Taking down trade barriers - Congresses in U.S., Chile are to vote on a deal

www.sfgate.com David Armstrong, Chronicle Staff Writer Sunday, January 12, 2003

When Hewlett-Packard's wholly owned subsidiary in Chile imports office equipment from the parent company, such as HP printers, it must pay a 6 percent Chilean import duty.

That fee will disappear if a proposed free-trade agreement between the United States and Chile becomes law, as expected.

That, in turn, could help HP Chile lower its operating costs and grab market share from Canadian and Japanese companies that already benefit from their countries' free-trade agreement with Chile, said HP Chile's marketing manager, Axel Heilenkotter.

In time, Heilenkotter said, the free-trade agreement could create such favorable business conditions that the Palo Alto company might set up manufacturing operations in Chile, a small but entrepreneurial South American nation in whose capital, Santiago, HP employs 200 people at a sales and marketing complex.

The pact now goes before the congresses of both countries for ratification. In the United States, Congress can vote either for or against the deal, but cannot amend it under terms of trade promotion authority narrowly granted to President Bush last year.

Supporters of the agreement maintain that it will create a level playing field for business. Skeptics fear that U.S. producers will be undercut by cheap Chilean imports and the South American nation's skirting of U.S. labor and environmental laws.

If implemented, the trade deal will be Washington's first such agreement with a South American country. It would make Chile the fifth nation to join the United States in a tariff- and quota-slashing trade pact, after Canada, Mexico, Israel and Jordan.

The United States also has reached tentative agreement on a free-trade pact with Singapore.

On Wednesday, U.S. Trade Representative Robert Zoellick announced that Washington will open talks with five Caribbean nations, to forge a trade deal with them. Two days later, Zoellick said he will meet trade ministers from five southern African countries this week with an eye toward creating a regional free-trade area there.

The pact with Chile could serve as a stepping-stone for even more ambitious projects such as the proposed Free Trade Area of the Americas, an idea ardently supported by Bush. It would encompass every country in the Western Hemisphere except Fidel Castro's Cuba, in a huge region devoid of tariffs, quotas and other trade barriers.

Chile's ambassador to Washington, former central banker Andres Bianchi, helped negotiate the deal with the United States, which as Chile's largest trading partner accounts for 18 percent of Chilean trade.

Bianchi said in an interview that he is convinced the agreement will benefit both nations, and that its significance goes beyond its immediate worth in dollars and cents.

"The real value is the message that it sends to the rest of Latin America," Bianchi said. "The message is that countries that pursue sound monetary and economic policies, that are open, that are democratic, those countries are accepted into the club."

Bianchi said failure to pass the agreement could strengthen the populist backlash reflected recently in the election of left-leaning leaders in Brazil and Venezuela.

Chile emerged in 1989 from a bloody military dictatorship led by Gen. Augusto Pinochet. Since then, it gradually has rebuilt democratic institutions and embraced freewheeling capitalism, which the government says has reduced the number of Chileans living in poverty from 45 percent to 20 percent of the population.

In addition, Chile has enjoyed government budgetary surpluses in 14 of the past 15 years and earns high marks on international surveys of competitiveness,

transparency and resistance to corruption.

The Chile trade deal has been in the works for some time. First floated as an idea in 1989, it was set aside while Washington crafted NAFTA with Canada and Mexico. Formal talks with Chile finally began in late 2000 and lasted two years.

When the tentative agreement was announced last Dec. 11, Zoellick characterized Chile as "an ideal free-trade partner of the United States because of its sound macroeconomic policies and commitment to free trade."

In the long prelude to negotiations, U.S. businesses were broadly supportive, though some, including California vintners and farmers, fear unfair competition from rivals that pay their workers low wages and receive government subsidies.

Bianchi, though, played down the threat of competition from Chilean farmers and winemakers, noting that because it is in the Southern Hemisphere, Chile is growing produce when it is winter in the United States, while in the summer, U. S. producers could export to Chile.

Lisa Dillabo, an international specialist at the California Farm Bureau, said the Farm Bureau is generally supportive of free trade.

In working out the tentative deal with Chile, however, Dillabo said California farmers demanded that the pact incorporate penalties should Chilean exporters dump products on the U.S. market below cost.

She said California fruit and vegetable growers are vulnerable, but added that the deal could open up opportunities for the state's meat producers.

The Wine Institute, a trade group based in San Francisco that represents U. S. winemakers, expressed reservations about the deal. "We insisted on tough point-of-origin regulations, so companies couldn't just transship their products through Chile to the United States and say they were Chilean and take advantage of the trade agreement," said Gladys Horiuchi, a spokeswoman for the Wine Institute.

U.S. agricultural interests succeeded in getting a 12-year delay for the elimination of tariffs on farm goods. Tariffs on most nonfarm goods are either dropped the day the trade deal becomes law or expire after four years.

Lon Hatamiya, secretary of California's Technology, Trade and Commerce Agency, said he thinks the Chilean trade pact eventually will prove to be a good deal for California's farmers, whom he characterized as highly productive and competitive.

Chile, ranked 32nd among the state's export markets, is not a big country, Hatamiya noted, but certain sectors of the Chilean economy could be profitable for California exporters, he said.

The state's manufacturers, he said, should benefit, noting that Chile, which has a large mining industry, needs to buy heavy equipment for mining and for environmental cleanup, fields in which California companies are world leaders.

U.S. high-tech firms largely support the deal with Chile, said Tim Bennett, senior vice president for international affairs with AEA (formerly the American Electronics Association).

"The size of their market is not huge," Bennett said of Chile. "However, Chile is probably the most advanced and open economy in South America. We think this will have some symbolic effect, and that it will stimulate a move toward the Free Trade Area of the Americas."

Chile, with 60 percent of its gross domestic product generated by exports, strongly supports free trade, said Bianchi, the Chilean ambassador. Chile has trade deals with the European Union and South Korea that should become law this year, he said.

If all goes well, said Bianchi, who follows the machinations of the U.S. Congress from his base in Washington, the agreement could be approved this summer or fall, clearing the way for it to become law Jan. 1, 2004.

U.S.-Chile free trade agreement

The agreement: Trade negotiators announced an agreement between the two nations on Dec. 11. The Chilean pact will be the first for the United States with a South American country. The agreement will be the fourth free-trade agreement that the United States has entered into. The other agreements are the North American Free Trade Agreement (the United States, Canada and Mexico) and bilateral agreements that the United States has with Jordan and Israel.

What will it do? Phase out 85 percent of tariffs within four years and all tariffs in 12 years. Loosens controls on foreign investment and flow of capital. Serve as a model for agreements with other Latin American countries.

What's next: The agreement needs to be ratified by the congresses of both nations. .

Demographics on the two economies:

Chile (flag)

Population: 15 million

Gross domestic product: $153 billion (2001)

Value of exports to the United States: $4.3 billion (2001).

Leading exports to the United States: copper, nitrates, fruit, wine, farm- raised salmon

United States (flag)

Population: 281 million (2000)

Gross domestic product: $10.08 trillion (2001)

Value of exports to Chile: $4.5 billion (2001)

Exports to Chile: autos, computers, construction machinery, paper products, telecom equipment.

California (state flag)

Population: 35 million

Gross state product: $1.3 trillion

Value of exports to Chile: $281 million (2001)

Imports from Chile: fruit (fresh, canned, juice), wine

Exports to Chile: computers, construction equipment, aircraft .

Sources: U.S. Trade Representative's Office, Government of Chile, World Factbook 2002, California Trade, Technology and Commerce Agency, U.S. Census Bureau

E-mail David Armstrong at davidarmstrong@sfchronicle.com.