Chile, the Slender Success Story, Hopes to Fatten on US Trade Ties

A CROCHET hook. A dental tool. A seahorse. A garden hoe. Stretched out along 2,700 miles of South America's western coast and on average only 110 miles wide, Chile resembles all these things. What this country of 13 million people would like to be is a member of the North American Free Trade Agreement.

And that is what NAFTA's three members - Canada, Mexico, and the United States - want Chile to be by mid-1996.

Technical negotiations start this week in Mexico and will likely continue through 1995. Negotiators anticipate few tough nuts for the entry talks to crack, and NAFTA's expansion to a foursome by this time next year appears easily achievable.

But why Chile?

The motives on each side are different.

For Chile, a free-trader considered Latin America's brightest economic light, the draw is twofold.

First, it will provide easier access to the NAFTA market, especially the giant US; and second, stepped-up, long-term foreign investment is expected to follow the guarantees that NAFTA membership affords.

In addition, Chilean officials say NAFTA fits into their strategy of diversifying the country's heavily natural-resource-based economy through greater technology transfers and more joint-venture development.

For the US, with an economy 145 times larger than Chile's, the attraction is less economic than political. US direct investment in Chile over the past two decades - primarily in mining, banking, agriculture, and forestry - is already nearing $4 billion. And Chile already applies among the lowest tariffs on imported goods of any Latin country. With Chile's economy expected to grow 5 to 7 percent annually through the end of the decade, NAFTA would solidify US participation in a growing market.

A 'reward' for Chile

Yet even more important, US officials say, is that Chile's application to NAFTA offers the US an opportunity to send a signal of economic partnership to its Southern neighbors - especially when they are on the threshold of what is expected to be a period of unprecedented economic growth throughout the region.

By accepting Chile into NAFTA, the US can ''reward'' Chile the way a teacher offers a gold star to the best student in the class: Acknowledging Chile's economic reforms and its successful transition from Latin America's old state-run economic model to a competitive market economy encourages other Latin countries aspiring to the same treatment to press on in the same vein.

''Chile's a country that punches above its weight,'' says one US official here. ''Not only does it buy a lot more US products for its size than many countries, but by bringing it into NAFTA we get the demonstration effect. As a long-term performer in the market economy,'' he adds, ''a Chile joining NAFTA encourages Argentina, Peru, Brazil, and others to stay the course.''

Other observers who are less trusting of US motives say the US wants Chile in NAFTA primarily to weaken prospects for a powerful South American trade bloc. ''The US sees Chile as a way to weaken Mercosur [the customs union joining Argentina, Brazil, Paraguay, and Uruguay],'' says Miguel Baquedano, president of Santiago's Political Ecology Institute and a NAFTA opponent. ''Mercosur already has stronger trade ties with the European Union, and the US doesn't want South America going farther in that direction.''

Still, a long track record of investment by US and Canadian companies and the country's positive economic performance - Standard & Poor's this month highlighted Chile as the best economic performer in Latin America - makes entry in NAFTA seem a natural step for most Chileans, from economists to average citizens.

''NAFTA is an important and logical step in our strategy of development through free markets, heavy investment, and exports,'' says Felipe Larrain, an economist at Catholic University of Chile in Santiago. NAFTA, he says, will give Chile access to the world's largest market and - its single most important effect - encourage foreign investment by reducing investors' perception of risk in the Chilean market. Joining NAFTA should be worth foreign investment gains of up to several percentage points of GNP per year, Mr. Larrain estimates.

Keeping up momentum

On a less tangible note, Larrain says Chile's entry in NAFTA, as well as its trade talks with Mercosur and the European Union, are important factors in keeping alive Chile's perception of forward economic momentum.

''This is an important moment of opportunity for Chile, we can feel it,'' says Larrain, pointing to prospects for years of high economic growth and relatively low (1.7 percent) population growth. ''The country is on a threshold of development that can place us at $8,000 per capita income by the beginning of the next decade [compared with $3,700 today] or about the level of a Portugal.''

Yet while pro-NAFTA voices dominate in Chile, opponents of membership do exist. Much as in the three current NAFTA countries, opposition is strongest among pro-labor and environmental groups. ''Joining NAFTA would lock us into what we are,'' says economist Fernando Leiva: ''A low-wage, resource-export-oriented economy.''

Mr. Leiva, a respected University of Chile economist here and a longtime opponent of a hemispheric free-trade zone, agrees with Larrain that NAFTA's most important impact would be to encourage foreign investment.

But he criticizes that strategy, saying the preponderance of the investment would be in the traditional areas - mining, lumber, fishing, agriculture - that degrade the Chilean environment while creating mostly low-wage, unskilled jobs.

Lower logging standards

''Chileans are already working more [hours] to earn the same or less; intensive export-oriented agriculture is exposing them to more pesticides, while foreign logging companies are cutting the forests we have left,'' Leiva says. ''We don't consider that ideal development.''

Other opponents worry that industries in these natural-resource sectors will move south to take advantage of Chile's lower environmental standards.

''Much of Chile's success is the result of deregulation in these industries, and the ill effects of that deregulation would be intensified under NAFTA,'' Mr. Baquedano says.

A prime example he offers is in forestry.

''The cellulose industry in the Northwest US and Canada is under fairly strict environmental control, but here the development of that industry has not been followed by a strengthening of regulations,'' he says.

''With NAFTA, the incentive will be even greater for that industry to come south.''

Both Baquedano and Leiva favor Chile dropping NAFTA for some partnership with Mercosur: first, because Chile's trade with the Mercosur countries tends to be more in manufactured, value-added goods that generally rely on better-paying jobs; and second, because that would help give the southern countries a stronger position from which to negotiate an eventual trade accord with North America.

'An uphill battle'

The problem for NAFTA opponents here is that their position is at heart a condemnation of Chile's economic model at a time when most Chileans support the country's economic reforms - because they have brought low inflation, stable growth, and low unemployment, and Chile's economic globalization.

Baquedano speaks of ''lower growth, but sustainable growth,'' just as many Chileans are most interested in profiting from the higher growth rates.

''We know we're competing with the malls and the credit cards and everything they promise; it's an uphill education battle,'' Leiva says.

In that vein, Leiva says Chile's ''democratic space'' for discussing and deciding such important national issues is already limited by vestiges of Chile's military dictatorship still in the constitution. NAFTA, he contends, would further limit Chile's self-determination.

''NAFTA would take us into a new structure beyond citizen control and limit or abolish some of the controls we do have,'' he says. As one example, he points to Chile's limit on the movement of capital, which requires a one-year stay for foreign capital investments before they can be repatriated. Some experts credit that limit with helping Chile avoid a Mexico-style financial collapse this year. ''But NAFTA would take that away,'' he predicts.

NAFTA battle looms

Chilean officials counter that NAFTA would not only not limit national initiatives, but say it would actually encourage action in areas like the environment and labor to eventually come up to their more developed partners' standards. ''These are important issues we will have to continue addressing with or without NAFTA,'' says one official close to Chile's negotiating team.

With a battle looming in the US Congress over whether an extended NAFTA should include the original agreement's labor and environment side accords, Chile's official position is that it can live with or without them.

But there is one thing Chile says that it cannot live without.

That is the so-called fast-track legislation from the US Congress that would limit a congressional vote on Chile's accession to a simple yes or no, with no provision for amending the final accord.

''We have no interest in being dragged through a line-by-line debate in the US Congress,'' says the Chilean official.

''Either Congress approves fast track, or Chile is prepared to forgo membership.''

As Chile's NAFTA opponents see it, a Republican Congress unwilling to give President Clinton the fast track he has requested is probably their only hope of sidetracking Chile's membership.

''We're hoping the Congress refuses, then Chile can negotiate an agreement with Mercosur and work on southern development,'' Baquedano says.

''Let Mercosur be for the south,'' he says. ''And let NAFTA be NAFTA, that is, for the north.''