ECONOMY-CHILE: Tariff Reductions, Antidote to the Asian Crisis

By IPS Correspondents Reprint | | Print |

Gustavo Gonzalez

SANTIAGO, May 22 1998 (IPS) - Chile will lead Latin America on the trade liberalisation score once more, when the large drop in the single external tariff announced by President Eduardo Frei is coupled with the search for antidotes to the “Asian ‘flu.”

Frei’s announcement of a five percent tariff reduction, from 11 to six percent, was received with glee by the big companies Friday, and even the right-wing opposition was pleased.

The Santiago Stock Exchange, reopening after a public holiday on May 21, registered increases of more than one percent in its t indices this Friday, signalling the market had received the presidential decision well.

In his Message to the Nation, Thursday, the leader said he would be proposing a reduction of three points from January 1999 with the additional two points in the two following years.

For the right, this was one of the few positive aspects of the presidential speech, which they claimed was symptomatic of a downbeat government with “nothing to offer” in the final stretch of their term, due to end in March 2000.

Walter Riesco, chairman of the Production and Commerce Confederations, said the tariff reduction is satisfactory, but the government should push it through earlier to counteract the effects of the Asian crisis.

Meanwhile, entreprneur Angel Fantuzzi said importing goods at lower tax rates would be equivalent to “digging a grave” for small and medium sized businesses – a sector which provides more than 80 percent of employment in the manufacturing sector.

In his message, presented to Congress in Valparaiso, 120 kilometres west of Santiago, Frei stressed the tariff reductions were an attempt to make the export sector more competitive given the current international economic situation.

“Several of our trade partners are up against a serious financial crisis, bringing with it difficult times for the export sector,” said the leader, referring to the turbulent stock exchanges and currency markets in Southeast Asia.

According to 1997 figures, around 35 percent of Chilean trade is with Japan, China and the Asian Tigers – one of the highest percentages in Latin America.

The lower tax income due to the drop in tariffs will have to be compensated for by sales taxes, the most difficult aspect to negotiate with the right-wing opposition, which forms a majority in the Senate.

Under this governmental strategy, the drop in tariffs will mean having to guard against fiscal imbalance and preventing an exaggerated deficit on this front from negatively affecting the anti-inflationary aims, a priority for the Central Bank.

And this tariff reduction has been on the cards since 1996, as one of the concessions Frei made to the right in the Senate in order to gain approval for assosciation with the Southern Cone Common Market (Mercosur), beginning in October this year.

Chile first adopted the single external tariff under the Augusto Pinochet dictatorship (1973-90), for the dictator was a pioneer of trade liberalisation policies in Latin America promoting exports on the basis of comparative advantages.

The first democratic transition government of President Patricio Aylwin (1990-94) established the present tariff of 11 percent, a fall from the 15 percent rate inherited from the dictatorship.

Aylwin’s term also started negotiation of bilateral free trade treaties on the basis of planned tariff exemptions, something which developed into the differentiated tariff bands of today.

A study by the Santiago Chamber of Commerce, released a week ago, indicated that due to the trade agreements, the average external tariff in Chile is 8.9 percent, a figure which will reach an average of 6.5 percent with the three point reduction.

The country has bilateral agreements with Mexico, Canada, Venezuela, Ecuador, Colombia and Bolivia, as well as the treaty with the Mercosur, made up of Argentina, Brazil, Paraguay and Uruguay.

This month, the foundations were laid for a trade agreement with Peru and negotiations will shortly be embarked upon between Chile and the Central American Common Market, including Guatemala, El Salvador, Nicaragua and Costa Rica.

The tariff reduction was called for early this months by politicians ranging from Senator Jovino Novoa, of the far-right Independent Democratic Union, to former socialist deputy, Jaime Estevez.

The competivity of the Chilean export sector was seriously affected by the closure of markets in Asia and by the arrival of lower cost imports from this area due to the currency devaluations.

On April 15, the trade balance stood at a deficit of 617.5 million dollars, compared with a surplus of 811.2 million dollars in the first four months of 1997.

And even while last year closed with a trade deficit of around 1.294 billion dollars, and a negative outcome is also expected for this year, the authorities want to prevent an even worse outcome in the balance of trade.

Seen from this point of view, the tariff reductions are not only an instrument to help recover exports and to broaden markets, but also one of the remedies to counteract the impact of the “Asian flu” coming in from the far east.