Chile, one of the world’s most open emerging markets, plans to respond to the global trade war by opening up still further and positioning itself as a regional financial centre, according to finance minister Felipe Larraín.
Headwinds generated by the trade battle between China and the US, Chile’s top two export markets, have buffeted the South American nation and prompted analysts to downgrade their 2019 growth forecasts to around 2 per cent.
“We are facing a trade war and a complicated international scenario, but we are responding with more openness and improved access,” Mr Larraín told the Financial Times during a visit to London for the annual Chile Day investor event. Chile has trade agreements with 64 countries covering 86.3 per cent of global gross domestic product and aims to increase that figure.
One example of the trade war’s unintended consequences came when a cargo of Chilean nuts destined for India was caught by a levy introduced by New Delhi in retaliation for tariffs imposed on its steel by the US. Under World Trade Organization rules, India cannot put tariffs on products from just one country so the levy applied to all nuts.
“We were caught in the middle,” said Mr Larraín. “Although our country has the widest web of free trade agreements in the world . . . we have had a very tough first half.”
But he insisted growth of “close to 3 per cent” was still possible this year, rising to 3-3.5 per cent next year.
Chile’s top market is China, which takes a third of its exports, about twice as much as the US. Santiago has been particularly enthusiastic about boosting trade links with Asia via the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which groups 11 Asian and Latin American nations.
As it completes ratification of the CPTPP treaty, Chile favoured enlarging the bloc to include countries such as the UK, Mr Larraín said. “The [original deal] lost momentum when the US walked out but now it’s one of the most interesting agreements.”
Chile was also the first country to negotiate a post-Brexit trade deal with the UK, he added.
Chile has for many years wanted to move away from dependence on copper, which accounts for almost half of exports. Copper prices have dipped sharply as a result of the trade war’s effects on China, the main consumer.
President Sebastián Piñera’s centre-right coalition now hopes to capitalise on the country’s reputation as a beacon of stability, good governance and sound economic management by selling it as a regional financial centre.
The government is piloting a tax reform bill through Congress that will simplify the tax system, eliminate discriminatory tax treatment of local and foreign financing, and make it easier for foreigners to navigate.
Mr Larraín, a Harvard-educated former World Bank economist, acknowledged that becoming a regional financial centre was an ambition easier to outline than to achieve — it was something he was keen to pursue during his first spell in the post from 2010 to 2014 — but said that the country’s small size was not an obstacle.
Chile’s competitive advantages included the rule of law, deep local financial markets and low sovereign risk, he said. “For midsized companies, we could be a market where you can issue bonds and do IPOs. I think there’s a big opportunity for us to grow.”
Maria Luisa Puig, a Latin America specialist at the Eurasia Group consultancy, described Chile’s efforts to diversify its economy as a “work in progress” that would take many years. She said Mr Piñera’s lack of a majority in Congress had delayed reforms, narrowing the window for approval before the next electoral cycle begins in a year’s time.
In parallel, the central bank has begun the process of gaining admission for the Chilean peso to the CLS, a specialist US financial institution that settles more than half of the world’s foreign exchange transactions. The process is expected to be completed by 2021 and would make the Chilean peso the first South American currency to be settled via CLS.
The move is part Chile’s continuing effort to escape the middle income trap — the rut in which emerging economies can find themselves when their development stalls.
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