CHILE'S NORTHERN FREE TRADE ZONE: A PLATFORM FOR

UNCLAS SANTIAGO 000690

SENSITIVE
SIPDIS

STATE PLEASE PASS TO USTR KATE KALUTKIEWICZ
COMMERCE FOR KMANN

E.O. 12958: N/A
TAGS: ECON ETRD KIPR PGOV PREL CI
SUBJECT: CHILE'S NORTHERN FREE TRADE ZONE: A PLATFORM FOR
SOUTH AMERICA


1. (SBU) SUMMARY: The Free Trade Zone of Iquique (ZOFRI) is
an essential part of Chile's northern economy, providing 25
percent of jobs in the city of Iquique. Already Chile's
largest free trade zone, officials are extremely upbeat about
the ZOFRI's future because of its strategic location,
infrastructure, and efficient administration. Trade with the
U.S. has increased from $263 million in 2003 to $600 million
in 2008, making the U.S. the second largest supplier to the
ZOFRI after China. ZOFRI officials described a passive
approach towards intellectual property rights protection, but
pledged cooperation on law enforcement issues. As workers
constructed approximately 30 new warehouses, officials
outlined their vision to make the ZOFRI a platform for South
America that reached from Chile to Peru, Bolivia, Argentina,
Paraguay, and Brazil. END SUMMARY.

ZOFRI: ENGINE OF ECONOMIC GROWTH IN NORTHERN CHILE
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2. (SBU) During a recent meeting with Poloff, officials
explained that the ZOFRI serves as a key engine for economic
growth and development in northern Chile. The ZOFRI, Chile's
largest free trade zone, employs 30,000 people in over 1700
registered businesses that trade with more than 70 countries.
Officials highlighted the ZOFRI's strategic location,
well-developed infrastructure, and efficient administration
as features that combine to make it an attractive entry point
for businesses looking to expand in South America. Located
more than 1000 miles north of Santiago but within 100 miles
of the Peruvian and Bolivian borders, the ZOFRI has a growing
industrial distribution area, a large shopping mall, and a
convention center. The ZOFRI also extends to industrial
centers in Arica, a city that borders Peru, and Alto
Hospicio, a small town east of Iquique.


3. (SBU) Eugenio Cortes, ZOFRI General Manager, noted the
increase in overall sales from $1.2 billion in 2002 to $3.4
billion in 2008. Trade with the U.S. has also jumped, with
ZOFRI purchases from the U.S. rising from $263 million in
2003 to $600 million in 2008. The U.S., currently the second
largest supplier to the ZOFRI after China, primarily sells
fuel, lubricants, and used cars. Fifty-five percent of ZOFRI
sales are to Chile, followed by Bolivia with 25 percent.


4. (SBU) The ZOFRI has a diverse mix of international small
business owners. Large immigrant populations have
established themselves in certain sectors, and Chilean
nationals own just 47 percent of ZOFRI businesses. Chinese
nationals own 17 percent of ZOFRI businesses, while Pakistani
and Indian immigrants each own six to seven percent. The
Chinese primarily trade textiles and household goods, and
Pakistanis dominate the used car market.

THE NOT SO GOOD: IPR ENFORCEMENT
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5. (SBU) ZOFRI administrators defended their cooperation with
law enforcement officials on issues such as intellectual
property rights (IPR) and money laundering. Any company that
is convicted of an IPR crime can have its ZOFRI license
rescinded, but officials acknowledged that this has never
taken place. They noted, however, that the Board of
Directors was scheduled to meet soon to consider revoking the
license of a business found guilty of selling fake Nike and
Disney products.


6. (SBU) A representative of the Chilean Customs service who
attended the meeting challenged officials by saying that
Customs officials regularly seize fake products destined for
ZOFRI businesses, but there are no consequences for
importers. ZOFRI officials explained that without a judicial
finding, they cannot take action.


7. (SBU) Administrators noted that they fully cooperate with
Chile's Financial Investigative Unit (UAF) and Customs
officials on questions of money laundering and valuation
problems. They lamented the lack of cooperation from
Bolivian officials and stated that information only flows in
one direction, from Chile to Bolivia. Officials explained
that four to five years ago, the Government of Bolivia (GOB)
regularly complained about undervaluation and smuggling
within the ZOFRI, but those complaints have stopped. ZOFRI
administrators speculated that the current GOB does not care
about smuggling or contraband.


FUTURE INCLUDES INFRASTRUCTURE EXPANSION, MORE REGIONAL TRADE
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8. (SBU) Officials see the ZOFRI as a regional platform for
South America, with a bright future in markets in northern
Chile, Peru, Bolivia, Argentina, Paraguay, and even Brazil.
Construction is currently underway on approximately 30 new
warehouses and officials discussed port expansion as a key
goal for the long term. They are also considering expansion
of the industrial center in Alto Hospicio to accommodate the
booming used car business. ZOFRI administrators acknowledged
competition from the free trade zone in Tacna, Peru, but do
not view Peru as a serious threat. They proudly noted that
it only takes two weeks to register a business in the ZOFRI,
and Chile has an excellent reputation for business
transparency.

COMMENT
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9. (SBU) There were no signs of the global economic slowdown
in the ZOFRI, as construction workers labored to build
approximately 30 new warehouses and the mall bustled with
shoppers looking for deals on the latest electronics. The
building boom reflects the private sector's optimism that
demand will continue to grow. The ZOFRI's passive approach
to IPR protection, however, is a worrisome sign that some in
the private sector are part of Chile's IPR problem instead of
the solution.
SIMONS