US embassy cable - 05SANTIAGO2322

UNCLAS SECTION 01 OF 02 SANTIAGO 002322 
 
SIPDIS 
 
DEPT FOR WHA/EPSC 
PLEASE PASS TO USTR FOR MARY SULLIVAN 
COMMERCE FOR SARA MCDOWELL 
 
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 
--------------------------------------------- ---- 
 
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