This article was contributed by Craig Dempsey, Co-Founder and Managing Director of Biz Latin Hub.
Considering Chile was the first Latin American territory to build relations with China back in 1970, the upgraded China-Chile Free Trade Agreement is a long time coming. Back in 2005, the two nations signed the first FTA, but by 2016 the Chinese President Xi Jinping said that he wanted to bolster relations and upgrade the Free Trade Agreement. After long negotiations, the new trade agreement is now in place, meaning up to 98 percent of the country’s bilateral trade will be exempt from tariffs, as outlined by the Ministry of Commerce.
With a renewed sense of confidence between the markets and liberalization of trade, what does the FTA mean for businesses, and how can entrepreneurs exploit new opportunities?
Overview of the new FTA
The new China-Chile Free Trade Agreement was designed to take advantage of the growing bilateral trade between the two countries, which increased to US$42.8 billion in 2018. In the past five years, trade between the two has been growing by around 24 percent year-on-year, and now accounts for around 32% of all Chilean foreign exports. Under the new agreement, 98% of Chilean products will be exempt from Chinese tariffs. China’s Ministry of Commerce has also promised that, in the coming years, it will eliminate tariffs on goods such as wood products, which will offer Chilean firms even greater opportunities for international trade.
Chile is also eliminating tariffs on Chinese imports, including textiles, sugar, and clothing. Chile will open up 40 sectors to Chinese investors and businesses, such as in construction and transportation and China will open 20 sectors to Chilean businesses, like legal services and distribution. Entrepreneurs considering doing business in Chile, therefore, will not only be able to take advantage of the growing Chilean market but can also maximize returns by entering into Chinese sectors and businesses, making it an attractive investment spot.
Over the past decade, Chile has basked in the rising demand for agricultural produce from China, with products such as fruit, meat, and vegetables becoming increasingly popular commodities. When you consider that China will hold 20% of the world’s GDP by 2050, it is advisable that Chilean businesses cement trading relationships with Chinese distributors so they can forge long-term trading contracts and deliver quality goods for decades to come.
Increase in Exports
Speaking of goods, let’s touch on exports. As well as fruit and meat, Chile currently exports copper and seafood to China, whilst China currently exports textiles, industrial products and machinery to Chile. More than half of Chilean exports are in metals. China is one of the fastest-growing nations in the world, spending billions of dollars on new housing and infrastructure. Demand is high for copper, but that demand isn’t going to be there forever.
As businesses and governments look long-term to trading relationships, easing the strain on trade between the two nations will ensure exports remain high, even as demand starts to fall in some sectors in the coming decades. Changing political landscapes around the world and the escalating trade war between the United States and China unlock major opportunities for businesses in territories like Chile, as China has to fulfill the demand for products and services from somewhere. Even if Chilean businesses cannot deliver on all of the demands the Chinese middle-class, it can leverage the wider Latin American manufacturing and distribution sector to become a trade and export hub and unlock new potential for businesses in Latin America.
Although China and Argentina signed a bilateral trade deal in 2018, other countries such as Paraguay and Bolivia have no official ties with the country. Brazil and China also have no free trade agreement in place. Savvy Chilean entrepreneurs should capitalize on this and maximize returns before China connects the dots and re-opens dialogue with other LatAm markets.
New Market Opportunities
While it has a long way to go to match up to the stature of the Chinese economy, Latin America may be the world’s next major growth engine. With thriving economies, unprecedented levels of investment (including from China, who has invested billions in the region over the past decade), ease of access, and major untapped markets, Latin America offers tremendous opportunity for businesses who want to exploit the upgraded China-Chile FTA.
The food sector is likely to be one of the most lucrative. China is home to more than 1.4 billion people, so it has to import quality products in order to feed its populace. Chilean food businesses can benefit not only from selling bulk raw produce like beans, rice, and meat but also sell to China’s growing middle class. Many Chinese consumers are now looking for high quality and luxury products and will pay a premium for the privilege.
Chinese businesses can serve the growing middle class in Latin America and import manufactured goods from the region to appease demand in a number of sectors. Importing wine, grapes, cherries, apples, and cranberries from Chile and adding value through manufacturing, branding, and advertising could offer significant returns.
China and Chile are strengthening ties with political and commercial reasons at the fore, so businesses on both sides of the Pacific should exploit reduced or eliminated tariffs to their maximum benefit.
