American Enterprise Institute

May 23, 2006

[Edited transcript from audio tapes]

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

Proceedings:

Roger F. Noriega:  Well, thank you very much for coming.  Ladies and gentlemen, we welcome you here to the American Enterprise Institute for this important panel that will have a considerable impact, not only on our opportunities in the Americas, but stability in the region and development of the economy of an important, reliable, and stable friend, Chile. 

I recall having a conversation with a friend of mine from Latin America reflecting on all sorts of issues, and finally he asked me an essential question, “Why is the United States so rich?”  And in a few seconds, I sort of reflected on that question.  I wondered about the agricultural exports and strength of the United States over centuries but I’m from Kansas, and I know that when Kansas was initially settled, there was no weed out there to harvest or corn.  It had to be planted.  As a matter of fact you had to develop certain kind of planting and irrigation and disk farming literally to get anything to grow on that arid environment. 

I thought about mineral wealth, but we all know that an important fact of developing countries with mineral wealth are much more likely, as a matter of fact, to grow slower than countries without mineral wealth.  Chile is an exception, and part of the reason that it is an exception is the way it has handled that mineral wealth, and we will talk a little bit about that in broad terms. 

And in a second I thought about the question of why we are wealthy.  Is it technology?  Well, we were absolutely wealthy before we were the technological leader, and there are countries in the world that are at least as developed in terms of cutting-edge technology as we are, and it came down to an essential point rules.  We are wealthy because we have rules.  We have rules that are clear and applied in a predictable way, and you have a state strong enough to apply rules without fear or favor. 

That applies in trade, too.  You need transparency and predictability to encourage trade and investment, and that is the foundation of our initiatives in the trade.  But I have to know that the United States pursues this agenda with just a strong and essential commitment to the concept of the rule of law and of democracy because you can use trade to develop economic growth, but you need strong institutions.  You need rules.  You need representative democracy.  It would be our contention to extend that economic opportunity and the fruits of economic growth to people from all walks of life and to have sustainable integral development.  And that is extraordinarily important in this hemisphere at this hour. 

We reflect a little bit about the tumult in recent years in Latin America and point of fact, it is the continuation of a decades-old struggle of how do you develop economies, and how do you bring people who are on the margins of society along in this development process so that they are included, that they have access to political power and economic opportunities so they can claim their fair share of the economic growth of their country.  So rules are essential to all of that.  They are essential to our trade agendas I have suggested.  But the contention here is that trade agreements do not implement themselves, and that you can have rules but they have to be respected. 

We have assembled a panel to reflect on one example, one very auspicious example, of trade initiative in this hemisphere that we hope will be a model for our continued development of economic partnerships in this region.  I’m going to introduce the panelists just before each of them speaks, and we will then take questions.

Our first presenter is Rolando Ortega who is a member of the Diplomatic Foreign Service of Chile.  He is the first secretary for the commercial office of ProChile here in Washington.  In 2004 he was posted to the Embassy of Chile in the United States, working in the Economic Division of the Embassy.  He works on trade promotion activities, as well as in the implementation of this Free Trade Agreement.  From 2001 to 2003 he was the chief of staff of the director general of International Economic Affairs at the Ministry of Foreign Affairs of Chile.  In this position, he was responsible for coordination of the work within that directorate, which includes ProChile operations, as well as with other ministries of the administration during a period which Chile reached a Free Trade Agreement with the United States, the European Union, the European Free Trade Association, and South Korea. 

We have asked Rolando to walk us through the experience of the U.S.-Chile Free Trade Agreement, and he will give us the basic presentation, basic numbers on the agreement.  Rolando, please.

Rolando Ortega:  Hello, good morning.  My name is Rolando Ortega.  I work at the Embassy of Chile as Roger presented me.  First of all, I would like to thank you, the American Enterprise Institute, for this invitation and also the Law Center for Free Trade Implementation.  And I’m going to talk a little bit about the US-Chile Free Trade Agreement, its implementation process and results.  I will skip some slides because my presentation probably is too long for this occasion. 

First of all, I will give some basic figures about Chile.  Chile has a population of 15.7 million people.  Its GDP is $115 billion.  That represents more or less one percent of the GDP of the US economy.  Our income per capita at the year 2005 was $7,430, but if we measure our income per capita at purchasing power parity, it is $12,000, which is one of the highest in Latin America.  As Chile has a small economy, we decided to abandon an import substitution model more than three decades ago in favor of an open economy, competitive and export oriented.  Chile is highly dependent on foreign trade.  Export plus imports represent 65 percent of our GDP, and foreign trade is an essential component of our strategy of economic development as it stimulates exports, imports, economic growth, employments and finally the reduction of poverty as we will see. 

Chile has had an active policy of trade liberalization through three different channels.  First, there was a unilateral liberalization.  Right now we have a flat external tariff of 6 percent.  However, if we take into account the many Free Trade Agreements that we have, the effective external rate is just 1.7 percent.  Then, there is the multilateral level.  Chile participates actively at the World Trade Organization and supports a world trade system based on fair, transparent and non-discriminatory rules in order to avoid that some big countries can impose unilateral measures to small countries like Chile.  And finally there are the bilateral and regional agreements.  Since the 1990s, Chile has begun to have an active policy on bilateral and regional trade agreements negotiations, and this has allowed us to deepen our openness to the world economy. 

Here we can see that during the first part of the 1990s, Chile negotiated and signed an Economic Complimentary Agreement with our neighbors in Latin America in the framework of ALADI, but then we learned the experience of NAFTA and we expanded those agreements with new areas and disciplines.  And we began to negotiate very important Free Trade Agreements since the second part of the 1990s, with important partners as Canada, Mexico, Central America, the European Union, the United States in 2004, South Korea, EFTA, which is the European Free Trade Association. 

And then we have signed agreement with P-4 (Pacific Four), which is comprised of Singapore, New Zealand, Brunei, and Chile, and then we signed an agreement with China and India.  Those last agreements have been finished the negotiation, but at the moment are in the Congress and we think that at the end of the year will be enforced.  Now we are negotiating a very important agreement with Japan. 

So what does it mean?  It means that a small country as Chile, as I show you, has a market access to a world population of more than 3.8 billion people representing more than $30 trillion, which is three times the U.S. economy and 300 times the Chilean economy.  Because we have had a non-discriminatory openness to world markets and because of the many free-trade agreements we have signed with different countries in different regions, we have a very even distributed trade with different regions in the world.  As you can see our trades with North America represent 18 percent, with Europe 22 percent, with Asia 28 percent, and with Latin America 28 percent.  That means that we diversified our risk, because if one region of the world does not have any good economic performance, we still have important trade with other regions of the world. 

So in that context is that we negotiate a Free Trade Agreement with the United States.  At the end of the year 2000, President Clinton invited President Lagos to initiate negotiation.  That was a very risky operation because at that time the United States did not have a Trade Promotion Authority, but we took the challenge and we started negotiations.  And I do not remember if it was in 2001 or 2002, the U.S. administration got the Trade Promotion Authority, and after fourteen rounds of negotiations, in June 2003 we signed the agreement with the United States and the Free Trade Agreement entered into force the 1st of January 2004. 

What is important to mention is that this Free Trade Agreement will liberalize all the products traded between both countries.  That means that at the end of twelve years, there will be no exceptions.  All the trade will be zero tariff.  At the moment the agreement entered into force, 88 percent of Chilean export to the United States were duty free, and also 88 percent of US export to Chile were duty free.  After two years, 95 percent of our exports to the U.S. market are duty free and 89 percent of U.S. exports to Chile are duty free.  Some sensitive agricultural products will be liberalized in the longest phase output of twelve years.  There are phase output periods of two, four, eight, and twelve.  Now we are in the third year of the agreement. 

Now if we have a look to the figures of our bilateral trade, we can see that a bilateral trade between our countries has had a spectacular increment during the first two years of the agreement.  So in the year 2003 our bilateral trade was nearly $6 billion, and in the year 2005 it was nearly $11 billion.  That represents an increment of 83 percent in just two years.  Now if we have a look to a Chilean export to the US in the first two years, they have had an increment of 80 percent while U.S. exports to Chile have been even more dynamic, and they have had an increment of 88 percent in the first two years. 

Now here we have the figures for the first quarter of this year, and the first conclusion that we are going to take is that the bilateral trade has continued being very dynamic.  It has grown at a rate of 30 percent compared with the first quarter of last year.  But Chilean exports to the United States have been even more dynamic than U.S. exports to Chile during this first quarter.  Even though this is a very short period, and we cannot exact conclusion for the whole year from just one quarter, so far figures are very good. 

The thing that is important to mention is that our total exports to the world during the first quarter of this year have increased at a rate of 33 percent, while Chilean export to the United States have increased at 46 percent.  So this is a demonstration of the importance of the U.S. market to Chile and the effect that the Free Trade Agreement has in our trade.  This graph is very important because it shows the trend that bilateral trades between Chile and the United States have had during the last fifteen years.  As you can see during most of the 1990s, the United States had a surplus in the bilateral trade with Chile.  But since the year 1998, U.S. export began to decline in absolute terms. 

One of the reasons why is that the United States had no Free Trade Agreement with Chile, while Chile was having a very active policy of negotiating a Free Trade Agreement with other countries and important partners as for instance, Canada, Mexico, and Mercosur.  So the United States was losing competitiveness in the Chilean market because it had no Free Trade Agreement with Chile.  As you can see from the year 1998 to 2003, the U.S. exports to Chile were declining in absolute terms.  But since the year 2004, U.S. exports to Chile reversed the trends and began to increase again, as you can see from here to here.  And then during the year 2005, again there was a spectacular increment in U.S. exports to Chile.  So this is a demonstration of the effect of the Free Trade Agreement in trade. 

This graph shows more or less the same with the previous one.  The green columns are the Chilean exports to the United States, and the red columns are the U.S. exports to Chile.  As you can see from 1998 to 2003, U.S. exports to Chile were declining in absolute terms but since the year 2004, there was an important reverse in that trend, and the U.S. export began to increase very rapidly - the red columns. 

In this slide we can see the main Chilean export to the United States.  As you can see, the main export to the United States is copper.  Copper is our traditional product.  It represents 26 percent of our total export to the United States.  However, it used to be less than that.  Two years ago, it was just 16 percent but as you know world market prices of copper are very high at the moment, and that explains why the proportion of copper in the total Chilean export to the United States has increased.  Nonetheless, in our total export to the world, copper represents 44 percent.  So that means that our exports to the United States are more diversified than our export to the whole world. 

Having looked to the product that we export, we can conclude that 63 percent of our exports are processed natural resources.  About 51 percent are natural resources and just seven percent are industrial goods.  Now here we have the U.S. exports to Chile.  They are mainly intermediate goods.  Sixty-three percent of all the U.S. exports to Chile are intermediate goods, and 29 percent are capital goods and just six percent are consumer goods.  So we can conclude that our economies are very complimentary.  We export mainly processed natural resources and you export to us intermediate goods and capital goods, which is very good for our economy in order to increase our productivity and increase our capital capacity to expand our economy.

 Here we can see that the United States is the main trade partner of Chile, representing 13.5 percent.  The second partner of Chile is China.  It used to be Japan for a long period of time, but now China is ahead of Japan, and it is growing very fast.  You can see that we have foreign trade but very diversified in terms of countries.  So the main partner is just 13 percent of the total trade. 

Regarding foreign direct investments, the United States is the main source of foreign direct investments in Chile.  U.S. companies invested in Chile $16 billion since the year 1974, and this represents 26.5 percent of the total.  However, during the first two years of the Free Trade Agreement, the FTA has not stimulated significant U.S. investment in Chile as it was expected.  During the first two years of the agreement, just 2.8 percent of total foreign direct investments have come from the United States.  Then, we will see some hypothesis for that.  This is a distribution of U.S. investments in Chile, so the main sector that receives U.S. investment is the mining.  We are a mining country 35 percent.  And the second sector is electricity, gas, and water with 15 percent.  The third sector is financial services with 14 percent, and the fourth sector is telecommunications with 11 percent. 

So to conclude that the United States is the major source of foreign direct investment in Chile, but so far the Free Trade Agreement has not stimulated a significant amount of new investment from the United States as it was expected.  There are many hypotheses, but I will not mention those because we do not have time, but you can read it there, and if you want I can send you my presentation afterwards. 

Intellectual property rights:  As a consequence of the Free Trade Agreement, Chile has committed itself to set up one of the highest intellectual property rights standards in the world.  Chile has implemented in the last year reforms to IPR legislation, new civil and criminal procedures are in place, which represent - it may have changed a significant upgrade to IPR protection.  On December 2005, a new IPR law entered into force, which upgraded our relations to WTO TRIPS standards and complied with our international obligations under the Free Trade Agreement.  The main characteristic of the new law is that it strengthens IPR, provides additional transparency to registration procedures and contains specific regulations for data protection.  I will not go in the details because this is a very complex matter, and I have to say that I’m not an expert, but anyway, I have to give you a broad picture about this subject.  If you have a question, you can ask me after my presentation. 

We also implemented a new criminal procedure in June 2005.  It was completed with its implementation in the Metropolitan Region of Santiago.  The new criminal procedure speeds up proceedings to a maximum length of two years, and also it was created the General Attorney's Office in charge of prosecuting all violations of criminal law, including IPR offenses.  We have also implemented important additional reforms.  The number of patent examiners was doubled to reduce time of granting patents.  Structural changes to the Industrial Property Codes, and it was created in an inter-ministerial committee in order to improve the coordination of IPR matters after the implementation of commitments regarding IPR. 

Regarding the Special 301 Report, I do not know if you are aware of what is that.  This is a report that the USTR made every year regarding how countries are complying with its obligations in IPR matters.  Chile, after the process of assessment, the USTR decided to maintain Chile in a watch list as the previous years but with an out-of-cycle review, which means that in anytime during the year, the USTR can ask for consultation with Chile for specific matters. 

Anyway, the Pharma [??] and the Intellectual Alliance for Property Rights had asked to downgrade Chile to priority watch list, but the USTR made an assessment of our improvements and decided to keep Chile in watch list.  And the USTR recognized the progress Chile has made concerning enforcement of IPR, both through legal reforms to IPR legislation and new civil and criminal procedures.  And anyway, we understand that this is an ongoing process.  The enhancement of IPR is an ongoing process.  We are open to continue talking and engage in a very constructive bilateral dialogue with the USTR in order to improve those things that of course we can do in the future.  So Chile reaffirms its commitment in meeting its international obligations. 

One of the conclusions that I would like to make is that the implementation of the Free Trade Agreement has been very successful because there have been a remarkable increase in bilateral trade in both directions, but it is especially worth to mention the increase in new export to Chile after the period in which they were declining in absolute terms.  Second, there have not been any conflicts in the bilateral trade relations except for specific concerns on the application of some regulations.  The institutional framework established in the Free Trade Agreement has worked properly.  There have been different meetings of different committees that deal with specific matters in which it has been possible to talk, to discuss, and to solve minor differences. 

Now, we have mentioned just two complete examples that we have obtained from the Free Trade Agreement in the framework of the bilateral technical group of XPS measures.  The USDA published last December the final rule authorizing Chilean export of red meat to the United States, and so far there are four Chilean companies authorized to export red meat to the US market.  Regarding poultry, the Chilean inspection system of poultry led by SAG, which is Servicio Agrícola y Ganadero, has been approved technically by USDA and FSIS, and it is found in the draft rule for publication and then the final rule to authorize the Chilean export of poultry to the U.S. market, these are complete results. 

New initiatives:  The United States has expressed its willingness to harmonize rules of origin between Chile and NAFTA countries.  This will simplify custom proceedings and also will facilitate trade.  And it make sense because the Free Trade Area of the Americas is stagnant, as you see, so it makes sense to try to harmonize rules of origin between countries that have a Free Trade Agreement between themselves in order to simplify custom proceedings and facilitate trade.  Chile agreed with that proposal, and the negotiations can start once NAFTA makes the announcement.  On other hand, the recent initiative to negotiate an acceleration in the trade liberalization schedule, there are still 300 tariff lines that are not duty free, out of a total of 7,000 tariff lines, and both countries agree to accelerate the trade liberalization of some products.  So we will soon start the process of acceleration in the phase-out of duties. 

Each country has improved temporary entry of business people.  According to the Free Trade Agreement, each country shall grant temporary entry to businesspersons for a period of between six months and three years.  There are four categories, business visitors, trader and investor, intercompany transferees, and professionals.  The idea is that they can take advantage of the provision of the Free Trade Agreement.  However, the lack of information about those visas has restrained their use but there is a growing interest in using them and we think that in the future Chilean people will start to use them more intensively.  On the other hand, there is the government procurement, according to the Free Trade Agreement companies of both countries have access to government procurement of the other party, but the U.S. system is complex and Chilean companies have not been able to take advantage of the huge opportunities that the U.S. market offer.  So at the moment we are doing an assessment study in order to learn the rules of the games of the US system regarding this matter. 

Now, why the Free Trade Agreement has been so successful?  Well, because Chile has a strong and stable economy, a competitive one, and this is because we have a pragmatic policy mix on the roles of markets and the states.  A very long time we implemented important economic reforms.  I will just mention the liberalization of prices on markets, privatization of public enterprises.  There is a concensus on key role of the private sector in the productive process, openness to foreign investment, low external tariff and, on the other hand, the government has a focus on policies regarding maintaining stable, clear, and nondiscriminatory rules, reducing poverty and preserving economic stability. 

Regarding microeconomic stability, Chile has sound and consistent microeconomic policies.  I just will mention three of them.  We have a monetary policy based on inflation targeting framework aimed at keeping the inflation in a range between two and four percent.  The Central Bank of Chile is independent from the government and they conduct the monetary policy.  We have a flexible exchange rate, which helps us to make the Chilean economy more resilient to external changes and external chaos and we have had a strict fiscal discipline for more than twenty or thirty years, and since the year 2000 there is a rule of structural fiscal surplus of 1 percent of GDP.  That means that in average, we should have a fiscal surplus of 1 percent, estimating some economic growth. 

Here I will show you a study released by the World Economic Forum in April this year regarding competitiveness of Latin American economies.  As you can see, here it is ranked number one in Latin America, as it has been doing the last years, and it is by far the most competitive economy in Latin America.  This is in a study released by World Economic Forum in April this year, and it is made in Brazil, and it is a supplementary study for the Global Competitiveness Index.  As you can see, Chile ranked 27th out of 117 countries in the world.  And what is remarkable to mention is that Chile is ahead of thirteen of twenty-five European Union countries in terms of competitiveness.  No other Latin American country is ahead of any European Union country. 

And now I will finish showing the link that there is between openness to foreign market, increase in export, economic growth, and reduction of poverty.  This is the trend that out exports have had during the last twenty years.  We have increased our export ten times in twenty years.  It has produced a spectacular evolution of the gross domestic problem, that is, economic growth.  Here we have the figure for the last twenty-one years, and we have had an annual average GDP growth rate of 5.9 percent annual average.  So I know that China has an even higher rate but we are in Latin America, so for us it has been very important.

 Yes, and we have not had any balance of payment crisis during the last twenty-one years, and what it means, well, a very stable and solid economic growth have allowed us to reduce in a very significant way, poverty rate.  When Chile recovered democracy in 1990 there was a poverty rate of 38 percent, and now according to the last survey that was made in the year 2003, the poverty rate is 18.8 percent.  I’m sure that this figure should be even lower, because from 2003 to this year we have had three years of very strong economic growth and very well-focused social policies.  The reason for that is the strong and stable economic growths are very well-focused social policies.  There had been tremendous efforts to increase coverage and quality of health, education, and other social necessities. 

And with that I will finish, thank you.

Roger Noriega:  Thank you very much, Rolando, and I should note that we will make arrangements to have your slides on our website, AEI’s website, probably within a few hours of the conclusion of this meeting.  And then, of course, I’m sure they are available on your website, too, but we want to make those available, and we thank you very much for that thorough and very informative presentation. 

Our nest presenter is John Murphy, and I’m sure he is a very well known to all of you.  He is vice-president of the International Affairs for the U.S. Chamber of Commerce and executive vice-president of the Association of American Chambers of Commerce in Latin America.  Mr. Murphy directs policy advocacy activities related to international trade and investment on behalf of the U.S. Chamber of Commerce.  In late 2005 he assumed responsibility for the Chamber’s advocacy relating to the global trade negotiations called the Doha Development Agenda, as well as a series of crosscutting international policy issues impacting trade and investment.  With a long background and trade issues relating to the Western hemisphere, Mr. Murphy and his colleagues directed a successful multifaceted advocacy campaign to win congressional passage of the CAFTA-DR agreement.  And he also played a very important and similar role with regard to the U.S.-Chile Free Trade Agreement in 2003, John Murphy.

John Murphy:  Thank you very much, Roger.  I would like to express my appreciation to Roger and to AEI for holding this forum.  I think your opening remarks about the rule of law were particularly germane, considering events in Latin America, and as a person and as an institution I thank you for your leadership on those issues.  I was just commenting to Rolando and to Roger before we started, that recently with Ambassador Bianchi leaving, there has been a little bit of nostalgia about the effort to secure approval of the U.S.-Chile Free Trade Agreement several years ago.  I think at that time we thought it was hard but since then, and here is Maria Benatton with the Embassy of Honduras, I think we have seen what a hard trade campaign can be.  But there are good lessons to be learned from this trade agreement, which is, as has been noted in many ways a tremendous success and a great sort of poster child for what a free trade agreement can do. 

I’m planning to split my time more or less evenly between a PN to the FTA success and a focused criticism on the Chilean government's failure to implement one part of the agreement.  So those of you who woke up in a sunny mood and wish not to be disturbed, you can break away at my halfway point, and those of you who woke up grumpy and wish to stay that way, can take a five minute break now. 

But first, the good news.  I will try not to repeat the statistics that Rolando gave, but the agreement has succeeded in doing what a trade agreement is supposed to do, foster trade.  It has driven growth and jobs.  It is an example to other countries, with regards to efficacy of free trade as a policy, and in terms of its ability to enhance the U.S. partnership with Chile across a variety of fields.  We have two full years of implementation according to the U.S. statistics, which are a little bit different but fundamentally show the same trends.  In 2004 we had a 33 percent rise in U.S. exports and then in 2005 we had a 43 percent rise in exports. 

So all told, U.S. exports are up about a little more than 90 percent.  That is almost doubling in a space of just two years.  As a reference point, U.S. exports, globally in that period, rose about 23 percent.  So we are talking about an increase that is four times as fast going to Chile.  According to the U.S. statics, Chilean exports to the US have risen almost as much by 80 percent in two years, so it is quite a balanced result.  I think it is very fair to point out as Rolando did, that Chile is undergoing a huge export boom, based in large degree on commodity sales to Asia.  Chilean exports to Asia are rising even faster than their exports to the United States.  In many ways, what you have is a kind of a triangular trade where U.S. capital goods are sold to Chile and used to drive that export boom to Asia.  I think everybody is winning from that. 

Now we all expected the agreement to be a success, but I think the huge explosion in trade has caught many people in the city by surprise.  The U.S. International Trade Commission has the job of doing an estimate in advance of how much new trade we expect to see from a Free Trade Agreement.  Now their forecast before this agreement was even approved was export growth from the United States of 18 to 52 percent over the first twelve years of implementation.  So the rising U.S. exports to Chile, in fact, over just two years was five times higher than the low end of that estimate and twice the high end of that estimate.  And just to reiterate - I’m talking about the positive reality of two years, not this twelve years that the ITC was using. 

Now some individual companies can point even more astonishing gains, for example Caterpillar.  Bill Lane of Caterpillar was one of the co-chairs of our business coalition that worked on this, and I think we all memorized his talking points.  This morning I remembered I had a poster in my closet - here is my visual aid.  It takes more than a Caterpillar machine to level trade’s playing field.  It points out that this motor grader, which cost $187,000 was facing tariffs of over $11,000 dollars, 6 percent at that time.  Now academics might think, “Oh, 6 percent.  That is nothing to a global multinational.”  That is completely wrong.  Margins are so low in today's globally competitive world that that is a huge difference.  And of course, Caterpillar, like a good global company, also manufactures in Brazil, which had duty-free access.  So they were selling the Brazilian motor graders to Chile. 

So what is the upshot for Caterpillar?  Exports of Caterpillar-type equipment from Illinois have risen dramatically.  Sales of front-end shovel loaders rose from about $10 million to $40 million in two years.  Sales of off-road dump trucks, which are the colossal dump trucks used in mining operations, rose from about 40 million to 200 million.  So we are talking four-fold and five-fold increases here from the state of Illinois.  That is pretty good news for Peoria. 

So let me just draw a quick couple of conclusions from that.  First, the International Trade Commission needs a new model.  I’m joking, but only a little bit.  On CAFTA they said it was going to have this little impact.  I’m quite confident that in CAFTA we are going to see incredible results also.  On the Peru agreement, we are expecting the ITC to come out with the report shortly, and here is Italo Acha from the Embassy of Peru.  I think we can expect it to also lowball the expectations here.  But the Chilean experience is helpful because it is a remedy to that exaggerated conservatism.  There is a real political risk that arises from that kind of lowballing there, so that is why I wanted to highlight it here. 

The other conclusion I want to draw from that is that you should never bet against the animal spirits of American entrepreneurs or Chilean entrepreneurs or entrepreneurs anywhere.  You can never predict how taking away barriers to trade is going to bring benefits.  Tariffs around the globe are generally much lower today than they were right after World War II, but modern FTAs had disciplines that go far beyond just cutting tariffs.  It covers economic growth sectors, such as services, government procurement, and investment.  So that is why we are seeing these great benefits.

 Now against this general back draft of success, I would like to spend a few minutes talking about one of the major disappointments of the agreement, namely the Chilean government’s failure to implement the intellectual property provisions of the agreement.  Intellectual property is a very big deal.  In fact, at the U.S. Chamber of Commerce, we have a huge anti-counterfeiting initiative, which is, we spend about as much money on it as we do on all other international trade issues combined. 

That is what we are hearing from our membership.  Condoleezza Rice, the Secretary of State, says that intellectual property is the mother’s milk of the 21st century economy.  That is true not just in the United States but around the globe.  Innovative industries are at the core of our economic progress.  They make high-paying jobs, they enhance our competitiveness and they deliver the goods, whether we are talking about entertainment in the form of a good movie, whether we are talking of business tools like software or lifesaving medicines in the form of pharmaceuticals. 

Now, counterfeit and pirated goods are a problem in Chile as they are in many countries, including in the United States.  The particular problem I would like to talk about is in the pharmaceutical sector.  If you will bear with me for just a moment, I will tell you about the two central challenges that the pharmaceutical industry faces in Chile and in many other countries around the world, problems that pose a direct threat to the value of their intellectual property.  These problems raised questions about whether or not research in life-saving medicines will continue to be economically viable. 

For the pharmaceutical industry, the product is a molecule and a set of test data that shows the molecule’s efficacy and safety.  Developing these items requires hundreds of millions of dollars of investment and years of research.  Because the act of filing for a patent obligates a firm to reveal these data to a government agency, it is understandable that firms will seek legal tools to protect the fruits of their investigations.  That is what we mean by data protection – protection of the data that shows the medicine’s efficacy and safety, and if data of this sort is not intellectual property, then what is? 

Now there is second challenge, which is called linkage.  Basically, firms that have received a patent from the patent office want to avoid a situation in which the Health Ministry can grant marketing approval for a copy of their products, third-party.  In other words, they want their patent to mean something.  You do not have to be an IP lawyer to see that your patent does not mean much if the Health Ministry does not pay attention to the question of whether or not companies seeking marketing approval do not hold a patent.  Failure to enforce this linkage between patent ownership and marketing approval undermines the patent system. 

So with that primer on data protection and linkage, let me read to you the text of the Chile-United States Free Trade Agreement on this subject, one sentence.  "With respect to pharmaceutical products that are subject to a patent, each party shall not grant marketing approval to any third-party prior to the expiration of the patent term unless by consent or acquiescence of the patent owner."  Pretty clear.  I can tell you that the U.S. pharmaceutical industry greeted the text of the agreement with great satisfaction, and they worked very hard to secure the agreement’s approval. 

Now, a couple of specific examples; Merck, for instance, has two products protected by patents in Chile:  Stocrin, an HIV-AIDS drug, and Vytorin an anti-cholesterol drug that combines Merck products with a Schering-Plough product.  In both of these cases, the Chilean Institute of Public Health has issued marketing approvals for copy products manufactured by other companies, companies that never faced the burden of hundred of millions of dollars of investment in creating those products. 

In the case of Stocrin, the Chilean courts refused to issue an injunction after the copy was approved for marketing.  One of those marketing approvals was issued late last year under the Lagos government, and the other just a few weeks ago since the Bachelet government has taken office.  This company is not alone.  Others have brought these difficulties to my attention as well and more importantly to the office of the US Trade Representative.  In the annual special 301 report on intellectual property rights around the world, the USTR announced in April that it will conduct an out-of-cycle review to monitor progress on IP issues in Chile.  This is somewhat unusual to have an out-of-cycle review, and it was at the urging not just of pharmaceutical companies, but of the Chamber. 

Now after commenting on the data protection and linkage problems I have mentioned, the report says, and I quote, "The United States is very concerned that Chile continues to grant marketing approval via sanitary approvals to unauthorized copies of patent-infringing pharmaceutical products."  Now, a skeptic might ask, "Can all these difficulties not be minimized and disregarded as limited to a single industry?  Is this not just an asterisk on an otherwise successful agreement?"  I would contend that the answer is no.  The refusal to abide by the clear terms of the FTA is an aberration from the rule of law, respect for which has been the key factor differentiating Chile from many of its neighbors in Latin America and the Caribbean, for Chile truly is a nation of laws. 

When I lived in Chile in the early 1990s, I remembered seeing copies of laws sold on newsstands in downtown Santiago and people actually bought them.  That is something that United States and Chile share, the sense of the law having a central role in our lives.  U.S. firms have invested, according to our statistics, over $10 billion in Chile.  I saw the $16 billion statistic earlier.  That is 40 percent more than US firms have invested in India.  They have done that because Chileans had allowed very little daylight between the letter of the law and its implementation.  This respect for the rule of law is the best and most effective investment promotion program you could possibly device, and Chile's track record has been very good generally.  In the words of one pharmaceutical industry executive, "It never occurred to me that the Chileans would not implement the agreement." 

The precedent here is incredibly important in the region.  The positive results I cited at the beginning of my remarks bear eloquent witness to the potential of FTAs to bring benefits to the United States and to our neighbors in Latin American and the Caribbean.  Now if law-abiding Chile does not adhere to the terms of our agreement, how can we expect other countries to do so?  What about Guatemala, where the Congress has witnessed tough fights about intellectual property rights?  What about the Dominican Republic where overt instances of IP theft, such as broadcast piracy have been a problem throughout for several years?  And what about Peru and Columbia where we have FTAs pending? 

The Chambers' leading business coalition seeking congressional approval of these agreements, how can we secure their passage if the toxic idea takes hold in the Congress that foreign governments simply cannot be trusted to uphold their trade agreements?  Worst of all, Chile's potential as a country in the path toward a high level of economic development will be frustrated if this problem is not taken seriously.  At a time when other Latin American governments are nationalizing natural resources or in one instance, nationalizing a billion dollars worth of U.S. investment in that industry, respect for the rule of law and for property, including intellectual property, is critical.  In the end, wealth is made, not found and you can never achieve true economic development except through a laborious process based on the rule of law. 

I hope that in the years ahead, Chile will take the higher path towards development growth.  Thank you.

Roger F. Noriega:  Well, thank you very much, John for introducing an important issue.  I know that when we conceive of this meeting, we understood that we wanted to have a genuine dialogue, an important dialogue about the implementation of the agreements and respect for the rule of law, and I knew that John would make an important contribution reflecting the concerns of friends of Chile who really want to see this agreement succeed. 

And the genesis of the session was an encounter I had with a good friend, Ambassador Esteban Tomić, with whom I had the real privilege of working at the Organization of American States when I was a permanent representative there.  Ambassador Tomić is a very thoughtful, respected leader in Latin America, and I valued his contribution to the debates at the OAS because not only were his presentations well-reasoned, people listened very much, and it reflected not only the credibility of Chile but of an important respected leader. 

And it was good news to me when he visited me here at AEI and explained that he was establishing one of the founders of the Law Center for Free Trade Implementation, and it has really captured my attention because it is extraordinarily important that Chile as a leader.  And I understand that Chileans are very self-conscious about the fact, that they are a model, and they do not like to be called a model.  As a matter of fact that is why the stakes were so high on the Intellectual Property Rights issue. 

But as I mentioned in my opening comments, these agreements do not implement themselves.  They need the law to be essential to that exercise.  Ambassador Tomić has represented Chile at the OAS for the last six years.  From 1992 to the year 2000, he served at the Council of the Municipality of Las Condes in Chile.  Between 1968 and 1970, Ambassador Tomić led the Adjunct General Office for Economic Affairs at the Foreign Ministry of Chile.  He was exiled from 1973 to 1984, and it will be his returning to Chile at this time that will hold so much promise for this common effort of improving our economic ties, realizing the full potential of the Free Trade Agreement, and demonstrating in important ways to our neighbors in Latin America the promise of the rule of law.  Ambassador Tomić.

Ambassador Esteban Tomić:  Thank you very much, Roger, for your kind words.  Good morning everyone, and I thank also the American Enterprise Institute for hosting us this morning.  We have heard, to me, at least very interesting comments from all the three persons that have spoken before me.  I think each one of us has to contribute what he really knows this morning in order that it becomes an important meeting for you.  As Roger Noriega said, I have been the Chilean Ambassador to the OAS for the last six years, so my position there was to contemplate a political process in the Americas, which is our common geography; yours and mine. 

What would they say as the first thing?  The Americas is living at a very interesting process if you think it worldwide.  And I want to put a very precise and perhaps painful accent.  I want to place you on the 11th of September 2001.  That day, all our foreign ministers, including Colin Powell, were meeting - and including Roger Noriega - were in Lima.  We were holding a special general assembly of the OAS because we were signing the Inter-American Democratic Charter, which is a fundamental document that we all agreed upon in order to improve the democratic functioning of all our governments in the continent.  It is really a very interesting and well-done instrument done by the OAS. 

The same day, at the same moment we were signing the charter, happened what you know in New York, Washington, and other places of the United States.  What do I want to say with this?  The same day where the Americas were organizing themselves, giving themselves rules in order to improve democracy, other parts of the world decided to use the weapon of terrorism, and we are not organizing themselves but we are disorganizing the word “order”.  I’m making this comparison, and it is a very painful remembrance, because it is good that we become conscious, that what we have in the Americas, our common continent and our common framework, which is the OAS, is much better than in many places of the rest of the world.  So we are in a better position in the Americas in order to think of a better future or to think of improving our common and reciprocal relations, and so on. 

This is my starting point.  Roger said something, which is very true.  We have all heard about Chile.  I thank John also for his criticism.  I think good news comes sometimes together with bad news, and we have to hear the bad news in order not to think that we are living in paradise.  We have to tackle all the problems that we have, but to say it shortly, indeed Chile is put as an example many places today.  And that is a problem for us Chileans, because we know that it is not good.  If you have a good idea and you are improving, and you have a feeling that you chose the right path and you want the others to do the same, it is not good to say, “I’m the first of the class.  I want to give you some lessons,” because you get the contrary of that. 

So we have to choose passes where our neighbors can look at what we are doing without receiving a lesson from Chile.  And I think we have been rather successful in doing that.  Sometimes I get criticized, we get criticized — Chilean diplomats — because we do not give lessons so you are too lucky people.  But this is the real reason, and I think you will understand me.  In this Americas, which are on a better position than the rest of the world, I insist, we have, of course, open problems and one of them is the problem of populism.  It has disorganized the panorama we had three or four years from now and before.  They are people that are very much concerned, but I insist the problems we have here are not as big as the problems that we find in the rest of the world.  And populism has made of “free trade” a bad word. 

Living there… oh, yes after six years I go back to Chile, I go back to my profession — I’m a lawyer by profession — I knew about an initiative of creating in Chile a law center for implementation of free trade, and the people that were behind this initiative, among them the National Law Center for Inter-American Free trade of Arizona, the law faculty of the University of Chile, some very known law firms of Chile, they asked me if I wanted to join them.  And I enthusiastically said, “Yes.”  Why?  Because thinking always on not giving lessons to the rest, but we have to engage with free trade and try to make free trade in all of the region not a bad word but a good word. 

Why?  And I’m looking at things still from the political point of view.  Perhaps after two or three years, I’m going to become an expert lawyer who will speak about technical matters like John did, but now I’m still looking at things from the political point of view.  Free trade as you have seen has worked for all Chileans.  We have reduced substantially poverty.  And that is what the rest of Latin America and Central America needs to do.  To reduce poverty, democracy has to deliver and democracy cannot deliver.  I am convinced of that if we do not have free trade among us.  Why?  Because trade brings with it two things:  First of all, if you sell somebody something, it is because you specialized on doing that — a service, a good — you specialized.  So you know how to do it better than others.  So you put it on the market and that is very good for the country to specialize on doing certain things and selling them on the market. 

But the second aspect, a very important aspect of trade is that buying something from somebody implies having trust in that person or in that country.  It is very difficult to have trust, and trade brings necessarily trust with it.  If you buy fruits from Chile, you trust that that fruit is not going to damage your health, and so on.  If you buy water from France, we all drink Perrier and nobody asks if it is dangerous or not.  Why?  Because trade brings trust with it and trust makes links, and links bring to a better relationship.  And a better relationship brings also with it a better political understanding among countries. 

Friends, I’m not going to speak longer but we have decided to create this law center in Chile, to work in Chile, and the idea is to propose to the government, to Congress better laws, better regulations to deal with the juridical aspects of a better and freer trade in our country but we are conscious that if we succeed in Chile, other countries of the region will want to know what we are doing, how we are doing it, with whose help we are doing it, and we are going to be very happy to let them know it is in an indirect, not haughty way. 

Thank you.

Roger F. Noriega:  Thank you very much, Esteban.  Our final presenter is Dr. Boris Kozolchyk, who is an Evo DeConcini professor of law at the James E. Rogers College of Law at the University of Arizona and president and director of the National Law Center of Inter-American Free Trade.  Prior to his position at the University of Arizona, he was on the faculty or was a visiting professor at a number of law schools including Southern Methodist University of Costa Rica, National University of Chile, National University of Mexico, University of Provence, France, and Louisiana State University, where he was also a member of the advisory board to the LSU Hemispheric Trade Program.  In addition to his work with the United Nations Commission on International Trade Law, Dr. Kozolchyk worked with the Organization of American States in its Private International Law Organization. 

We welcome him here this morning.  Dr. Kozolchyk.

Boris Kozolchyk:  Can you hear me?  Okay.  What I would like to do in the fifteen or so minutes that have been allotted to me is just dream a little bit about what the implementation of the Chilean, the U.S. Free Trade Agreement can mean not only for Chile but for the region.  And I will start out by telling you very simply that the dream entails Chile acting as a financial center for that part of the hemisphere and the reasons for it.  Ambassador Noriega spoke about the rule of law, John Murphy talked about buying laws in Santiago, and Roger talked about the importance of the implementation of all sorts of legal programs, and Ambassador Tomić has now told you about the creation of a law center in Santiago. 

My exposure to the Chilean legal system goes back to the 1960s when I visited the University of Chile at that time.  But since that time I have been exposed to Chile in various capacities.  One of them most recently was to try to help to resolve what loomed very large as a possible major financial crisis in the hemisphere.  This is during the Clinton administration.  You remember the days of the Tequila crisis?

And at that point, the National Law Center that I direct, and about which in above, which I’ll tell you a little bit more in a moment, was asked by the Department of Treasury of the United States and by the Chilean Department of Treasury to see what could be done in terms of transparency and disclosure rules for the banking institutions of the hemisphere to avoid what seemed to be a rather imminent crisis.  At that point, we were lucky enough to put together a team of accountants, economists, bankers, auditors, lawyers, and visit the few countries in the hemisphere that were threatened by this financial crisis. 

Chile was the very first one we visited.  And the visit to Chile was a superintendent of banks and I remembered as if it were now, we marched in with a number of questions that our Chilean Economic Advisor Christian Larraín had prepared, and one of the members of the delegation was one of the most distinguished banking auditors in the hemisphere, Marcelo Bessan from Brazil with KPMG.  And we asked the superintendent of banks in Chile how many reports they got from the banks and how open, how reliable where they, how prompt where they and he said, “Well, we have dailies by computer and then weeklies and then monthlies.  And the monthlies are the most complete, the most exhaustive.” 

So at that point, Marcelo Bessan said to the superintendent, “And when do you get that report?  He said, “Well, the first day of the month following the month that expired.”  He said, “No, no, we are in family here.  We are talking among friends.  Please tell me really the date that you get it.”  And he said, “No, we get it the next day.”  He says, “No, that cannot be.”  So he said, “To be frank with you, I have been in this business in Brazil for the last thirty-eight years, and I have never seen one of these reports filed any less than six months afterwards.”  “Well, if the reports were there in the file, they will file the next day,” as the superintendent had said. 

And then we started talking about loan classifications and reserves and all sorts of arcane matters, and it was very, very clear that Chile was setting a pattern, a pattern that, to be sure, had been brought about by a very severe crisis in the 1980s but nonetheless a very, very successful pattern.  And the pattern caught across many areas of banking, not only transparency and disclosure.  It caught across something that John Murphy talked just a little bit on the issue of patents in their respect, thought of the issues of fairness, because one thing that was discovered in the 1980s in Chile was that there was a great deal of insider trading in the Chilean banking industry, and as a result of this particular experience, the Chilean banking industry and its standards emerged as a golden standard for the rest of the hemisphere. 

Christian Larraín visited a number of countries, seven or eight by last count.  There was a chief draftsman of provisions that had to do with a friendly and family treatment in terms of loans, disbursements, et cetera.  In other words, the standards had been set forth on what is insider trading in terms of the solidity of banking institutions.  So after that visit, it became very clear that in comparison with many other countries, Chile was the standard.  And if there was as success in that particular operation and the crisis was averted, I would credit the Chilean group and particularly the work of Mr. Larraín and the standards that were set during that effort as being tremendously important in getting it done. 

Recently, I got a letter from Larry Summers before he was fired as president of Harvard.  He was secretary of the Treasury when that took place and he noted, although at first, he was not very much in favor of providing so much freedom for that operation but how successful it had been.  And now if you look at that particular component of the Chilean experience, you start realizing that there is an element of a financial marketplace right there, which is sound regulation.  At the very top of the system, you have a sound regulation. 

What is a financial marketplace?  As a rule, I would like to compare a financial marketplace to a credit pyramid.  At the bottom of the pyramid, you have the consumers that buy from retailers, you have the retailers that buy from wholesalers, and both the consumers and the retailers as well as the wholesalers received banking credit.  And then you have the bankers for the wholesalers and the retailers and the consumers, and then you have the manufacturers and their bankers.  And then at the top of this pyramid, you have the central banking authorities, which are the ones that make possible the rules of the game that, as the money goes up, it flows up from the consumers all the way to the top of the pyramid, it comes right down by way of credit on a sound basis. 

I would suggest that Chile has already part of it.  Chile has part of it and the part that is missing in Chile, interestingly enough, and this was very apparent to me during my last visit to Chile about a year ago with Rodrigo Novoa, just before Rodrigo founded the center in Chile.  What was missing was credit to the consumer to the small- and medium-sized merchants.  Chile had become a major player at the upper levels of the pyramid.  Chile was financing major project finance throughout the region; gas stocks.  The Chilean pension plan was beginning to be a real engine for growth in the region.  Yet, as you looked at that pyramid, the consumer did not have the kind of credit that it had in other places like the United States, Canada, or perhaps Europe, and the same thing with the small and the retail and medium-sized business.  That was missing from the pyramid. 

On the other hand, Chile had something very important in terms of the financial marketplace.  If you look at what happened with the so-called “sterling market” and the “dollar market” and their respective banker’s acceptances when they came about, they were the results of very strong export economies.  Great Britain was the export economy up until the told beginning of the First World War, and this was the sterling market.  There were drafts drawn from all over the world to English banks, and London was the place for the financing of international exports and imports by the discounts of this so-called banker’s acceptances. 

When the United States took over that role at the end of the First World War, you started seeing in places like New York statements like the following:  “Harem [sounds like] and Brothers, we will buy your cotton bills on Liverpool for so much.”  This is somebody putting an ad in the New York Times or the Wall Street Journal or any newspaper saying, we will buy your paper from whatever it comes directed to exports to Great Britain.  Now what made that possible?  What made it possible whereas the trustworthiness of the Harem and Brothers of the day plus the very preeminent role that the United States was beginning to play as a result of the disappearance of the Britannia ruling the waves after the end of the First World War.  The United States had become the major exporting powers for the region, and suddenly it also became the financial center for that particular region. 

One of the things that world trade has brought about is the need for economic engines in the various regions of the world.  The need for an economic engine is very much apparent in Europe.  When I was representing the United States at the UNCITRAL, we were discussing at that point whether or not there would be a European euro, a European unit that would become the source of the — perhaps the replacement of the dollar.  And it became very apparent. 

I asked our French delegate, I said, “How do you feel about being dependent upon the Bundesbank after all?  Do you know?”  He said that he had been doing the resistance during the Second World War.  I asked Professor Macconi representing Italy, also an antifascist fighter and all that, they were perfectly happy with having the Bundesbank becoming the economic engine for their countries because it was providing a measure of stability as Professor [indiscernible] once told me, the French delegate, he says, every morning when the president of the French Central Bank gets up, he needs to call the Bundesbank and see what he does with the French francs in relationship to the Deutsche Bank.  And we welcome it because it provides an element of civility.  Look at the figures of civility that you have been giving us with respect to the Chilean peso. 

So Chile already has that component as well as having the component of being a very important element in terms of the exports for the region.  However, what is still missing in Chile is, on the one hand, while I was talking about the lower rungs of the pyramid, the credit for the small- and medium-sized commerce that Chile still does not have.  Hopefully in the cooperation between our two centers, the one that Ambassador Tomić was talking about that had just being created in Chile and our own center, we are hoping to convince the Bachelet government. 

Already, the government and shown its interest in getting such a law enacted; a law that would make it possible for small- and medium-sized merchants to acquire credit at reasonable rates of interest based upon the security of accounts receivable, inventory, all sorts of assets that so far do not amount to assets in the Chilean banking system.  That is very important because that is the base of the pyramid; that is what generates the flows that eventually get used in the overall operation. 

And finally, a few words about fairness in what John Murphy said.  There is trademark and intellectual property piracy and there is piracy.  There are different types.  When I visited first Costa Rica, I had the experience of trying to collect all the case law that the Supreme Court of Costa Rica had done in various areas, and one of the clear areas in which the Supreme Court had left a mark was that of piracy, trademark piracy. 

It was very common in those days for somebody to find out that an entity like Greyhound was going to be bringing its buses to Costa Rica and then rush to the registry and record Greyhound, Los Galgos, and then say to Greyhound, “If you want to use your trademark you have to pay me.”  The same thing was true with JP Coats, a very famous English thread, and the same thing was true with watches, and everything else.  This was a cottage industry, not in only in Costa Rica.  It was in El Salvador, it was throughout Central America. 

I would suggest that there is a difference between what John Murphy described as being the situation with regard to that third party that is allowed to produce that medicine and the others.  The difference is that in the case of the original trademark piracy, what you had is basically trademark pirates, that is to say people who are stealing it for the sake of taking advantage and exploiting the situation, robbing somebody else.  In the case that he has described, there is problem of fairness, that is to say, the government sees a part of its population that does not have access to this type of medicine, and then tries to do something for that segment of the population by making that medicine available. 

I would suggest that in the field of fairness, there is room for the negotiations that should take place between the people that John Murphy represents and the Chilean government in terms of arriving at a solution that is really fair, that takes into account not the interest of the pirates in the most vulgar sense of the word, but those who would like to help parts of the population that would not have access to it. 

And one final word about this financial marketplace that I’m talking about and it is connected with this element of fairness.  In the last few days, we would be meeting with AID, Nick [indiscernible] is here, about the sole problem of secured transactions and the rule of law in economic development, and I have kept on emphasizing to my good friend Nick and others that the real fundamental element in the law is not so much the ultimate title to anything.  Yes, title can help.  Title is a necessary condition for economic development.  That is to say the legal certainty that you have a piece of paper with which you can work but it is not the beginning and end of everything.  It is not the sufficient condition.  Even much more important than title are standards of fairness that govern the transactions such as anywhere from these patents to important medicines down to the treatment of a secured creditor or secured debtor that is consistent with the morality of a marketplace that is not the marketplace so the winner-take-all, loser-take-none. 

It is not a zero-sum game.  What the global trade system [indiscernible] first by GATT, WTO, et cetera, has brought about, has a profound economic and moral formula, and that is the formula of national treatment.  What national treatment means is that you treat the other party to the transaction pretty much in the same manner in which you would like to be treated.  And this is something that is quite a conquest for mankind. 

The first time that it appeared was in the Middle Ages and the Middle Age fairs.  There were certain towns in Europe where if you came from another town, you were treated like an enemy.  And if somebody from that town owed money to somebody in that fair, you could be quartered, you could be thrown in jail, you had no rights.  The first cities in Europe that started introducing the notion of the “peace of the marketplace” were those cities that brought about national treatment, which is the basis for this treaty, these treaties that we are talking about. 

When we are talking about national treatment, we are talking about the fact that the Mercks or anybody else should be treated within that jurisdiction in a manner similar in which their counterparts would have wanted to be treated.  I would say that Chile is in a very good position to accomplish that leading role, particularly that is required in a financial marketplace.  And my hope is that those of you who feel like we do get in touch with us either contacting Ambassador Tomić, Rodrigo Novoa, and the center or ourselves at the National Law Center because that will be one of the purposes of this exchange and alliance hopefully that we are trying to forge. 

Thank you.

Roger F. Noriega:  Thank you very much.  I know you have… after each of these presentations, I have noticed people wanted to applaud and I think this is the appropriate time to give all of our panelists the applause.  And we thank them very much for very, very thoughtful, thought-provoking presentations as well.  We have time for questions, and there is a gentlemen here with the microphone, and please identify yourselves and direct your question to one of the panelists preferably.  Identify yourself and your organization, please.  Thank you.

Omar Garcia-Bolivar:  Hello, Omar Garcia-Bolivar with the BG Consulting.  It is a question to everyone, but maybe to Boris and Ambassador Tomić.  It is about judicial system.  You have been speaking about rule of law and about trade, et cetera.  In all Latin America, all the judicial systems are in a very bad shape, and I’m speaking very much about judicial systems related to business.  In Chile recently, there was an approval of the so-called “reform of the century,” but it was very much related to criminal courts.  Boris was speaking about financial markets and I have the feeling that there is no way you can have a sound financial market if you do not have sensible courts where poor people [on banks??] can take little cases and be decided in a very independent and reliable way. 

So my specific question is what is Chile doing about this in terms of, again, business judicial system reforms?  It is well known, for example, that in Chile everyone speaks about the telephone justice, where people at high levels call lower level judges to instruct them how to decide and so on.  With that, I do not think, if that phenomenon is in place, I do not think you are going to have a sound financial market.  So what is Chile doing first, and secondly what you think, Boris, can be undertaken in order to have not only reform in Chile but a pattern that somehow can be taken to a whole emissary and eventually serve as a model for all the Americans?

Roger F. Noriega:  Ambassador Tomić will answer first and then I’ll …

Esteban Tomić:  Yes, very briefly.  As you mentioned and has Rolando also mentioned, we have introduced a very important reform in criminal justice, which also has to do, of course, with trade and commerce and so on.  So our criminal justice now has entered into a wholly new process, and the country is really very much surprised about the results we are getting from it. 

And again, this is also… this has been accompanied by the rest of the countries with a great attention.  It has been created the so-called Centro de Estudios de Justicia de las Américas, which is based in Santiago, in order to form their judges from all over the region and this center is working already for five, six years and it has had very good results.  It does not belong to areas [sounds like] exclusively.  The State Department has also helped on the creation of this center, but we are very much aware of the necessity of having a renewed judiciary in the hemisphere.

Boris Kozolchyk:  Yes.  Omar is a colleague, and we participated together in an assessment of Central American legal institutions, particularly commercial legal institutions and we see very much eye-to-eye in terms of the problems.  Specifically, trade and commercial law, what kind of judging do you need in trade and commercial law? 

The first thing that you need in trade and commercial law good judging is, paradoxically as it may sound, factual analysis and understanding of the facts, the facts of the transaction.  Very simple example, when I was in Costa Rica, there was a case when we collected this case law, there was a case — I try to collect cases on, say, negotiable instruments - and I can only find one case on a draft, a bill of exchange, una letra de cambio, only one case.  And it came from a judge in the surrounding town of Cartago, Carthage.  And this judge in Cartago had said the following thing:  “I draw this draft.  I’m a poor person, but I know that Rodrigo Novoa is a very wealthy guy.  He is going to be with law practice anyway.” 

And I draw a draft against Rodrigo Novoa.  I did not ask him for his permission.  I just put his name there and I put him as the drawee of that draft and the holder, Omar Garcia, the holder of the draft, goes to court and he files a summary action.”  And the judge says, “Yes, it is summary action.  Please, show up Rodrigo Novoa, and show why you should not be held liable summarily in this draft.” 

So I was sitting and talking to the judge and I said, “But judge, Rodrigo never signed that thing.  He is saying he never signed it.  He does not know the holder; he does not know the drafter.”  “Ah,” said the judge, “but I read this book by this Italian author Cesar Mirante that talks about the theory of incorporation and negotiable instruments incorporate abstractly writes into it, and once you put it in there, it is a right.”  And I was taken aback and I said, “Judge, how many drafts have you seen?”  “No,” he said, “this is the first draft I have ever seen in my life.” 

He had never seen a draft.  The only document that was used in San Jose at that time was a promissory note, two-party instrument.  So he did not know why you needed a three-party instrument, what the roles were.  So the rules that came out of that court, first of all was a rule that totally ignored the facts.  He did not understand the transaction, so consequently, you have a rule that is incoherent, inapposite; you cannot do business that way.  The result of that decision incidentally when it was known was that whoever was inclined to used drafts in San Jose for the next few years, did not use it.  They were afraid of it.  Because suddenly, your name can appear on it, you never authorized it, and you are hold into court.  So the first element is factual analysis. 

In terms of the Chilean judges, I have very limited experience with the Chilean judges.  My experience with Chilean judges is limited to what I learned from Rodrigo Novoa.  Rodrigo wrote a piece on culpa in contrahendo, which is a rather fancy doctrine that was coined by German great historian, legal historian von Jhering, and here he wanted to write on culpa in contrahendo, which is a way to hold people liable pre-contractually prior to the time that there is a contract.  The question is, do the party, the parties are negotiating, do they have duties to each other and if so what are the duties?  I read that Chilean decision and he was right on the facts.  It was a very well-reasoned, it was a very well put together decision by a judge who understood the facts of the negotiation. 

By comparing it to the other decisions that I had seen elsewhere, I would say facts played a very little role.  I am not disputing the fact that as you say there is this telephone justice that you are talking about that may very well exist but clearly factual analysis as well as understanding the context of the transaction is essential for a commercial law rule-making because what merchants need is rules that satisfy their reasonable expectations.  If I never signed anything, how in the world am I going to be hold into court for something?  That is totally unreasonable to expect that.  That rule will never live. 

So starting out with that particular point, you need to have rules that satisfy reasonable expectations.  One of the things that we are trying to do with these two centers in Chile is, we are trying to develop a program of arbitration, ADR.  David Orta here from Arnold & Porter, he is going to be part of it.  And this idea is to try to develop sectoral rules of arbitration that respond to the best business practices.  They respond to what people in effect do in their respective professions, sector by sector, banking, pharmaceuticals, whatever it might be, trying to get away because in trade and particularly in international trade as you know better than I do, it is very important to get a quick decision and to get a fair decision as much as possible. 

So hopefully this experience, I was very impressed with the Chamber of Commerce in Santiago.  They do a lot of these arbitrations, hundreds of them a year, and apparently, very well than arbitration has come to the center in Santiago from other South American countries.  So hopefully, that is another way to build up a body of commercial law that will be more responsive to the realities of the marketplace.

Roger F. Noriega:  Great, we have a question at the back here.

Cesar Muñoz:  Yes, Cesar Muñoz with EFE News Service.  I wonder if one of the representatives of Chile could comment or give a reaction to Mr. Murphy’s comments.  And also if I may, a question for Rolando, on this issue of the rules of origin in NAFTA.  I mean, is this going to mean that Chile, in practice, is going to be sort of like annular member of NAFTA or will there be still barriers to trade there and have you been approached by the United States on the issue of CAFTA and the new, you know, the Andean countries, I mean, is that something that is going to happen with these other trade agreements?  Thank you.

Roger F. Noriega:  Rolando?

Rolando Ortega:  Well, regarding the first question, regarding IPR, I think that the comments that John Murphy made are not very fair to say in a way because now we have made tremendous efforts to improve our IPR protection system, and as I have mentioned in December 2005, a new IPR law entered into force.  And this strengthened our IPR and gives transparency to the registration procedures and includes a specific disposition to data protection, and that was recognized by the USTR in the 301 special report.  Of course, they criticized some other aspects but they recognized our progress that we have made. 

Regarding the statement of John that the IPS have given a marketing approval, that is not correct.  The IPS cannot give marketing approval because this is a technical instance; they just give sanitary registration.  And one very important thing that is necessary to mention is that in Chile there is no administrative linkage.  There are two different instances:  One is the Ministry of Economy, the Department of Industrial Property, where right holders must register their patents, and the other is the Institute of Public Health, and the role of the Institute of Public Health is just to verify the efficacy and effectiveness of a given medicine but they cannot pronounce judgment on the legality of a patent because the Institute of Public Health is not a court. 

So what else can I say?  I can say that, of course, the new law entered into force in December 2005, so we have to give it some time to see how the new law works.  This is a new law.  On the other hand, there are five cases out of 850 registration processes.  So I think we have to take things in perspective. 

So there are specific cases but this is not the general situation.  So we are respecting IPR, and we have upgraded our intellectual property system to WTO TRIPS standards and we are complying with our international obligations under the fated agreement.  We recognize that there are still some differences but we asked the USTR, said in the special 301 report, this is an ongoing process, and we will continue having a very constructive bilateral dialogue with the US.  Here is Mary of the USTR.  She is a witness of the many meetings that we have had, and we are solving the problems one by one, and we will continue having a very constructive dialogue with the US. 

Regarding rules of origin?  No, it does not mean that Chile will be a member of NAFTA, not at all, at least for a moment.  It is a harmonization of rules of origin between Chile and NAFTA countries.  The United States offered us this possibility and we accepted that and now we are waiting for the NAFTA announcement, the official NAFTA announcement of a start of a new session of harmonization of rules of origin.  And this is just between Chile and NAFTA countries so far and do not comprise CAFTA countries or Andean countries.  But anyway, this process is very interesting as the Free Trade Agreement of the Americas, FTAA, is stagnant at the moment so this is a very good opportunity for Chile to harmonize rules of origin which will simplify custom proceedings and will facilitate trade.

Roger F. Noriega:  Thank you very much.  John, do you want to respond in any way?

John Murphy:  Only the smallest comment, I will just [audio gets cut off] you to the special 301 report issued by USTR on www.ustr.gov.  I guess it is quite clear.

Roger F. Noriega:  Okay, great.  One last question.  This lady.

Hasna [??]:  Thank you.  Hasna, from the embassy of Malaysia.  Question for Mr. Ortega.  You have mentioned, if I understand you correctly, you mentioned that Chile has not really been able to get access to the U.S. market because of the difficulty with regards to their government procurement, their difficulty of the U.S. systems, so my questions are first, whether … I appreciate if you could elaborate more on that, a little bit, and whether this was discussed during the negotiation.  And finally, what about their U.S. site, had they been able to get access to government procurement in Chile as a result of the FTA?  Thank you.

Rolando Ortega:  Thank you.  What I said is that this is chartered in the free trade agreement between Chile and the United States that allows Chilean companies to access to government procurement of the U.S. government.  I do not know the figures by heart but there are more or less thirty-seven states in the United States that allow us to access to their government procurement.  This is in place, and what I said is that the U.S. government procurement system is complex, so Chilean companies have not been able to take advantage of the huge opportunities that the US government procurement can offer to our companies. 

So now we are in the process of doing an assessment study in order to understand well how the system here in the United States works and with the aim to take advantage of the huge opportunities that we can have in the future.  So I’m not complaining about the US system, I’m just saying that the U.S. system is complex and Chilean companies do not now how it works, and we need to assess carefully how it works in order to take advantage.  That is what I said. 

Regarding U.S. companies accessing government procurement in Chile, I really do not know.  I do not know if somebody else can answer that question, but we have a very transparent system.  This is called in Spanish, Chile Compra, where every purchase of the Chilean government must be published in a website, and this is working very well inside Chile, but I do not have information regarding US companies participating in Chilean government procurement.  Thank you.

Roger F. Noriega:  Very fine.  Well, I want to thank our panelists again for your presentation.

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