By H. E. Jorge Heine, Jorge Heine is the ambassador of Chile to China
At a time when globalization and free tradefind themselves increasingly under siege, the Chile-China Free Trade Agreement(FTA) signed in 2005 takes us back to a seemingly better, happier time inglobal trade, when everything seemed possible, new vistas were being openedbetween Asia and Latin America, and China-LAC trade was still very much in theoffing. Contrary to what is sometimes said, this was not just the first FTAbetween China and a Latin American country. It was actually the first FTAbetween China any single, individual country ( China had signed one with ASEANbefore).
Chile had been in the forefront ofdeveloping what has come to be known as a “lateral” international trade policy,based on the pursuit of bilateral or pluri-lateral FTAs with as many countriesas possible, having signed shortly before that FTAs with the EU (2002), theUnited States ( 2003) and South Korea ( 2003). For China, on the other hand,FTAs were relatively new terrain. However that may be, both countries areconsidered to be among those that have made the most of globalization byopening their economies and taking up the many opportunities offered by theworld economy. China, defying all expectations, grew at double-digit rates forthirty years, lifted 700 million people out of poverty and is now poised toeradicate poverty all together by 2020, according to the latest Five-Year Plan.It is no coincidence that China´s opening, which many date back to 1978,overlaps and coincides with the current phase of globalization, which many saystarted in 1980, the year the first PC came on the market and CNN went to theair. On a much smaller scale, Chile, bynow the most developed country in Latin America, and with an average growth of5 per cent a year for much of the past quarter century, is also often describedas one that has managed to deal well with the challenges of globalization,having reached a per capita income of US$ 15,000 ( twice that of China) innominal terms, and having cut its poverty rate from 39 per cent in 1990 to lessthan 10 per cent today.
Twelve years after signing the Chile-ChinaFTA, in 2017 negotiations are under way to deepen and strengthen it,negotiations that should be finalized by year-end. What does the balance sheetof this pioneering trade agreement look like ? Who has it benefitted the most?Why does the FTA need an upgrade ? What are the issues being negotiated andwhat is stake ? Which is the way forward for Chile-China trade in the era ofBrexit and Trump ?
The purpose of this article is to respondto these questions. The first section assesses the results of the FTA in this12-year period and the various additions that have been made to the overallframework to facilitate bilateral trade and investment flows. The secondexamines the new disciplines that are being brought into the FTA in the currentnegotiations and sets the FTA within the broader framework of the One Belt, OneRoad (OBOR) Initiative put forward by President Xi Jinping in 2013. A third andfinal section draws some conclusions.
The Chile-China FTA : breaking new ground
For obvious reasons, when the possibilityof a Chile-China FTA was first mooted, eyebrows were raised. Many people inChile were critical of it, arguing that the country would be swamped withChinese goods and get little in return. At least one study projected that Chile´simports from China would grow at 13% a year and Chile´s exports at a mere3.7%.Yet, far from shrinking from the challenge such an FTA entailed, Chilestepped up the plate, fully aware that this was exactly what its overall,long-term trade strategy dictated. And the results have not been disappointing.
The impact the agreement had on bilateraltrade, and especially on Chile´s exports to China, can be ascertained from thefact that Chile´s exports to China doubled in just one year, from US$ 5.255billion in 2006 ( the year the Chile-China FTA came into effect ) to US$ 10.505billion in 2007. Since 2005, when the FTA was signed, bilateral trade hasincreased fourfold, from US$ 8 billion to US$ 31 billion. China is today Chile ´s# 1 trading partner and Chile is China´s third largest trading partner in LatinAmerica, and the second in South America. China does more trade with Chile thanwith many of its neighbors, many of them far larger than Chile both in populationand in territory. And in 2016 Chile exported twice as much to China (US$ 17billion) than it did to the United States ( US$ 8 billion).
Yes, the trade is somewhat lopsided in thesense that Chile exports mostly minerals and agricultural products, whereasChina exports mostly consumer goods and industrial products. But then, that iswhat Chile largely exports to the rest of the world as well. Chile´s exportbasket is also heavily skewed toward copper ( Chile is the world´s biggestproducer and exporter of copper, and China the world´s biggest importer andconsumer) and is strongly influenced by the latter´s price in world markets.Accordingly, Chile´s exports to China peaked at US$ 19 billion in 2013, and theheight of the commodities super-cycle, and have declined modestly since, thoughthey picked up in 2016, growing 4.5%.
Yet, perhaps the most significant trend inChile´s exports to China has been its diversification, away from copper andtowards other products. This is particularly true in the case of fruits. From amere US$ 5 million in 2005, Chile´s fruit exports to China have increased by240 times in eleven years. In 2016, Chile became the # 1 exporter of fruit toChina, at US$ 1200 million, overtaking neighbors of China such as Thailand andVietnam, and leaving behind such agricultural powerhouses as Australia and theUnited States. And the sheer variety of Chile´s Mediterranean fruit offeringsto the Chinese market is remarkable : they include cherries (US$ 671 million),table grapes (US$ 194 million) , blueberries (US$ 71 million), fresh prunes ( US$ 45 million), avocados (US$ 35 million), kiwis (US$ 27 million), and apples ( US$ 14 million), withnuts and peaches soon to come, and pears and citrus fruits waiting in the wingsfor their approval.
In this area, rather than placing its hopesin one or two items, Chile´s fruit exporters have followed a strategy ofconstantly bringing new productsto the Chinese market, capitalizing on Chile´sfruits’ well-earned reputation for quality and flavor. Most notable is the factthat China´s main fresh fruit supplier is also the country that is the farthestaway, particularly since fruits are, by definition, a highly fragile andperishable product.
What explains this seeming paradox?
The answer is both simple andstraightforward. Contrary to a widespread misconception, exporting fresh fruitsis very different from exporting bulk commodities. It is a highly specializedendeavor that demands enormous attention to detail and to shifting consumertastes. With forty years of experience, Chile´s producers and exporters arewell-placed to succeed . As opposed to what happens elsewhere, where countriesexport whatever is left after having satisfied the local market demand, inChile, given the small size of the domestic market, from the very beginningfruit production is geared toward international markets, and plannedaccordingly. The very type of fruit that is planted is decided on the basis ofwhatever world market it will be shipped to, and treated accordingly.Harvesting, packaging, shipping, cold-chain managing and distributing in finalmarkets are by now highly specialized tasks handled mostly by seasoned staff withmany decades of experience.
Container-technology advances have made itpossible to cut down on the time it takes to transport fruit from Chile toChina ( on average, some thirty days), while cold-chain technology allowsfruits ( and other food products) to be shipped safely and swiftly across thePacific. In some specific cases of high-value products such as cherries, and atcertain times of the year, shipping time from Chile to China can be cut down to21 days, while for special occasions, such as the year-end holidays and theChinese Lunar New Year, air freight is more and more common for cherries andblueberries. Chilean producers have tapped into the Chinese consumer´s urge forfresh fruits, in a market where the premium is placed on freshness, and thevalue is added not by bottling, freezing or pressing the fruit into juice, butby making it reach in as pristine a condition the supermarket shelf or theTaobao warehouse.
Similar techniques have been applied toother food items, where Chile has also made inroads in the Chinese market. Wineis, of course, Chile´s flagship product, and in 2016, China became the # 1market for Chilean bottled wine, with record sales of US$ 197 million, makingChile into the third largest wine exporter into China, after France andAustralia. In meats, chicken, beef and turkey are doing well, while pork, theChinese consumer´s favorite meat, has beaten all expectations, reaching US$ 129million sales in 2016, and becoming Chilean pork´s # 1 export market, beatingJapan and Korea. Sea food is not lagging behind, with salmon, a new product inChina, doing especially well. Chilean food products reached US$ 1799 million insales in China in 2016, a 47 per cent growth on 2015.
Yes, Chile has done well as a result of theFTA, but so has China. In Chile, it has found a ready market for its mobilephones, PCs, cars, jewelry and office equipment, with companies like Huawei,Chery and others doing a thriving business, while Chilean department storechains like Falabella, Ripley and Almacenes Paris do much of theirsourcing in China, where they keepoffices with hundreds of buyers. In the latest twist of the Chile-China tradeboom, Aliexpress, an Alibaba platform, has developed a base of many thousandsof loyal e-commerce customers in Chile, wreaking havoc with the establishedpractices of the Chilean Post Office, which after years of peaceful slumber hasseen itself inundated by millions of packages hailing from China, leading tomajor adjustments of its personnel, equipment and mailing policies.
Over time, a number of additions have beenmade to the original FTA. A Supplementary Services Agreement provides a legalframework for services to be traded bilaterally. It provides Chilean nationalsthe same conditions as those obtaining for Chinese ones. Since 14 February2014, a Supplementary Agreement on Investment has been added to the FTA. Itadds and improves on the Investment Protection and Promotion Agreement signedin 1995. In 2015, a Double Taxation Avoidance Treaty was signed, has now beenratified by both parties and is thus in full effect.
Extending OBOR to South America : Fromgoods to services
However, twelve years after the signing ofthe Chile-China FTA, the world has moved on, and it has become necessary toupdate the Agreement. Whereas the text of the 2005 FTA as mainly focused ongoods, services have now become much more significant ( in fact, in 2016, morethan half of the Chinese GDP was made up of services, in a further indicationof the major changes we are witnessing in the Chinese economy, as it evolvestowards a post-industrial condition), as has the need to look for ways tofacilitate their trade. In the visit undertaken by Prime Minister Li Keqiang toChile in May 2015, it was agreed to move forward on deepening the Chile-ChinaFTA. After sorting out some differences on market access, a schedule on thevarious negotiating rounds was agreed on in early 2017, with them taking placein Beijing in April and June of 2017 and in Santiago in August of the sameyear, with another session to provide the necessary legal review taking placein late September in Beijing.
To handle the various issues at hand,several Working Groups were formed. As far as trade in goods is concerned, theyrelate to Market Access, Rules of Origin and Customs Procedures and TradeFacilitation. In terms of trade in services, they relate to Economic andTechnical Cooperation, Trade Related Rules and Legal Issues. The Trade RelatedRules , in turn, includes subgroups covering Competition Policy, Public Procurement, E-Commerce and the Environment.
As mentioned above, with e-commerce growingin leaps and bounds, ways to deal with it are bound to receive specialattention in years to come.And this where the enhancement of digitalconnectivity across the Pacific, and the role of the One Belt, One RoadInitiative comes in.
For years, the weak connectivity betweenAsia and South America has been an issue. One only has to look at a map of thesubmarine Internet cables that cover the world´s surface to realize that, whilethere are more than fifty crossing the North Atlantic, there is none crossingthe South Pacific, between Asia and South America. Voice and data from Asia toSouth America ( and vice-versa) have thus to be routed via North America, withthe considerable addition of time and cost that entails.
It is in this context that Chile´s proposalto install a submarine, fiber optic, trans-Pacific submarine cable from Chinato Chile becomes relevant. First mooted in January of 2016 during a visit ofChile´s Vice Minister for Telecommunications, and formally submitted to theNational Development and Reform Commission (NDRC), it has since madeconsiderable progress, being mentioned in the Chile-China communiqué issued byPresident Bachelet and President Xi during the former´s state visit to China inMay 2017. References to it were also made to it in the formal exchanges betweenboth leaders during the One Belt, One Road International Cooperation Forum heldin Beijing on May 14-15. In June 2017, a pre-feasibility study of the projectwas delivered, with the next phase contemplating a full-fledgedfeasibilitystudy,that would include both its technical and commercialviability. Chinese companies, some of which are already at work in a similarproject that would link up Brazil and Africa in the South Atlantic, have theengineering capabilities to undertake such an ambitious project, which at some20,000 km, would be among the longest such cables in the world. It would alsoconstitute a very real– albeit digital– extension of the One Belt, One RoadInitiative, until now confined to Eurasia, to the Americas.
Conclusion
If there is an instance that proves thecase for FTAs and for free trade more generally, it is that of the Chile-ChinaFTA. Although greeted initially with considerable skepticism, in the course ofmore than a decade it has shown to be a suitable tool to facilitate mutuallybeneficial exchanges between two very, distant, different and unequaleconomies, but that share a commitment to free trade. Decried by economicorthodoxy as an imperfect instrument bound to create a “spaghetti bowl” effectof difficult-to-track and monitor trade deals across the world, FTAs haveworked for Chile, a country that has pursued them systematically andrelentlessly over the past quarter century, with excellent results. In thisperiod, Chile has signed 24 FTAs with some 65 countries, by far the largestnumber of any country. As a result of its rapid growth and development drivenby its fast-growing exports, Chile was the first South American country to jointhe OECD, sometimes referred to as “the rich countries´ club” in 2010.
And in this growth and development, it isnot just Chile´s vision of the dynamics of international trade that has beeninstrumental. It is also Chile´s understanding of which way the world was ( andis) going, an understanding of “globalization as Asianization”, meaning thatthis part of the world would become its driver, with China in the lead. Much asChile bet early on China, establishing diplomatic relations as far back as1970, Chile also placed an early bet on Asia, joining APEC in 1994. And in thisregard, our links with China have been critical, and the FTA we signed in 2005,the first for China with any individual country, decisive.