US embassy cable - 05SANTIAGO1794

S E C R E T SECTION 01 OF 07 SANTIAGO 001794 
 
SIPDIS 
 
NOFORN 
 
EAP/CM FOR KAYE LEE 
WHA/PCP FOR JEFF BISCHOFF 
WHA/ESPC LAWRENCE GUMBINER 
 
E.O. 12958: DECL: 07/27/2015 
TAGS: EAGR, ECON, EFIN, EINV, EMIN, ENRG, ETRD, ETTC, PHUM, PREL, SENV, CH, ETRD 
SUBJECT: CHILE: INCREASING TIES WITH CHINA 
 
REF: SECSTATE 138041 
 
Classified By: Ambassador Craig A. Kelly for reasons 1.4 (b) and (d). 
 
1. (S/NF)  Summary: Chile is trying to position itself as the 
business platform for Latin America.  It is using China's 
interest in stable suppliers -- primarily for copper -- to 
increase ties with its second largest bilateral trading 
partner after the U.S. and with the Pacific Basin as a whole. 
 Chile and China are moving ahead with negotiations for a 
free trade agreement, and Chile expects to complete talks by 
the end of 2005.  The Chinese government has also openly 
expressed a desire to increase ties with Latin America, and 
has chosen to negotiate its first free trade agreement in the 
region with Chile.  Chinese President Hu Jintao's November 
2004 visit to Chile (in conjunction with APEC) produced a 
number of additional agreements to increase trade, 
educational and tourism ties.  There is talk that President 
Lagos may return to China for a second official visit before 
the end of his presidential term in March 2006.  Both sides 
agreed to consult more frequently on important multilateral 
political issues; Chile does not appear to be raising tough 
topics like human rights violations, democratic processes, 
labor protections or environmental preservation. 
 
2. (S/NF) China's growing commercial, educational and 
military ties with Chile will increase its access to many 
areas of Chilean government and society.  This, in turn, will 
increase Chile's vulnerability to Chinese intelligence 
gathering activities.  And - if used as a base for increased 
Chinese presence in the region - Chile may become a platform 
country in more ways than it ever imagined.  End Summary. 
 
--------------------------------------------- ------------- 
Engaging China ) A Reflection of Chile's "Diversification" 
--------------------------------------------- ------------- 
 
3. (C) Chileans understand that market diversification is key 
to maintaining trade-dependent growth.  Chile has already 
negotiated free trade agreements with seven other countries, 
including the U.S. and the European Union.  Chile also has 
limited economic cooperation agreements with seven Latin 
American countries.  Chile signed a limited trade agreement 
with Cuba in 1999. 
 
4. (C) Now Chile has focused on Asia.  In 2004, Ricardo Lagos 
Weber, son of President Lagos and then the Foreign Ministry's 
Director of Multilateral Economic Affairs (DIRECON), stated, 
&We have always looked to the north, to North America and 
Europe, but the future is in Asia and we are committed to 
playing a role in that part of the world.8  In 2004, the 
Chileans successfully negotiated an FTA with South Korea and 
they recently finalized FTAs with New Zealand, Singapore and 
Brunei.  However, an FTA with China would be Chile's crowning 
trade achievement in Asia, given the size of potential 
Chinese markets. 
 
--------------------------------------------- -------- 
President Hu Jintao's Visit to Chile in November 2004 
--------------------------------------------- -------- 
 
5. (U) Chile was the 2004 host of the Asia Pacific Economic 
Cooperation (APEC) Leaders' Summit in November 2004.  In 
addition to the Leaders' Summit, President Hu Jintao's trip 
to Chile included an official State Visit.  He met with 
President Lagos and the two announced a series of 
deliverables: 
 
      - The formal establishment of free trade negotiations 
between China and Chile, which commenced in January 2005. 
 
      - An agreement to add Chile to China's "select" list of 
authorized destination countries for the 35 million Chinese 
tourists who travel abroad every year. 
 
      - Protocols to improve cooperation on health and 
medical research. 
 
      - An agreement to limit the quarantining of poultry 
products. 
 
6. (U) During a joint press conference, the two leaders 
emphasized the historical ties between Chile and China. 
Chile was one of the first South American countries to 
establish full diplomatic relations with China in 1970; Chile 
was one of the first South American countries to recognize 
the Chinese economy as a full "market" economy; and Chile is 
the first South American country to negotiate a free trade 
agreement with China.  Though President Lagos had previously 
visited China in 2001, President Hu Jintao invited him to 
make a second state visit before the end of Lagos' 
presidential term in March 2006. 
 
------------------------------------- 
China's Impact on the Chilean Economy 
------------------------------------- 
 
7. (U) China has become Chile's second most important trading 
partner after the U.S.  China is one of the top exporters of 
manufactured goods to the Chilean market, including garments, 
footwear, toys, machinery, electronics and light industry 
products.  Chile exports paper pulp, fishmeal, fruits and - 
most importantly - copper to China.  From 2000 ) 2004, trade 
between Chile and China increased 249.1 percent.  Chile has 
become China's third most important trading partner in Latin 
America, behind Brazil and Argentina. 
 
- In 2004, the trade between the two countries grew an 
additional 51.9 percent for a total of USD 5.9 billion. 
 
- During the first quarter of 2005, Chilean exports to China 
totaled over USD 1 billion, a 65 percent increase 
year-on-year. 
 
-------------- 
Copper is King 
-------------- 
 
8. (SBU) Chile's current economic boom is partially due to 
the highest world copper prices in the last 17 years.  Prices 
are rising in part due to demand from the Chinese market, 
which requires 3.8 million tons of copper each year to 
sustain economic growth.  Stability and large reserves make 
Chile an attractive supplier for China.  Chile's state copper 
company, CODELCO, currently supplies 10 percent of the 
world's copper and has documented reserves and extraction 
capacity to continue production at the current rate for the 
next 120 years.  Industry experts report that most Chilean 
copper is being shipped to the Chinese provinces of Shandong, 
Shanghai and Zhejiang. 
 
9. (SBU) Prices have consistently exceeded the expectations 
of the Government of Chile's Copper Commission.  When 
calculating the 2005 Budget Law, the Copper Commission 
estimated that the commodity would sell for USD 1.10 per 
pound.  It currently trades at USD 1.60.  Because of Chile's 
unique budget formulation, CODELCO must contribute all 
profits above the USD 1.10 Budget Law estimate to government 
coffers.  Experts calculate that if the copper price stays at 
least at USD 1.50 for the rest of 2005, there will be a USD 
1.4 billion surplus in the Chilean Treasury.  At USD 1.50, 
there will also be a USD 400 million increase in tax revenues 
paid by the top ten private mining companies alone. 
--------------------------------------------- - 
State Copper Companies Sign Bilateral Alliance 
--------------------------------------------- - 
 
10. (U) On May 31, 2005, the Executive Director of Chile's 
CODELCO signed a USD 2 billion per year sales, finance, and 
investment agreement with the Executive Director of China's 
MinMetals.  This agreement comes after a 10-year study of 
Chile's copper sector by MinMetals.  CODELCO will receive an 
up-front payment of USD 550 million for a 15-year, 57 million 
tons per year supply contract with MinMetals.  In addition, 
MinMetals will purchase a 25 percent share for 600 million 
USD in the Gaby mine, a facility in Antofogasta, which will 
produce 17,000 tons of copper per year beginning in 2007. 
 
11. (SBU) CODELCO is pleased with this alliance because it 
provides a guaranteed market for their copper.  It also 
offers them new alternatives for financing future projects. 
CODELCO has ambitious plans for the future -- hoping to 
almost double annual production capacity -- and needs to 
invest USD 1.7 billion between 2005-2015 to accomplish that 
goal.  CODELCO sees its partnership with the Chinese as an 
excellent way to expand, without assuming new debts and 
possibly harming its risk classification in global financial 
markets. 
 
----------------------------------------- 
Chinese Links to Other Chilean Industries 
----------------------------------------- 
 
12. (U) The Chilean-Chinese Chamber for Commerce, Industry 
and Tourism (CHICIT) has worked to promote other Chilean 
opportunities for Chinese investors.  On the margins of the 
FTA negotiation rounds, CHICIT prepared presentations on 
"Chile as a Platform Country" and "Attracting High Tech 
Investments." 
 
13. (U) CHICIT reports that total Chinese direct foreign 
investment in Chile only totaled USD 24 million in 2004, 
although the MinMetals deal above has already raised that 
figure for 2005.  Most of the 2004 funds were spent to set up 
representative offices for Chinese companies preparing to 
enter this new market.  In addition to copper, the Chinese 
are currently studying Chile's iron and gold mining sectors 
for possible future investment.  Two Chinese high tech 
companies - Huawei Technologies Inc and ZTE - have also 
opened offices in Santiago with a strategic plan to enter 
into the telecommunications market.  Both companies are based 
in Guangdong province.  CHICIT mentions that both companies 
"have preferred to maintain a low profile" during their 
start-up periods, although both of these companies have also 
opened offices in 13 other Latin American countries and are 
enjoying great success in the Brazilian market.  COSCO, one 
of China's largest shipping companies, also maintains an 
active representational office in the Chilean capital. 
 
14. (U) Other representative offices for Chinese corporations 
have not fared so well in Santiago, opting to close their 
local offices "for strategic reasons."  NORINCO (a mining 
machinery company), CITIFOR (a forestry investment company 
with initial investments in Chile's Region X) and CMEC (the 
Chinese National Machinery and Equipment Import/Export Group) 
were among those who closed shop.  CHICIT speculates that 
these companies were unable to find adequate local legal 
representation and local commercial partners. 
 
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Bilateral Exchange Programs Are Established 
------------------------------------------- 
15. (U) In addition to increased trade and investment 
cooperation between Chile and China, the two governments have 
begun to establish formal exchange programs.  In conjunction 
with the March 2004 APEC Educational Ministerial in Chile, 
Chilean Minister of Education Sergio Bitar and Chinese Vice 
Minister of Education Zhang Xinsheng signed a Memorandum of 
Agreement to promote Chinese language instruction in Chilean 
schools.  Four schools with a total of 200 students were 
chosen in Santiago, Vina del Mar, Valparaiso and Chillan to 
begin the pilot program in August 2005 with six teachers from 
Beijing.  Both countries hope that the first class of Chilean 
students fluent in Mandarin will graduate in 2010.  With 
financial support from the Government of China, six Chilean 
students will begin a one-year study program in 2005 at the 
University of Beijing.  In terms of higher education, the 
Catholic University of Chile has a formal exchange program 
with the Beijing Institute of Technology.  Other Chilean 
universities hope to sign agreements with Chinese 
institutions in the future. 
 
16. (S/NF) General Cheyre, the Chilean Army Chief of Staff, 
visited China in October 2004 and agreed to establish a 
Mandarin language training program for the military.  In 
January 2005, two Chinese instructors arrived in Santiago to 
begin a two-year language study program with 10 Chilean Army 
officers.  The Chilean officers will spend the third year of 
this program in Beijing, perfecting their skills in-country. 
(Note: Sources have told the Embassy that Chile's close 
military ties with the United States are of great interest to 
the Chinese.  There is concern that the Chinese could be 
using Chilean officers and access to the Army training school 
to learn more about joint programs, priorities and techniques 
that the Chileans have developed with their U.S. 
counterparts.  End Note.) 
 
17. (U) On May 30, 2005 in Beijing, Chilean Foreign Minister 
Walker and Chinese Foreign Minister Li Zhaoxing announced the 
creation of a scholarship program for young Chilean diplomats 
to spend a six-month training period with their counterparts 
in Beijing.  As the Chilean press at the time noted, there is 
currently only one diplomat in the entire Chilean Foreign 
Ministry who speaks Mandarin. 
 
18. (C) Sources have also informed post that a small 
delegation of high-ranking Chinese National Police officers 
just completed an official visit to Chile hosted by the 
Carabineros (Chilean National Police). 
 
19. (U) Chileans have also expressed an interest in improving 
their knowledge of China's culture and languages.  A small 
Chilean-Chinese Cultural Institute opened in Santiago in 
1953.  Known mostly for their Mandarin language classes, the 
Institute's director reports there are currently 180 language 
students enrolled, compared to only 23 students two years 
ago.  Though this is a two-year program, there is a long 
waiting list of Chileans who are willing to make a commitment 
to learning Chinese language and culture.  In terms of 
cultural activities, the Institute's mission statement says 
that it organizes conferences, seminars, art expositions and 
cinematic festivals to promote Chinese culture.  However, the 
only recent activity has merely been a joint art exhibition 
with the Carabineros.  The Institute's most popular cultural 
program features the Chinese circus, but it only comes to 
Chile every two or three years. 
 
--------------------------------------------- ----- 
Chilean Tourism Officials Expect a Boom from China 
--------------------------------------------- ----- 
 
20. (U) In June 2005, the Chinese government informed Chile's 
National Tourism Administration that Chile was formally added 
to the "select" list of authorized destinations for Chinese 
tourists who wish to travel abroad.  This new agreement, 
which went into effect July 15, means Chile can now compete 
for revenue generated by the 29 million Chinese who travel 
every year.  Chinese tourists are reported to be the 
seventh-biggest spenders when traveling abroad, with an 
average daily budget of USD 175 per day.  Chileans hope 
Chinese tourists will favor the high-end destinations that 
they are trying to develop and promote. 
 
21. (U) Lan Chile, Turavion, Turismo Cocha, ADS Mundo and 
other Chilean tourist agencies traveled to China in June 2005 
to sell Chile as an &End of the World8 exotic destination. 
Though Brazil and Argentina have applied to the Chinese 
government for similar "select" status, Chile is the first 
country in South America to be added to the list.  Given 
this, the World Tourism Organization has estimated that as 
many as 100 million Chinese tourists can be expected to visit 
Chile by 2020.  Chilean tourism agencies are preparing to 
make the most of this important economic opportunity. 
 
--------------------------------------------- ---------- 
Working to Increase Awareness About Chinese Intelligence 
Activities 
--------------------------------------------- ---------- 
 
22. (S/NF) As bilateral ties between Chile and China have 
increased, appropriate personnel at Embassy Santiago have 
worked with Chilean government officials to sensitize them to 
the security and intelligence threats emanating from China. 
Chile has long considered itself immune from 
counterintelligence issues.  However, select Chilean 
government officials are starting to understand that national 
assets are largely unprotected.  They are unaware of the 
potentially harmful role the Chinese could begin to play in 
Chile.  The Chileans have few baseline figures regarding 
Chinese security intelligence collection activities.  There 
are 22 staff members at the Chinese Embassy in Santiago, 
reportedly one of China's largest missions in Latin America. 
The diplomats are all good Spanish speakers, and are active 
on the social circuit.  In addition, there are usually three 
Xinhua reporters assigned to Chile, and it is assumed that 
they are involved in some kind of collection activity.  The 
number of Xinhua representatives in Chile surged to 12 during 
the APEC 2004 Leaders' Summit in Santiago. 
 
23. (S/NF) It is likely that Chinese security intelligence 
organizations will endeavor to augment collection activities 
and capabilities as business interests grow in Chile.  Also, 
as the USG augments its support to the Chilean Armed Forces, 
Chinese interest in USG activities in the Southern Cone will 
most assuredly increase.  The Chinese will likely attempt to 
learn more about U.S. military strategies and techniques via 
Chilean participation in bilateral training programs and 
joint exercises. 
 
--------------------------------------------- ------------ 
Bilateral FTA Negotiations: Current Status and Short-Term 
Goals 
--------------------------------------------- ------------ 
 
24. (S/NF) Chilean and Chinese trade negotiators concluded 
their third round of talks on June 28, 2005.  Chile 
reportedly agreed to China's demand to limit this FTA to 
trade in commodities, excluding any formal agreements on 
services and investment.  Foreign Ministry Director of 
Bilateral Affairs Rebolledo told the Ambassador August 26 
that negotiations were proceeding well, and he expected China 
and Chile to complete talks by the end of 2005.  Rebolledo 
characterized the Chinese negotiations as well prepared. 
Unlike the U.S.-Chile FTA, Rebolledo said the Chile-China FTA 
would have a separate labor chapter, and no environmental 
chapter.  Some Chilean sources cite this as proof that China 
looks at Chile as only a "commodities colony", not a full and 
equal trading partner.  Other Chileans view the limited FTA 
as a rational way to limit potential areas of conflict, and 
to come to rapid accord on the areas governing 95 percent of 
bilateral trade. 
 
25. (S/NF) The third round of negotiations produced a number 
of agreements, including the creation of a joint entrepreneur 
committee.  However, Foreign Minister Walker took a tough 
line with his Chinese counterpart on the issue of illegal 
over-fishing of mackerel, sea bass and scads by Chinese 
boats.  Walker said that if the Chinese did not come into 
compliance with Chilean fishing regulations, they would be 
barred from docking at any Chilean port.  The Chileans have 
asked the Chinese to provide them with proof of substantial 
advances in cooperation by August 2005, otherwise punitive 
measures will come into effect.  Walker told Chilean 
reporters that Chile's fishermen would not be sold out just 
to finish FTA negotiations with the Chinese. 
 
26. (S/NF) Publicly, China has stated that it chose Chile as 
its first South American free trade partner so it could learn 
negotiating skills from the "respected and experienced 
Chilean trade team."  They also cited Chile and China's 
common interests as developing countries.  In private, 
China's negotiators have displayed the same intransigence 
their delegations demonstrate in other international 
negotiation fora.  The Chileans were reportedly quite taken 
aback and may have been overconfident about their ability to 
sway the Chinese on key issues. 
 
27. (S/NF) There has been no public announcement of the 
schedule for future FTA negotiations, although this issue 
seems to be on the fast track in both countries.  Contacts at 
Chile's Ministry of Economy (DIRECON) mentioned President 
Lagos' desire to have all negotiations completed before the 
November 2005 APEC Leaders, Summit in Seoul.  In order to 
meet this goal, the FTA negotiation teams may drop a few of 
the more contentious points and sign an even 
less-comprehensive agreement. 
 
---------- 
Conclusion 
---------- 
 
28. (C) Chile is actively courting increased ties with China 
on economic, political, educational and tourism fronts.  This 
focus is driven largely by what most Chileans believe to be a 
bottomless market for Chilean goods.  This trade policy 
toward China is in line with Chile's ambitions to be a player 
on the global stage and diversify its trade relationships. 
This pattern will likely persist regardless of who wins the 
upcoming presidential election in December 2005.  Most 
Chileans recognize the commercial importance of this trading 
partner and an increased number of business and government 
officials are enrolled in Chinese language courses.  Relative 
to the national push for bilingualism in English, however, 
Mandarin remains a boutique specialty. 
 
29. (C) China is deliberately increasing its presence in 
Chile with substantial investment in the copper industry and 
potentially significant increases in tourism.  Given its 
political "shyness", it is unlikely Chile will independently 
raise difficult issues of human rights violations, democratic 
processes, labor protections or environmental preservation 
for the time being, especially if it perceives its continued 
economic prosperity to be at risk. 
 
30. (S/NF) China's increased commercial, educational and 
military ties could increase Chile's vulnerability to covert 
Chinese activities, such as security and industrial 
espionage.  While the Chileans are sophisticated about their 
trade relationships, they are still a bit naive about the 
company they will soon be keeping. 
 
31. (C) Anecdotal but nonetheless a Cassandra-like comment 
was recently made by a respected political scientist here: 
"China is the single-most controversial foreign policy issue 
being discussed in the presidential candidates' camps, but 
nobody wants to raise it publicly because it might involve a 
choice between China and the U.S." 
KELLY