• Chile is among the most progressive economies in the Latin American region, scoring high on both economic freedom and ease of doing business. • The country’s major strengths include openness to trade and investment, transparent regulatory systems and strong rule of law. • Chile has signed a number of trade agreements over the past few years. It is on the verge of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). • India’s trade with Chile is highly concentrated and below potential. It is important for Indian firms to establish physical presence in the Chilean market.
Chile is one of the most advanced economies of the Latin American region. Its strong macroeconomic fundamentals have enabled an accelerated reduction in poverty levels from 30% in 2000 to 6.4% in 2017 (World Bank, percentage of people living on US$ 5.5/day).
Chile has an economic freedom score of 75.4, with its economy ranked 18 in the 2019 Index. The country’s overall score increased by 0.2 points, reflecting improvements in labour freedom, business freedom, and monetary freedom even as there was a decline in its score on judicial effectiveness. Overall, Chile ranks 3rd among 32 countries in the Americas. Some of Chile’s fundamental advantages include openness to global trade and investment, transparent regulatory systems and strong rule of law.
After plummeting for four years, investments in Chile recovered in 2018 due to positive outlook and expectations from the present government under President Miguel Juan Sebastián Piñera Echenique. The government has brought in key tax reform measures, proposals for incentivisation of capital investment, entrepreneurship and innovation.
Trade and macroeconomic indicators of Chile
Source: Compiled from multiple sources
Chile has a market-oriented economy characterized by a high level of foreign trade and a reputation for strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America. Exports of goods and services account for approximately one-third of GDP, with commodities making up around 60% of total exports. Copper is Chile’s top export and provides 20% of government revenue. Other key exports are minerals, wood, fruit, seafood and wine. China is the top trading partner for Chile followed by the US.
Import trends of Chile for services, in US$ million
Source: ITC Trade Map
Trade outlook
Chile has recently executed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, Japan, New Zealand, Peru, Singapore and Vietnam. This important agreement was approved by the Chilean Chamber of Deputies in April, and is awaiting approval by the Senate. Countries within CPTPP encompass around 500 million citizens and account for 12% of world trade.
Driven by its bias in favour of trade liberalisation, Chile unilaterally brought down its tariffs to a flat 6%. This has led to successful conclusion of a number of trade agreements with its partners, and lowering of average tariff to 1.8%. Chile is planning to bring the average tariffs down further over the next decade.
China is the largest trade partner for Chile, with bilateral trade at US$ 42.8 billion in 2018, growing by 24% yoy. This accounts for one-third of Chile’s total trade. The two countries had signed an FTA way back in 2005, when their bilateral trade was just US$ 7 billion.
They upgraded the agreement in March 2019, The upgraded China-Chile FTA will increase the number of tariff-exempt items to 98% of all items, according to China’s Ministry of Commerce. China also plans to remove tariffs on some wood product imports from Chile over a period of three years. Chile will immediately remove tariffs on Chinese imports like textiles and clothing, home appliances and sugar products. In recent years, Chile has benefited from rising Chinese demand for its agricultural exports, such as fruits and meat.
The FTA will also see China opening more than 20 sectors to Chilean investors, including legal services, entertainment services and distribution. Chile, on the other hand, will open up more than 40 sectors, including express delivery, transportation, and construction.
India-Chile Bilateral Trade Relation
Chile has been aggressively active in signing trade agreements with several countries in last five years. India had also expanded the preferential trade agreement (PTA) with Chile in 2017 (original PTA came into force in 2007). Under this expanded PTA, India offered tariff concessions on 1,031 lines to Chile, while the latter gave concessions on 1,798 tariff lines to India.
However, India’s trade relations with Chile have been demand driven, due to which our market presence in Chile is meagre. If we see our trade basket with Chile, the said statement gets corroborated, as it is not diversified.
Going by the India-Chile trade basket of last year, India’s imports from Chile remained at US$ 1.7 billion, out of which 80% were ores and slags of copper followed by edible fruits (apples and kiwis) and chemical compounds of precious metals. From the futuristic perspective, Lithium has a major export potential for Chile, as India is making a strong push for electric vehicles (EVs). Chile has the largest confirmed reserve of Lithium in the world.
India’s exports to Chile stood at meagre value of US$ 925 million, out of which 31% consisted of automobiles. Other top products imported by Chile from India include pharmaceuticals, articles of iron and steel, textiles, leather products and organic chemicals.
Merchandise exports increased at a CAGR of 19% during 2016-18, with strong growth in sectors like vehicles, pharma, articles of iron & steel, textiles, plastics and organic chemicals. There is no doubt that the Chilean market is not fully explored by Indian stakeholders. Future prospects are immense, and doing business in Chile is quite smooth (Ease of Doing Business rank 56) unlike Argentina (119) and Brazil (109).
On the flip side, lack of investment in research and development and limited innovation negatively impact competitiveness, efficiency and productivity of Chilean companies. Moreover, enterprises need to develop their human capital, an area where India can play a major enabling role.
Signing or expanding a trade agreement with Chile alone will not solve the purpose. Indian companies need to establish their physical presence in Chile, just like Chinese firms have done over the years.
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