REVISITING CHILEAN REVISITING CHILEAN INTEGRATION TO WORLD INTEGRATION TO WORLD

ECONOMYECONOMY

APEC Symposium: Catalytic Role of the APEC Process: Behind the Border, Beyond the Bogor

Goals Chiba, Japan, 14-15 March 2005

OSVALDO ROSALESDIRECTOR

DIVISION OF INTERNATIONAL TRADE AND INTEGRATION, ECLAC (CEPAL)

FORMER CHILEAN VICE-MINISTER OF TRADE (2000-2004)

TABLE OF CONTENTSTABLE OF CONTENTS

Policy continuity; trade reform as integral part of development strategy

Three-pillar strategy of international integration

Remaining challenges and policy responses

MAIN FEATURES OF MAIN FEATURES OF CHILE’S TRADE REFORMCHILE’S TRADE REFORM

Early experience that began in middle of the 70´s, much earlier than the rest of Latin America. Now, more mature and greater consensus;

Chile’s economic policy has been relatively independent from trade agreements, unlike other LA countries where trade reform or FTA´s were specially conceived to support economic reforms

Trade reform in Chile has been characterized by its comprehensiveness (width, depth), persistence and speed; and

Trade reform has been part of a greater institutional transformation process, which involved diverse dimensions of Chilean economy and society.

CHILE’S TRADE POLICY PHASESCHILE’S TRADE POLICY PHASES

13,9

%

10,1

%

10,0

%

10,0

%

26,3

%

20,0

%

20,0

%

15,0

%

15,0

%

15,0

%

11,0

%

11,0

%

11,0

%

11,0

%

11,0

%

11,0

%

11,0

%

11,0

%

10,0

%

9,0%

8,0%

7,0%

6,0%

20,0

%

94,0

%

67,0

%

44,0

%

15,7

%27,0

%

10,0

%

24,5

%

0,0%

50,0%

100,0%

150,0%

200,0%

AÑOS

AR

AN

CE

L

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

110,00

120,00

Indi

ce 1

986=

100

Arancel Máximo Arancel Promedio TCR

Phase I

Phase II

Phase III

Phase IV

4 PHASES OF CHILE’S TRADE OPENING4 PHASES OF CHILE’S TRADE OPENING

Phase I (1973-1979): Trade reform; Reduce anti-export bias • Tariff reductions and its unification, NTB reduction, • Opening of investment regime, exchange rate unification,• Introduction of drawbacks and reimbursement Value-added tax• Reduce risks for exporters (Pro-Chile and its network)• Sectoral subsidies: very focused, especially on forestry and automotive sectors.

Phase II (1982-1984): Crisis management, preserving the trade opening process almost intact:

• Tariff increases up to the consolidated 35% level in GATT;• Creation of a mechanism to correct “distortions” in foreign trade; and• Limited exceptions allowed for in the uniformed tariff system (price bands)

Phase III (1985-1989): Trade Opening once again• Trade Opening once again; Re-initiate export-based growth strategy Macroeconomic recovery and stabilization; Privatization and debt conversion programs; Export incentives:

i) deferred payments of import duties on capital goods importation; and ii) simplified “reintegro” system (drawbacks); and

Creation of special export regime (almacenes particulares).

Major Results: 1974-1989• Increase in trade volume export diversification by product and by destination

Phase IV: since 1990 to the present

CHILE’S TRADE CHILE’S TRADE DYNAMISMDYNAMISM

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Andean Community Mercosur Argentina Brazil Chile Colombia

Chile

TOTAL EXPORTS (1990=100)

Source: CEPAL, International Trade Division o the basis of official data.

TRADE DIVERSIFICATION BY TRADE DIVERSIFICATION BY DESTINATIONDESTINATION

Source: CEPAL, International Trade Division o the basis of official data.

Herfindahl-Hirshmann Index

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Méx

ico

Vene

zuel

a

Hond

uras

Cost

a Ri

ca

Colo

mbi

a

Ecua

dor

Nica

ragu

a

Guat

emal

a ElSa

lvad

or

Para

guay

Boliv

ia

Perú

Arge

ntin

a

Urug

uay

Bras

il

Chile

1986-1989 1999-2002

TRADE DIVERSIFICATION BY PRODUCTTRADE DIVERSIFICATION BY PRODUCT

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Arg

en

tin

a

Bo

livia

Bra

sil

Ch

ile

Co

lom

bia

Co

sta

Ric

a

Ecu

ad

or

El S

alv

ad

or

Gu

ate

mala

Ho

nd

ura

s

Méxic

o

Nic

ara

gu

a

Para

gu

ay

Perú

Uru

gu

ay

Ven

ezu

ela

1986-1988 2001-2003

HHI =1 (total concentration)

Source: CEPAL, International Trade Division o the basis of official data.

Herfindahl-Hirshmann Index

PHASE IV BEGAN IN 1990PHASE IV BEGAN IN 1990

Deepen unilateral opening: 1991 and 2004 Addressed not only tariffs but also diverse

dimensions of trade policy Improvement of prior reforms (financial

system, telecommunications) and regulatory framework

Broadening private sector participation (infrastructure and ports, etc.)

Concerted Opening: trade agreements.

CHILE: PRESENT LEVEL OF TRADE OPENINGCHILE: PRESENT LEVEL OF TRADE OPENING

MFN 2004MFN 2003MFN 2002

Effective tariff

Source: Camara de Comercio de Santiago

TYPES OF TRADE AGREEMENTS SIGNEDTYPES OF TRADE AGREEMENTS SIGNED

LAIA

(ALADI)NAFTA type

Based on

GATT, GATS

and WTO model

WAITING RATIFICATION

NEGOTIATION ON GOING

BOLIVIA, COLOMBIA, ECUADOR, PERU, VENEZUELA, MERCOSUR

CANADA, CENTRAL AMERICA, USA, MEXICO, REP OF KOREA

EU AND EFTA

CHINA,

NEW ZEALAND, SINGAPORE AND BRUNEI (P4),

JAPAN, AND INDIA

CHILE’S TRADE OPENING AS INTEGRAL CHILE’S TRADE OPENING AS INTEGRAL PART OF DEVELOPMENT STRATEGYPART OF DEVELOPMENT STRATEGY

1. Opted in favor of trade opening• Growth acceleration and poverty reduction• Broad national consensus on X-oriented strategy• Technological catch-up advances faster in open

economies

2. Link between competitiveness and social cohesion• Lower level of poverty• Public policies to support SMEs and vulnerable groups

o CORFO, INDAP (management, technology)o PROCHILE (export promotion)o SENCE (workforce training)

3. Open regionalism• Multilateral• Unilateral• FTAs – PTAs

COHERENT AND SOUND PUBLIC POLICIESCOHERENT AND SOUND PUBLIC POLICIES

Functional links between macroeconomic stability and trade opening

• Correct sequencing of economic reforms• Central role of exchange rate policy• Anti-cyclical macro-management (from 2000)

o Fiscal policy: “structural surplus” ruleo Stabilization funds (copper, petroleum) o Monetary policy: inflation targeting with “bands”o Exchange rate policy: flexible exchange rates

(dampen external shocks)o Sustainable current account deficit: low level of

external debt, sufficient reserves, prepayment of public debt in times of economic prosperity, net creditor at the IMF

CHILE: NECESSARY COMPLEMENTS TO CHILE: NECESSARY COMPLEMENTS TO TRADE OPENINGTRADE OPENING

1. State modernization• Institutional upgrading• Government as catalyst for ICT adoption

o Taxes through internet (90%)o Electronic invoices;Digital signatures; Single digital windows

2. Infrastructure to support foreign trade• Quality and connectivity in telecommunications• Concessions on highways, ports and airports• Network of trade representatives in 65 locations around the

world.3. Vigorous social policies

• Social expenditures grow faster than GDP• Unemployment insurance• Focalization of social programs • Reforms in education and health care• Special Programs for extreme poor (Chile Solidario)

ECONOMIC GOVERNANCE AND ECONOMIC GOVERNANCE AND INSTITUTIONAL STRENGTHENINGINSTITUTIONAL STRENGTHENING

• Strong supervision and prudential regulation of the financial system

• Autonomy of the Central Bank• Transparency• Low level of corruption• Autonomous regulatory agencies. • “Market-friendly” regulatory mechanisms• Expedient and transparent judicial system (pending

task)o Economic courtso Specialized arbitration

PART 2PART 2

CHILE’S THREE-PILLAR CHILE’S THREE-PILLAR STRATEGYSTRATEGY

PROS AND CONS OF EACH PILLAR: PROS AND CONS OF EACH PILLAR:

UUNILATERAL OPENING, WTO AND NILATERAL OPENING, WTO AND FTASFTAS

UNILATERAL LIBERALIZATIONUNILATERAL LIBERALIZATION

Major advantages• Reduces anti-export bias• Favors trade creation• Stimulates competitiveness• Creates export lobbies that

counter protectionist lobbies• Stimulates adoption of new

technologies in key sectors: IT-related sectors; Business-related and financial services

Major Disadvantages• Does not secure preferential

access to third markets • Nor guarantees legal certainty

in trade and investment with trade partners

• Does not stimulate X diversification (tariff escalation abroad)

• Less maneuver space for international business alliances

• Policies are still seen as “reversible” by third countries and by domestic agents (weak “lock-in” effects)

WTO: THE BEST SCENARIOWTO: THE BEST SCENARIO

• Only mechanism to tackle the systemic issues • Three pillars of agriculture (access, export

subsidies, domestic support)• Antidumping and other disciplines• Special and differential treatment (SDT)• Capacity Building

• Multilateral rules favor small economies• Multilateral agreements favor trade creation and

reduce costs in administrating agreements• Only multilateral forum that has been successful in

challenging or even modifying trade policies of the major trading economies

• Greater recognition of its dispute settlement mechanism

WTO’S WEAKNESSES WTO’S WEAKNESSES Its weaknesses • Lengthy negotiations (6 to 10

years)• Protracted periods to address

issues that are of interests to Developing Countries including tariff reductions in the sensitive sectors (10 years and more)

• Until now, limited coverage of and depth in issues that are key to developing countries (agriculture, AD, textiles)

• Persistence of differences in: tariff escalation, domestic support and tariff peaks

• As based on consensus, decisions are taken on a lowest common denominator dictated by the most protectionist countries

Weak commitment of developing countries

• “Geneva is where the action takes place”

• With few exceptions, developing countries do not have a strong influence in the process;

• Benefits are not owned: appropriation problems

• Strong heterogeneity in capacity building and trade negotiations capability;

• Different levels of domestic consensus about opening-up and strategies of international market participation

MULTILATERAL WEAKNESSES MULTILATERAL WEAKNESSES STIMULATE FTAsSTIMULATE FTAs

Lengthy WTO negotiations hurt small and open economies that:

• Need immediate market access to big markets

• With legal certainty, and• Are willing to go beyond the

WTO in terms of speed and depth;

• Cannot stay outside FTAs while competitors take full advantage of those FTAs (“Domino” effect)

1. Objectives of FTAs

( Chilean approach) Secure access to large and

stable markets; serving as a catalyst of technological change and quality enhancement in products and services

FREE TRADE AGREEMENTS FREE TRADE AGREEMENTS (FTAs)(FTAs)

2. Benefits Consolidate and expand access

to main markets Provide greater legal certainty

for exporters and investors Wider coverage of rules and

disciplines beyond the WTO in several chapters (e.g., Customs, Investment, and IPR)

In the absence of progress in multilateral forums, FTAs may regulate trade and investment rules with large trading partners

Some benefits in investment and transparency on institutions in charge of trade and investment policies

3. Problems

• May deviate trade (especially intra-regional)

• May politicize trade more than in multilateral negotiations

• May slow down the progress in multilateral, regional negotiations or unilateral tariff reductions

• May lead to neglect of macroeconomic management and/or advances in economic reforms, when they are viewed as “automatic” products of FTAs signed with big trade partners

SOME CONCLUSIONS ON FTAsSOME CONCLUSIONS ON FTAs

• FTAs do not substitute development strategies• Can support high-quality participation of the country in

the international economy, if it´s part of an international strategy

• If complemented by other necessary components:o Macroeconomic stabilityo Infrastructureo Institutional stability and Modernization of the Stateo Social cohesion

• If the process creates political spaces that permit to address the challenges of competitiveness

o Increasing productivityo Enhancing formation of “Clusters” and Value-chainso Technological innovationo International alliances

POLITICAL ECONOMY IMPLICATIONS of POLITICAL ECONOMY IMPLICATIONS of FTAsFTAs

Following a right sequence of information dissemination and consensus building, FTAs can be conducive to:• Better governance of economic and political system• Upgraded quality of public administration• Enhanced institutionality between the gov’t and business

organizations• Greater opportunities to get labor-related organizations

involved in policy debate on development and to generate a dialogue between unions and business organizations

• Important to develop transparent and participative processes with business communities and labor organizations, political parties, and civil society during the process of negotiations

• Convenient to connect parliamentary approval of the agreement with guidance for administrating FTAs

• Not to forget the fiscal impact of FTAs!!

PART 3PART 3REMAINING CHALLENGES AND REMAINING CHALLENGES AND

POLICY RESPONSESPOLICY RESPONSES

STAGES IN CHILE’S TRADE POLICYSTAGES IN CHILE’S TRADE POLICY

• Unilateral trade liberalization (1974-89)• Open Regionalism, focus on Latin America (1990-99)• FTAs with mega-markets (US, EU) (2000-03)• Strategic orientation towards Asia (2004-05)

o APEC 2004 in Chile, FTA with S.Koreao Singapore, New Zealand, Brunei (P-4)o China, India (already signed) and Japan (in negotiation)o Thailand and Malaysia in the phase of pre-negotiation…ASEAN?

• Innovation leap into the knowledge society (2005-…)o Trade strategy as part of a global strategy to promote the presence in

international networks of innovation and technological changeo Reinforcement of the links between trade policy, productivity

enhancement and technological upgrading, as well as human capital formation

o Think “big” with a global vision: international alliances, entrepreneur associativity, niches in the global economy, international value chains

WEAKNESSES OF THE EXPORT MODEL WEAKNESSES OF THE EXPORT MODEL PERSISTPERSIST

• Still high concentration of commodities • Weak linkages between X and the rest of the economy• Low participation of SMEs in X as direct or indirect exporters• Limited effort to promote X and make use of the

opportunities offered by the FTAs• Low level of “quality” certification• Very low effort of R&D

• Limited incorporation of knowledge in X• Weak linkages between universities and enterprises

• Lack of commitment of private sector with the technological issue• Ideological constraint: State´s role and alliances among government

ad private sector

OBJECTIVE: IMPROVE THE QUALITY OF OBJECTIVE: IMPROVE THE QUALITY OF PARTICIPATION IN INTERNATIONAL PARTICIPATION IN INTERNATIONAL

MARKETSMARKETS

• Deepen the export model stimulating further its dynamism, diversification and sustainability, taking benefits of FTAs• Special national programs oriented to exploit the benefits of these FTA´s

with US, EU, China and APEC zone • Reinforce the linkages with the global economy maximizing rents

associated with natural resources and position itself in the dynamic sectors of the global markets• International Alliances on trade, investment and technology

• Intensify efforts on innovation, technological diffusion and the formation of human capital• Special joint-ventures with APEC countries, learning of their experiences

• Progressive reduction of productivity gaps among distinct domestic sectors• To define some critical clusters that incorporate SME in the X chains

MAJOR COMPONENTS OF THIS STRATEGYMAJOR COMPONENTS OF THIS STRATEGY

• Efficient administration of the opportunities offered by the FTAs (US, EU, China, S. Korea)

• A strategic “bet” towards Asia: China, Korea, Japan, Singapore, New Zealand

• A bridge of trade and investment between S. America and Asia Pacific• Investment platform and web of trade agreements

• Deepen economic ties with Brazil, Argentina and Peru:o Sharing our presence in Asiao Fostering subregional physical and energy integration

• Reinforce business alliances with Mexico and Canada to exploit further the US and Central American markets

• To invite Peru and Thailand to be part of the P4 agreement and to explore how to share some trade and investment initiatives in South America and Pacific Asia

Osvaldo Rosales ECLAC 29

REVISITING CHILEAN REVISITING CHILEAN INTEGRATION TO WORLD INTEGRATION TO WORLD

ECONOMYECONOMY

THANK YOU osvaldo.rosales@cepal.org

OSVALDO ROSALESDIRECTOR

DIVISION OF INTERNATIONAL TRADE AND INTEGRATION, ECLAC (CEPAL)