For many, Chile represents a natural first step in expanding hemispheric trade. Although Chile is a relatively small market, its political stability, growing export-oriented economy, and pro-market reforms over the past decade and a half positioned the country as a prime candidate for integration with NAFTA of MERCOSUR. In 1996 Chile’s population was roughly 15 million. GDP was $56. 4 billion and per capita income was $ 3,848. Chile’s total trade in goods was #33. 2 billion, with exports of $15. 4 billion and imports of $17. 8 billion. (World bank, World Development Report, Washington, DC: The world Bank, 1997).
Traditional products such as minerals (cooper), fishmeal, and wood pulp account for most of Chile’s export revenues; however, the share of trade earnings from export of wood manufactures, basic metal products, fruits, and wine is increasing. Chile imports oil, chemicals, industrial and transportation equipment, share parts and food products, including wheat, live animals and meat, and tropical commodities such as coffee.
Chile’s trade is well distributed among Western Hemisphere countries, the nations of Western Europe, and Asia (see appendix, Table 1). In 1996, the United States, Canada, and Mexico (NAFTA) accounted for 25.0% of Chile’s trade, while the European Union represented 18. 6%, the Asia-Pacific countries 22. 8%, and MERCOSUR 18. 7%. The United States is Chile’s principal trading partner, receiving 16. 7% of Chile’s exports and accounting for 30. 5% of its imports.
Chile has steadily been moving towards trade liberalization since the 1970s. By 1980, government policies had resulted in the privatization of hundreds of companies and the reduction of tariffs from an average of 105% to 10%. In 1980, worker pension funds were privatized, a move which has allowed Chile to generate capital for investment.
Chile’s move towards liberalization stalled temporarily in early 1982, when Chile faced severe financial pressures caused by its heavy dependence on foreign financing, a crushing current account deficit, and an overvalued currency. To avoid the collapse of the financial sector, the banking industry was nationalized in 1983. Tariff levels were raised to 35% to stimulate the manufacturing sector (Patrick, J. Michael, “Chile: The Right Partner for NAFTA? ” Trade Insights, No. 9 Austin, TX: Center for the Study of Western Hemispheric Trade, September 1996).
The 1982 crash, however, did not push Chile to move away from its fundamental goal of trade liberalization and a shrinking state sector. Average tariffs rates were reduced from 26 % in 1985 to 15% in 1988;firms, including state-owned power, telecommunications, steel and insurance companies, as well as the national airlines, were privatized. Taxes were cut and public spending was reduces from 33% of GDP in 1985 to 23 % in 1989. Chile’s private sector blossomed during the second half of the 1980s, aggressively developing Chile’s comparative advantage in fruits, finished wood products, and fisheries.
Small and medium-sized firms proliferated; exports soared and diversified. Whereas in 1975, only 200 companies were exporting some 500 products to 50 markets, in 1995 there were some 5,840 firms selling more that 3, 600 different products to 167 markets. Since the late 1980s, Chile has maintained a relatively flexible system of foreign exchange. The country’s central bank intervenes in the currency market to keep the peso’s exchange rate competitive against a basket of currencies including the dollar, the German mark, and the yen.
This ‘managed float’ helps keep Chilean exports, from forest products to manufactured goods, competitive in its principal market, the United States, The European Union, and Japan. In the last decade, Chile has become the model for economic change in Latin America as it has privatized most state enterprises, sharply reduced tariffs, liberalized investment markets, and has opened its doors to foreign capital. The result has been eleven years of uninterrupted growth, with an annual rate of 7% since1988.
Economic growth in 1995 was 8. 5%, the highest in the hemisphere. Inflation slowed to 8. 2% in 1995 (from 27% in1990), and unemployment dropped to 5. 6%. Today, because of the privatization of pension funds and other measures, Chile boasts one of the highest domestic savings rates in the world and has been largely able to self-finance government spending. Total investment, financed by domestic savings, rose to 27% of GDP in 1995, nearly double that from the previous decade. Chile also has become an active foreign investor in Brazil, Colombia, Argentina, Peru and Bolivia. Helping attract foreign investment is the political stability Chile has regained since the 1970s.
With century-long democratic tradition, Chile made a smooth transition back to democracy after seventeen years of rile by military strongman Augusto Pinochet. General Pinochet relinquished control of the government while remaining chief of the army after Patricio Aylwin was elected president in 1990. Today, Chile faces the change of consolidating and expanding its export markets, and attracting long-term foreign investment in order to carry its “new” domestic development strategy based on an open economy, export promotion and the discipline of competition.
Accordingly, Chile has created an expanding network of bilateral free trade agreements, having signed over 12, and maintained an overall 11% tariff rate (low by Latin American Standards). At the end of 1944, Chile joined the Asian-Pacific Economic Cooperation Forum (APEC) as the only non-Asian member of the organization besides the NAFTA countries. In June 1996, Chile became associated with MERCOSUR and the Europe Union (but not as fully fledged member). In 1997, Chile finalized a bilateral agreement with Canada and initiated bilateral discussion with Mexico.
Chile has been waiting to begin formal negotiation for membership in NAFTA since 1994. Would Chile be better off joining NAFTA or MERCOSUR? Conventional trade theory holds that if the comparative advantage held by a country’s industries in world trade is increased of preserved by membership in a particular trading bloc, said membership can lead to trade creation and enhanced country welfare (that is, higher GDP, jobs, and income)(Salvatore, Dominick, International Economics, Upper Saddle River, N. J. : Prentice-Hall, Inc. 1995, pp. 30-36).
The converse is also true. Many development and trade theorists also believe that a country’s modernization and economic growth are based, in part, on its ability to develop competitive exports of manufactures (Toraro, Michael, Economics Development, White Plains, N. Y. : Longman, 1994, p. 483-491). It can be argued, therefore, that Chile’s trade and development goals will be best met by joining that trading bloc, NAFTA or MERCOSUR, most likely to enhance its export comparative advantage and promote its export of manufactures. Results:
In order to answer the question, under which trade bloc, NAFTA or MERCOSUR, Chile would fair better, an ‘export index of reveled comparative advantage’, formulated by Kreining and Plummer was used. Their results were the following: trade flow data (average 1990-94) reveled that NAFTA was the preferred market for Chile’s exports over MERCOSUR in the early 1990. Table 2 shows that NAFTA received a larger share of Chile’s world exports (16. 8) than did MERCOSUR (10%). NAFTA also received a larger share of Chile’s world exports of non-manufactures (18. 2% versus 9. 4% for MERCOSUR) and manufactures (16. 8% versus 13. 4% for MERCOSUR).
A closer look at Chile’s exports to NAFTA and MERCOSUR reveals that NAFTA was by far the dominant market in the early 1990s. Table3 shows that NAFTA accounted for 60. 7% of Chile’s combined exports to NAFTA and MERCOSUR manufactures exports. Table 4 presents the Spearman rank correlation coefficient for Chile’s exports to NAFTA and MERCOSUR against Chile’s exports to the world as a whole. The coefficients indicate that the comparative advantage ranking for Chile’s export commodities to the world as a whole is essentially preserved under membership in both NAFTA and MERCOSUR.
Coefficients are presented for all export commodities as well as non-manufactures and manufactures. The Spearman coefficients for Chile-NAFTA exceed Chile-MERCOSUR coefficients in all cases, all commodities (0. 94 versus 0. 77), non-manufactures (0. 90 versus 0. 78), and manufactures (0. 94 vs. 0. 76). Chile’s manufactures are more competitive (0. 94) in NAFTA market than are its non-manufactures (0. 90). By contrast, Chile’s non-manufactures (0. 78) are more competitive in the MERCOSURE market than are its manufactures (0. 76).
The ‘export index of revealed comparative advantage’ technique found the comparative advantage ranking of Chile’s export commodities in world trade in the early 1990s to be essentially preserved through membership in both NAFTA and MERCOSUR. Chile’s non-manufactures and manufactures exports, however, were more competitive in the NAFTA market than the MERCOSUR market. These findings suggest, under current NAFTA and MERCOSUR trading regimes, Chile’s opportunities for increasing its exports are greatest with membership in NAFTA.