Trade agreements keep business booming

Chile has the most free trade agreements (FTAs) in the world. Though geographically remote, and with just 17 million people, or perhaps because of this, it has long based its economic strategy on export-led growth. Today, Chile has 21 trade agreements with 58 different countries, including the U.S., the EU, China, Mercosur, India and Mexico. The latest agreement to come into force was a FTA with Turkey in March of this year.

These agreements give Chile preferential access to markets that represent 62.5% of the world’s population, and 86.3% of global GDP. The country’s exports totaled US$64.2 billion in 2010, representing 45% of the national GDP. This is to say that nearly half of Chile’s production was shipped abroad last year. More than 90% of the country’s trade is carried out with the countries with which it has trade agreements.

Chile’s FTA with the U.S. came into effect on January 1, 2004, with bilateral trade between the two countries jumping by more than 200% in the following five years. Last year, trade between the two nations reached US$18 billion, placing the U.S. ahead of Japan in the ranks of Chile’s top export markets and taking it to second place behind China, by far Chile’s largest market and the destination for 23.2% of its exports. Its Latin American and Asian markets combined represent more than half of Chile’s export base, the diversity of which has helped protect the country from global volatility and provides ample sources of growing external demand.

Chile was a founding member of the Trans-Pacific Strategic Economic Partnership Agreement (TPP), a multilateral FTA that came into force in 2006 and aims to further liberalize the economies of the Asia-Pacific region. According to Jorge Bunster, director general of the Ministry of Foreign Affairs’ International Economic Relations Office (Direcon), the TPP is “the most ambitious process of economic and trade integration in the history of the Asia-Pacific region.”

Opting for trade liberalization in the 1970s, and producing one of the simplest and most transparent trade regimes in the world, Chile is today the world’s 11th most open economy, according to the 2011 Index of Economic Freedom by the Heritage Foundation. Its “freedom score” of 77.4 puts it just 0.4 points behind the U.S., which ranks in ninth place, and 2.9 points ahead of the U.K., which appears 16th in the assessment of 179 countries.

In addition, Chile leapt 10 places this year, to 43rd position, in the Doing Business 2011 report by the IFC and World Bank that analyzed and rated 183 economies for their ease of doing business.

Former President Patricio Aylwin, who took over from Augusto Pinochet in the 1990s, expanded the economic reforms begun under the military regime. This policy of continuity has been preserved by successive governments, which have pursued even closer economic integration into the global economy, underpinning Chile’s rise as the Latin American country with the highest GDP per capita and best-sustained growth record. The Economist also calls Chile the Latin American country with the soundest economic fundamentals.

“Chile’s policies on a wide variety of areas – from trade openness and global integration to human rights – have followed the same line for many, many years and will continue to do so as they are now ingrained in society,” says Minister of Foreign Affairs Alfredo Moreno.

A prominent businessman and economist prior to his election last year, President Piñera placed so many high-level private sector executives in ministries and other senior positions upon taking office that some dubbed the incoming government as “Chile Inc.” Consequently, he clearly represents another link in the chain of Chile’s successful open economic model, one that has become an example to developing countries across the globe.

Pledging to set Chile on the path to becoming a fully developed country by 2018, President Piñera has in fact worked to broaden and deepen Chile’s trade links, including efforts to more closely integrate with the region’s Pacific economies (Mexico, Peru and Colombia). Earlier this year, he also oversaw the integration of the Chilean stock market with those of Colombia and Peru, which created the largest and second-largest bourse in Latin America in terms of listed firms and capitalization respectively.

The Minister of Foreign Affairs says that while Chile is looking to continue integrating with the Asia-Pacific region and maintaining political and economic ties with the U.S. and Europe, it also has “a lot of work to do with regards to improving Latin American and South American integration.”

He comments: “We are working to improve relations with Argentina. We are also working with Brazil on shipping routes, in order to bring Brazilian machinery into Chilean ports, and on matters of energy and water. We also want to improve infrastructure so that it is easier for people to move from one country to another. And although some countries have different development models, we feel that there is plenty of room for mutually beneficial collaboration.”

Chile’s strong financial institutions and sound macroeconomic management, which have given it the strongest sovereign bond rating in the region, have made it a regional destination for equity and debt investors.

“The current administration is focused on new sectors and innovation, and that is very promising,” says U.S. Ambassador to Chile Alejandro Wolff. He says that the U.S. has a number of companies that are doing very well in Chile. Its pool of highly qualified and English-speaking professionals is one of the reasons for this, and also why Chilean firms also do well in the U.S.; the Chilean government has long promoted education initiatives targeting English-language proficiency and digital literacy.

“On the other hand the institutional framework is transparent, based on a legal system that is respected. The rules are known; they don’t change, so people and businesses can come to Chile and know what they are getting into,” says Mr. Wolff. “That is of course a big advantage when you make decisions on where you want to establish a subsidiary, knowing that the business, legal and political environment is stable, predictable and respected.”