Chile cuts tariffs and raises tempers, trying to offset US sanctions

When the Reagan administration put sanctions on Chilean exports Christmas Eve, Chile's economic managers responded by devaluing the nation's currency 4 percent and cutting duties on imported goods. But the devaluation came as a surprise to businessmen here, since the run-up in the price of copper, Chile's main export, has strengthened the peso. These businessmen, especially those who produce goods for the internal market, also were not pleased by the tariff reduction from 20 to 15 percent.

Instead of making Chile's exports more attractive, they say, the government's moves will make it harder for domestic companies to fight off imports.

``This reduction endangers small and medium-size industry and oversubsidizes a sector which is already doing fine,'' said Roberto Fantuzzi, former head of the non-traditional exporters association.

``We're approaching the level of 10 percent tariffs, which was one of the fundamental causes of the 1979-82 crisis,'' added Marcelo Zalaquett, president of the textile institute.

Even worse, the business magazine Estragegia editorialized, the move introduces doubts about future tariff policy.

``There should be no change in the rules in the middle of the game,'' the publication lectured.

The 20 percent tariff on imports had been considered sacred in the business community, since any changes add to uncertainty about the future and can sometimes make productive investments riskier.

But Finance Minister Hern'an Buchi, Chile's economic planning chief, was apparently trying to ease the sting of the United States government's decision to end Chile's participation in the General System of Preferences (GSP), which waives tariffs on a wide range of products coming from developing nations.

Simultaneously with the GSP decision, the US also disqualified investments from Chile under the Overseas Private Development Corporation (OPIC), which insures US investors against losses for nationalization, appropriation, or other foreign government measures.

The decision will not affect $285 million of US investment currently insured by OPIC in Chile, but it could discourage any foreign investors from taking on new risk.

``This [US] decision, although of scarce significance overall, unjustly damages numerous export-oriented companies and their workers,'' Mr. Buchi said in his speech announcing the measures.

Buchi said the devaluation would compensate local manufacturers who are worried about stiffer competition from foreign products paying the lower tariff. A cheaper peso should cancel this effect and maintain the advantage for locally produced goods.

But skeptics are concerned that the US dollar will gradually slip back against the peso, wiping out the temporary advantage while the tariff cut remains permanent.

Local producers remember the painful experience of Chile's ``boom'' of the early 1980s, when foreign products flooded the country, wiping out dozens of companies. At that time, the government fixed the peso at an artificially high exchange rate, and easy petrodollar loans buoyed a consumer buying spree.

But all that ended in a disastrous recession in 1983, during which economic activity contracted by 14 percent. Chile's debt burden, one of the highest per capita in the world, was another result.

Officials say, however, that the recent measures are designed not to stimulate consumer imports but Chilean exports. Export-oriented manufacturers have been buying new equipment and replacement parts at a rapid clip, driving total imports up by nearly a third in 1987. In some cases, these costs account for half a product's price. Easing the tariff barrier will reduce these producers' costs and increase the stimulus for exporting more, government officials contend.

In addition, Buchi hopes to help some small export firms that were just testing US waters to stay in the game, despite the December sanctions. Overall, Chilean exports rose about 20 percent in 1987 to a value of about $5 billion.

The military government is also promoting new consumption in an attempt to ``burn'' some of the excess dollars entering the country as a result of the skyrocketing price of copper, Chile's No. 1 export.

Extra taxes on imported color televisions, VCRs, auto parts, and other luxury items were abolished, measures that will cost Chile's Treasury some $175 million, says central bank Vice-President Alfonso Serrano.

Political opponents of the military regime warn that the windfall from copper and other exports will be used to pay for populist measures to increase the electability of the head of state, Gen. Augusto Pinochet. The ruling junta is widely expected to nominate General Pinochet as its candidate in a presidential plebiscite later this year.