U.S.-Chile Free Trade Agreement: Building on Success
About This Event

The importance of the U.S.-Chile Free Trade Agreement (FTA), enacted on January 1, 2004, is often overshadowed by both the North American Free Trade Agreement (NAFTA) and the Central America–United States–Dominican Republic Free Trade Agreement (CAFTA-DR). Nevertheless, the U.S.-Chile FTA offers valuable lessons about the impact of bilateral trade agreements and highlights the fact that countries benefit more when top-down reductions in trade barriers are complemented by bottom-up reforms.

Two years into the U.S.-Chile FTA, Chile has demonstrated its success in helping businesses identify and resolve indigenous barriers to trade, as well as in increasing productivity. But despite its success, the country continues to fall short in certain areas, most notably in harmonizing intellectual property rights to American standards and helping small and medium enterprises participate in this process. How can a country like Chile—with a population of 16 million and a GDP just one-hundredth that of the United States—be competitive in the American market against China and other Latin American nations? Which public and private efforts have been particularly successful in Chile, and how? In what areas can Chile continue to improve its competitiveness? And, most importantly, does Chile provide any best-practice examples that can be replicated elsewhere?

These and other questions will be the focus of a panel discussion moderated by AEI visiting fellow Roger F. Noriega. Professor Boris Kozolchyk and Ambassador Estaban Tomić will discuss their joint venture to establish the Law Center for Free Trade Implementation in Santiago, Chile.

Agenda
8:45 a.m.
Registration and breakfast
9:00
Panelists:
Boris Kozolchyk, National Law Center for Inter-American Free Trade
John Murphy, United States Chamber of Commerce
Rolando Ortega, ProChile
Ambassador Esteban Tomić, permanent representative of Chile to the Organization of American States
Moderator:
Roger F. Noriega, AEI
11:00
Adjournment
Event Summary

May 2006

U.S.-Chile Free Trade Agreement: Building on Success

The importance of the U.S.-Chile Free Trade Agreement (FTA), enacted on January 1, 2004, is often overshadowed by both the North American Free Trade Agreement (NAFTA) and the Central America-United States-Dominican Republic Free Trade Agreement (CAFTA-DR). Nevertheless, the U.S.-Chile FTA offers valuable lessons about the impact of bilateral trade agreements and highlights the fact that countries benefit more when top-down reductions in trade barriers are complemented by bottom-up reforms.

Two years into the U.S.-Chile FTA, Chile has demonstrated its success in helping businesses identify and resolve indigenous barriers to trade, as well as in increasing productivity. But despite its success, the country continues to fall short in certain areas, most notably in harmonizing intellectual property rights to American standards and helping small and medium enterprises participate in this process. How can a country like Chile--with a population of 16 million and a GDP just one-hundredth that of the United States--be competitive in the American market against China and other Latin American nations? Which public and private efforts have been particularly successful in Chile, and how? In what areas can Chile continue to improve its competitiveness? And, most importantly, does Chile provide any best-practice examples that can be replicated elsewhere? These and other questions were the focus of a panel discussion on May 23, 2006 moderated by AEI visiting fellow Roger F. Noriega. Professor Boris Kozolchyk and Ambassador Estaban Tomić will discuss their joint venture to establish the Law Center for Free Trade Implementation in Santiago, Chile.

Rolando Ortega
ProChile/Embassy of Chile

Chile is a small economy that opted to liberalize its economy three decades ago, making trade an important component of its economic development strategy. It has achieved this liberalization through three channels: unilateral liberalization (through lowered tariffs), multilateral liberalization (through the World Trade Organization, for example), and bilateral and regional agreements. Once all current and pending free trade agreements are in force, Chile will have access to a market of 3.8 billion people and $30 trillion.

As a result of the U.S.-Chile Free Trade Agreement (FTA), bilateral trade has increased 83.4 percent between 2003 and 2005, and it continues to grow. However, the FTA has not spurred a significant number of new investments, possibly because Chile was a relatively attractive candidate prior to the enactment to the FTA and because most new foreign direct investment is going to Asia. But the FTA goes well beyond tariff reduction, which has meant that Chile has had to modernize its intellectual property laws and patent system, for example. Finally, the overall framework of the FTA has worked properly, with a few minor concerns on the applications of some regulations. Two major areas for improvement are the availability of information regarding temporary visas for businesspeople, and the complexity of the U.S. Government Procurements system, which Chilean businesses have not been able to utilize.

Why has Chile been so successful? Because the country has already taken the necessary economic reforms to ensure a key role of the private sector in the productive process, general openness, macroeconomic stability, and overall competitiveness. Additionally, it has managed to achieve these reforms in conjunction with enacting social policies to reduce poverty.

John Murphy
U.S. Chamber of Commerce

The U.S.-Chile FTA is a poster child for what a free trade agreement can do. The agreement has been incredibly successful in fostering trade, growth, and jobs, as well as enhancing partnership in other areas. While the U.S. International Trade Commission (USITC) expected 18-52 percent export growth over the first twelve years, the United States has in fact almost doubled its exports to Chile in the first two years. Therefore, it is likely that CAFTA-DR and the U.S.-Peru FTAs will perform better than the modest USITC estimates, a fact that we need to keep in mind when we weigh the political risks of lowballing our estimates. Furthermore, while the success in reducing tariffs and therefore increasing bilateral trade of goods is important, FTAs go well beyond tariffs to include reducing barriers to trade in services, government procurement, and investment.

Despite the successes, the Chilean government has disappointed in its implementation of intellectual property rights. Innovative industries are at the core of our progress; they foster high-paying jobs and competitiveness. Industries subject to IP rules are pharmaceuticals, movies, and technology. The major bone of contention with Chile has been in the pharmaceutical industry, as U.S. companies continue to ask themselves if the intense amount of research necessary to produce a given product will continue to be economically viable. Patents are a necessary means of protecting years of investment, research, and data, and when countries ignore these patents--for example, when the Chilean health ministry grants permission for marketing approval to Chilean companies while the patent held by a U.S. company is still valid--these acts harm drug innovations. Is this just an asterisk in an otherwise successful free trade agreement? No, in the sense that it is an aberration from the rule of law, one that sets an important precedent in the region as the United States is discussing FTAs with countries that have proven difficulties in implementing and enforcing intellectual property rules.

Ambassador Esteban Tomić
Organization of American States

The Americas share a common continent and framework, and when compared with other regions in the world, this region is best positioned to create a better future. Although Chile struggles on some aspects of implementation, it is by and large an example for the rest of the region in free trade implementation. It is difficult to be the “first in the class” because others do not want help, but Chile is also accused of being too low-key. Furthermore, populism in the region has given “free trade” a bad name. In the spirit of helping to make “free trade” a positive phrase without preaching to our neighbors, we are founding a law center to study free trade implementation and to propose laws to guide better implementation in Chile.

Chile hopes to serve as an example of how free trade works and contributes to reducing poverty. Trade brings two things. When someone sells a product, it is because that person has specialized and creates a better product, which is good for the country. Buying a product implies having trust in the seller and that country. Therefore, trade brings trust, links, and eventually, a better political understanding. The hope is then that the law center will help enact policies to increase the benefits of free trade, such that other countries will want to know what Chile is doing and Chile will be able to respond in a productive way.

Boris Kozolchyk
National Law Center of Inter-American Trade

Chile’s largely untapped strength, at least up until this point, has given it the possibility of becoming the financial center of South America. The country has already proven itself at the forefront of the banking industry, with high standards in the areas of transparency, recordkeeping, and regulations against insider trading. Much as the European countries used to turn to the Bundesbank for their financial information, countries in South America could turn to Chile. Chile has a strong financial marketplace with sound regulation, but it still misses one point: providing credit to small and medium merchants and consumers. The law center has already begun work with President Bachelet to create the laws necessary to promote microfinance.

Although some intellectual property rights deal with trademark issues, which constitute a blatant piracy of a name, for example, the pharmaceutical situation is a bit different. Regarding the pharmaceutical industry, a government might see a part of its population that does not have access to a given medication. and through the health ministry it may grant permission to market a drug in an effort to address that population. There is room for negotiation on this issue, which does not necessarily mean helping pirates, but those who would like to help groups that would otherwise not have access to these drugs. In the financial marketplace, it is not the title that is all important, but rather standards of fairness that govern these transactions. This is not a zero-sum game. Foreign companies should be treated within a given jurisdiction in the same manner in which their counterparts would want to be treated.

AEI research assistant Megan Davy prepared this summary.

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