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Red hot chile peppers the globe with FTAs

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Chile, the “jaguar” economy of South America, holds a newly-minted Free Trade Agreement with Australia. The Airport Economist, Tim Harcourt, explains why this is good news on both sides of the South Pacific Ocean.

In July, Australia signed a new free trade agreement (FTA) with the South American nation of Chile. The pact with Chile is the first FTA under the new Rudd Labor Government.

Chile’s enthusiasm as the leading free trading nation of Latin America has also been highlighted by Carlos Furche, the Vice-Minister of International Trade and Chief Trade Negotiator. “We’re not going for the Guinness Book of Records in terms of FTAs but as a small country of only 16 million people we rely on them for our prosperity,” he said.

According to Furche, 90 percent of Chile’s trade is covered by FTAs. In addition to agreements in Latin America, Chile has FTAs with the European Union, non-EU countries such as Norway and Switzerland, the USA and the major Asian economies of China, Korea and Japan.” Yet Furche regards Australia and New Zealand as role models. “We are a middle-income country but aspire to be more like Australia and New Zealand in terms of economic sophistication and living standards.”

Chile not only signs a lot of FTAs, it also does so very quickly. “The FTA with China got through our national Congress in a day, as did the agreement with Japan. You couldn’t see that happening in Washington,” he said.
Trade has been important in reducing poverty for Chile. While the rest of South America ran ill-conceived economic nationalist policies, Chile (the ‘Jaguar’ economy of South America), opened up its markets and became a free trade agitator in the global arena. Eventually, the rest of the continent followed with Mercosur. According to Furche, “In 1990, 43 percent of Chileans lived below the poverty line. Now, it has been reduced to 13 percent and extreme poverty is less than five percent.

Having an open economy is an important part of Chile’s successful efforts of poverty alleviation,” he said.

According to Harris Gomez, the President of the Australia-Chile Chamber of Commerce in Sydney, Chilean businesses in Australian are “excited about the FTA in terms of profile building and the creation of stronger personal ties between Sydney and Santiago.” In fact, Gomez has just opened a new legal office in Santiago to help Australian businesses in Chile, as he believes that the FTA moves the relationship “beyond tariffs, into important practical areas that affect services and investment, like standards and intellectual property.”

A number of Chilean companies are now based in Australia, particularly in wine marketing and wine technology, as well as mining and agribusiness. For example, Full-Pak Bulk Containers, a logistics company based in Adelaide, is strengthening its foundations in Australia. According to local representative, Edgardo Veliz, Australia’s prosperity made it attractive for his company to set up a base here: “Being in Adelaide, close to the wine areas has made it easy for us and Australia’s prosperity is there for all to see.”

But what is in it for Australia? Australian exports to Chile are mainly mining-focused, with some large investments by BHP Billiton and technology companies like Mincom. But this overshadows the important fact that Chile is a “gateway” for Australian businesses in South America. According to Austrade research, 439 Australian businesses export to Chile and Santiago is the regional headquarters for 50 Australian corporates. Many miners, such as BHP Billiton, Mincom, Surpac, Groundprobe, Ludowici and GRD Minproc, have been in Chile for up to 20 years. However, Australia is also moving beyond mining in Chile and Austrade Santiago works with new industry sectors in Chile that are as diverse as education, telecommunications, aquaculture, viticulture and animal genetics. Viticulture is really taking off and industry participants such as Nick Yap of AB Mauri, who knows the Chilean market well, warns that: “Given Chile’s propensity to sign FTAs with everyone else, if Australia has no deal, we’ll be left out.”

Carlos Furche expects that the FTA will help trade between Australia and the rest of South America and open up trade more widely within APEC and the rest of the world: “I see the FTA as a building bloc, not a trading bloc or a ‘spaghetti bowl’ of agreements. The agreement with Australia will help support agreements with the rest of APEC and in Chile we hope this will add momentum to open trade more globally.”

He’s right, of course, as Chile and Australia have been strong allies in the WTO urging other countries to open up their economies to increased trade and investment. And in terms of momentum, with this new comprehensive FTA, Chile and Australia are certainly off to a flying start.
Tim Harcourt is the author of The Airport Economist and is the Chief Economist at the Australian Trade Commission (Austrade). You can read his blog at: www.austrade.gov.au/economistscorner
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