U.S.-Chile Free Trade Agreement
More often, a country has to extend its activities outside its territory in order to advance its economic state. For this reason, there are countries which involve in activities that create ties with other countries. Chile, in particular, signed an agreement with the United States. This proved beneficial, as both country made improvements. Chile’s free trade agreement with the United States brought positive outcomes in terms of the conduct of business in Chile.
Chile has its shares of many ups and downs through the years. It experienced economic failures time and again but also succeeded in its endeavors to improve the economy through reforms such as the tariff reductions and free trade agreements (Aninat, 2000). The military government led the economic reform during the early 1990s, but the democratic government of Patricio Aylwin further contributed to the improvement of the economic reform. Chile became the role model for economic reform, as shown in the growth of its GDP from 1997-1998, which averaged to 8% (The World Factbook, 2008). GDP or Gross Domestic Product measures the size of the economy of the country (Office Management and Budget, 2008).
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One characteristic of Chile’s market-oriented economy is its high-level foreign trade. It held fast to its commitment to trade liberation (The World Factbook, 2008). In the country’s rise from stagnation, it involved in free trade agreement with other countries, especially the United States. The U.S. – Chile Free Trade Agreement (FTA) was put into force in 2004 after long years of bilateral conversations and negotiations. The United States wanted to expand its economic relations and pursue issues of interest. Thus, the country signed the agreement with Chile. Moreover, the United States government thinks that the entire hemisphere will benefit greatly if Chile has a healthy economy (Smurr, 1998).
The year preceding the FTA, used goods imported to Chile were subject to 50% tariff surcharge (“Chile,” n.d., p.64). With the FTA, tariffs charged on 90% of U.S. exports to Chile and 95% of Chile exports to the U.S. were removed (United States Trade Representative, 2004). However, there are still products that are prohibited from entering Chile, such as cargo transport and used passenger vehicles (Export.gov, n.d.).
The Free Trade Agreement consists of the set of laws, standards for health and safety, regulation and judicial transparency, regulations, property rights, capital flows, environmental regulation, and many others. In turn, these led to potential growth and welfare effects for the concerned countries. Additionally, new administrative practices and changes in legal issues and regulations that are required by the agreement and consistent with the policies and regulations may have a positive effect on policy stability and development at the institutional level. This then strengthens the policy credibility of the country. Furthermore, this will contribute to the increase in the international demand for Chilean liabilities, which would then mean larger capital inflows. All in all, this will advance growth and investment (Chumacero et.al, 2004).
However, it is important to note that political association and economic cooperation are not included in the agreement between U.S. and Chile. However, the agreement was comprehensive in terms of institutions and economic policies. Chile’s agreement with the United States has a transition period lasting 12 years. During this period, Chile is required to remove its luxury taxes on cars in five years and the complex price bands on agricultural products in 12 years. On the other hand, the agreement means that the U.S. must eliminate its subsidies on quantitative restrictions on Chilean exports and of subsidies charged on agricultural exports. Each country can only apply safeguards for agricultural products within the transition period. Both countries were also expected to follow WTO rules regarding anti-dumping policies (Chumacero et.al, 2004).
When it comes to telecommunications regulation, financial and non-financial services, and investment, Chile and U.S. must conform to the existing principles. Additionally, both countries must agree to observe intellectual property rights protection, which Chile assigned before the FTA was implemented. Through the FTA, regulations set to protect intellectual property rights and their enforcement was accelerated. The agreement requires that Chile must adhere to the environmental and labor-market regulations. Furthermore, the United States must cooperate to reduce environmental damages in forestry, mining and agriculture. Moreover, the country must use clean fuels and supervise and enforce environmental regulations (Chumacero et.al, 2004).
The Central Bank of Chile showed that for the year 2004, there was a substantial increase of 12.1% in Chilean exports to the U.S. This totaled to US$1.17 billion. The exports include industrial products (10.4%), natural resources (39.6%), and processed goods from natural resources (50%). There was also an increase in the raw materials exported from Chile which are used by U.S. businesses in manufacturing products that are of high value (United States Trade Representative, 2004). Moreover, the agreement enabled U.S. exports to increase. Some of these products are the following: computers exported in 2007 almost tripled the amount garnered in 2003; trucks increased by six folds; passenger cars tripled in 2007; scrapers also tripled; printers increased by almost 14 times; and, fertilizers increased twice in 2007 compared to 2003 when FTA was not yet in the picture. Some of these products became duty-free upon entrance to Chile (U.S. Department of Commerce, n.d.).
With the free trade agreement and the country’s being one with the most open economies, Chile has begun importing products from foreign countries. Its market for imported automobiles is booming, thus countries have exported their products to Chile. One example is the shipment of Chinese cars. The General Motors and Toyota Motor Corp dominated the market. Moreover, the motorcycles were also imported from China (de la Jara, 2006). When FTA took effect, the 85% luxury tax on imported automobiles decreased to 63.75% ((United States Trade Representative, 2004).
Through FTA, the U.S.’ conduct of business in Chile has dramatically improved. As was mentioned before, the FTA removed the 50% surcharge on used goods. However, other goods such as books and computer products from U.S. enter Chile duty-free. Moreover, used clothing and used textile articles were also duty-free due to the FTA (“Chile,” n.d., p.64). Additionally, the FTA enabled the U.S. to increase by 24% its exports to Chile, leading to an increase from $617.29 million to $766.79 million. Moreover, manufactured goods from U.S. account for a 19.5% increase during January/March 2004. This indicates an increase from $570.9 million to $682.3 million. These exported goods include construction equipment, medical equipment, and paper. Agricultural products exported, on the other hand, increased from $22.66 million to $27.77 million (United States Trade Representative, 2004).
U.S. has benefited from the FTA with Chile. It became Chile’s top source of imported goods. Despite the small size of Chile’s economy and its relative impact on the U.S., the FTA will benefit the U.S. in such a way that the Enterprise for the Americas Initiative (EAI), which Bush advanced, will be able to “create a Western Hemisphere free trade zone stretching from Alaska to Antarctica.” Moreover, the FTA will help the U.S. in realizing the long-term political and economic interests in the country. It will also help Chile in maintaining its impressive economic growth. Aside from all these, the agreement will further strengthen Chile’s reform programs (Wilson, 1992).
In much the same way, Chile has benefited from the free trade agreement. The FTA facilitated bilateral trade between the two countries which doubled upon the implementation of the agreement. There was also an increase in the totaled trade between U.S. and Chile. In 2003, trade totaled $6.4 billion. But a year later when FTA took effect, the total was $16.4 billion. Moreover, Chile’s exports reached $9.6 billion in 2006, as compared to $3.7 billion in 2003 (“Economic benefit,” 2007).
The FTA further advanced the increasing trade relationship between U.S. and Chile and enabled the two countries to advance in terms of political and economic (Roffe, 2004, p.4). Chile must implement stronger protection for trademarks, trade secrets, copyrights, and patents. Moreover, the agreement requires that Chile must eliminate its regulatory barriers for the U.S. service providers. These factors will enable U.S. businesses to have “a more accessible and more easily navigable Chilean market” (Export.gov, n.d.).
An analysis for the year 2007 showed that the bilateral trade between the two countries has reached $17.3 billion. Moreover, an increase of 206% was noted on U.S. exports to Chile. The trade relationship was further reflected in Chile’s being in the 28th place in 2007 as compared to being 35th in 2003. With Chile’s good economy, doing business in the country was beneficial for the U.S. (U.S. Department of Commerce, n.d.).
Additionally, U.S. exporters have lost some of their market share to the European Union, Canada, and Mexico, which all entered into free trade agreements with Chile long before United States. The FTA enabled these exporters to acquire their shares once more. By 2007, U.S. exports to Chile reached 17% in the share in Chilean market. This was a major change from the 14.5% market share in 2003. This can be shown in the following graph:
Source: U.S. Department of Commerce, n.d.
The following four years after the implementation of FTA, U.S. products exported to Chile have tripled. In 2007, some U.S. exports were duty-free upon entry into Chile. Some of these products were tractors, printers, fertilizers, bulldozer scrapers, passenger cars, trucks and computers. Moreover, U.S. farmers have also benefited from the agreement. With the tariff reductions, they were able to increase the products that are exported. Agricultural products such as wheat and meslin were duty-free under the FTA. Exports of these products amounted to $116 million in 2007, which shows that there was a 220 percent increase compared to pre-FTA levels. Others products such as yellow dent corn became duty-free, too. With the tariff reduction, its sales have increased. In fact, yellow dent corn became one of the products included in the top twenty U.S. exports to Chile. This was a first since FTA was implemented (U.S. Department of Commerce, n.d.).
Although there were still some things to polish regarding the Free Trade Agreement, studies have shown that it was beneficial for both the participating countries. Many say that the Free Trade Agreement was successful. The figures which increased since the FTA took its effect were evidence to this. The Free Trade Agreement entails laws, regulations and policies that lead to potential growth and welfare effects for the United States and Chile. Through the FTA, U.S. exports to Chile and Chilean exports to U.S. significantly increased right after the agreement was put in place. Moreover, the surcharge on used goods was eliminated. Tariffs charged on U.S. exports and Chilean exports were also removed. There were also products that became top exports of U.S. to Chile and vice versa. Since Chile is dependent on international trade, the agreement was beneficial for the United States. Through FTA, United States can expand its economic activities. Moreover, the country became Chile’s top source of imported goods. But more importantly, Chile has also benefited from the agreement. The implementation of FTA strengthened its reform programs. The trade also amounted to billions, which would not happen had Chile not signed the agreement with the United States. Furthermore, the FTA enabled both countries to advance in terms of politics and economics.
The conduct of business has positive results, as the business relationship between the two countries improved and advanced. All of these show contributed to the success of the conduct of business in Chile.
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