The Impact of EU FTAs on the trade and economic performance of Chile

09/06/2011

Prof Claudio Dordi - Professor of International Law at Bocconi University (Milan), and MUTRAP III Team Leader

Mr Federico Lupo Pasini - Lawyer and consultant specialized in international economic law and policy. Based in Hanoi.

The literature on the assessment of the economic and trade performances of the FTAs concluded by the EU is quite comprehensive: however, most of the researches are conducted before the agreement is negotiated and is entered into force, as they are intended to support the negotiators to understand the magnitude of the effects of each agreement. Few analytical studies have been published to analyze the impact on trade and on the economies of the FTAs members after the agreement entered into force. In this research we select, among the countries which participated to a FTA agreement with the EU, only those agreements which might represent a reasonable example for Viet Nam. For this reason we excluded all the agreements with EU members’ candidates or with countries that are geographically close to the EU as well as the agreements with countries which are not comparable to that of Vietnam and we selected some agreements which already entered into force for a minimum number of years, allowing the possibility of an effective assessment of their impact on the members’ economies.

The Main Features of Chile

 

Chile

Surface

756600 sq km

Population

17 millions

GDP

116 bn. Euro

GDP per capita

6829,2 Euro

Export/GDP

32,1%

Import/GDP

28,3%

Trade/GDP

60,4%

 

The EU-Chile Free Trade Agreement

 

Chile

Signed

18.11.2002

Entered into force

1.3.2005

 

Main issues covered

The Association Agreement between the EU and Chile entered covers a number of relevant issues as follows:

-          Progressive liberalization of trade in goods;

-          Establishment of a agreed discipline on customs, rules of origin, TBT and conformity assessment procedures, SPS, safeguards, antidumping;

-          Progressive liberalization of trade in services;

-          Improvement of the environment for reciprocal foreign investments;

-          Liberalization of movement of capitals;

-          Government procurement;

-          Protection of intellectual property rights;

-          Protection of competition;

-          Dispute settlement.

Trade performances

EU-Chile trade showed a clear increase of trade flows from the entering into force of the FTA agreement (2005). The annual growth rate in the period 2005-2008 was 19.17% for the export and 12.47% for the import.

Exports: the entry into force of the agreement boosted the exports only in the first year of implementation (2006). Since 2007 the exports growth rate has been limited (2007: + 3%) or negative (in 2008 and in 2009). While in the last two years this has been probably due to the economic and financial crisis, the data of 2007 probably illustrate that the trade effects of the agreement on exports have been quite limited. This is confirmed by data in table 2, which shows similar data regarding the annual exports growth in the pre-crisis (2005-2007: table 2) pre-agreement (2002-2005) periods (respectively: +30.77% and + 30.66%) annually.

The post-agreement period growth rate of import (+12.47%) has been lower than the pre-agreement one (+18.11%). The higher increase of exports compared to import amplified the trade balance surplus for Chile (in the post-period, +25.76%). The agreement did not influence the relative value of the trade balance: indeed, comparing the period 2005-2007 (pre-crisis and post-agreement) with the 2002-2005 period (pre-agreement), table 2 shows similar growth rates (+51% vs. +54%)

Table 1

 

Chile-EU Trade (000 USD)

 

Value in 2002

Value in 2003

Value in 2004

Value in 2005

Value in 2006

Value in 2007

Value in 2008

Value in 2009

Growth 2005-2008

Growth 2002-2005

Export

4290406

4972083

7882569

9569440

15883042

16364055

16193417

9646674

Annual

Annual

Growth rate

 

15.9

58.5

21.4

66.0

3.0

-1.0

-40.4

19.17

30.66

Import

3042924

3286535

3584266

5013443

5177083

5957093

7132448

6578245

 

 

Growth rate

 

8.0

9.1

39.9

3.3

15.1

19.7

-7.8

12.47

18.11

Trade balance

1247482

1685548

4298303

4555997

10705959

10406962

9060969

3068429

 

 

Growth rate

 

35.1

155.0

6.0

135.0

-2.8

-12.9

-66.1

25.76

54.00

Source: ITC, Trade Map

Table 2

 

Growth 2005-2007

Growth 2002-2005

Growth rate export

30.77

30.66

Growth rate import

9.01

18.11

Trade balance

51.14

54.00

Source: ITC, Trade Map

 

It is highly probable that trade flows have not been deeply influenced by the implementation of the agreement for a number of reasons. The very low level of average tariffs already applied in the reciprocal trade between the two FTA members before the agreement is probably one of this: table 3 below shows that the in the bilateral trade there had not been substantial reduction of tariffs.

 

Table 3. EU tariffs applied on Chilean imports.

Product Name

Year

Simple Average

Weighted Average

Standard Deviation

Maximum Rate

Total Trade

2004

4.01

1.84

5.55

57.6

Total Trade

2008

4.19

2.09

5.36

57.6

 

 

 

 

 

 

Agricultural

2004

6.12

9.22

8.04

57.6

Agricultural

2008

6.39

9.42

8.02

57.6

 

 

 

 

 

 

 Industrial

2004

3.64

1.02

4.46

26

 Industrial

2008

3.84

1.12

4.37

26

Source: World Bank, Wits

 

It should be taken into consideration, however, that the share of import from Chile in the total import of the EU increased from 0.24% in 2004 to 0.27% in 2008, while, like in 2004, Chile exports to EU amount to 25% of total Chilean exports. This shows that the FTA has probably helped Chile in maintaining, at least, the same market share in EU imports.

Copper is the most important product exported to the EU: in the period 2004-2008 its exports increased by 17% (6.8 bn. USD in 2008); the other four main products exported are Ores (+16.3%, 2.9 bn.), Edible fruit (+18.6%, 1.8 bn.), Beverages-spirits-vinegar (+10.7%, 0.8 bn.), pulp of wood (16.8%, 0.8 bn.) and seafood (+13%, 0.5 bn.). The economic crisis on Chilean exports to the EU (-40%); copper is still the most important products exported to the EU (amounting to 31% of total export towards EU in 2006, reduced to 19.7% in 2009).

The data available from the Central Bank of Chile shows that the export to EU of industrial products, in the period 2003-2009 (the official statistics take into account the date of signature), increased annually by 9.5%, while the growth rate of agricultural products, in the same period, was 15.8%.

The share of EU export to total Chilean import in 2009 is around 15%, almost the same value of 2005 and 2004 (16%). The economic crisis had the effects of restoring the presence of EU products in the Chilean market (in 2008 the share was only 11%). Machinery (+6% in the period 2004-2008, 2.1 bn. USD the value of import in 2008), Electronics (+20.9% and 1 bn.), Automotive (+15.4% and 0.7 bn.), pharmaceuticals (+18.7% and 0.24 bn.) and articles of iron or steel (+15% and 0.28 bn.) are the most important imported products from the EU.

In line with the huge economic growth, there has been an increase of import of capital goods from the EU (annual increase of 10% from the signature of the agreement). Consumers’ goods from the EU increased, in the same period, by 11.7%.

Investment performances

The EU is one of the main investors in Chile, in line with the world tendency. The following table and charter illustrate the evolution of EU FTDIs in Chile since 1998 (data in millions of EURO).

partner\time

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Chile

1590

4676

1537

3048

1564

1643

1987

889

997

763

1157

39

Source: Eurostat.

 

It is apparent that FDIs from the EU to Chile reveals great fluctuations until 2004. Afterwards, there has been, with some minor exceptions (2006 and 2008) a constant decline. The huge increase in 1999 was due to the important inflows of capital from Spain, traditional Chilean partner, following the process of internationalization carried out by Spanish enterprises in that period. The privatization processes in Spain of the second half of the 90s gave a unique opportunity to have liquidity to access to the Latino American markets of telecommunications, oil, electricity and financial services. Indeed, between 1997 and 2001, more than 55% of Spanish FDIs had been directed to Latin America. In 2008, the main sectors of EU investments in Chile have been transport and storage (29,1%), mining (25%), electricity, gas and water (17,1%), financial services (13,1%).

There are no evidences of any effects promoted by the conclusion of the FTA, on the promotion of FDIs from the EU to Chile.

 

partner\time

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Chile

-9

-72

46

110

2138

-295

23

-26

200

1125

168

-967

Source: Eurostat

 

The above charter and table show that after the entry into force of the FTAs there had been an important increase of FDIs from Chile to the EU (except in 2008 and 2009: however, due to the international economic and financial crisis, these data are not fully reliable). The investments are mainly concentrated in the services sector (60%) while 40% are focused on the industrial sector.

Conclusions

As forecasted in a previous study, the effects of the FTAs on the trade relationships between Chile and the EU have been positive, but modest, regarding their magnitude. This is probably due to the already existing openness between the two entities before the entry into force of the FTA agreement.

Committee on International Trade Policies - VCCI