Chile-Japan FTA: Key indicators

Economic relations between Chile and Japan are at an all- time high after nearly seven years of steady growth. And both economies may grow even more, thanks to the free trade agreement signed by both countries.

Japan is currently the second-largest economy in the world. With a Gross Domestic Product (GDP) of $ 4.46 billion, it is smaller than the United States, but larger than Germany and China.

This is the result of policies implemented since the end of the Second World War. Japan focused on industrializing and modernizing in order to compete with the post-war Great Powers, as they were known. This effort bore fruit in the 1980s, when Japanese growth surpassed all predictions.

Despite this initial burst, the 1990s saw stagnation. Growth rates were close to 1% of GDP, not to mention the effects of the Asian crisis. Now, during the early years of the twenty-first century, Japan has again found the path to steady growth, with rates that are closer to the United States.

A fruitful relationship

However, Japanese relations with Chile have remained stable. In fact, it is currently our third-largest trading partner. Chile currently exports a total of $7.18 billion to Japan. A total of nearly $1.15 billion was imported from that nation into Chile.

During 2006, it was the leading destination of Chilean exports to Asia, with 32% of the total. But China is beginning to dispute this ranking. In contrast, Chile represents 0.88% of all Japanese imports, though we remain its leading trade partner in South America.

Chile-Japan trade has shown steady growth over recent years, leaving us with a trade surplus. By 2000, it reached nearly $1.83 billion, while in 2006 it nearly doubled to $4.89 billion.

The explanation for this is simple according to Fanor Larrain, an economics professor at the Catholic University of Valparaíso. 95% of this growth is the result of copper exports. That is why mining, and especially copper, account for 74.34% of our export shipments.

NAFTA opportunities

Japanese investment in Chile has plenty of space to grow. During the period 1975-2004, Japanese investment in Chile reached nearly $1.8 billion. This figure corresponds to 3% of all foreign investment during the period.

Japanese direct investment in Chile has focused on fisheries, mining and wood chips for paper production. Today, however, there is more investing in copper mining in northern Chile, which has contributed to the stable supply of the red metal to Japan.

This significant level of investment has helped strengthen ties in the financial services sector. A question arises. Will Chile become a platform for Japanese investment in South America? Fanor Larrain's response is categorical. "No. The Japanese are leaders in finance and business,” so there is nothing we can offer them in this regard.

But with the FTA signed, opportunities abound. This applies only to the exchange of goods, however. When you add up all the benefits of the agreement, exports to Japan should increase by $388 million per year within five years.

In the short-term, 70% of Chilean exports will benefit from the FTA. The rest will be covered too, item by item, until 95% of domestic products are covered. The remaining 5% will never be duty-free. 53% of agricultural shipments are now tariff-free, while another 35%, in various proportions, have favored access to the market from day-one of the agreement. Thus, almost 90% of our agricultural exports have zero, or extremely favored, tariff preferences. 99% of fruit is included in the FTA. The slightly less than 1% that are excluded will be negotiated within five years time.

Criticisms have been made by sectors, such as the National Agriculture Society (SNA). It feels Japan is highly protectionist in some aspects of agriculture, having left out the milk industry from FTA terms.

To take advantage of this treaty, it is essential to diversify shipments beyond copper. This will take an improvement in quality according to Larrain. "Our export products must be perfect, including packaging and presentation. The Japanese market must be permanently monitored. That means understanding what they want," he concludes.