CHILE ANNOUNCES FTA WITH CHINA: A FIRST LOOK

UNCLAS SECTION 01 OF 02 SANTIAGO 002322

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E.O. 12958: N/A
TAGS: ECON EINV ETRD PREL CI
SUBJECT: CHILE ANNOUNCES FTA WITH CHINA: A FIRST LOOK

REF: SANTIAGO 1794


1. (SBU) Summary. On November 4, Carlos Furche, Director
General of Economic Relations at the Chilean MFA, made the
first public presentation of the just-announced Chile-China
Free Trade Agreement. Furche explained that Chile's interest
in the FTA was based on the expectation of continued strong
Chinese economic growth, the need to increase foreign
investment in Chile's own economy and the recognition that
Chile must diversify its exports. He said Chile-China trade
represented 11 percent of Chile's overall trade in 2004, and
he expected China to emerge as Chile's number two trading
partner -- after the U.S. -- by the end of 2005. In a
separate talk with econoff, Furche said that he did not
foresee significant domestic opposition to the FTA, with
ratification and implementation of the FTA expected by July

2006. End Summary.

Chile Is Betting on Continued High Chinese Growth
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2. (U) On October 28, the Government of Chile (GOC)
officially announced that it and China had completed their
fifth and final round of negotiations for a Free Trade
Agreement. Public sources and our own contacts in the GOC
expect the FTA to be signed on November 17 on the margins of
the APEC meeting in Korea. On November 4, before an audience
of Chilean business leaders assembled by SOFOFA, the largest
association of Chilean manufacturers, Director General of
Economic Relations Carlos Furche from Chile's Ministry of
Foreign Affairs and the GOC's main FTA negotiator laid out
the reasons behind Chile's pursuit of an FTA with China. He
said Chile had been driven by the mantra of acquiring the
best access in the shortest amount of time. Negotiations
were begun in January 2005 and the fifth and final round
concluded in October in Beijing. Furche expects the FTA to
come into force by July 2006.


3. (U) Furche explained that GOC thinking was driven by three
main factors. First, the GOC assumed that China would
continue to achieve growth rates significantly higher than
the rest of the world for the next two decades. (Note:
Furche told econoff separately that Chile was betting on
China averaging six percent real GDP growth over the next
twenty years and to become the major source of growth in the
world's economy.) Second, he said that Chile has achieved
its goal of tapping into international trade through its web
of FTAs. With that accomplished, Chile now needed to attract
more foreign direct investment to continue its development.
Chile believed that the China FTA would lead to greater
investment. Third, Furche said Chile had to export more
non-traditional goods such as agricultural products, wine,
chemicals and manufactured items. He said that trade with
China in recent years was already trending towards
non-traditional exports. In 2005, while copper still
represented 80 percent of Chile's exports to China,
non-traditional exports to China were up over the last four
years by nearly 200 percent. The FTA would guarantee access
to the Chinese market for many of these non-traditional
exports.

Trade Ties Already Growing
--------------


4. (SBU) Even before the FTA, trade between Chile and China
has been growing rapidly. In 2004, China was Chile's number
three trading partner. This year it will be number two.
Furche cited figures for the first half of 2005 that had
Chilean exports to China up by 70.3 percent and imports from
China up by 40.6 percent. He called the Chinese FTA a key
addition to Chile's strategy of setting up a web of formal
trade agreements. He said it would help diversify Chile's
economy by promoting the growth of non-traditional exports as
well.


5. (C) Furche said this FTA was the first that China had
pursued outside of Asia and it offered the chance to tie
South America into Asia's economies. Chile wants to be that
platform for Asian investment in the region. To that end,
the China FTA will join agreements Chile has already reached
with South Korea, Singapore and New Zealand. Furche told
econoff he hoped that Japan would formally announce its
interest in starting FTA negotiations at the November APEC
summit. He added that after APEC, he would travel to India
for trade talks. He did not offer details other than to say
that Chile would like to pursue a full FTA with India but the
Indians are not interested at this time.


6. (SBU) Under the FTA, over 90 percent of Chile's current
exports to China will receive duty free access right away.
Other products, like wine, face a phase-in period of ten
years. Only about one percent of Chilean products were
excluded from the terms of the FTA. Furche said the
agreement did not cover much beyond just trade. Science and
technology, education, tourism, IPR and investment were
intentionally left out to complete the agreement rapidly. He
said these topics were subject to future discussion and/or
agreement. Furche told econoff that one such adjunct
agreement had already been signed by Chile and China, a labor
cooperation agreement, on November 3.

Ratification Not an Obstacle
--------------


7. (SBU) After signing, the FTA will need to be ratified by
the Chilean Congress. Furche told econoff that he did not
expect any significant opposition to it. While some might
fear a flood of Chinese imports, particularly textiles,
Furche said there was little current protection against such
imports now, with Chilean duties averaging just six percent.
If the encouraging questions and comments that Furche
received after his public presentation on November 4 were any
indication, there is strong domestic support for formalizing
the trade relationship with China.


8. (SBU) Comment: There is a broad domestic consensus on the
importance of this type of FTA to Chile's future. That
Chile's trade relationship with China is of growing
importance is also self-evident. The GOC recognizes that
this FTA is much narrower than the U.S.-Chilean FTA, but it
does achieve important goals such as securing access for
current exports and improving Chile's position for future
exports of Chinese investment.
KELLY