Trade to flow freely between Chile and the US

A free-trade agreement being signed Friday is the first of its kind in South America.

Next month, in the small southern Chilean town of Tomé, a local fabric factory will start operating again - after being closed for more than a year.

Once a modest mill, the rebuilt plant is going global, supplying a large US clothing maker with fine textiles. Thanks to the new US-Chile free-trade agreement, which will be signed Friday in Miami, the fabrics will enter the US duty-free, instead of being hit with tariffs of up to 36 percent.

"We were looking forward to this free-trade agreement; that is why we selected Chile," says Juan Pablo Grez, general manager of the US-backed partnership that has taken over the mill site. The plant will supply Tom James, the world's largest manufacturer of custom-made dress apparel, based in Nashville, Tenn.

Tom James, which until now had no Latin American presence, is just one of many multinational companies choosing Chile as its base of regional operations.

While Chile already provides a stable environment for business and has long promoted itself as the economic gateway to Latin America, it now has a trump card.

Chile will be the first country in South America to sign a free-trade agreement with the US. And it will be at the forefront as the Bush administration pushes for the Free Trade Area of the Americas (FTAA), covering all 34 countries from Canada down to the southern tip of Patagonia.

Analysts agree the US-Chile agreement is the most important development in Western Hemispheric trade since the North American Free Trade Agreement (NAFTA) took effect in 1994.

The agreement creates incentives for US manufacturers, banks, insurers, telecommunication companies, agribusinesses, and most other US enterprises to enter the Chilean market with virtually no restrictions. US companies, for example, will no longer have to exclusively use Chilean raw materials in their products.

Tariffs on 85 percent of traded consumer and industrial goods will be eliminated immediately - most will be gone in four years, and all will completely disappear within 12 years. The textile and apparel industry is one of the big winners, with tariffs being scrapped immediately. By contrast, tariffs on farm goods will be withdrawn more slowly and selectively.

Chile's National Chamber of Commerce says two-way trade - worth more than $8 billion annually - could jump 30 percent. The Chilean-American Chamber of Commerce says Chile's GDP could rise between one and three percentage points through the deal.

For its part, Chile wants to attract American companies with a higher level of technology to break its reliance on copper exports and agricultural products.

The US government hopes the agreement will mark the beginning of a new push for the regionwide FTAA and put pressure on other Latin American countries - especially Brazil - to come on board.

Left-leaning Brazilian President Luiz Inacio Lula da Silva called the FTAA a US bid of "annexation" in the lead-up to his election victory last October, although he has since toned down his rhetoric.

And both Brazil and Argentina, under its new president, Nestor Kirchner, are looking to strengthen the Mercosur trade bloc, a potential rival to the FTAA.

The original plan to have the FTAA operating by 2005 is looking increasingly unrealistic. Chile only achieved its goal of a US free-trade agreement after a decade of persistence.

Chilean president Ricardo Lagos said last month that in the runup to the pact's finalization, 30 international companies had already established facilities in Chile. Most of the major US firms have arrived in the past three years.

But Mr Lagos said one of the greatest barriers to be overcome is the lack of English language skills in the labor force. "Our first challenge is to strive with extra force for bilingualism," he said.

Even so, Delta Airlines has already established a regional call center in Santiago, and Citigroup and Motorola have both established software centers here serving Chile and other Latin American countries.

Next month, Unilever Bestfoods Latin America will officially move its Latin American headquarters from the US to Santiago. One of the key reasons the Chilean capital won out over regional rivals São Paulo, Mexico City, and Buenos Aires is its low rates of violent crime.

Company president Alberto Sobredo, who is from Argentina, cited security as a major factor in the decision to relocate to Chile. "We travel a lot and need to know that our families are in a safe and comfortable place," he said.

On the economic side, part of the attraction is Chile's wide web of trade agreements and its associate membership in the Mercosur trade group. It already holds five free-trade agreements, including pacts with Canada, Mexico, and the European Union, and trade associations with no less than 10 regional countries.

This means US companies can come to Chile, produce goods or services locally, then export them regionally and worldwide, capitalizing on the preexisting network of trade agreements.