Hot Chile peppers the globe with FTAs

Free trade agreements can do wonders for opening up a market to Australians, and the latest FTA with Chile is a stand-out example. TIM HARCOURT

Australia signed a free trade agreement (FTA) with Chile this week – the first FTA under the new Rudd Labor Government. Trade Minister Simon Crean has described the historic agreement as: “A high-quality agreement that covers goods, services and investment. The commitments go beyond what each country has committed at the WTO.”

Chile’s enthusiasm as the leading free trading nation of Latin America was 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 says.

According to Furche, 90% of Chile’s trade is covered by FTAs. “Of course, we have agreements in Latin America with Mercosur and the Andean Trade Pact countries, but also with the European Union, the non-EU countries such as Norway and Switzerland, the USA and the major Asian economies of China, Korea and Japan.

“We also have an agreement with New Zealand and want one with Australia too as we regard Australia and New Zealand as our 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,” he says.

Chile not only signs a lot of FTAs but 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,” Furche says.

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 global arena. Eventually the rest of the continent followed with Mercosur.

According to Furche: “In 1990, 43% of Chileans lived below the poverty line. In 2006 it was reduced to 13% and extreme poverty is less than 5%. Having an open economy is an important part of Chile’s success efforts of poverty alleviation,” he says.

The FTA is really important to Chile according to Pro-Chile’s Sydney based Trade Commissioner Marcelo Salas. “We have lots of complementarities between our two economies in mining, wine and agribusiness, and Australia is Chile’s fifth largest source of foreign investment,” he says.

According to Harris Gomez, the president of the Australia Chile Chamber of Commerce in Sydney, Chilean businesses in Australia are “excited about the FTA in terms of profile building and the stronger creation of stronger personal ties between Sydney and Santiago.”

However, 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. However, the strength of the economy has affected our ability to hire skilled labour, and we have had some productivity issues as a result.”

Veliz believes there are few trade issues between the two countries but there are “business culture differences that means Chilean companies should use Pro-Chile and the Chamber to help them navigate through these culture issues”.

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 fact that importantly Chile is a “gateway” for Australian businesses in South America. According to Austrade research, 425 Australian businesses export to Chile and Santiago is the regional headquarters for 50 Australian corporates.

While many miners like BHP Billiton, Mincom, Surpac, Groundprobe, Ludowici and GRD Minproc have been in Chile for up to 20 years, 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 like 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.”

Australians in the Chilean market have observed that having large mining presence does have its spin-offs in terms of both services and manufacturing. For example, in manufacturing, Richard Andrews, the CEO of Cutting Edges Equipment Parts, which sells equipment parts to the mining industry in Chile, moved from being a direct exporter to setting up a joint venture there before eventually selling to a Chilean partner.

Andrews welcomes the FTA. “There’s so much opportunity in the resources sector in South America, and Chile has been at the forefront. Our ability to offer performance based products enables us to take advantage of the high volumes we can sell in South America. The FTA will provide easy access to the whole continent given Chile’s strong trade links with its neighbouring economies,” he says.

In fact, 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 block, 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.”

And in terms of momentum, Chile and Australia, with this new comprehensive FTA, have certainly got off to a flying start.

Australian businesses looking to do business in Chile should contact Nigel Warren, Senior Trade Commissioner, Austrade Santiago at: Nigel.Warren@austrade.gov.au

Chilean businesses looking to do business with Australia should contact Marcelos Salas, Trade Commissioner of Chile in Australia at: msalas@prochile.com.au

Tim Harcourt is Chief Economist of the Australian Trade Commission and the author of Beyond Our Shores and The Airport Economist. See: www.austrade.gov.au/economistscorner

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