Chile pact has potential to rival huge northern blocs

By GREG ANSLEY in Canberra

A new trade deal with Chile could be a significant spur for the development of a Southern Hemisphere counterweight to huge northern pacts such as the European Union and the North American free trade agreement, a study by Victoria University researchers says.

But the paper also warns that if it is not handled carefully, the common economic partnership (CEP) being pursued in Wellington and Santiago could hand most of the benefits to powerful corporate players.

As it stands, Warwick Murray and Edward Challies argue in an article in the Australian Journal of International Affairs, the two countries see sufficient potential economic and strategic gains to seriously consider an agreement that could open much wider doors for both.

These include the major markets of North America for New Zealand, and Southeast Asia for Chile.

Murray is senior lecturer in human geography and development studies at Victoria University's Institute of Geography. Challies is a master's candidate at the institute.

They say the potential transpacific relationship would be keenly watched by other members of the Asia Pacific Economic Co-operation forum - especially Australia and Singapore, which has free trade agreements with both Wellington and Canberra, and which was likely to be a member of any eventual three-party pact.

"There can be little doubt that a 'P3' agreement involving New Zealand, Chile and Singapore has the potential to broaden regional integration and provide a solid connection between the Asia-Pacific and Latin American markets," Murray and Challies argue.

"A CEP between New Zealand and Chile has the potential to set a benchmark for trade liberalisation within Apec and promote free trade in the region, which under certain circumstances may contribute to the betterment of living standards in some cases.

"However, it also has the potential to trample on the livelihoods of people on both sides of the Pacific if it is not thoroughly negotiated and researched."

Murray and Challies say similarities in the commodities produced and exported by New Zealand and Chile, similar economic reforms and similar challenges in the global market place could promote closer integration that could be seen as a step towards collective action in the Southern Hemisphere to help it face big northern trading blocs.

But they warn it could also further open the door for "powerful oligopolistic trading interests", and argue that this is, in fact, the main motivator driving the present talks.

The two economies are remarkably alike, with exports lodged overwhelmingly in primary commodities: New Zealand in dairy products, meat, forestry and wood products, fish, aluminium, fruit and wool, and Chile in copper, forestry and wood products, fruit, processed food, fish and wine.

Commodity trade between the two countries has fluctuated widely over the past 30 years, with the balance in New Zealand's favour and overall levels of trade likely to increase over the coming years.

New Zealand is already a significant investor in Chile, pumping in US$412 million between 1974 and 1996 and ranking at that time as Chile's 10th most important source of direct foreign investment.

Murray and Challies say New Zealand interests have played a major role in the development of Chile's forest industry through Carter Holt and Fletcher's (now-sold) investments, with further involvement in fruit.

But the most important sector has been dairy, with Fonterra's 51 per cent majority holding in Soprole, one of Chile's big four dairy players. In contrast, Chilean investment in New Zealand has been minuscule.

With only limited importance to each other in commodity trade, and only small gains likely from a CEP, Murray and Challies say the attraction more likely lies in the value to each other as door-openers to much larger markets, in potential transfers of technology, and in the centre-left politics of the present Governments.

New Zealand is eyeing Chile's associate membership of Latin America's Mercosur pact and the Free Trade of the Americas (FTAA) negotiations, and has noted Santiago's aggressive pursuit of free-trade agreements - including those it has signed with both the EU and the US.

Chile is immediately attracted by Wellington's agreement with Singapore.

"The most significant motivation driving a CEP then appears to be the potential for both countries to gain better access to regional markets with which the other is associated," Murray and Challies say.

New Zealand believes Chile's FTAA prospects and the likelihood of its becoming the fourth member of the North America Free Trade Agreement - with the US, Canada and Mexico - would secure its position in the Americas. Chile sees New Zealand as a relatively easy stepping stone into the Asia-Pacific market.

For both, a CEP would set a high benchmark for free trade measures and help promote trade liberalisation within Apec.

But Murray and Challies warn there could be substantial socio-economic costs, especially for Chile's dairy sector, which employs thousands of small-scale producers in the south.