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Hot Prospects, High Stakes in Chile Market
This month’s AgExporter focuses the spotlight on a country and on the larger region--Chile and the Americas. Chile is the first country outside North America to be invited to join NAFTA.
An official visit to the United States by Chilean President Eduardo Frei in late February helped draw attention to the growing U.S.-Chile trade relationship. Canada and Mexico already have free trade agreements with Chile, and the Clinton Administration has reaffirmed its commitment to negotiating a comprehensive free trade agreement with Chile.
Work is also proceeding toward a larger, hemispheric free trade agreement. The proposed Free Trade Area of the Americas would expand trade and investment opportunities throughout the region, opening new markets for U.S. exporters.
Of course, our neighbors in the Western Hemisphere are already major markets, taking more than $16 billion in U.S. agricultural exports last year, the highest ever. Our two NAFTA partners--Canada and Mexico--accounted for 70 percent of this total.
In this first article, AgExporter interviews the U.S. agricultural counselor in Chile, Richard Blabey, about the Chilean market, recent trade developments and the potential impact of a free trade agreement with Chile. Subsequent articles focus on Chile’s expanding supermarket sector, exports to our current NAFTA partners and the growth in trade with other markets throughout the Americas.
AgExporter: Would you start by sharing an overall impression of Chile.
Blabey: Chile is a country on the move. You can feel the optimism and energy of the people as they go about their daily business. And business appears to be Chile’s leading preoccupation. Even though the country has only 14 million people, it supports two daily newspapers devoted solely to business and financial news.
The big story in Chile is that economic restructuring, which began in the late 1970s, is responsible for 13 years of uninterrupted economic expansion. Since 1990, real (inflation-adjusted) growth has averaged over 8 percent per year.
AgExporter: Isn’t this a relatively small market? Why should a U.S. exporter of foods or other agricultural products have an interest in Chile?
Blabey: True, Chile is not a major market, and it’s a good distance from the United States. By air, for example, London is more than 1,000 miles closer to Chicago than is Santiago, Chile’s capital.
Furthermore, farmers here in Chile can grow just about anything because of the diversity of climatic conditions, soils and other agricultural resources found in this long, narrow country. Geographically, Chile is so long and spread out that, in the Northern Hemisphere, it would stretch from the Alaskan panhandle to Acapulco, Mexico.
But two things make this market worth considering. The first is the level of political and economic stability, which reduces the risk of doing business. Secondly, U.S. exporters find it relatively easy to conduct business in Chile because of its excellent communications, sophisticated banking system, sound currency and the lack of governmental interference in commercial transactions. These are advantages that many larger export markets can't match.
AgExporter: Could you give us a brief rundown on how U.S. agricultural exports to this market are faring?
Blabey: Although the numbers have bounced up and down in the last few years, the underlying pattern so far this decade is decidedly upward. U.S. agricultural exports to Chile were valued at $131 million in 1996, off 23 percent from 1995 but more than double 1990's level.
Bulk commodities, led by feed corn, accounted for half the total. Planting seeds were the largest item by value among U.S. exports of intermediate products. Pet foods and processed fruits and vegetables shared the spotlight among consumer-oriented products. Total U.S. consumer-oriented exports set a new record at $33 million in 1996, up 110 percent in just the last two years.
In terms of market share, the United States has an estimated 18.5-percent share of total Chilean imports of bulk commodities. It varies from year to year. The U.S. share of Chile’s high-value agricultural imports is currently around 8 percent. It is in this latter category--particularly among consumer-oriented products--where we see the strongest potential for long-term sales growth.
Let me add a brief footnote here. While Chile is far down the list of leading U.S. markets in this hemisphere, it would rank much higher if we measured sales per capita, based on the population of each country. For instance, our agricultural exports per capita to Chile in 1996 were more than 2-1/2 times those to Brazil.
AgExporter: Isn’t it true that Chile restricts some agricultural imports?
Blabey: Chile has a fairly good record overall and is open to trade in most commodities, but there are some important access issues that need to be addressed. The country maintains very strict quarantine regulations, which have been used to limit or prevent imports of fresh fruits and vegetables, meat and poultry products and U.S. wheat.
Now, everyone recognizes the importance of proper plant and animal quarantine procedures to protect human health and to prevent the introduction of pests and plant and animal diseases from outside. But a zero-tolerance for salmonella on imported poultry? Only Chile, the Czech Republic, Honduras and El Salvador enforce such an unscientific restriction.
And then there’s wheat. When the Karnal bunt fungus was detected in the U.S. Southwest last year, Chile effectively banned imports of our wheat by not recognizing the worth of USDA phytosanitary certificates assuring wheat buyers that the grain does not come from the areas under quarantine. Even today, Chile proposes to allow its flour mills to buy only U.S. wheat from the Pacific Northwest, where climatic conditions prevent the spread of the fungus.
Horticultural restrictions are another priority U.S. concern. Raspberries are the only fresh U.S. fruit or vegetable now permitted entry, while Chile can export over 130 horticultural items to the United States.
AgExporter: Do you think Chile is likely to lift its nontariff import barriers anytime soon?
Blabey: I have some basis for optimism. Chile's new Minister of Agriculture, Carlos Mladinic, has extensive experience in international trade relations. I think the government here understands that in order to keep its export markets open and growing, its own markets must be open to imports.
The United States is Chile’s number one export market for table grapes, peaches, plums, kiwis and avocados. We imported more than $400 million in fresh fruits from Chile last year. To sustain their presence in our market, Chile’s exporters pay USDA’s Animal and Plant Health Inspection Service (APHIS) to manage a quarantine preclearance program that is said to be the largest of its kind in the world.
Chile, therefore, relies on the cooperation of APHIS to ensure that its fruit arrives in U.S. supermarkets in the freshest condition possible. Trade and technical cooperation must work both ways. This is a principle that cannot be ignored for very long. It is the same with all of our trading partners.
AgExporter: So we’ve been encouraging Chile to further open its markets?
Blabey: Absolutely. The U.S. Ambassador to Chile, Gabriel Guerra, has been insisting that U.S. exporters have the same opportunities to sell in this market that Chile's exporters enjoy in the United States. USDA officials and others continue to press this point.
A similar message was delivered by a congressional delegation in January, when Representative Bob Smith of Oregon, chairman of the House Committee on Agriculture, and four members of his committee visited Chile. They told officials here that restrictive trade practices would harm chances for congressional passage of "fast track" legislation. Fast track authority basically provides the green light for the Office of the U.S. Trade Representative to move ahead with formal negotiations on new trade agreements, including negotiations aimed at creating a comprehensive free trade agreement with Chile.
AgExporter: How important is a free trade agreement with Chile to future U.S. export prospects in this market?
Blabey: It’s extremely important for a wide range of U.S. products, agricultural and nonagricultural. At present, Chile's import duty on all products is 11 percent. Our leading competitors in the hemisphere--Canada, Argentina, Brazil and even Mexico--have already negotiated preferential trade agreements with Chile calling for the phased elimination of the 11-percent duty on many products.
Unless we, too, can negotiate elimination of the duty, U.S. exports will become less price competitive in this market with every passing year. An 11-percent duty is not high by most standards, but its impact on price is enough to influence the buying decision with a great many products.
AgExporter: What do you foresee in terms of future U.S. sales opportunities if we get a free trade agreement?
Blabey: First, we’ll be in a much better position to hold onto our share of the Chilean market for bulk products, such as grains, as well as our share of such high-value intermediate items as oilseed products and planting seeds. Because of Chile's proximity to Argentina and Brazil and the pricing policies of the Canadian Wheat Board, the United States generally finds itself playing the role of residual supplier for many of these products.
This results in rather dramatic fluctuations in sales from one year to the next. Over the last three years, for example, our wheat exports to Chile went from $5 million in 1994 to $53 million in 1995 and then to almost nothing in 1996 due to the Karnal bunt situation.
In the category of consumer-oriented products, preferential access is likely to help the United States find markets for fresh fruits and vegetables in those months when local produce is out of season. However, it is among processed consumer foods where I see the greatest potential for U.S. sales.
Expansion and competition within Chile's supermarket sector and the growth of fast-food chains are creating a market for a host of foods unavailable from local suppliers. U.S. exporters are likely to fill many of these orders if they can compete on an equal footing with their international competitors.
AgExporter: What about Chile’s recent agreement with the MERCOSUR common market (Argentina, Brazil, Paraguay and Uruguay)? Does this arrangement pose any obstacle for future U.S. negotiations with Chile?
Blabey: Not at all. In the first place, Chile's relationship with MERCOSUR is not one of membership but one of association. Also, Chile's negotiators ensured that their country would be free to join NAFTA or sign any other free trade agreement, like the one Chile signed with Canada last November.
I might add, however, that MERCOSUR is having an impact on trade throughout the entire region. Most important, perhaps, food processors in these countries are seeking to become more competitive as the market for consumer products becomes increasingly integrated.
AgExporter: What’s the best way for a U.S. exporter interested in Chile to get a foot in the door?
Blabey: Perhaps the simplest and most cost-effective way for exporters of consumer-ready foods to meet Chilean buyers is to exhibit their products in the U.S. Food Export Showcase. This export event, sponsored by the National Association of State Departments of Agriculture, is held in Chicago each May in conjunction with the annual Food Marketing Institute (FMI) show.
The export showcase is targeted to the international trade, and it benefits by sharing a common location and timing with the large FMI show. Both are well attended by representatives of Chile's chain stores.
A visit to Chile might also be useful, especially if you are an exporter of food ingredients. My office is able to advise exporters regarding the contacts they should make when they arrive in Santiago. For the sake of economy, any business trip to Chile should probably include stops in Buenos Aires, Argentina, and Sao Paulo, Brazil, where FAS also has offices.
And, if you’re really interested in Chile, I would think twice about waiting for a future free trade agreement. Those who get in there and establish the contacts and the market presence are almost always going to have an advantage over those who wait. ___________________________
For additional information on the Chilean market, contact the Office of Agricultural Affairs, American Embassy, Santiago, Chile. Tel. (011-56-2) 330-3704; fax (011-56-2) 330-3203.
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