ 93 million invested in Uruguay, and U.S.$ 51 million invested in Paraguay). See, Augusto Bermudéz, Mercosur-Chile: Una Nueva Realidad, 3 FLASH MERCOSUR-MERCOSUL 14 (May 1998).
See Ofensiva Privada Para Acelerar La Asociación Chile-Mercosur, EL MERCURIO, April 1, 1995, at D1.
See Treaty of Montevideo Establishing the Latin American Integration Association, Aug. 12, 1980, in T.A. O’KEEFE, LATIN AMERICAN TRADE AGREEMENTS, app. 2 (1997) [hereinafter ALADI]. All the Spanish-speaking countries of South America plus Brazil and Mexico are members of ALADI.
See Anexo 13, supra note 8.
By June of 1998, Chile and the MERCOSUR had reached a compensation arrangement on some 174 tariff items for which the Canadians enjoyed duty preferences in the Chilean market over the MERCOSUR countries as a result Canada-Chile agreement. See Acuerdo Entre Chile y El Bloque, GAZETA MERCANTIL LATINOAMERICANO, June 22, 1998, at 4N.
See Canada-Chile Free Trade Agreement, November 18, 1996, U.S.-Chile, 36 I.L.M. 1079 [hereinafter Canada-Chile F.T.A.]. The Canada-Chile Free Trade Agreement may be viewed in English through the Internet at http://cbsc.org/ontario/bis/2545.htm. (visited October 15, 1998). See also, Principales Aspectos del Tratado de Libre Comercio Chile-Canada, COMERCIO 5 (1996).
See Canada-Chile F.T.A., Annex C-02.2, supra note 17, at 1089.
See Canada-Chile F.T.A., ch. H, supra note 17, at 1126.
See Canada-Chile F.T.A., ch. H, art. H-01(2), supra note 17, at 1127.
See Canada-Chile F.T.A., ch. K, art. K-03(1), supra note 17, at 1136.
See id. at 1137.
See Government of Canada, News Release No. 211, at 2, Nov. 18, 1998.
Annex O-03.1(1) of the Canada-Chile F.T.A., supra note 17.
Article P-04 of the Canada-Chile F.T.A., supra note 17. See also, Article M-05(b) & (d).
See, Paula L. Green, Chile and Canada Sign Trade Treaty, J. COM., Nov. 19, 1996, at 5A. The initial media euphoria may have been based on the fact that the Canadian-Chilean free trade agreement does include NAFTA-style side agreements on labor and the environment, two issues which are often blamed for the current impasse between Congress and the Executive Branch with respect to fast track authority. Under the two side agreements, any country that has a less stringent labor or environmental code cannot use this as an unfair advantage to attract investment fro the other. Failure to adequately enforce one’s environmental or labor laws can ultimately lead to dispute settlement mechanisms and the imposition of a U.S.$ 10 million fine.
See Annex G-09.1(1)(a) of the Canada-Chile F.T.A., supra note 17. If the investment was made pursuant to Law 18.657 (i.e., the Foreign Capital Investment Fund Law) the restriction on repatriation is for up to five years.
See Annex G-09.1(1)(b) & (c) of the Canada-Chile F.T.A., supra note 17. As an alternative, the investor or lender may purchase Central Bank commercial paper which is equivalent to the amount of interest that the deposited funds would have generated.
See Article C-17(1) of the Canada-Chile F.T.A., supra note 17.
See Article D-01(d), supra note 17. Stricter rules exist in the context of agricultural items, most chemicals, plastics, automobiles, footwear, textiles, and metals. The specific content requirements here are found in seemingly endless Annexes to Chapter D
See Chapter M of the Canada-Chile F.T.A., supra note 17. The two countries also agreed to establish a Committee on Anti-dumping and Countervailing Measures which will, inter alia, study the possibility of “eliminating the need for domestic countervailing duty measures between them”. Id. at Article M-05(a).
See David A. Gantz, The United States and the Expansion of Western Hemisphere Free Trade: Participant or Observer?, 14 ARIZ. J. INT’L & COMP. L. 389 (1997).
For the text of ALADI A.C.E. No 17 in English, see T. A. O’KEEFE, LATIN AMERICAN TRADE AGREEMENTS, app. 4 (1997).
For the text of ALADI Resolution No. 78 in English, see T.A. O’KEEFE, LATIN AMERICAN TRADE AGREEMENTS, app. 3 (1997).
The Spanish text of the new Chile-Mexico Free Trade Agreement, can be accessed through: http://www.sice.oas.org/trade/chmefta/indice/stm [hereinafter T.L.C. Chile-Mexico].
See T.L.C. Chile-Mexico, supra note 37, art. 20-28.
See id. at Anexo 3-04.
See id. at Anexo 3-09.
See id. at Artículos 4-04 and 4-06.
See id. at Artículo 5-02.
See id. at Artículo 6-02.
See id. at Anexo 9-10.
See id. at Anexo 1.
ee id.
See Anexos II, III and V, T.L.C. Chile-Mexico, supra note 37.
See Artículo 15-09(3), T.L.C. Chile-Mexico.
See Artículo 15-12, T.L.C. Chile-Mexico, supra note 37.
See Anexo 15-21, T.L.C. Chile-Mexico, supra note 37. In the past, the U.S.T.R. has complained that Chilean trademark law is deficient in that there is no requirement of use to maintain trademark protection (a trademark must be “novel” before it can be protected), there are no provisions for trade marking figurative marks, color or packaging or collective marks, and so-called “notorious” or well known trademarks are not offered protection unless registered in Chile. See, U.S. TRADE REPRESENTATIVE, NATIONAL TRADE ESTIMATE REPORT ON FOREIGN TRADE BARRIERS 43 (1998).
See Artículo 19-06(1), T.L.C. Chile-MERCOSUR, supra note 37.
See Artículo 20-04(2), T.L.C. Chile-MERCOSUR, supra note 37.
The Spanish text of ALADI A.C.E. No. 21 can be accessed through: SICE.OAS.org
The Spanish text of ALADI A.C.E. No. 24 can be accessed through: SICE.OAS.org
The Spanish text of ALADI A.C.E. No. 32 can be accessed through: SICE.OAS.org
See Chilean President Proposes Joint Front With Mercosur in FTAA Talks, 4 AMERICAS TRADE 1, 22 (June 26, 1997).
See Id. at 22.
See, e.g., P. Covarrubias Meyer, Whether for Chilean NAFTA (or NAFTA “Light”) Accession: The Necessity of Fast Track Authority, 4 NAFTA: LAW & BUS. REV. OF THE AMERICAS 157 (1998).
See id. at 156.
See U.S. Salmon Farmers File a Complaint Against Chile, J. COMM., June 19, 1997, at 3A. On January 6, 1998, Chile was named along with three other countries in a new petition filed with the U.S. Commerce Department alleging that all four were engaged in dumping mushrooms in the United States. The petition resulted in the imposition of antidumping duties of 149% on imports of certain preserved mushrooms from Chile. See Jack Lucentini, Chilean Mushrooms Hit with Penalties, J. COMM., Dec. 4, 1998, at 3A.
Juan Gabriel Valdes, Speech, The FTAA Process & Economic Integration in the Hemisphere Today (1997). Available in English through: direcon.com
Naciones Unidas-Comisión Económica Para América Latina, Panorama de la Inserción Internacional de América Latina y El Caribe, Santiago: O.N.U.-CEPAL 62, n. 67 (1997).
See Id.
Isolated U.S. Opposes Changes to Antidumping, CVD Laws Under NAFTA, 4 AMERICAS TRADE 1, 21 (June 26, 1997).
See id. at 21. The explanation for MERCOSUR’s lack of support was that while the bloc favors a comprehensive negotiation on antidumping and countervailing duties it does not want to “prejudge the outcome of those talks by naming elimination of AD measures as an up-front objective.” Meanwhile Canada’s reluctance to highlight the elimination of antidumping duties as an FTAA negotiating goal was due to the severe criticism it received from its steel industry for including such a provision in the Canada-Chile F.T.A.
See, e.g., U.N. Economic Commission for Latin America and the Caribbean, U.S. Barriers to Latin American and Caribbean Exports 1997, U.N. ECLAC (1998).
See Valdes, supra note 61.

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