Chile’s tireless expansion into foreign markets has reached new heights, racking up $21.34 billion in exports during the first nine months of this year. Yet while the country has conquered new markets and diversified its product offerings, its companies face new challenges, especially small and midsize enterprises. They must not only add greater value to their products but also compete in global and domestic markets where the playing field is not always level. This situation may change, however, due to a proposal from Ricardo Lagos, Chile’s president, to create a free-trade agreement within the 21 nations that comprise APEC, the Asia-Pacific economic association. Its members are the most dynamic economies on the globe, generating about 70% of all growth during the past decade.
At the moment, Chile maintains free-trade agreements with the United States, Canada, South Korea and Mexico. Chile is also engaged in negotiations to create similar pacts with China and Japan, two other countries that belong to APEC. The other members of APEC are Australia, Brunei, Hong Kong, Indonesia, Malaysia, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taiwan, Thailand, and Vietnam.
The Chilean government presented its plan for an APEC free-trade zone to the APEC Business Advisory Council, made up of 62 business leaders chosen by the leaders of APEC countries. The Council has been called one of the “rare” signs of progress to come out of the negotiations for deregulating global trade within the Doha Round of the World Trade Organization (WTO). The Council’s goal is to overcome obstacles that show up within the bloc as a result of the members’ huge number of bilateral treaties. Currently, there are some 80 bilateral and regional treaties. Within a few years, that number could rise as high as 190. The people behind this plan also argue that this approach would create new trade without creating trade diversion. The free-trade agreement would impede fragmentation in the region; in other words, the separation of Asian member-states from American member-states.
President Lagos’ free-trade proposal drew immediate support from Mexico. Francisco Gil Díaz, Mexico’s finance minister, noted that his country’s free-trade pact with Japan is about to go into effect. A mere decade ago, Mexico’s imports from China were almost non-existent. This year, Mexico is going to import more than $10 billion in goods from that country.
From Chile’s point of view, the numbers are also looking good. According to a study by Asexma, the country’s Association of Exporters of Manufacturers and Services, Chilean shipments to APEC countries could grow at a 44.8% rate in 2004, to reach $17 billion by the end of the year. Within APEC, the United States has been one of the major buyers of Chilean products, with a 27.7% share this year. Japan has a 20.7% share; China, 15.2%; South Korea, 11.1%. Meanwhile, bilateral trade between Chile and APEC will reach around $25.28 billion in 2004, up 35.2% over 2003. Chile will enjoy a trade surplus of about $8.9 billion, up 83.3% from 2003.
Roberto Fantuzzi, president of Asexma, makes no statistical estimates of the possible impact of an APEC free-trade pact. However, Fantuzzi predicts that everyone involved in the pact would enjoy increased sales in every sector where sales have already been developed. Chile has already signed treaties or complementary economic agreements with the American members of APEC. “We can anticipate that the impact would be to boost Chilean exports in Asia. That’s because Chilean tariffs are, on average, lower than the tariffs Asian countries charge on Chilean shipments to them.”
The Asexma study warns that Pacific Rim countries are highly competitive, so the benefits of creating a grand free trade zone will be reflected more in the clarification of rules, and the homogenization of procedures. Commodities could be the main beneficiaries, especially copper, which comprises 20% of all Chilean shipments to Asia. A free-trade pact could also help other traditional sectors, as well as the “emerging” sectors in recent years – including several varieties of trout, sea bass and salmon; wood products; fresh grapes; methanol; and wine – the star in recent years.
“Obviously, deregulation of these markets will lead to sales growth,” says Andrés Ballesteros, Asian regional director for Concha y Toro, Chile’s largest wine exporter. Last year, the company sent 280,000 cases of wine to the Asia-Pacific region, racking up more than $6.5 million in sales.
Ballesteros admits that any free-trade treaty that reduces tariffs on Chilean wine “is highly useful, and will be extremely advantageous.” But he adds that a high level of investment will be required if Chile is to find a secure spot in this prestigious segment. “Hopefully, it will be the result of high quality, not [low] price.” The free-trade pact with South Korea has not had a significant impact on lowering prices of Chilean wine in that country. “Nevertheless, (the FTA) is extremely useful when it comes to consumers’ perceptions.”
According to the Asexma report, Chilean wine exports to APEC countries sold for an average price of $2.62 per liter in the first six months of this year. Ballesteros thinks that trade deregulation could have a positive impact. “Most likely, it would lead to an improvement in our prices. Moreover, it would allow us to take advantage of some marketing strategies.”
Fantuzzi anticipates that wood products for the construction industry might enjoy a significant growth surge in China because of that country’s exceptionally dynamic domestic market. However, selling wine and salmon would mean going after the most upscale segments of the Chinese market. “In general, the [high] prices [of these products] set a limit on market penetration because of the low per-capita income of most people in Asian countries. Therefore, Japan and South Korea are the most appealing markets for these products.” Fantuzzi offers his own recipe for success in those two promising markets: “In both cases, it is advisable to serve white wine along with salmon and seafood; and serve red wine along with beef – including ostrich, wayu (a breed of cattle). That makes it easier to do promotions and sell products.”
Beyond traditional product sectors, Fantuzzi mentions other Chilean products that can find profitable niches in Asian markets: “The kinds of products that are handmade, or made to measure, and have very high quality. Especially in China, Japan, Singapore, and South Korea.”
While Chilean exports to APEC involve a low level of processing, Chile’s imports from APEC countries are headed by high-value manufactured goods such as cars and trucks (8%), and cellular phones (4.1%).
The Competitiveness Gap Barrier
Alejandra Molina, foreign trade director of Asimet, Chile’s association of metallurgical and metals industries, agrees that it would help if Chile came away with some preferences from Asia-Pacific economies. According to Molina, local industries in those countries would not grind to a halt as a result, especially in areas where Chile has unilaterally opened itself to competition from Asia. “It doesn’t sound very logical that, if we sell them copper wire, we must open our doors to the very same merchandise.”
Molina is worried about “a kind of black zone” in some Southeast Asian economies. “Some products in that region are not adjusted to reality; there are situations where the rules of pricing don’t apply. Some very predatory people do not hesitate to lower prices until they reach a level people are looking for.”
Molina supports APEC trade liberalization, not just because it implies opening doors wider for products whose prices are adjusted to reality. However, she says, “our small and midsize companies are the most labor-intensive, and we must protect them. The idea is to protect the small margin many companies have so they can sell in their local market.” For example, in the free-trade pact with South Korea, some Chilean industries managed to establish markets for products excluded from that agreement. “In those countries, there are subsidies that favor certain products and their sales in foreign markets. Generally speaking, they are markets characterized by distortions.”
According to Fantuzzi, Chilean companies can overcome differentials in pricing and costs by improving their products, and raising both productivity and quality. He also recommends that companies “add value through industrial design, and create new products that focus on providing solutions in global markets.”
Might an APEC free-trade zone become a new opportunity to diversify the supply of Chilean exports, either by signing technological agreements, strategic alliances or platforms for regional business? “Not necessarily,” says Fantuzzi. Although greater demand can generate greater diversification, this phenomenon is tied more closely to the development of supply than to growth in demand. “Countries tend to commercialize sectors where they are most efficient and competitive. If Chile does not find new products to develop, and new solutions to offer, it will be hard for the country to expand its supply of export products simply by signing free-trade agreements.”
Foreign investment is another factor that can bring benefits, says Fantuzzi. “If a possible free-trade agreement included a chapter for promoting and protecting foreign investment, it would open up new opportunities in the entire bloc for doing business. It would have unimaginable benefits for every member of the bloc.”