Free trade's end run: got something to sell the world? Chile's port of Arica says come on down.

Bolivia has more than a hundred varieties of wood, among the finest in Latin America, exceeding Chilean wood in both variety and quality, says Fathi Abdalla, a naturalized Bolivian. Yet he's exporting the products made from that wood--doors, frames, closets and other finished wood products--from Arica, a northern Chilean port, and stamping "Made in Chile" on them.

Abdalla is ever-mindful of La Paz's rancor toward Chile, which runs deep since a 19th-century war with its neighbor that left Bolivia landlocked. Yet Chile's track record of signing trade deals over the past decade--it has made deals worth tens of billions of dollars with all of North America, the European bloc and the richest chunks of Asia, as well as bilateral pacts around Latin America--has made for an enticing proposition: Set up shop across the border, then ship to the world.

Abdalla's company is one of the pioneers aiming to use Chile's free trade agreements to capitalize on the opportunities offered by those huge markets. Bolivia's general political and economic upheaval also convinced Abdalla's company, Incomat, to build its furniture plant at the Arica port, Chiles fourth-largest in terms of tons handled, right on the Peruvian border and a short drive from Bolivia.

Incomat isn't the only foreigner starting to knock on Chilean doors. Ramiro Aravena, president of the Association of Industrialists of Arica, says five Bolivian companies came to Arica in just one week in November to assess setting up operations in the port. Brazilian soybean exporters have dropped by to discuss the possibility of processing their soybeans in Chile and then exporting them via the Pacific to the United States, says Aravena.

Figures are hard to come by, but Osvaldo Rosales, Chiles chief trade negotiator, says Peruvian exporters, too, are now exploring joint ventures with their Chilean counterparts to take advantage of the country's free trade deals, as are Argentine companies such as agro-industrial businesses in Mendoza, while footwear and textile firms are among the Brazilians also considering moving operations to Chile. "We believe that our trade agreements open up a great opportunity for initiatives of productive or commercial integration with neighboring countries," says Rosales.

Abdalla's choice is an early test as to whether Chile will indeed fulfill its long-stated goal of serving as Latin America's chief trade gateway to foreign markets. Chile isn't sitting back idly waiting for companies to come. In October 2003 it signed a two-year trade deal with Argentina designed to boost the number of Argentine companies operating in Chile. The accord also aims to foster international joint ventures to allow Argentine companies to take advantage of Chilean tariff preferences.

Chilean ports like Arica are offering their own carrots, providing new businesses with substantial tax breaks and financial benefits for hiring additional employees. Further, it offers convenience: The port is just five hours by car from La Paz. Arica also hopes to entice U.S. businesses to use Chile to reach the rest of Latin America.

Worldwide, only Miami has more fiber-optic nodes than Arica, making the city an ideal place for multinational companies in terms of communications and information technology, says Aravena. He also believes that U.S. companies could use Arica to gain better access to Brazil, a country with which the United States has locked horns frequently on trade. Companies moving to Chile also have better financing prospects because of Chile's low sovereign risk rating, compared to other Latin American countries.

Transformations. To benefit from Chilean trade deals, however, and carry a "Made in Chile" label, companies must comply with complex rules of origin that require them to at least transform their products in Chile, which may mandate using a certain percentage of Chilean primary materials or processing the produces in Chile.

Chileans, however, preach patience as their country slowly turns into the Southern Cone's free-trade gateway, since its treaty with the United States only went into effect on January 1, 2004.

Enrique Mantilla, president of Argentina's Chamber of Exporters, notes that even before Chile signed free trade deals with the United States and the European Union, cross-border trade and investment between Chile and regional countries like Argentina was brisk. The two also have undertaken joint ventures, such as bundling Chilean and Argentine wine for sale in Asian countries.

While Chile's trade deals can now reduce trade costs for Argentine exporters, Mantilla says that the problem is that "benefits go specifically to Chile, not Argentina." He's not certain that the cooperation agreement between Chile and Argentina will change this significantly and lead to a stream of Argentine companies moving to Chile. "There will be some investment due to the Argentina-Chile deal," Mantilla says, "but what will be the magnitude of this investment? It's very early to know."

Viktor de los Heros, president of Bolivia's National Chamber of Industries, says Chile's trade deals offer Bolivian businesses "interesting opportunities" in finishing their products, but he isn't aware of any that have moved to Chile in recent months.

Abdalla, however, thinks that many pragmatic Bolivian businesses will exploit their home country's rich raw materials and follow Incomat's lead. "It's more difficult to enter the markets of other countries with Bolivian products compared to Chilean products," says Abdalla. "When the product says, 'Made in Chile,' it has a better presentation than that which says, 'Made in Bolivia.'"

Nor are such arrangements a loss for Bolivia, national pride notwithstanding. Incomat, depending upon the season, has from 50 to 100 laborers in Santa Cruz, Bolivia, treating and drying wood. The Arica operation in Chile employs another 15 people to convert the wood into furniture. The furniture export is clearly of higher value, both in terms of wages and export income, but job creation is happening on both sides of a bitterly contested border. Few things salve old wounds like prosperity.