For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31144
------------------------------------------------------------------------------
Order Code RL31144
CRS Report for Congress
Received through the CRS Web
The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues
Updated September 10, 2003
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ~ The Library of Congress
The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues
Summary
On June 6, 2003, the United States and Chile signed a long anticipated bilateral
free trade agreement (FTA) in Miami, Florida, concluding a 14-round negotiation
process that began on December 6, 2000. Following hearings before the House Ways
and Means, Senate Finance, and both Judiciary Committees, the House passed the
U.S.-Chile Free Trade Implementation Act (H.R. 2738) by a vote of 270 to 156,
followed by the Senate one week later, 66 to 31. President George W. Bush signed
the bill into law on September 3, 2003 (P.L. 108-77) and it will take effect on January
1, 2004.
Chile has now joined a select group of only five other countries that have an
FTA with the United States (Canada, Mexico, Jordan, Singapore, and Israel).
Although many point to the potential for trade growth between the two countries, the
significance of this FTA runs deeper: 1) it is the first agreement with a South
American country; 2) it is an agreement with one of the most open and reformed
economies in Latin America; 3) it exemplifies how trade policy issues, including
those with social and economic implications, can be resolved between a small
developing country and a large developed one; and, 4) it may prove to be a step
toward completing the Free Trade Area of the Americas.
The FTA allows increased market access, with 85% of bilateral trade in
consumer and industrial products eligible for duty-free treatment immediately, and
other product tariff rates being reduced over time. Some 75% of U.S. farm exports
will enter Chile duty-free within four years and all duties will be fully phased out
within 12 years after implementation of the agreement. For Chile, 95% of its export
products gain duty-free status immediately and only 1.2% fall into the longest 12-
year phase-out period. Other critical issues resolved included environment and labor
provisions, more open government procurement rules, increased access for services
trade, greater protection of U.S. investment and intellectual property, and creation of
a new e-commerce chapter. The trade remedies chapter is limited to safeguards so
there is no change to the antidumping and countervailing duty options currently
available to both countries.
The bilateral negotiation was a challenging exercise for both countries and
although a broad-based agreement was struck, a few issues were controversial for
many Members of Congress, as expressed at hearings in both the House and the
Senate. Overall, because there are now multiple FTAs being contemplated, there was
an overarching concern that provisions in the Chile FTA might become a "template"
for others that follow. In particular, attention turned to language governing dispute
resolution treatment of labor provisions, and financial transfers (capital controls), as
well as the temporary entry for business persons. These and other issues are
discussed in this report, which provides background and analysis on Chile's
economy, trade relations, and the bilateral FTA. Because Congress has completed
action on this FTA and it has become law, this is the final version of the report.
Contents
Why a U.S.-Chile FTA? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Economic Reform in Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Chile's Trade Policies and Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The U.S.-Chile Bilateral Trade Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Review of Negotiations and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tariffs and Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Services Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Trade Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
IPR and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Labor and Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Congress and the U.S.-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The U.S.-Chile FTA in Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Labor Dispute Settlement Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Capital Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Temporary Business Personnel and Workers . . . . . . . . . . . . . . . . . . . . . . . 20
Key Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Major Points of Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Appendix 1. Chronology of U.S.-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Appendix 2. US-Chile Merchandise Trade, 1985-2002 . . . . . . . . . . . . . . . . . . . 26
Appendix 3. Major U.S.-Chile Product Trade and Tariff Rates, 2002/03 . . . . . 27
Appendix 4. Chile's Multilateral, Regional, and Bilateral Trade Agreements . . 28
List of Figures
Figure 1. Growth in Chilean Trade with Major Partners, 1993-2001 . . . . . . . . . . 6
Figure 2. Chile Direction of Trade, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 3. U.S.-Chile Merchandise Trade, 1992-2002 . . . . . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. Chile: Selected Economic and Financial Indicators . . . . . . . . . . . . . . . 4
The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues
On June 6, 2003, the United States and Chile signed a long anticipated bilateral
free trade agreement (FTA) in Miami, Florida, concluding a 14-round negotiation
process that began on December 6, 2000. Following hearings before the House Ways
and Means, Senate Finance, and both Judiciary Committees, the House passed the
U.S.-Chile Free Trade Implementation Act (H.R. 2738) by a vote of 270 to 156,
followed by the Senate one week later, 66 to 31. President George W. Bush signed
the bill into law on September 3, 2003 (P.L. 108-77) and it will take effect on January
1, 2004 (see appendix 1 for a chronology and appendix 2 for a summary of U.S.-
Chile bilateral trade).
The bilateral negotiation was a challenging exercise for both countries and
although a comprehensive agreement was struck, some issues were contentious, as
expressed in debate at hearings in both the House and the Senate. Overall, because
there are now multiple FTAs being considered, concern arose over the potential for
the Chilean provisions to become a "template" for those in other FTAs. Specifically,
immigration, investment (capital controls), and labor provisions emerged as the hot
topics, and many Members of Congress effectively sent the message that language
in the U.S.-Chile FTA would not be acceptable in future trade agreements. A
summary of these issues appears in the back of this report. Because the FTA has
been signed into law, this is the final version of the report.
Why a U.S.-Chile FTA?
Trade agreements evoke strong reactions from supporters and opponents alike.
Nowhere is this debate more alive than in the U.S. Congress, which for eight years
was at an impasse over passage of trade promotion authority (TPA) until it renewed
TPA in August 2002 as part of the Trade Act of 2002 (P.L. 107-210). Without TPA,
the politically charged nature of trade negotiations made passage of implementing
legislation for multilateral and regional agreements more uncertain. In addition to
complex multilateral trade arrangements, the United States has pursued simpler
bilateral agreements that were expected to be less politically sensitive and therefore
more likely to gain congressional approval, especially if TPA had not been renewed.
On September 28, 2001, for example, President Bush signed into law the
implementing legislation for the U.S.-Jordan FTA (P.L. 107-43). Bilateral FTAs
with Singapore and Chile were pursued with the expectation of similar support.
Opposition to bilateral FTAs, however, has heated up for both economic and
political reasons. Economists, even those who support free trade, point out that
bilateral (and regional) agreements are poor substitutes for multilateral arrangements.
CRS-2
Although both countries in a bilateral arrangement may see their welfare improve
through trade creation, the agreement may also cause trade (and investment)
diversion, which can negatively affect those both in and outside of the agreement.
Although trade diversion is often difficult to assess, it is a real consideration in
pursuing negotiations below the multilateral level.1
In addition to economists' questions over the trade effects of bilateral
agreements, there is vehement opposition by various interest groups. Perhaps first
among many are the import-competing industries that bear the brunt of the
adjustment costs of a trade agreement. Despite the welfare gains to society as a
whole (e.g. more efficient resource allocation, lower priced imports, greater selection
of goods), those industries subject to increased competition face potentially serious
pressure to adjust their operations to become more efficient, lower-cost producers.
Competition is generally accepted as a tenet of doing business in a market economy,
and on a national level, these adjustment costs may be small and lead to greater
productivity. When the rules change because of trade agreements, however, affected
workers and industries resist strongly and their concerns are an integral part of the
trade liberalization debate.
Strong criticism of virtually all trade agreements also arises from groups arguing
that any arrangement is unacceptable unless it includes strong provisions addressing
the impact of the trade agreement on labor and environmental conditions. When
joined with other groups protesting "globalization" in general, a formidable coalition
is created. Collectively, these interest groups raise the question of whether trade
agreements enhance the social welfare of participating countries. Given the intensity
of debate and amount of effort and resources needed to consummate an FTA, some
questioned whether the marginal gains from a U.S.-Chile bilateral agreement would
be justified given that Chile is a small and distant U.S. trade partner, and already has
a relatively open economy.
Advocates of the U.S.-Chile FTA responded that it offered both economic and
political gains, with Chile seen as a potential strategic foothold in South America, a
region historically linked closely with Europe and Asia. From an economic
perspective, U.S. business interests considered Chile a prime target for expanding
exports and repeatedly stressed the need to reduce the higher tariffs they faced
relative to Canada and other countries that already had FTAs with Chile. Lower-cost
U.S. imports from Chile also provided benefits to individual and business consumers.
Further, some of Chile's exports to the United States have zero or low tariffs already,
suggesting that the adjustment costs to import-competing firms could be low (see
appendix 3). U.S. investors also saw Chile's political and economic stability as
attractive for foreign investment.
From a trade strategy perspective, it was argued that a U.S.-Chile FTA would
support U.S. initiatives with the Free Trade Area of the Americas (FTAA), currently
under negotiation, by encouraging greater Chilean support for U.S. issues and
perhaps even helping define key negotiating parameters (e.g. labor and environment
1
For a discussion, see: CRS Report RL31072, Regional Trade Agreements: An Analysis of
Trade-Related Impacts, by Gary J. Wells. August 3, 2001.
CRS-3
provisions) that could be precedent-setting.2 The U.S.-Chile FTA was also offered
as a compelling case for passage of TPA legislation, which would serve as a signal
to Latin America and the rest of the world of the U.S. commitment to pursue and
complete trade agreements.
Chile also saw a logic in prioritizing an FTA with the United States because
export promotion has been a building block of its growth and development strategy.
Guaranteed access to the large U.S. market offers opportunities for increased and
perhaps more diversified trade. Chile also envisioned increased foreign investment
as an attendant benefit of the FTA, and argued that its well-established track record
on economic and trade reform made it the Latin American country most ready to
negotiate a bilateral FTA. In short, despite its relatively small economy, Chile
presented itself as a country ready, willing, and able to negotiate a mutually
beneficial FTA with the United States.
In addition to the benefits that were expected to accrue to U.S. businesses,
investors, and consumers, an FTA with Chile was also seen as an opportunity for the
United States to support economic and trade reform in Latin America, for which
Chile had become a regional model. Trade was a big part of the economic growth
and development story in Chile, and linked directly to increased productivity, higher
standards of living, greater diffusion of technology, and overall modernization of the
country. Therefore, the United States, it was argued, should support these gains
because they are a foundation for continued economic, social, and political stability
and progress in the region. Trade agreements were also presented as playing a role
in development and have the added benefit of "locking in" reforms, lending a sense
of permanence to economic and political conditions that is conducive to attracting
and keeping foreign trade and investment.
Clearly, there were competing viewpoints on the desirability of a U.S.-Chile
FTA. A look at Chile's economic development is one way of addressing many, if not
all, of the issues highlighted above precisely because Chile has been an early and
aggressive reformer of economic and trade policy in Latin America. In this light, to
the extent that the welfare of Chilean society has improved with economic openness,
it may be one indication that freer trade can support a broad array of economic and
political goals. It is with this approach in mind that this report integrates a discussion
of Chile's economic growth and development with trade policy issues raised in both
the United States and Chile.
Economic Reform in Chile
Chile has become one of the most open, reformed, and developed economies
in Latin America, a rebuilding process initiated under the military dictatorship of
Augusto Pinochet (1973-90) and accelerated under civilian government following the
return of democratic rule in 1990. Chile transformed its state-dominated economy
2
The FTAA would include 34 nations of the Western Hemisphere and is scheduled for
completion by January 2005. See: CRS Report RS20864, A Free Trade Area of the
Americas: Status of Negotiations and Major Policy Issues, by J. F. Hornbeck.
CRS-4
into one grounded in market-based economic principles, first by stabilizing the
economy and then restructuring it (e.g., lifting price controls, deregulating labor
markets, privatizing state enterprises, reducing trade and exchange rate restrictions).
As part of the process, Chile weathered some devastating domestic setbacks,
including the 1982 economic collapse, followed by the sudden onset of the Latin
American debt crisis. Chile survived it all, however, and eventually thrived
economically, although not without incurring significant social costs along the way.3
Economic reform has continued into the 21st century and actually coincided with
a period of strong economic growth that held for most of the last decade (see table
1). Currently, Chile is adjusting to the slower economic growth experienced both at
home and abroad over the past two years. In 2002, Chile's gross domestic product
(GDP) rose by only 1.7%, which was higher than many of its neighbors. Although,
this reflects a slower growth rate compared to average economic growth of over 5%
in the late 1990s, Chile's economy has proven resilient in the face a global economic
downturn and contagion from the Argentine financial crisis.
Table 1. Chile: Selected Economic and Financial Indicators
1996 1997 1998 1999 2000 2001 2002
GDP Growth (%) 7.4 6.6 3.2 -1.0 4.4 2.8 1.7
Inflation - CPI Avg. (%) 7.4 6.1 5.1 3.3 3.8 3.6 2.4
Unemployment Rate (%) 6.5 6.1 6.2 9.7 9.2 9.2 8.8
Fiscal Balance (% of GDP) 2.4 1.9 -0.1 -2.2 -0.9 -0.9
----
Current Acct Bal (% of GDP) -5.1 -4.5 -5.2 -0.1 -1.3 -1.4 -1.8
Terms of Trade (% change) -15.5 2.6 -12.6 0.9 -0.1 -8.0
----
Foreign Exchange Res. ($bil) 15.5 17.8 16.0 14.7 14.7 14.4 15.6
Data Source: International Monetary Fund and Central Bank of Chile.
Chile's current macroeconomic management rests on three policy pillars: a
flexible exchange rate; inflation-targeting monetary policy; and strict fiscal discipline
aimed at generating a public sector surplus. On the positive side, tight fiscal control
has kept Chile's public external debt position relatively low, helping restrain inflation
to 2.4% in 2002 and leaving room for monetary policy to support economic growth
as well as price stability. Productivity levels have been sufficient to see real wage
growth, as well. On the negative side, unemployment has remained around 9%, a
nagging problem facing Chilean policy makers.
Trade reform began in the 1970s and helped transform the economy. By
dismantling its multilevel tariff schedule and reducing nontariff barriers, Chile sought
to engage foreign markets more aggressively and open itself to international
3
A detailed summary of this process with an emphasis on trade policy may be found in:
CRS Report 97-56, Chilean Trade and Economic Reform: Implications for NAFTA
Accession, by J. F. Hornbeck. October 17, 1997. pp. 1-9.
CRS-5
competition. The uniform average nominal import tariff rate fell from 105% in 1973
to 15% in 1988, and to 11% in 1991 under civilian government. Chile then reduced
the tariff rate by 1 percentage point each year until it reached 6% on January 1, 2003.
Although not without adjustment costs, the competitive pressures of trade reform
have clearly increased productivity and economic growth.
Continuing a trend since the mid-1980s, Chile has recently made a number of
simplifying capital market reforms, including abandoning its exchange rate band in
favor of a floating system, eliminating most controls on foreign capital, including the
one-year, non-remunerated reserve requirement, and reducing and equalizing capital
gains treatment of domestic and foreign investment.4 Changes in capital controls and
exchange rate management have been essential to spurring Chile's export-led growth.
Privatization and deregulation have also progressed beyond financial services to
include telecommunications, energy, and selected public infrastructure, with Chile
also leading Latin America in the divestiture of public-owned enterprises.
Chile's record of reform, growth, and development corresponds with increased
measures of income and social well being. In 2001, Chile's per capita income level
was second only to Argentina's in Latin America and will likely be first once data
reflect Argentina's financial crisis. In addition, Chile's human development index
(HDI) for 2002 ranked second in Latin America behind Argentina and ahead of the
much larger economies of Brazil and Mexico.5 Welfare gains for the poorer
segments of Chilean society are also being seen, with a relatively low child mortality
rate and absolute measures of poverty declining over the past decade and registering
lower than most other Latin American countries.6 High unemployment and a skewed
income distribution in line with the rest of the region, however, point to the need to
increase the quality and quantity of workforce participation, which is related to
improving education, health care, and other public policies.
Chile's Trade Policies and Relations
Over the past decade, Chile's increasingly expansive and independent trade
policy portrays a strategy that is commonly referred to as "open regionalism." This
approach combines unilateralism with the formation of sub-regional integration
groups open to future expansion, such as the Andean Community and the Southern
Common Market (Mercado Comun del Sur -- Mercosur), among others, while also
4
Latin American Monitor: Southern Cone. June 2001, pp. 4-5 and Central Bank of Chile,
Press Release, April 16, 2001.
5
The Human Development Index (HDI) is a composite measure of average achievement
in human development (education, income, and life expectancy). Worldwide, Chile ranked
38 compared to Argentina (34), Uruguay (40), Costa Rica (43), Mexico (54), Venezuela
(69), and Brazil (73). Argentina's rank may fall precipitously once corrected for its current
financial crisis. See: United Nations, Human Development Report 2002, p. 149.
6
Less than 2% of Chile's population lives on less than $1.00 per day compared to 10% in
Brazil, 8% in Mexico, and 15% in Venezuela. The under-5 mortality rate for Chile is 12 per
1,000 compared to Argentina (19), Brazil (36), Mexico (29), and Venezuela (22). See: The
World Bank. 2003 World Development Report, pp. 58-59 and 112-14.
CRS-6
leaving open the possibility for bilateral and extra-regional trade agreements. As
pointed out in one study, it differs from earlier, fundamentally unsuccessful, attempts
at economic integration in Latin America by emphasizing trade opening rather than
collective sub-regional protectionism.7
The "open regionalism" policy took shape in the early 1990s when Chile signed
economic complementarity agreements (simplified free trade agreements) with
Bolivia, Mexico, Venezuela, Colombia, and Ecuador under guidelines set out by the
Latin American Integration Association (Association Latinoamericana de Integracion
-- ALADI). Similar arrangements followed with Peru and Argentina. Chile has
signed FTAs with Canada, Mexico, and Central America. In April and October 2002
respectively, Chile completed negotiations for an FTA with the European Union and
South Korea. It is currently courting other countries including Japan, New Zealand,
and Singapore, and closing in on an agreement with the European Free Trade
Association (EFTA), see appendix 4. All are considered part of a strategy to open
industrial economies further to Chilean exports. Chile joined Mercosur as an
associate member in 1996, limiting its commitment largely because of Mercosur's
higher common external tariff. Chile is also an active participant in the World Trade
Organization (WTO), seeing it as the venue to settle controversial issues less suited
to regional or bilateral discussions.
Trade data Figure 1. Growth in Chilean Trade with Major
reflect Chile's Partners, 1993-2001
o p e n a n d
independent trade
policy. Its exports
t o t h e world
expanded by 89%
over the eight
years 1993-2001
(see figure 1) and
imports grew by
56%. Although
Chile is not part of
the Andean
Community or a
full partner of
Mercosur, its
fastest ex port
growth has been
intra-regional, a testament to Chile's trade strategy that combines unilateral
reductions in tariff and nontariff barriers with an aggressive effort to enter into
bilateral arrangements. From 1993 to 2001, Chilean exports expanded by 126% to
Latin America, compared to 100% to the United States, 43% to Japan, 70% to the
rest of Asia, and 71% to the European Union. Chile's trade with Canada points to
7
Weintraub, Sidney. Development and Democracy in the Southern Cone: Imperatives for
U.S. Policy in South America. Washington, D.C. Center for Strategic and International
Studies, 2000. pp. 2-3.
CRS-7
another interesting trend. Although the dollar value of exports is very small, it grew
by some 380%, an issue that was not lost on many U.S. business advocates of a U.S.-
Chile FTA, who argued that the Chile-Canada FTA put U.S. firms at a competitive
disadvantage until a similar or better agreement could be reached with the United
States.
Figure 2. Chile Direction of Trade, 2002
As seen in figure 2, Chile has diversified export markets, which not only
increases opportunities for trade, but also reduces dependence on a few markets and
thereby softens exposure to foreign shocks (e.g. Argentina). Its largest export market
is the European Union, which accounted for 23% of exports in 2002, followed by the
United States with 20%, and Latin America with 19%. Japan accounted for 11% of
Chilean exports and the rest of Asia 17%. These figures reflect some relative change
over the past decade, as seen in the growth patterns in figure 1. There was a decrease
in the European Union's and Japan's share of Chilean exports, as well as to Latin
America. Although Chile's exports to Latin America had been rising during the
1990s, slow regional growth at the turn of the century reduced its export market
share. The export shares to Asia and the United States, two areas that have
experienced relatively faster growth, have risen recently. There was also a large
increase in Chilean export share to Canada, although from a very small base.
Latin America is Chile's largest importing area, accounting for 35% of imports,
followed by the EU with 18%, the United States with 15%, and Asia with 13%.
Japan and Canada follow at a distance with 3% and 2%, respectively. The EU trade
presence in Chile has declined over the past decade, as it did with other Latin
American countries. The relative importance of the United States suggests that Chile
has had a strong incentive to pursue a bilateral FTA, other than a general preference
for expanding its export base.
CRS-8
Chile's open regionalism and export driven trade policy have been challenged,
however, for not focusing enough on diversifying the country away from minimally
refined agriculture and mining products (copper, fish, grapes, and wood).
Manufactured products account for less than 15% of total exports, suggesting two
potential problems. First, relying on traditional commodities can provide strong
export earnings, but earnings are unpredictable given the volatile nature of
commodity prices (see Chile's swings in its terms of trade in table 1).8
Second, little movement toward a manufacture-based, value-added approach to
export promotion can limit long-term economic growth, a point developed by an
Inter-American Development Bank (IDB) study arguing that the relatively poor
income growth performance of commodity exporting countries can be traced to this
lack of export diversification. Although many Latin American countries have
expanded their intra-regional trade, deepening integration with developed economies
seems necessary to achieve greater export diversification.
The large gains in export manufactures of Mexico and the Central American
countries in the 1990s, for example, were related, in some measure, to preferential
trade arrangements with the United States. Other Latin American countries had
much slower growth of manufactured exports.9 Whether Chile will adopt export
diversification as part of its long-term development strategy is unclear, but Chile's
efforts to develop trade relationships with developed economies, including the U.S.-
Chile FTA, would seem to be an important component of such a goal.
On Chile's import side, most from developed countries are capital goods,
highlighting the link between an open trade policy (lower tariffs on capital goods)
and development (capital goods form the investment base for other production).
Importantly, there is strong competition in the Chilean capital goods market from
firms around the world. Given Chile's many trade negotiations underway, there was
pressure exerted by U.S. firms to expedite the Chile-FTA. A closer look at the
structure of U.S.-Chile trade suggests there is potential for mutual benefit from
strengthening trade ties between the two countries.
The U.S.-Chile Bilateral Trade Relationship
The United States is Chile's largest single-country trading partner, accounting
for 20% of Chilean exports and 15% of imports in 2002. By contrast, Chile is the
United States' 34th largest export destination and 36th largest import contributor,
accounting for 0.3% of U.S. trade (2002 data). Chile's relatively small share of U.S.
trade has actually slipped slightly in recent years, but its increasing openness to U.S.
trade is evident in the numbers. In 2002, Chile's per capita imports from the United
8
Inter-American Development Bank (IDB). Integration and Trade in the Americas:
Periodic Note, December 2000. Washington, D.C. p. 14. At the other end of the spectrum,
manufactured goods account for 71% of Mexico's exports, reflecting the large amount of
maquiladora trade with the United States.
9
Ibid., pp. 12-15.
CRS-9
States were $163, higher than other major South American countries considered less
liberalized in their trade policies such as Argentina ($44) and Brazil ($71).10
Figure 3. U.S.-Chile Merchandise Trade, 1992-2002
Trends in U.S.-Chile merchandise trade are shown in figure 3 (data appear in
appendix 2) and mirror the trend in Chile's economic growth. U.S. exports grew
significantly in the first half of the last decade, rising by 77% from 1992 to 1997.
After that, they fell precipitously for two years, coinciding with the precipitous fall
in Chile's economic growth from 7.4% in both 1996 and 1997 to 3.4 % in 1998 and
-1.1% in 1999 (see table 1). As economic growth picked up again in 2000, rising to
5.4%, so too did the demand for U.S. goods, but economic and U.S. export trends
faltered again in 2001 and 2002, with the United States running a merchandise trade
deficit with Chile for the first time since 1988. In 2002, U.S. exports were not much
above levels ten years earlier. This pattern parallels declining exports levels to Latin
America, as a whole, reflecting weaker economic conditions and therefore demand
for imports in general.
U.S. imports from Chile have grown steadily since 1992, reflecting continuing
U.S. interest in Chilean products and the extended expansion of the U.S. economy.
U.S. imports grew by 172% from 1992 to 2002, a higher rate of import growth than
from either Latin America, excluding Mexico (107%), or the world (118%). The
United States maintained a trade surplus with Chile from 1989 until 2000; in 2001
10
See: CRS Report 98-840 E, U.S.-Latin American Trade: Recent Trends, by J. F.
Hornbeck, p. 4.
CRS-10
the trade balance turned to a deficit equal to 6% of total trade between the two
countries and 18% in 2002.
Major U.S. products exported to Chile are mostly capital goods (see appendix
3). These include: machinery (31%), particularly computers, office machinery, and
industrial equipment such as gas turbines and bulldozers; electrical machinery (16%)
including television and radio transmission apparatus, telephone equipment, spare
parts, integrated circuits, sound recording equipment and media; vehicles (8%)
mostly trucks and passenger cars; aircraft and parts (5%), and optical/medical
instruments (5%). In recent years, the U.S. export trends have exhibited a slowing
in transportation equipment such as airplanes and automobiles, and an increase in
computer and electronic equipment relative to other goods.
The top five U.S. imports from Chile are natural resource based goods that
reflect some refining of the basic resource, but little value-added manufacturing
activity. They account for nearly 70% of total imports from Chile and include:
copper articles (19%), mostly refined alloys; edible fruits and nuts (18%), most of
which are grapes; fish (15%), mostly salmon; wood (13%), various types of lumber;
and beverages (4%), virtually all wine. Recent trends have seen an increase in grape
and fish imports, with a steady level or slight decline in demand for copper, wood,
and wine products relative to other goods.
Review of Negotiations and Policy Issues
The congressional debate over trade agreements invariably turns to their
potential economic effects on the United States, including both aggregate
macroeconomic, as well as, sectoral effects. Assessing these effects is the
responsibility of the United States International Trade Commission (ITC), which in
June 2003 released a comprehensive study as part of the congressional consultation
process. The report provides both quantitative and qualitative estimates of the FTA's
possible impact.
The overall estimate of the ITC study was that by 2016, when the full effect of
the tariff eliminations would be felt, U.S. exports to Chile would increase in a range
between 18% and 52%; U.S. imports would rise between 6% and 14%. The study
noted that this would be very small relative to total U.S. trade and that the economy-
wide effects on trade, production, and overall economic welfare would be small to
negligible (in a range of negative 0.001% to a positive 0.003% of GDP). This is in
keeping with general expectations from the outset of the negotiations that recognized
the limited benefits that could be achieved by the FTA given Chile is already a
relatively small open economy with a relatively small trade position with the United
States. The ITC finding, however, serves as an estimate of confirmation, focusing
largely on the implications of tariff reduction, which may be quantified, unlike
changes in many nontariff barriers.11
11
United States International Trade Commission. U.S.-Chile Free Trade Agreement:
Potential Economywide and Selected Sectoral Effects. USITC Publication 3605. June
(continued...)
CRS-11
The rest of this section briefly summarizes the major policy issues that had to
be reconciled in the negotiating process and references the ITC's conclusions with
respect to each major issue area, where applicable.
Tariffs and Market Access
For the United States, market access and particularly reducing tariff rates, was
a central goal of the negotiations. For countries that have trade agreements with
Chile, such as Canada, the uniform 6% tariff is being phased out on most goods, an
advantage the United States wanted to eliminate. On the other side, the primary U.S.
imports from Chile face varying levels of tariffs, although some goods enter the
United States duty free under normal trade relations (see appendix 3 for U.S. tariff
treatment of major Chilean exports). The major U.S. imports from Chile do not
qualify for duty-free treatment under the Generalized System of Preferences (GSP),
a preferential trade arrangement made by developed countries for developing country
imports. The United States and Chile negotiated tariff reduction phase-out schedule
on a product-by-product basis that differentiated treatment for sensitive products, as
was done in the North American Free Trade Agreement (NAFTA).
The ITC identified the major sectors that would likely benefit the most from the
FTA based on quantitative estimates of the likely increase in U.S. exports and
imports for the year 2016, when the full effect of the tariff reductions would be felt.
The estimated ranges of increase in U.S. exports for the most affected sectors are:
1) motor vehicles and transportation equipment (35%-215%); 2) textiles, apparel, and
leather goods (29%-101%); and 3) coal, oil, gas, and other minerals (26%-72%). For
U.S. imports, the range estimates for most affected sectors are: 1) dairy products
(169%-575%); 2) textiles, apparel, and leather goods (77%-372%); and other crops
(55%-114%), particularly avocados when the tariff rate quota is eliminated in 12
years. In all cases, the increases are estimated to be large on a percentage basis
because of relatively high tariff or tariff equivalent barriers on these goods. Because
the changes are computed from relatively small bases on a dollar value basis,
however, the effects on industry production are expected to be small.12
Services Trade
Services are an important part of U.S. exports and are a key negotiating area in
trade agreements. The United States is a leading provider of financial (insurance,
banking, securities), telecommunications, and management consulting services. The
U.S.-Chile FTA would lower barriers and would enhance disciplines with respect to
the provision of these services, but would not alter significantly U.S. imports of these
services, nor would there likely be a large change in the U.S. export position. First,
Chile has only a small presence in the United States with respect to these services and
11
(...continued)
2003. pp. xiii-xv. In addition to a review of the literature, the study bases its conclusions
on a computable general equilibrium model (CGE) that estimates the "likely impact of a the
U.S.-Chile FTA for 22 aggregated sectors." See pp. 2-3, 53-55, and Appendix C.
12
Ibid., pp. xv-xviii and 46, 51, and 57. The report has a detailed discussion of the FTA's
possible effects by sector and commodity.
CRS-12
second, Chile is a relatively small market for U.S. services and has been relatively
open for some time.13
Trade Remedies
In addition to tariff reductions, trade remedies presented negotiators with
significant challenges. In the United States, low tariffs on most products have caused
domestic industries to rely on trade remedy laws to fight import competition.
Perhaps the most controversial issue was the application of U.S. antidumping statutes
(investigations to determine if goods are being sold at less than fair value), which
Chile expressed a desire to address in the bilateral FTA. This was not a new issue
and was tackled in the Canada-Chile FTA, which provides for the "reciprocal
exemption from the application of anti-dumping laws," except under "exceptional
circumstances."14 The thrust of that agreement appears not to force the elimination
of antidumping remedies, but to make their use a last rather than first recourse, under
WTO guidelines.
Chile's sensitivity to U.S. antidumping investigations was based on their
"frequent and at times unjustified use,"15 and Chile argued that just the filing of
dumping charges initiated a process with significant unrecoverable costs regardless
of the investigation's outcome. In recent years, antidumping investigations were
concluded on Chilean salmon, mushrooms, grapes, and raspberries. The ITC ruled
that there was reasonable indication that material injury was caused to U.S. producers
in the cases of salmon, mushrooms, and raspberries, but not for grapes.16 The United
States indicated that trade remedy laws would not be negotiated unless otherwise
directed by Congress and the Bush Administration, and extended an offer to Chile
to make the process more transparent. Chile responded with concrete proposals to
make this suggestion operational.17 The United States also had NTB concerns over
Chile's price band system used to maintain domestic agricultural prices and its
sanitary and phytosanitary regulations that restrict imports of U.S. agricultural and
meat products.18
IPR and Investment
Among the other issues of special interest to the United States were intellectual
property rights (IPR) and investment provisions. Chile has signed the Trade Related
Intellectual Property Rights (TRIPS), but its congress has yet to pass legislation
13
Ibid., pp. 94-101.
14
Government of Canada, Canada-Chile Free Trade Agreement, February 1997.
Antidumping was also addressed in the Chile-Mexico FTA.
15
On Chile's trade agreements, see: [http://www.direcon.cl/acuerdos/index.htm]
16
ITC antidumping rulings may be viewed at: [http://www.usitc.gov/7ops/7opsindex.htm]
17
Conversations with office of the USTR, August 17, 2001 and Embassy of Chile, May 9,
2002.
18
Office of the United States Trade Representative. 2002 National Trade Estimate Report
on Foreign Trade Barriers. pp. 38-39.
CRS-13
implementing the provisions. In addition Chile has also signed two World
Intellectual Property Organization (WIPO) treaties, but has failed to conform fully
to these obligations, as well. The U.S.-Chile FTA reaffirms obligations under TRIPS
and adds another layer of important protection for U.S. industries, which if enforced
would potentially increase revenues to a number of industries including: motion
picture, sound recording, business software, book publishing, pharmaceuticals, and
agricultural chemicals, among others.19
Chile is known for its transparent and high level treatment of foreign investment
and has eliminated restrictions on capital inflows that existed in the 1990s (see next
section). As a WTO member, it is a signatory to both the WTO Agreement on Trade
Related Investment Measures (TRIMS) and the WTO General Agreement on Trade
in Services (GATS), both of which affect investment rules. The U.S.-Chile FTA
goes beyond these rules and provides U.S. investors with strong protection. As
important as these provisions are for the United States, the ITC estimates that
because of Chile's historically open economy and small investment market, the FTA
might foster increased U.S. investment in Chile, but it is unlikely to be significantly
higher than would otherwise be the case.20
Labor and Environment
Labor and environment provisions have become accepted as legitimate, but
difficult issues to resolve in trade agreements. At the heart of the matter is whether
a difference in environmental and labor standards between developed and developing
countries creates economic and social issues that should be addressed in trade
agreements. This has led to a strong divergence of opinion, both among groups
within the United States, and between developed and developing countries.
Advocates of including labor and environment provisions in trade agreements
argue that developing countries enjoy an "unfair" competitive advantage because
their lower standards translate into lower costs, which in turn are reflected in lower
prices for goods that compete with those produced in developed countries.21 Over
time, this argument suggests that the difference in standards leads to investment and
jobs moving abroad to take advantage of the lower production costs. On the other
hand, many studies show that these costs are usually not high enough to determine
business location, where productivity remains the primary factor.22 There are also
19
USITC, op. cit., pp. 109 and 118.
20
Ibid., pp. 103-108.
21
The difference is that the social costs associated with environmental degradation,
pollution, poor working conditions, and low wages are not captured in the production
process. Through legal and regulatory measures, developed countries require that
businesses bear many of these costs, which are then reflected in the final (relatively higher)
price of the good or service in the market place.
22
See: CRS Report 98-742, Trade with Developing Countries: Effects on U.S. Workers, by
J. F. Hornbeck. September 2, 1998, pp 11-13. Productivity and wage levels are, however,
highly correlated. See: Rodrik, Dani. Sense and Nonsense in the Globalization Debate.
(continued...)
CRS-14
social concerns to the labor and environmental issue that relate directly to the human
impact of diminished health and living conditions caused by pollution, poverty, and
unsafe working conditions. Given countries' different levels of development and
therefore capacities to address these issues, there is considerable disagreement over
how far a trade agreement should go in engaging these domestic policy issues.
Developing countries, including Chile, have expressed two basic concerns
regarding the inclusion of environmental and labor provisions in trade agreements:
1) that their sovereignty may be undermined if such agreements endorse higher
standards; and 2) that such provisions may be used to justify disguised protectionism.
Free trade advocates in the United States and other developed countries have
expressed similar sentiments in opposition to placing environmental and labor
provisions in trade agreements.
Labor and environment provisions in trade agreements have evolved over time.
NAFTA's side agreements set a precedent in both labor and environment provisions
that all parties: 1) not relax standards to attract investment or reduce costs of exports;
2) strive to improve standards over time, and; 3) enforce effectively their laws and
regulations. The U.S.-Jordan bilateral FTA (the implementing legislation was signed
into law by President Bush on September 28, 2001 -- P.L. 107-43) took labor and
environmental provisions a step farther. It includes most key features of the NAFTA
side agreements, but moved the provisions to the main body of the text, thereby
placing these provisions under the dispute resolution process of the entire agreement.
Significantly, this includes language stating that an affected party may take "any
appropriate and commensurate measure," including trade sanctions if the dispute
remains unresolved.23
Chile recognized the importance of labor and environment provisions when it
included them in the 1996 FTA with Canada, but kept them equally general in
NAFTA-like side agreements. The labor and environment provisions differ from the
Jordan model by their placement in a side agreement and their reliance on less
stringent dispute resolution options, emphasizing monetary assessments rather than
trade sanctions.24 During the negotiations, it was unclear whether the Chile-Canada,
U.S.-Jordan, or some new or hybrid model would work for the U.S.-Chile FTA. U.S.
negotiators looked to guidance in the TPA legislation and the core debate focused on
dispute resolution and enforcement mechanisms, particularly the use of trade
sanctions in cases of noncompliance. Chile was on record, however, as flatly
rejecting inclusion of any language that allows for the use of trade sanctions.
22
(...continued)
Foreign Policy. Summer 1997, Number 107. pp. 30-33.
23
See: CRS Report RS20968. Jordan-U.S. Free Trade Agreement: Labor Issues, by Mary
Jane Bolle. pp. 2-3 and CRS Report RS20999. U.S.-Jordan Free Trade Agreement:
Analysis of Environmental Provisions, by Mary Tiemann. pp. 2-3.
24
Government of Canada. Canada-Chile Free Trade Agreement. Article by Article
Chapter Summaries. February 1997.
CRS-15
Congress and the U.S.-Chile FTA
In recent years, the United States has signed bilateral FTAs with Jordan,
Singapore, and Chile. All three have common elements, but each reflects country
specific issues. A recurring question for the U.S. Congress with respect to the trade
negotiation process has been, to what extent does one agreement become a model for
another? For example, when the U.S.-Chile FTA was signed in December 2002,
United States Trade Representative Robert Zoellick announced that it could serve as
a "template" for U.S.-Central American Free Trade Agreement (CAFTA).25
As the 108th Congress considered the U.S.-Chile FTA implementing legislation,
a few issues became highly controversial and some Members suggested that some
language in this agreement should not be considered as a model for future FTAs.
One or more of these issues were raised in hearings before the House Ways and
Means and Senate Finance Committees, as well as both Judiciary Committees. This
section provides a brief summary of the relevant provisions in the U.S.-Chile FTA
and amplifies the debate over three controversial aspects of the agreement.
The U.S.-Chile FTA in Brief
With implementation of the U.S.-Chile free trade agreement, Chile joined a
select group of only five other countries that have an FTA with the United States
(Canada, Mexico, Jordan, Israel, and Singapore). Market access was a critical
provision, with duty-free access negotiated for all goods traded between the two
countries. When the agreement enters into force on January 1, 2004, fully 87% of
bilateral trade in consumer and industrial products will become duty-free
immediately, with the rest receiving reduced tariff treatment over time. Some 75%
of U.S. farm exports will enter Chile duty-free within four years and duties on all
goods will be fully phased out within 12 years. With a few exceptions, the agreement
will also increase market access for a broad range of services, with new opportunities
for the financial services sector, among others.26
Export subsidies on agricultural products will be eliminated, but either country
will be able to respond in-kind if damaged by third party export subsidies. There is
also a safeguards provision to address possible surges in agricultural imports from
Chile.27 Importantly, the chapter on trade remedies deals only with the safeguards
provision, so there is no change to the antidumping and countervailing duty options
currently available to both countries under WTO rules.
For Chile, 95% of its export products will gain immediate duty-free status and
only 1.2% will fall into the longest 12-year phase-out period. Other important market
access gains will include phasing out the luxury tax on automobiles over four years,
25
Washington Trade Daily, US, Chile Reach FTA, December 12, 2002.
26
The full text of the agreement has 24 chapters filling hundreds of pages. The entire text
may be found at: [http://www.ustr.gov].
27
CRS Agriculture Policy and Farm Bill electronic briefing book, Agriculture in the U.S.-
Chile Free Trade Agreement, [ http://www.congress.gov/brbk/html/ebagr53.html].
CRS-16
less restrictive treatment of textile and apparel products that meet rules of origin
criteria, and reduction over time of Chilean price bands, a provision not included in
either of the FTAs Chile negotiated with Canada and the European Union.
Other achievements of importance to the United States include consolidating
and stabilizing rules governing openness of services trade, telecommunications,
intellectual property rights (IPR), e-commerce trade, and investment. These areas
were of much greater interest to the United States than Chile and reflect gains for
highly competitive U.S. industries. There are few exceptions to the new services
rules, benefitting firms working in financial, telecommunications, computer, and
professional services. Chile's approach to IPR is also adjusted to accommodate U.S.
concerns over software, music, text, and videos. A new e-commerce chapter
addresses the growing trade in digital products.
Despite these many achievements, the 108th Congress raised questions on three
provisions in particular that may prove even more difficult to pass in future FTAs if
language is similar to that of the U.S.-Chile FTA. These involve the treatment of
labor and financial transfers in dispute settlement, and the temporary entry for
business persons.
Labor Dispute Settlement Provisions
A key controversy surrounded the treatment of three labor provisions in the
agreement. Labor advocates argued that they are a step backward from the provisions
agreed to in the U.S.-Jordan bilateral, as well as the Generalized System of
Preferences and Caribbean Basin Trade Partnership Act, which currently govern
much of the U.S. trade with Latin America. Specifically, provisions: 1) requiring
effective enforcement of domestic labor laws, 2) reaffirming commitments to ILO
basic principles, and 3) requiring parties to strive to ensure the "non-derogation"
from domestic standards (not weakening or reducing protections to encourage trade
and investment) are treated differently.28
In the first case, failure to enforce domestic labor laws can be formally
challenged in the dispute resolution process as defined in the FTA (Article 22.16(1)).
In the case of the other two provisions, which are supported in principle, such
recourse is not available. The USTR points to cooperative mechanisms for
improving workers' rights in the FTA,29 but labor advocates argue that unless all
three are enforceable, the FTA provides "a meaningful trade discipline where -- and
only where -- the country's labor laws are adequate. Otherwise we would simply
lock in low and unacceptable labor standards through our trade agreements."30
28
For more background on these issues, see: CRS Report RS21560, Free Trade Agreements
with Singapore and Chile: Labor Issues, by Mary Jane Bolle.
29
USTR. Response to the Labor Advisory Committee (LAC) report on the proposed FTAs
with Singapore and Chile. Undated. May be found at USTR web site.
30
Polaski,, Sandra. Carnegie Endowment for International Peace. Testimony Before the
Senate Committee on Finance on the Implementation of the U.S. Bilateral Free Trade
(continued...)
CRS-17
Although Chile has a sound record in support of basic labor rights, such
differentiated treatment is challenged as inadequate for use in other countries,
particularly those in Central America,31 and so raises a question for some as to
whether the Chile agreement does or should constitute a precedent.
In addition, in the one case where the formal dispute resolution process may be
invoked, it is differentiated from disputes related to commercial issues. Ultimately,
if a commercial dispute remains unsettled, the country faces the possibility of
suspension of benefits under the FTA "of equivalent effect" (Article 22.15(2)),
resulting in the raising of tariffs, or payment of a monetary assessment equal to 50%
of what a dispute panel determines is "of equivalent effect." This article does not
apply to the disputable labor provision. The difference is that the option for failing
to resolve a labor dispute is a monetary assessment, which would be capped at $15
million per year, with recourse to an equivalent dollar value of suspended benefits
(higher tariffs) if the monetary assessment is not paid. The monetary assessment
would also be paid into a fund and expended for "appropriate labor initiatives."
Labor advocates argue that by capping the assessment at $15 million and having the
assessment paid into a fund in the offending country render the labor provisions
ineffective. The USTR argues that for a small country like Chile, such a fine would
be significant relative to the dollar value of the trade benefits it will receive. 32
From a congressional perspective, there is an additional question of whether
differences in the treatment of the three labor provisions in some way fail to meet in
full the principal negotiating objectives of Congress as outlined in TPA legislation.
Although the three provisions are not accorded the exact same treatment in the FTA,
neither are they in the TPA language. Section 2102(b)(11) of the Trade Act of 2002
(TPA) states that among the principal labor negotiation objectives is the provision
"to ensure that a party to a trade agreement with the United States does not fail to
effectively enforce the environmental or labor laws." This may be contrasted with
the apparently weaker objective "to strengthen the capacity of United States trading
partners to promote respect for core labor standards," and, in Sec. 2102(a)(1)(7) to
"strive to ensure that they do not weaken or reduce the protections afforded in
domestic environmental and labor laws as an encouragement for trade."
There is a final point. Although the TPA provisions seem to differ with respect
to treatment of these three labor provisions, under the dispute resolution provision
(sec. 2102(b)(12)(G)), a principal negotiating objective also listed is "to seek
30
(...continued)
Agreements with Singapore and Chile. June 17, 2003. p. 2.
31
Polaski, Sandra. Issue Brief: Central America and the U.S. Face Challenge -- and
Chance for Historic Breakthrough -- on Workers' Rights. Carnegie Endowment for
International Peace. February 2003. pp. 1-2.
32
See: USTR, op. cit., and Report of the Labor Advisory Committee for Trade Negotiations
and Trade Policy (LAC). The U.S.-Chile and U.S.-Singapore Free Trade Agreements.
February 28, 2003. pp. 5-9 and Lee, Thea M. Testimony of the AFL-CIO Before the U.S.
House of Representatives Committee on Ways and Means, Subcommittee on Trade on the
Implementation of U.S. bilateral Free Trade Agreements with Singapore and Chile. June
10, 2003. pp. 2-3.
CRS-18
provisions that treat United States principal negotiating objectives equally" with
respect to the ability to resort to dispute settlement, the availability of equivalent
procedures, and the availability of equivalent remedies. Whereas the labor groups
have argued that this is not the case with labor and commercial disputes, the USTR
has responded that this standard has been met since both commercial and labor
disputes are subject to monetary assessments and suspension of benefits. The dispute
settlement procedures do operate slightly differently, however, and it may be a matter
of interpretation as to whether there is a problem in their meeting congressional
negotiating objectives.33
Capital Controls
A second controversial provision in the agreement relates to capital controls.
The relevant language is set out in the dispute settlement portion of Chapter 10 --
Investment of the FTA. During the 1990s, Chile became famous for controlling
capital inflows, a policy intended to limit the real appreciation of the Chilean peso
that large capital inflows can cause. This policy, some argue, helped Chile avoid the
currency overvaluation problem that contributed to multiple developing country
financial crises in that decade. Chile's main control policy on portfolio capital,
known as the Ley de Encaje, was discontinued in 2001. While in force, however, it
raised issues with respect to the U.S. position favoring the free flow of transfers and
payments related to investment, which has become a standard position in both U.S.
bilateral investment treaties (BITs) and other FTAs.34 In hearings on the U.S.-Chile
FTA, some Members of Congress expressed concern that U.S. negotiated positions
insisting on the free flow of payments and transfers might be imprudent if they inhibit
countries from using controls on capital to help maintain financial stability during
times of international financial turmoil.35
The provisions at issue appear in two annexes of the investment chapter of the
U.S.-Chile FTA that cover treatment of both long-term and short-term capital
investment. The provision in Annex 10-F focuses on the treatment of long-term
investments under Chile's Decree Law 600 (D.L. 600). This law provides an
investment option in the form of a contract with the Government of Chile that
stipulates certain rights of the investor, but also requires that foreign direct
investment (FDI) remain in country for a minimal period of one year (three years at
one point). Should a dispute arise, the language in the U.S.-Chile FTA would allow
the investor the option to make a claim in international arbitration as opposed to
33
It should also be noted that under the principal negotiating objectives with respect to labor
is the provision: 1) "to recognize that parties to a trade agreement retain the right to exercise
discretion" in investigating and prosecuting compliance matters; 2) that "a country is
effectively enforcing its laws" if its reflects reasonable action as being taken; and 3) "no
retaliation may be authorized based on the exercise of these rights or the right to establish
domestic labor standards." Sec. 2102(b)(11)(B).
34
See: U.S. Department of State. Fact Sheet: Bilateral Investment Treaty Program.
January 22, 2001, [http://www.state.gov/e/eb/rls/fs/197pf.htm], and NAFTA Article 1109.
35
It should be noted that there is an ongoing, and so far unresolved, debate among
economists over the efficacy and wisdom of using capital controls as a tool to manage
international capital volatility.
CRS-19
having to work through the domestic Chilean court system as set out in D.L. 600. It
is the less controversial provision of the two.
The more controversial provision relates to Chile's Ley de Encaje, which
governs short-term portfolio capital flows, and the recourse that U.S. investors may
have if faced with restrictions on the outward flow of certain payments and transfers
as defined in Annex 10-C. This annex must be understood as part of the larger
dispute settlement provisions related to foreign investment, as defined in Section B
of Chapter 10. The U.S.-Chile FTA adopted what has become more or less of a
standard provision, which states that, U.S. investors who seek to file a claim for
breach of the Chapter 10 provisions can do so only after six months have lapsed from
the event giving rise to the claim. This general rule applies to a broad range of
potential investment disputes such as failure to observe national treatment or
expropriation.
Annex 10-C, the mutually-agreed compromise developed by Chilean and U.S.
negotiators, is actually an important exception to the six-month rule. Paragraph 1(a)
states that claims alleging that Chile has breached an obligation under Chapter 10
from its imposition of restrictions on transfers can only be made one year after the
restriction was put in place, with certain exceptions. In general, the United States
wanted to make sure that Chile did not have a general "balance of payments"
exception to impose capital controls.36 Chile wanted to ensure that it would not be
penalized if it were ever to reimpose its Ley de Encaje. Under Chile's Ley de Encaje,
any short-term capital investment in Chile required that an additional
nonremunerated deposit equal to 10%-30% of the investment value be placed in the
Central Bank of Chile for one year.37 The deposit would be forfeited if the portfolio
investment were repatriated in less than one year, imposing an additional cost on
capital volatility. In essence, Annex 10-C attempts to reconcile these goals by
allowing for an extension from six months to one year (the life of the encaje) of the
"cooling off period" before a claim can be made for dispute resolution related to
restrictions on transfers and payments, and by stipulating that the encaje is not an
open-ended invitation to restrict (may not substantially impede) capital movements.38
The important qualification relating to portfolio capital states that Chile will not
incur any liability for damages:
36
For example, if Chile were faced with a large and prolonged trend of capital outflows and
sought to have full freedom to restrict them without being held liable for any damages
investors might incur.
37
Encaje bancario is a Spanish financial term for reserve.
38
Note, there are two exceptions allowing recourse to the six-month standard, but neither
affects portfolio capital. The first exception guarantees that there are no restrictions on
transfers and payments related to foreign direct investment (excluding investments designed
with the purpose of gaining direct or indirect access to the financial market). The second
exception guarantees that there are no restrictions on payments made on loans or bonds
issued in foreign markets, including inter- and intra-company debt financing between
affiliated enterprises provided such payments are related to conducting business in the
affiliated enterprises. The language related to financial markets effectively prohibits
portfolio capital from qualifying under these exceptions, a provision added by Chile.
CRS-20
arising from its imposition of restrictive measures with respect to
payments and transfers that were incurred within one year from the date on
which the restrictions were imposed, provided that such restrictions do not
substantially impede transfers.39
There are two important thresholds that the Ley de Encaje must not exceed to
avoid triggering a claim for dispute resolution. First, it cannot affect an investment
for more than one year. Historically, this has been the case. Second, the encaje
cannot be considered as having "substantially impeded" capital outflows. Although
in any actual arbitration a panel would be empowered to determine what constitutes
"substantially impede," this language was crafted with the intent that the forfeiture
of the encaje not be construed as substantially impeding capital outflows and so may
be viewed as unlikely to open the door to U.S. investor dispute settlement.40
The U.S.-Chile FTA provisions do not eliminate Chile's right to reimpose its
capital control laws per se, especially the Ley de Encaje, but do extend certain
additional rights to U.S. investors. In addition, they indicate that U.S. investors could
pursue dispute settlement if Chile were to impose controls that substantially impeded
portfolio capital from leaving the country, setting up the debate over whether such
restrictions belong in FTAs. Attention to the issue has grown in the aftermath of
congressional approval for the U.S.-Chile FTA, particularly in light of the number
of subsequent FTAs that are heading for congressional action. Although in the U.S.-
Chile case the language governing capital controls may be viewed as a compromise,
it is far from clear that language adopted to fit the specific Chilean case will be able
to accommodate other countries negotiating FTAs with the United States, or U.S.
congressional concerns.
Temporary Business Personnel and Workers41
Key Provisions. Chapter 14 of the U.S.-Chile FTA creates separate
categories of entry for citizens of each country to engage in a wide range of business
and investment activities on a temporary basis, i.e., nonimmigrants. The FTA
addresses four specific categories of temporary nonimmigrant admissions currently
governed by U.S. immigration law: business visitors; treaty traders; intracompany
transfers; and professional workers. These categories parallel the visa categories
commonly referred to by the letter and numeral that denotes their subsection in
§101(a)(15) of the Immigration and Nationality Act : B-2 visitors, E-1 treaty traders,
39
Annex 10-C, paragraph 1(e).
40
Discussions with representatives of the U.S. Treasury and the Embassy of Chile. If the
Ley de Encaje were, for example, reimposed with a 50% deposit, this might well be
construed by a dispute settlement panel to be sufficiently high as to "substantially impede"
capital flows. The specifics of any future case will be critical to determining the outcome.
This issue was further clarified by U.S. Under Secretary of the Treasury for International
Affairs John Taylor in a side letter to the Singapore Monetary Authority. Although the
letter is not binding for Chile, it is intended to provide "interpretive guidance" for a dispute
settlement panel. The term "substantially impede" was used in NAFTA Article 2104,
paragraph 5(c), but not in bilateral investment treaties, and has not been tested in arbitration.
41
This section was written by Ruth Ellen Wasem, Specialist in Social Legislation.
CRS-21
L-1 intracompany transfers, and H-1B professional workers.42 Neither Party would
be allowed to require labor certification or other similar procedures as a condition of
entry and would not be able to impose any numerical limits on these categories, with
some exceptions noted for the professional workers (including an annual cap of
1,400).43
The FTA clearly states the desire to facilitate the temporary entry of persons
fitting these categories, provided the person complies with applicable immigration
measures for temporary entry (e.g., public health and safety as well as national
security). Chilean citizens who are business visitors, for example, would be able to
enter the United States for business purposes on the basis of an oral declaration or
letter from the employer specifying the principal place of business, detailing in the
FTA an admissions policy not currently specified in statute.
Title IV of the enabling legislation amends several sections of the Immigration
and Nationality Act (INA, 8 U.S.C.). Foremost, it amends §101(a)(15)(H) of INA
to carve out a portion of the H-1B visas -- to be designated the H-1B-1 visa -- for
professional workers entering through the FTAs. In many ways the FTA professional
worker visa requirements parallel the H-1B visa requirements, notably having similar
educational requirements. The H-1B visa, however, specifies that the occupation
require highly specialized knowledge, while the proposed FTA professional worker
visa specifies that the occupation require only specialized knowledge.
The legislation also amends §212 of INA to add a labor attestation requirement
for employers bringing in potential FTA professional worker nonimmigrants that is
similar to the H-1B labor attestation statutory requirements. The additional
attestation requirements for "H-1B dependent employers" currently specified in §212
are not included in the labor attestation requirements for employers of the proposed
FTA professional worker nonimmigrants.
There are numerical limits of 1,400 new entries under the proposed FTA
professional worker visa from Chile. The legislation does not limit the number of
times that an alien may renew the FTA professional worker visa on an annual basis,
unlike H-1B workers who are limited to a total of 6 years. It counts an FTA
professional worker against the H-1B cap the first year he/she enters and again after
the fifth year he/she seeks renewal. Although the foreign national holding the FTA
professional worker visa would remain a temporary resident who would only be
permitted to work for any employer who had met the labor attestation requirements,
the foreign national with a FTA professional worker visa could legally remain in the
United States indefinitely.
42
For background, see CRS Report RS20916, Immigration and Naturalization
Fundamentals, and CRS Report RL31381, U.S. Immigration Policy on Temporary
Admissions, both by Ruth Ellen Wasem.
43
For a discussion of the labor market requirements for employment-based visas, see: CRS
Report RS21520, Labor Certification for Permanent Immigrant Admissions; CRS Report
RL30498, Immigration: Legislative Issues on Nonimmigrant Professional Specialty (H-1B)
Workers; and CRS Report RS21543, Immigration Policy for Intracompany Transfers (L
Visas): Issues and Legislation, all by Ruth Ellen Wasem
CRS-22
On July 10, 2003, the House Judiciary Committee held a "mock" mark-up of the
USTR's draft language. Chairman Sensenbrenner took the lead in stating that
"immigration policy does not belong in free trade agreements," citing Congress's
plenary authority over immigration policy in Article 1, §8 of the U.S. Constitution.
Members on both sides of the aisle expressed agreement with Chairman
Sensenbrenner's position, with several Members going further to state that the draft
language was an "insult to Congress." The House Judiciary Committee
recommended including the FTA professional workers in the H-1B nonimmigrant
visa and counting an FTA professional worker against the H-1B cap the first year
he/she enters and again after the fifth year he/she seeks renewal. These
recommendations are reflected in the legislation as introduced and passed.
Title IV of S. 1416/H.R. 2738 also amends the INA to include Chile citizens as
E-1 treaty traders and E-2 treaty investors.
Major Points of Debate. The USTR maintains that ensuring cross-border
mobility of professionals and other business persons is critical for U.S. companies
in developing new markets and business opportunities abroad. The USTR further
argues that the temporary business personnel provisions in the FTAs are not
immigration policy because they only affect temporary entry. The USTR points out
that it issued a notice of intent to negotiate provisions to facilitate the temporary entry
of business persons in October 2001 and that it briefed congressional staff on the
FTA provisions on numerous occasions.
Others express concern that the USTR has overreached its negotiating authority
by including immigration provisions in the FTAs. Critics maintain that the USTR's
assertion that temporary entry of foreign business personnel and professional workers
is not immigration policy is disingenuous. More generally, some point out that these
provisions would constrain current and future Congresses when they consider
revising immigration law on business personnel, treaty investors and traders,
intracompany transfers, and professional workers because the United States would
run the risk of violating the FTA.
The specific issue of FTA professional worker is sparking the most debate. The
Labor Advisory Committee, one of six private sector advisory committees for the
USTR, is critical of the provisions on the temporary entry of business personnel and
professional workers because it appears to enable workers from Chile who have no
direct employment except a service contract to enter the United States.44 Others have
expressed concern that professional workers from Chile would be held to a less
stringent standard than existing H-1B law (specialized knowledge versus highly
specialized knowledge) and that the stricter attestation requirements for H-1B
dependent employers would also be omitted.
The USTR argues that it is incorrect to assert that the labor attestations required
under the FTA would be less rigorous than the LCA called for under current U.S.
law. According to the USTR, the labor attestation required under the FTA also is to
44
Report of the Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC).
The U.S.-Chile and U.S.-Singapore Free Trade Agreements. February 28, 2003. p. 9-11.
CRS-23
be modeled after the LCA that the Department of Labor requires under the existing
H-1B visa program, and (as is the case under the H-1B program) fees may be
collected along with the labor attestations.45 The USTR states that the labor
attestations, education and training fees, and numerical limits provisions have been
added to the FTAs in response to congressional concerns.
Issues surrounding legal authority to enforce immigration law are also arising.
Some are questioning whether §106 and §107 of the legislation would enable an
international panel to overrule decisions by officials in the Department of Homeland
Security or by the Attorney General to reject visa applicants from Chile and
Singapore. USTR responds that the panel that would be established by the FTA
would be bi-national and would only deal with cases brought by a Party to the
agreement in which there is alleged to be a pattern of violations.46
45
Letter. U.S. Trade Representative to Mr. George Becker, Chair, Labor Advisory
Committee on Trade Negotiations and Trade Policy. c. March 2003.
46
For more analysis, see CRS Electronic Briefing Book on Trade, "Immigration Issues in
the Free Trade Agreements," at [http://www.congress.gov/brbk/html/ebtra135.html].
CRS-24
Appendix 1. Chronology of U.S.-Chile FTA
Date Milestone
November 29, 2000 President George W. Bush notifies Congress of his
intention to negotiate a free trade agreement (FTA)
with Chile.
December 6, 2000 FTA negotiations initiated.
August 6, 2002 President Bush signs the Trade Act of 2002 (P.L.107-
210), which includes Trade Promotion Authority
(TPA).
August 22, 2002 President Bush notifies Congress again of his
intention to negotiate the U.S.-Chile FTA, as
prescribed in TPA.
December 11, 2002 FTA negotiations concluded.
January 29, 2003 President Bush notifies Congress of his intention to
sign the U.S.-Chile FTA.
June 6, 2003 USTR Robert B. Zoellick for the United States and
Foreign Minister Soledad Alvear for Chile sign FTA
in Miami, Florida.
June 10, 2003 House Ways and Means Committee, Subcommittee
on Trade holds hearing on the implementation of the
U.S.-Chile FTA.
June 17, 2003 Senate Committee on Finance holds hearing on the
implementation of the U.S.-Chile FTA.
July 3, 2003 President Bush submits to Congress changes in U.S.
law required to comply with FTA.
July 10, 2003 Senate Finance, House Ways and Means, and House
Judiciary Committees hold pre-introduction "mock
mark-ups" on the draft implementing legislation
submitted by the Bush Administration.
July 14, 2003 Senate Judiciary Committee holds hearing on the
temporary entry provisions of the draft implementing
legislation.
July 15, 2003 President Bush sends required supporting documents
and formal legal text of U.S.-Chile Free Trade
Implementation Act to Congress.
CRS-25
Date Milestone
July 15, 2003 Identical legislation introduced as H.R. 2738/S. 1416.
July 16, 2003 House Judiciary Committee meets and orders H.R.
2738 favorably reported by voice vote.
July 17, 2003 House Ways and Means and Senate Finance
Committees consider implementing legislation. Ways
and Means Committee orders H.R. 2738 favorably
reported by a roll call vote of 33-5. Senate Finance
Committee orders S. 1416 favorably reported by a
vote of 21-0.
June 17, 2003 Senate Judiciary Committee favorably reports out S.
1416 by a vote of 11-4.
July 21, 2003 H.R. 2738 reported by the House Committee on Ways
and Means (H.Rept. 108-224, Part I). Senate
Committees on Finance and the Judiciary file joint
report on S. 1416 (S.Rept. 108-116).
July 22, 2003 H.R. 2738 reported by House Committee on the
Judiciary (H.Rept. 108-224, Part II).
House Committee on Rules provides for a closed rule
for consideration of H.R. 2738 under which debate is
limited to two hours and all points of order against
consideration of H.R. 2738 are waived.
July 24, 2003 H.R. 2738 agreed to in House, 270 to 156.
July 31, 2003 H.R. 2738 agreed to in Senate, 66 to 31.
August 7, 2003 H.R. 2738 cleared for White House.
August 22, 2003 H.R. 2738 presented to President.
September 3, 2003 President Bush signs H.R. 2738 into law (P.L. 108-
77).
January 1, 2004 U.S.-Chile Free Trade Agreement takes effect.
CRS-26
Appendix 2. US-Chile Merchandise Trade, 1985-2002
(in US $ millions)
U.S. U.S. Trade Trade % Growth in % Growth in
Year
Exports Imports Balance Turnover U.S. Exports U.S. Imports
1985 682 745 -63 1,427 ---- -- ---- --
1986 823 820 3 1,643 20.7% 10.1%
1987 796 981 -185 1,777 -3.3% 19.6%
1988 1,066 1,181 -115 2,247 33.9% 20.4%
1989 1,414 1,292 122 2,706 32.6% 9.4%
1990 1,664 1,313 351 2,977 17.7% 1.6%
1991 1,839 1,302 537 3,141 10.5% -0.8%
1992 2,466 1,388 1,078 3,854 34.1% 6.6%
1993 2,599 1,462 1,137 4,061 5.4% 5.3%
1994 2,774 1,821 953 4,595 6.7% 24.6%
1995 3,615 1,931 1,684 5,546 30.3% 6.0%
1996 4,132 2,256 1,876 6,388 14.3% 16.8%
1997 4,368 2,293 2,075 6,661 5.7% 1.6%
1998 3,979 2,453 1,526 6,432 -8.9% 7.0%
1999 3,078 2,953 125 6,031 -22.6% 20.4%
2000 3,455 3,228 227 6,683 12.2% 9.3%
2001 3,131 3,555 -424 6,686 -9.4% 10.1%
2002 2,612 3,781 -1,169 6,396 -16.6% 6.4%
Data Source: U.S. Department of Commerce.
CRS-27
Appendix 3. Major U.S.-Chile Product Trade and
Tariff Rates, 2002/03
(% of total dollar value)
NTR Free
Major U.S. % of Tariff Major U.S. % of
Tariff under
Exports Total Rate Imports* Total
Rate** GSP#
Machinery: 34% 6% Edible Fruit and 20%
- Computers, (7%) Nuts:
- Office mach. (5%) - grapes (0806) (12%) $1.13- no
- parts (5%) 1.80/m3
- gas turbines (2%) - fruit (0809) (3%) $.002- no
.005/kg
Electrical 14% 6% Copper: 17%
machinery - refined (7403) (15%) 1% no
- unref. (7402) ( 2%) free
Vehicles (new) 8% 6% Fish (mostly
salmon): 13%
- fillet (0304) (11%) free
- fresh (0302) ( 1%) free
- frozen (0303) (1%) free
Aircraft 2% 6% Wood (lumber) free
- (4407, 4409, 15%
4411)
Medical 6% 6% Beverages: 4%
instruments - wine (2204) (4%) $.063/lit. no
Plastic 5% 6% Organic 4%
Chemicals:
- methanol(2905) (4%) 8% no
Organic 2% 6% Oil:
chemicals - not crude(2710) 2% $.525/bbl no
Other 27% 6% Other 25%
Total 100% Total 100%
Data Source: U.S. Department of Commerce.
*By HTS number = Harmonized Tariff Schedule of the United States. Note, HTS numbers are not
provided on U.S. exports, which are subject to Chile's 6% nominal uniform import tariff rate.
**NTR is the general or normal tariff rates (also known as most favored nation rates) applied to
products not given preferential tariff treatment.
#GSP = Generalized System of Preferences or preferential tariff treatment given to select developing
country imports by developed countries. Some imports receive GSP treatment only if the exporting
country is considered a "least developed country." Because Chile does not qualify under this
designation, most of its exports to the United States are not eligible for GSP treatment.
CRS-28
Appendix 4. Chile's Multilateral, Regional, and
Bilateral Trade Agreements
Agreement Date Effective Type
WTO (GATT) January 1995 multilateral free trade agreement
(FTA)
APEC November 1994 regional association
Mercosur October 1, 1996 regional customs union
(associate member)
FTAA negotiating (January 1, regional FTA
2005 deadline)
LAIA January 1980 regional association
· Bolvia July 1, 1993 economic complementarity
agreement#, FTA to be negotiated
· Venezuela July 1, 1993 economic complementarity agreement
· Colombia January 1, 1994 economic complementarity agreement
· Ecuador January 1, 1995 economic complementarity agreement
· Peru July 1, 1998 economic complementarity agreement
· Argentina signed May 19, 2000 economic complementarity agreement
Canada July 5, 1997 bilateral FTA
Mexico 1998 bilateral FTA
Central America* signed October 18, FTA framework agreement
1999
European Union February 1, 2003 FTA
European Free under negotiation FTA
Trade Association
Japan pre-negotiation impact bilateral FTA
studies completed
Singapore under discussion bilateral FTA
New Zealand under discussion bilateral FTA
South Korea negotiations concluded bilateral FTA
October 24, 2002
United States January 1, 2004 bilateral FTA
# limited trade agreement negotiated under guidelines see forth by the Latin American Integration
Association (LAIA), known in Spanish as the Asociación Latinoamericana de Integración (ALADI).
* Guatemala, Honduras, Nicaragua, El Salvador, and Costa Rica (ratified January 2002).
Data source: Organization of American States. Foreign Trade Information System. This may be
found at: [http://www.sice.oas.org] and Embassy of Chile.
------------------------------------------------------------------------------
For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31144