Free Trade with Chile: What has it delivered?
Ottawa, ON -- Chile has been a strong proponent of liberalized trade, and has signed many bilateral trade agreement...
Ottawa, ON — Chile has been a strong proponent of liberalized trade, and has signed many bilateral trade agreements over the years, including one with Canada in 1996 and one with the U.S. in 2003. But has Canada benefited? Has the U.S. benefited? And did Canada benefit more by being first?
Although it is common to think of trade agreements as helping companies to boost their exports through increased market access, it is important to recognize that international trade is beneficial to both countries regardless of its direction. While Canadian companies might hope that a trade deal with Chile would increase their exports, Canadian consumers would hope that the deal would lower the prices of imports of Chilean goods, thereby improving their purchasing power. Accordingly, economists tend to focus on how trade deals affect total trade between two countries that is, exports plus imports as that captures the benefits of increased trade to all.
Total trade in goods between Canada and Chile was US$556 million in 1996, the year before the Canada/Chile free trade agreement took effect. Nine years later, in 2005, total trade between the two countries had more than tripled to $1,712 million. By this measure, then, the deal was an unqualified success. Canadian imports from Chile rose much more than exports, from $251 million in 1996 to $1,372 million in 2005. Exports have risen by only about 10% in the same nine-year period. What this indicates is that most of the benefits of the deal to Canada came in the form of lower prices for copper, fresh fruit and vegetables and, of course, extraordinary wines.
Meanwhile, the U.S. negotiated a free trade deal with Chile that took effect in January 2004. Although it has not been in force for very long, total trade between the U.S. and Chile has already nearly doubled, from $6.4 billion in 2003 to $11.9 billion in 2005. In the U.S. case, both exports and imports have experienced a similar increase in the past two years. Taking a longer perspective, between 1996 and 2005, U.S. exports to Chile have risen by about 25%, while U.S. imports from Chile have about tripled, not unlike the overall performance of Canada-Chile trade.
It is natural, then, to ask whether Canada benefited more by getting an early trade deal with Chile, and the statistics appear to support this. Total Canada-Chile trade increased from $556 million to $863 million during 1997-2003, the first seven years of the Canada/Chile trade agreement, while U.S.-Chile trade remained roughly constant at $6.4 billion annually. And, while U.S.-Chile trade has nearly doubled since the U.S.-Chile deal in 2004, Canada-Chile trade has kept pace. But there is a difference between the two: imports from Chile have risen a lot for both the U.S. and Canada, but U.S. exports to Chile have increased twice as rapidly as Canada’s in the past two years. It is too early to call this a trend it could be transitional and the fact that Canadian exports continued to grow after the U.S. agreement is grounds for optimism.
The bottom line? The U.S.-Chile trade deal has leveled the playing field for Canadian and U.S. exporters in Chile. Canadian companies have lost their earlier advantage, but have built strong relationships and made quality direct investments in Chile in the meantime. Nevertheless, Canadian companies will need to continue to work hard to keep their Chilean customers happy.
The views expressed here are those of the author, and not necessarily of Export Development Canada nor this publication. Stephen S. Poloz is senior vice-president, corporate affairs and chief economist, Export Development Canada. He can be reached at email@example.com.