Chile Trade Policy Brief 2
Chile: Trade Policy Brief and Recommendations
For Improving International Trade
Adam Pilz, Sam Myers, and Steve Smolik
International Economics
Introduction
The history of Chilean trade policy starts with Salvador Allende, a socialist leader, who led Chile into inflation rates of over one-thousand percent per year during his three years in office 1970-1973. Chile citizens demanded economic market freedom instead of the government created inflation, which Allende created when he demanded the printing of more money to combat the the troubles in Chileans industries. As a result the people started an uprising against Allende’s centralized government. He was eventually killed by a military coup, who through the help of outside economic advisors educated at the University of Chicago, helped move Chile towards a free market economy (Central Intelligence Agency).
As a result of the fall of Salvador Allende in 1973, Chile has moved from a closed economy to a free market economy, and the trade policy of Chile has mirrored this economic mindset of capitalism for the past thirty-five years. Many changes can be seen in the past decade such as, Chile moving from a current account deficit to a current account surplus, a net demander to a net supplier, and changing from a net creditor to a net debtor. Chile, while moving towards free market principles, has used the formation of various Regional Trade Agreements in order to reduce trade barriers among its major trade partners. By creating these numerous RTAs, Chile is using market enlargement to stimulate investment, increase competition, and in turn accelerate the advancement pace of technology and productivity.
Over the past decade, Chile has been seeing a deficit in its current account, up until 2004 when Chile registered a 2.075 billion dollar surplus, see figure 1 (Barrientos). 2004 is also the year Chile signed a RTA with The United States, which has lead to the United States becoming the leading importer of Chilean goods. Since 2004, Chile has only seen a current account deficit in 2008, which is a possible result of the economic crisis affecting foreign countries preferences for Chilean goods relative to domestic goods. However, in 2009, Chile is estimated to be a net supplier of funds once again, with a 1.056 billion dollar surplus in it’s current account.
Chile’s exports have exceeded their imports every year for the past decade, but has recently seen a drop in total number of exports in 2009 compared to 2008 (see figure 2 and figure 3). However, rapid growth previous to this period, points towards indications that this is simply a result of the world economic recession, and rapid growth will continue to occur in exports of Chile once we see a rise in the economies of its leading importers such as The United States, who accounts for almost twenty percent of Chiles exported goods (Central Intelligence Agency). Exports of Chile make up roughly forty percent of its GDP with copper, Chile’s leading export, providing about one third of government revenue (Central Intelligence Agency).
Chile has taken all the necessary steps to move towards a free market economy, which is shown in Chile’s economic freedom score of 78.3 in 2009, for the second half of 2007 and first half of 2008, according to the heritage foundation’s economic freedom index (Miller, Kim, Holmes). This score puts Chile at number one in Central America in economic freedom, and places them just outside the top ten nations, right behind the United Kingdom, at number eleven. This measure of openness in their economy is based upon ten measures of openness, and Chile is above the world average in every area. These areas of freedom include business freedom, trade freedom, fiscal freedom, monetary freedom, investment freedom, financial freedom, property rights freedom, freedom from corruption, and labor freedom. Chile decreased in the areas of business freedom, monetary freedom, freedom from corruption, and labor freedom, while seeing a increase in trade freedom, fiscal freedom, and government size. Investment freedom, financial freedom, and property rights all registered no change from 2008. Indications from this freedom score show that Chile’s economy has rapidly advanced towards free market ideals, and has embraced the concepts which allow for a healthy and thriving economy.
Since January 1st, 1995, Chile has been a member of the World Trade Organization (World Trade Organization). After joining the WTO, Chile as created a uniform tariff rate of six percent on almost all imports, excluding wheat, wheat flour, and sugar. As well as being a member of the WTO, Chile has signed a regional trade agreement with fifty-seven countries in the past fifteen years. Countries included in some of these agreements include, the United States, S. Korea, all Latin American countries, and Chile is currently negotiating a RTA with India and the People’s Republic of China (Vergara).
Chile has seen a rapid increase in foreign investment from countries abroad recently. As seen in the chart “Chile as a net debtor,” over a spa of one year, Chile had an increase in direct foreign investment abroad of 16.61 billion USD relative to a .02 billion USD increase in direct foreign investment at home (Central Intelligence Agency). Foreign claims on Chile exceed Chile claims on foreigners, which deems Chile a net debtor during this time in Chile’s trade history.
Figure 1:
(For previous year) / Current Account Balance (in billions USD)
2000 / -0.898
2001 / -1.1
2002 / -0.58
2003 / -0.779
2004 / 2.075
2005 / 1.449
2006 / 7.154
2007 / 7.189
2008 / -3.439
2009 / 1.056
Figure 2:
Year of estimation (imports for year previous) / Estimation of imports (in billions USD)2003 / 15.60
2004 / 17.40
2005 / 22.53
2006 / 30.09
2007 / 35.37
2008 / 44.03
2009 / 57.61
Table 3:
2003 / 17.80
2004 / 20.44
2005 / 29.20
2006 / 38.03
2007 / 58.21
2008 / 67.64
2009 / 66.46
Chile Trade Partners
Chile is one of the most open nations in the world, economically speaking, and shares free trade agreements with fifty-seven nations. Of these nations, major trading partners include China, The United States, Brazil, Japan, Argentina, South Korea, The Netherlands, and Italy (Central Intelligence Agency). Chile has a long history of trade growth. Over the years Chile has pushed more and more for free trade agreement between themselves and larger nations. The Chilean government is successful in allowing free trade with the United States and also with China. This is important because these countries are Chile’s top two trading partners. As seen in the pie chart, “Largest Importers of Chilean Exports” China, USA, and Japan make up over one third of the imports of Chilean goods. These same three nations produce over one third of Chile’s imported goods (see pie chart “Largest Exporters of Chilean Imports”). Chile has Regional Trade Agreements with Japan and the United States, and is currently in negotiations to create a RTA with China as well (Mercurio, Chong, Smith).
Chile Trade Patterns
Chile has over the past century tried to liberalize their trade. Chile has attempted three notable times to liberalize it. The first attempt lasted from 1959 to 1961 and was an utter failure. The second attempt to liberalize trade came during the years between 1968 and 1970. This attempt was a great improvement over the first attempt in that the liberalization process has started. A large amount of opposition came with this second attempt because countries that were already trading with Chile had been benefitting from protectionist policies which allowed only trade with those countries. The second attempt also included a transformation that would ultimately grow the trade liberalization. Quantitative Restrictions (QR’s) were turned into tariffs making it a possibility for any country paying the tariffs able to trade with Chile. The third and final attempt was the opposite of the first. The third attempt was a success and took place in 1974. The liberalization of trade in Chile was now completed. In the following years Chile would have growth in every aspect, including an annual 4.2% raise in gross domestic product (http://countrystudies.us/chile/62.htm). After having much success with liberalizing trade policies, let us now take a look at Chile’s current trade policy.
Current Trade Policy
The main point of Chile’s current trade policy is its central role it gives to Regional Trade Agreements. Chile currently has twenty-one RTAs with fifty-seven trading partners in these agreements. Chile has maintained a Most Favored Nation import tariff rate of six percent which excludes goods such as wheat, wheat flour, and sugar. The MFN import tariffs of these items are relative to the price band system associated with these products in the international market. In the WTO’s most recent review of Chile’s trade policies, the WTO found that Chile has abolished some import taxes as well as export subsidies, which have opened up Chile even more, as Chile is the 11th most open nation currently.
Tariffs
Chile applies an ad valorem tariff to virtually all goods which is 6 percent. Importers also must pay a 19 percent value added tax (VAT) calculated on the customs value plus import tariff. When imports are duty free, the VAT is calculated on just the customs value. There are several exceptions to the ad valorem tariff. For example, a higher effective tariff is applied to wheat, wheat flour, and sugar. The higher tariffs result from the application of an import price band system. This program is explained in greater detail in the non-tariff barrier section. The US and Chile entered the United States-Chile Free Trade Agreement (FTA) January 1, 2004. Under the FTA, the two countries eliminated tariffs on 87 percent of bilateral trade immediately and will establish duty free trade in all products within a maximum of 12 years. (Foreign Trade Barriers, 2007)
Import Controls
There are virtually no restrictions on the types or amounts of goods that can be imported into Chile. All imports into Chile are supposed to be accounted for by either the customs authorities or a commercial bank. Customs authorities must approve all imports valued at more than $3,000[1]. Commercial banks are allowed to approve imports of less than $3,000. Larger firms must report their import and export transactions to the Central Bank. Commercial banks may sell foreign currency to any importer to cover the price of the imported goods. (Foreign Trade Barriers, 2007)
Export Policies
Chile currently provides a duty drawback program for exports that reimburses firms a percentage of the value of the items they export[2]. If capital equipment is imported, it must carry a minimum value of $3,813. For imported vehicles to be used in an export business, they must have a minimum value of $4,830. Another export promotion program lets all exporters defer import duties for up to 7 years on imported capital equipment or receive an equivalent subsidy for domestically produced capital equipment. To comply with the FTA reached with the United States, Chile is eliminating the use of duty drawback program for imports that are incorporated into any goods exported to the United States. (Foreign Trade Barriers, 2007)
Under Chile’s VAT reimbursement program, exporters can recover the VAT they have paid when purchasing goods and using services which are intended for export. To be eligible for the VAT reimbursement program, exporters must have annual sales of less than $16.7 million. (Foreign Trade Barriers, 2007)
Chile also offers the Guarantee Fund for small and medium sized companies. Through this fund, Chile guarantees access to credit to these companies. This Guarantee Fund benefits all nonagricultural companies whose annual sales do not exceed $8.2 million, and agricultural producers with annual sales less than $460,000. (Foreign Trade Barriers, 2007)
Chile’s Development Promotion Agency provides credit for exporting companies. It also provides credit to their export clients abroad. The maximum loan for Chilean exporters is $3 million. The program has been designed for Chilean companies with annual sales of up to $30 million that export goods and services. Through the Coverage of Bank Loans to Exporter program, Chile provides loan default coverage to the banks that give loans to small or medium sized companies. This benefit is only available for exporting companies with annual sales up to $20 million. (Foreign Trade Barriers, 2007)
Export Controls
Chilean customs authorities approve all exports. Large firms must report all exports to the Chilean Central Bank, except for copper exports, which are authorized by the Chilean Copper Commission. Imports are exempt from duties and VAT if they are later exported as noted above. (Foreign Trade Barriers, 2007)
Nontariff Barriers
Chile maintains a price band system for wheat, wheat flour, and sugar that will be phased out by 2016 under the FTA for imports from the United States. The price band system was created in 1985 and was intended to guarantee a minimum and maximum price for the certain commodities. When certain cost, insurance, and freight prices fall below the set minimum price, a special tax is added to the tariff rate to raise the price to the minimum price. The government sets a minimum import price that is normally higher than both international and Chilean domestic prices. Beginning in 2008, the minimum price will be adjusted downward by 2 percent a year, until 2014, when Chile’s President will evaluate whether to continue the price band system or eliminate it prior to the 2016 deadline. (Foreign Trade Barriers, 2007)