Moving On: Chile's Alternatives to NAFTA

By Beerman, Kenton | Harvard International Review, Summer 1996 | Go to article overview

Moving On: Chile's Alternatives to NAFTA


Beerman, Kenton, Harvard International Review


CHILE IS ONE OF THE BIGGEST SUCcess stories of the 1990s. With an annual growth rate of over seven percent per year--the second fastest in the world--Chile has caught the attention of businesses around the world, from the United States to the European Union, Asia, Canada, and Mexico. For most of this century, the United States was Chile's principal trading partner, with over 30 percent of Chilean goods heading to the US market. However, in the past decade, this balance has shifted dramatically. By 1994, the European Union accounted for 29 percent of Chile's exports and 25 percent of its total trade. The US share had fallen to 20 percent, while fast-rising Japan was at 15 percent. Additionally, Brazil and Argentina each accounted for 10 percent of total trade. Furthermore, the Chilean government has received lucrative no-tariff trade bids from all of these markets. Although it has conducted high-level negotiations with Asian, European, and Latin American countries, it does not want to commit to any of them yet because it still considers the United States its primary target. Chilean president Eduardo Frei believes that a free trade agreement with the United States is the wisest course of action for his nation. However, the protectionist-leaning US government has since struck down Chile's bid to enter the North American Free Trade Agreement (NAFTA) and put off further debate on the subject until 1997 at the earliest.

With its preferred path blocked, Chile should seriously consider its other options, which are equally lucrative. By waiting for the United States, it is only hurting itself. Chile should realize that the United States, which wants a foothold in the vast South American market, has more to lose than Chile does in this situation. Chile should set the terms of the trade negotiations itself by establishing no-tariff zones with other countries, instead of waiting for the United States to set the agenda.

The Obstacles

Chile's astounding economic success and efficient government has made it the envy of Latin America. Since the early 1980s, inflation has averaged around 8.5 percent, while Brazil and Argentina have struggled with inflation approaching 500 percent. Chilean unemployment runs at 5.5 percent, and its foreign debt is the lowest in Latin America. It is one of the least populated countries in South America, yet its 15 million inhabitants support a GDP of US$96 billion, the third largest on the continent. Much of this success can be contributed to Chile's historical commitment to market-oriented economic reform. While other countries were surrounded by tariff walls, military rule, and protectionist measures in the 1980s, then-dictator Augusto Pinochet limited the role of the state, encouraged the private sector and private savings to develop, and opened financial markets to foreign trade. As a result, long-term foreign investment is estimated at an impressive US$5 billion, or 7.9 percent of total GNP.

Such impressive statistics made Chile a logical place for NAFTA to enter the South American market. Initial plans called for Chile's rapid entry, followed by eventual expansion to other countries. However, this groundwork has fallen apart in the last year and a half. Republicans in Congress have attacked NAFTA as ineffective and costly to US workers. In November 1995, they struck down an amendment which would have given President Clinton "fast-track trade negotiating authority"--the power to approve NAFTA by a yes or no vote, without amendments that may dilute the treaty's effect.

Pressure against Chile's entry into NAFTA has come from several other sources as well. Church groups, Amnesty International, Greenpeace, and other organizations argue that Chile ought to be denied entry in NAFTA as punishment for Chile's questionable human rights and environmental records. They point to mistreatment of abortion activists and dissidents, as well as executions of political prisoners. …

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