Chile, the Slender Success Story, Hopes to Fatten on US Trade Ties DRIVE TO JOIN NAFTA

Article excerpt

A CROCHET hook. A dental tool. A seahorse. A garden hoe. Stretched out along 2,700 miles of South America's western coast and on average only 110 miles wide, Chile resembles all these things. What this country of 13 million people would like to be is a member of the North American Free Trade Agreement.

And that is what NAFTA's three members - Canada, Mexico, and the United States - want Chile to be by mid-1996.

Technical negotiations start this week in Mexico and will likely continue through 1995. Negotiators anticipate few tough nuts for the entry talks to crack, and NAFTA's expansion to a foursome by this time next year appears easily achievable.

But why Chile?

The motives on each side are different.

For Chile, a free-trader considered Latin America's brightest economic light, the draw is twofold.

First, it will provide easier access to the NAFTA market, especially the giant US; and second, stepped-up, long-term foreign investment is expected to follow the guarantees that NAFTA membership affords.

In addition, Chilean officials say NAFTA fits into their strategy of diversifying the country's heavily natural-resource-based economy through greater technology transfers and more joint-venture development.

For the US, with an economy 145 times larger than Chile's, the attraction is less economic than political. US direct investment in Chile over the past two decades - primarily in mining, banking, agriculture, and forestry - is already nearing $4 billion. And Chile already applies among the lowest tariffs on imported goods of any Latin country. With Chile's economy expected to grow 5 to 7 percent annually through the end of the decade, NAFTA would solidify US participation in a growing market.

A 'reward' for Chile

Yet even more important, US officials say, is that Chile's application to NAFTA offers the US an opportunity to send a signal of economic partnership to its Southern neighbors - especially when they are on the threshold of what is expected to be a period of unprecedented economic growth throughout the region.

By accepting Chile into NAFTA, the US can "reward" Chile the way a teacher offers a gold star to the best student in the class: Acknowledging Chile's economic reforms and its successful transition from Latin America's old state-run economic model to a competitive market economy encourages other Latin countries aspiring to the same treatment to press on in the same vein.

"Chile's a country that punches above its weight," says one US official here. "Not only does it buy a lot more US products for its size than many countries, but by bringing it into NAFTA we get the demonstration effect. As a long-term performer in the market economy," he adds, "a Chile joining NAFTA encourages Argentina, Peru, Brazil, and others to stay the course."

Other observers who are less trusting of US motives say the US wants Chile in NAFTA primarily to weaken prospects for a powerful South American trade bloc. "The US sees Chile as a way to weaken Mercosur {the customs union joining Argentina, Brazil, Paraguay, and Uruguay}," says Miguel Baquedano, president of Santiago's Political Ecology Institute and a NAFTA opponent. "Mercosur already has stronger trade ties with the European Union, and the US doesn't want South America going farther in that direction."

Still, a long track record of investment by US and Canadian companies and the country's positive economic performance - Standard & Poor's this month highlighted Chile as the best economic performer in Latin America - makes entry in NAFTA seem a natural step for most Chileans, from economists to average citizens.

"NAFTA is an important and logical step in our strategy of development through free markets, heavy investment, and exports," says Felipe Larrain, an economist at Catholic University of Chile in Santiago. NAFTA, he says, will give Chile access to the world's largest market and - its single most important effect - encourage foreign investment by reducing investors' perception of risk in the Chilean market. …