Pascale Bonnefoy, "Chile: A mediator among regional blocs," Latinamerica Press, Dec 7, 2006.

Chile’s relationship with its neighbors is based on trade, not politics.

Despite Chile’s adherence to the free market policies of the Washington Consensus and its enthusiastic support of the US-backed Free Trade Area of the Americas (FTAA), the country still looks to position itself as a political bridge and buffer between the competing integration initiatives throughout the region. As if this lofty goal were not enough, Chile is also trying to secure its energy supplies and improve its trade balance in Latin America.

Chile’s economic indicators are stellar in the region — Chile ranks 27th out of 125 countries on the World Economic Forum’s 2006-2007 Competitiveness Index. But the country is often accused of looking down upon its more politically and economically unstable neighbors in the region.

Since Chile’s return to democracy in 1990, the country has signed free trade agreements with Canada, China, South Korea and the United States, and free trade or economic complementation agreements with a dozen Latin American countries.

But Chile has had second thoughts when it came to its neighbors. Citing incompatibility with the Southern Common Market’s (MERCOSUR) tariff schedule, Chile opted to become only an associate member of the trade bloc, as it tried to enter into the North American Free Trade Agreement (NAFTA), which includes Mexico, the United States and Canada, and after that, it championed the all but dead FTAA.

Regional priority

When she took office in March, President Michelle Bachelet promised to prioritize South America for political and economic reasons. A series of spats strained diplomatic relations between Chile and Peru in recent years over maritime borders and other lesser issues, such as the origin of pisco. Bolivian-Chilean relations have also been tense over landlocked Bolivia’s long-running struggle to gain access to the Pacific Ocean. Tensions heightened between the two when Bolivia refused to sell Chile gas, and between Argentina and Chile when the former cut off Chile’s gas supply, conflicts that could only worsen in the coming years with a significant impact on Chilean industry and consumers.

Chile’s trade priorities

The European Union purchases 27.7 of Chilean exports. The United States buys 17.6 percent, the largest single-country consumer of Chilean goods in the world. In comparison, only 4.4 percent of Chile’s total exports go to members of the Andean Community of Nations (CAN) and 6.3 to MERCOSUR countries. And, even though trade to the United States increased just 2.5 percent the first six months of year compared to the same period in 2005, exports to MERCOSUR increased more than 50 percent, and to the CAN, nearly 30 percent. Nevertheless, Chile’s trade balance with these blocs is still negative. Chile’s 39-percent trade surplus with the CAN in 2005 plummeted to a 9 percent deficit in the first quarter of 2006.

"Chile needs to increase its influence in the process of building the South American Community of Nations," said Chilean Foreign Minister Alejando Foxley before the country’s Congress last April, referring to the proposed South American free trade zone. Chile should promote basic institutions and put into practice "concrete energy, trade and infrastructural initiatives."

In September, Chile rejoined the CAN as an associate member, ending a 30-year absence from the trade bloc. Venezuela has pulled out of the CAN in May, and with the exception of Bolivia, the majority of CAN member countries now support the same neo-liberal policies as Chile does and are on the path to free trade agreements with the United States. Chile pulled out of the CAN in 1976 amid incompatibility of its liberal economic policies with the members of the then-called Andean Pact.

The election of Peruvian President Alan García allowed Chile to fill the void left by the anti-US Venezuela. Chile joined as an associate member, and one of its tasks will be to promote trade between the bloc and Asian markets.

"Chile joined more for political than commercial reasons," explained Claudio Fuentes, director of the Santiago-based Latin American Faculty of Social Sciences. Chile was trying to "get closer to the region" and to create a lobbying force in both the CAN and MERCOSUR, to "resolve trade controversies," Fuentes added.

Now, an "axis of the Pacific," a free-market bloc aligned with the United States, is said to have emerged, as opposed to the other "axis," the Venezuelan petrodollar-fed MERCOSUR, whose member nations are led by left-wing presidents. Some analysts, right-wing sectors and even members of Chile’s ruling Concertación Democrática have urged Chile to withdraw from MERCOSUR completely, leaving behind the bloc’s internal conflicts and scant trade payoff for Chile, without hiding their irritation with the arrival of Venezuelan President Hugo Chávez to the southern bloc.

For Fuentes, the Pacific axis as a natural meeting point "is natural … for geographic reasons and for the growth in Asia, China in particular, which is entering into Latin America." There is a coalition of sorts, he says, because the Pacific countries of the CAN are going to sign a FTA with the United States, "and that requires a political logic … more than in the case of MERCOSUR. But in the long-term, the convergence of both (blocs) is certain: the resources and markets are on the Pacific coast, and the MERCOSUR nations will have to converse with Pacific countries," he added.

Different, but not by much

The supposed dichotomy of mutually exclusive and contradictory trade blocs may not be so abysmal, despite the evident tensions between some leaders and their domestic and foreign policies.

Almost all the members of MERCOSUR are associate members of the CAN and vice versa, and in 2004 both blocs signed an agreement to form the South American Community of Nations. The bloc would include both MERCOSUR and CAN members as well as Guyana and Suriname.

Physical integration is a large part of this broad-based trade bloc, through the South American Regional Infrastructure Integration Initiative, which would be funded by three regional financial institutions.

It makes little sense "to try to look at the region with a Cold War outlook, in which we divide it into the good guys and bad guys…" Bachelet said at the inauguration of newly re-elected Colombian President Álvaro Uribe in Bogota last August. "What we do have is the great challenge of looking for unity and resolving our common problems."

The Chilean government is trying to become a conciliating force in the region between the main trade blocs, and it sees the South American Community of Nations as the meeting place.

But Chile needs to improve its trade conditions in the region, and the country is extremely dependent on imported energy sources — especially natural gas and oil — that its economy requires. Almost 60 percent of these imports come from Argentina, Brazil, Ecuador and Peru. Bolivia, due to a long-standing maritime conflict with Chile, does not sell gas to Chile, and prohibits Argentina, under contract, from selling back to Chile the Bolivian gas it purchases.

As long as Chile, which in the 1990s decided to rely on natural gas as its main energy resource, does not achieve to diversify its energy sources, the country’s policy in the region cannot help but be conciliating and pragmatic, based on trade and energy factors as well as geopolitical ones. Chile does not want and is not able to marry anyone, but it also cannot afford the luxury of a divorce.

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