REVISITING CHILEAN INTEGRATION TO WORLD ECONOMY

1. REVISITING CHILEAN INTEGRATION TO WORLD ECONOMY APEC Symposium: Catalytic Role of the APEC Process: Behind the Border, Beyond the Bogor Goals Chiba, Japan, 14-15 March 2006 OSVALDO ROSALES DIRECTOR DIVISION OF INTERNATIONAL TRADE AND INTEGRATION, ECLAC (CEPAL)

2. TABLE OF CONTENTS • Policy continuity; trade reform as integral part of development strategy • Three-pillar strategy of international integration • Remaining challenges and policy responses

3. MAIN FEATURES OF CHILE’S TRADE REFORM • Began in 1973, much earlier than the rest of Latin America. Now, more mature and greater consensus; • Chile’s economic policy has been executed relatively independent from trade agreements, unlike other countries where economic reforms were conceived as preparation for trade reform. • Trade reform in Chile has been characterized by its comprehensiveness (width, depth), persistence and speed; and • Trade reform has formed part of a greater institutional transformation process, which involved diverse dimensions of Chilean society.

4. CHILE’S TRADE POLICY PHASES Phase II Phase IV Phase I Phase III

5. FOUR 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

6. CHILE’S TRADE DYNAMISM TOTAL EXPORTS (1990=100) Chile

7. TRADE DIVERSIFICATION BY DESTINATION

8. TRADE DIVERSIFICATION BY PRODUCT

9. PHASE 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.

10. CHILE’S TRADE OPENING AS INTEGRAL PART 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 • CORFO, INDAP (management, technology) • PROCHILE (export promotion) • SENCE (training) 3. Open regionalism • Multilateral • Unilateral • FTAs – PTAs

11. COHERENT 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 • Fiscal policy: “structural surplus” rule • Stabilization funds (copper, petroleum) • Monetary policy: inflation targeting with “bands” • Exchange rate policy: flexible exchange rates (dampen external shocks) • 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

12. CHILE: NECESSARY COMPLEMENTS TO TRADE OPENING 1. State modernization • Institutional upgrading • Government as catalyst for ICT adoption • Taxes through internet (75% - 80%) • Electronic invoices • Digital signatures • Single digital windows 2. “Completing markets” • Education and training • Long-term and venture capital • Technology innovation

13. CHILE: NECESSARY COMPLEMENTS TO TRADE OPENING 3. 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 4. 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)

14. ECONOMIC GOVERNACE AND INSTITUTIONAL STRENGTHENING • Strong supervision and prudential regulation of the financial system • Autonomy of the Central Bank • Transparency • Low level of corruption • Autonomous regulatory agencies. Vigorous competition policy • “Market-friendly” regulatory mechanisms • Expedient and transparent judicial system (pending task) • Economic courts • Specialized arbitration

15. PART 2CHILE’S THREE-PILLAR STRATEGY PROS AND CONS OF EACH PILLAR: UNILATERAL OPENING, WTO AND FTAS

16. 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 (weak “lock-in” effects) UNILATERAL LIBERALIZATION

17. WTO: 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

18. 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 WTO’S WEAKNESSES

19. 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) Objectives of FTAs Secure access to large and stable markets; serving as a catalyst of technological change and quality enhancement in products and services MULTILATERAL WEAKNESSES STIMULATE FTAs

20. 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 and 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 FREE TRADE AGREEMENTS (FTAs)

21. SOME CONCLUSIONS ON FTAs • FTAs do not substitute development strategies • Can support high-quality participation of the country in the international economy • If complemented by other necessary components: • Macroeconomic stability • Infrastructure • Institutional stability and Modernization of the State • Social cohesion • Create political spaces that would permit addressing the challenges of competitiveness • Increased productivity • Enhanced formation of “Clusters” and Value-chains • Technological innovation

22. POLITICAL ECONOMY IMPLICATIONS of FTAs 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!!

23. PART 3REMAINING CHALLENGES AND POLICY RESPONSES

24. STAGES 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) • APEC 2004 in Chile • Singapore, New Zealand, Brunei (P-4) • China, India (already signed) and Japan (in negotiation) • Innovation leap into the knowledge society (2005-…) • Trade strategy forms part of the global strategy to promote the presence in international networks of innovation and technological change • Reinforcement of the links between trade policy, productivity enhancement and technological upgrading, as well as human capital formation • Think “big” with a global vision: international alliances, entrepreneur associativity, niches in the global economy, international value chains

25. WEAKNESSES OF THE EXPORT MODEL PERSIST • Still high concentration of commodities to the detriment of manufactures • 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: below the levels of economies with less income per capita and lower trade opening coefficient • Limited incorporation of knowledge in X • Lack of R + D

26. OBJECTIVE: IMPROVE THE QUALITY OF PARTICIPATION IN INTERNATIONAL MARKETS • Deepen the export model stimulating further its dynamism, diversification and sustainability • Reinforce the linkages with the global economy maximizing rents associated with natural resources and position itself in the dynamic sectors of the global markets • Intensify efforts on innovation, technological diffusion and the formation of human capital

27. OBJECTIVE: IMPROVE THE QUALITY OF PARTICIPATION IN INTERNATIONAL MARKETS • Upgrade the quality of markets and economic institutions • Reconcile competitiveness with social cohesion • Dynamic participation in international markets through enhanced competitiveness • Competitiveness that rests on technical progress and productivity gains • Progressive reduction of productivity gaps among distinct domestic sectors • Salary increases and inequity reduction based on improved productivity and on labor markets that facilitate an adequate distribution of these increases

28. MAJOR COMPONENTS OF THIS STRATEGY • Administer FTAs making good use of the opportunities offered (US, EU) • A strategic “bet” towards Asia: China, Korea, Japan, Singapore, New Zealand, India • Deepen ties with Brazil and others: • Taking advantage of our presence in Asia • Subregional physical and energy integration • Investment platform and web of trade agreements • Reinforce business alliances with Mexico and Canada to exploit further the US and Central American markets • Once again, indispensable to incorporate the technology variable

29. REVISITING CHILEAN INTEGRATION TO WORLD ECONOMY THANK YOU OSVALDO ROSALES DIRECTOR DIVISION OF INTERNATIONAL TRADE AND INTEGRATION, ECLAC (CEPAL)