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Chile: in search of a strategy for emerging trade Behemoth.

SANTIAGO -- Chile might seem like a speck on the horizon to an economic superpower like China. Chile's economy--estimated to reach $200 billion this year--is one-thirtieth of the size of China's, and as President Sebastian Pinera pointed out during a recent state visit to Beijing, Chile is about as far away in the world as you can get from China.

But far-off China is front and center for Chile.

The world's most-populous country is the largest single export market for Chile, receiving one-fourth of its foreign sales. Export growth to China has become a linchpin of Chile's economic growth; therein lies the rub. The trade that binds these two disparate countries together is copper, by far Chile's largest export. Roughly one-third of China's copper imports came from the South American country in 2010, according to China's National Bureau of Statistics. But the major copper trade has not broadened into other sectors, and Chile remains a virtual monoexporter to its largest export market.

"When China thinks about Chile, it sees copper," said Osvaldo Rosales, director for international trade and integration at the Economic Commission for Latin America and the Caribbean, the ECLAC.

Some economists and business sectors have expressed unease over the growing stature that China has acquired in the small and open Chilean economy. Any slowdown in China's economic growth could translate into a major setback for Chile's foreign earnings, making the dependence on copper ties even riskier.

But Rosales, a former top trade negotiator for Chile's Foreign Ministry, dismissed fears that a drop in Chinese economic growth would have unintended consequences in Chile. Rosales forecast that China's economic output would continue to grow at 8 percent for the next four to five years and would continue to have an impact on the structure of Chile's exports. The two countries have long had unexpectedly close ties.

In 1970, under the Socialist government of President Salvador Allende, Chile became the first South American country to establish diplomatic relations with the communist nation. Relations remained in place throughout the 1973-1990 dictatorship of Augusto Pinochet. Then, in the 1990s, Chile was one of the first Latin American countries to support China's entry into the World Trade Organization. In 2005, Chile became the first nation in the world to sign a bilateral free-trade agreement with China, just two years after Santiago signed a trade and investment treaty with Washington.

For almost a decade, trade with China has offered an extra boost to Chile's economy. Between 2003 and 2008, while the country's total exports tripled, its sales to China increased fivefold. China helped, too, in the quick recovery from the 2009 recession. As China quickly recovered its appetite for copper, the international price of the metal rapidly improved after its late 2008 collapse. Moreover, earlier windfalls from copper exports were saved in an offshore sovereign fund, which the Chilean government tapped for its $4 billion stimulus plan in 2009. As a percent of its gross domestic product, the stimulus was reportedly the fifth-largest in the world.

Since the free-trade agreement came into force in 2006, Chile's imports from China have also surged and, in 2009, were almost double their 2005 level. In a country where income inequality remains extremely high, cheaper Chinese imports benefited the lower-middle class by reducing the price of consumer goods, particularly electronics, which were previously beyond their reach. Chinese imports are also largely responsible for a sharp drop in the price of clothing and footwear, said Rosales.

China is now by far Chile's largest individual export market, with reported exports of $12.5 billion in 2009, twice the amount of exports to the United States, Chile's second-largest individual market. While exports to the United States are relatively diversified, copper accounts for about 85 percent of Chilean sales to China; wood pulp represents an additional 6 percent, according to ECLAC, a United Nations organization based in Santiago.

Some diversification has taken place, according to Fernando Reyes, Chile's former ambassador to Beijing. Chilean cherries, which are delivered just in time for the Chinese New Year, have captured an important niche market, he said. Chilean wine, too, has become fashionable. According to Vinos de Chile, the industry association, sales rose year-on-year by 70 percent in the first nine months of 2010. Chile's wine exports to China topped $24 million in 2009.

"Chilean wine has become an icon of quality among upper-and middle-income groups in China," Reyes said.

But the gains in fruit and wine remain isolated achievements by individual sectors. "There are signs of diversification," said Rosales. "But without a public policy, the tendency toward concentration will remain strong."

Non-copper exporters are, moreover, contending with the negative impact of a strong currency that has made their export products more expensive, one of the unintended consequences of high copper prices.

Another concern is the low level of investment flows between the two countries. According to ECLAC, China had invested just $63 million in Chile by the end of 2009, compared with investments that were four times larger in Peru. Remedying that lag is one of the aims of an agreement, secured by President Pinera during his visit to China in November, to negotiate a bilateral investment treaty.

"Increasing Chinese investment in Chile should be a priority, and Chile has to offer projects," added Reyes, the former ambassador.

Rosales also suggested that Chilean companies invest more in China, which would allow companies to piggyback on China's rising exports by supplying inputs for these products. This strategy is already being followed by successful companies from other Asian countries, Rosales said. Chilean firms could also add value by forming joint ventures with Chinese companies in such areas as refining copper--either in Chile, China or third countries--instead of merely exporting ore or copper concentrate.


"To take greater advantage of the Chinese market, Chile needs to advance in innovation," Rosales said.

If, as Pinera has suggested, the low valued-added of Chile's exports is an impediment to his government's goal of setting the country on course to attain full-fledged development status by 2018--with per capita gross domestic product at the levels of a Portugal today--trade relations with China will be crucial. But if China continues to view Chile as merely a source of copper, Chile could become even more dependent on commodity exports and the accompanying vulnerability to the swings of the global economy.
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Author:Bradley, Ruth
Publication:Latin Trade
Geographic Code:9CHIN
Date:Jan 1, 2011
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