Order Code RL31144
CRS Report for Congress
Received through the CRS Web
The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues
Updated July 25, 2003
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues
Summary
On June 6, 2003, the United States and Chile signed a long anticipated bilateral
free trade agreement (FTA) in Miami, Florida, concluding a 14-round negotiation
process that began on December 6, 2000. The House Ways and Means and Senate
Finance Committees held informal markups on the draft implementing legislation on
July 10, 2003. On July 15, the U.S.-Chile Free Trade Agreement Implementation Act
(H.R. 2738/S. 1416) was sent to Congress. The next day, the House and Senate
Judiciary Committees approved the bill by voice vote. On July 17, the House Ways
and Means and Senate Finance Committees also approved it by voice vote. On July
24, the House debated and passed H.R. 2738 (270-156). The Senate is expected to
debate and vote on the companion bill, S. 1416, the week of July 28.
If the FTA is implemented, Chile would join a select group of only four other
countries that have an FTA with the United States (Canada, Mexico, Jordan, and
Israel). Although many point to the potential for trade growth between the two
countries, if passed, the significance of this FTA runs deeper: 1) it would be the first
agreement with a South American country; 2) it would be an agreement with one of
the most open and reformed economies in Latin America; 3) it would exemplify how
trade policy issues, including those with social and economic implications, can be
resolved between a small developing country and a large developed one; and, 4) it
may prove to be a step toward completing the Free Trade Area of the Americas.
The FTA would allow increased market access with 85% of bilateral trade in
consumer and industrial products eligible for duty-free treatment immediately, with
other product tariff rates being reduced over time. Some 75% of U.S. farm exports
would enter Chile duty-free within four years and all duties would be fully phased out
within 12 years after implementation of the agreement. For Chile, 95% of its export
products would gain duty-free status immediately and only 1.2% would fall into the
longest 12-year phase-out period. Other critical issues were resolved including
environment and labor provisions, more open government procurement rules,
increased access for services trade, greater protection of U.S. investment and
intellectual property, and creation of a new e-commerce chapter. The trade remedies
chapter is limited to safeguards so there would be no anticipated change to the
antidumping and countervailing duty options currently available to both countries.
The bilateral negotiation was a challenging exercise for both countries and
although a broad-based agreement was struck, there are a few issues that remain
somewhat unsettling for many Members of Congress, as expressed at hearings in
both the House and the Senate. Overall, because there are now multiple FTAs being
contemplated, there is a concern over the implications of one bilateral becoming a
“template” for others that follow. In the case of the U.S.-Chile FTA, attention is
focused on language governing dispute resolution treatment of labor and financial
transfers, as well as the temporary entry for business persons. These and other issues
are discussed in this report, which provides background and analysis on Chile’s
economy, trade relations, and the bilateral FTA. It will be updated periodically.

Contents
Why a U.S.-Chile FTA? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Economic Reform in Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Chile’s Trade Policies and Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The U.S.-Chile Bilateral Trade Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Review of Negotiations and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tariffs and Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Services Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Trade Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
IPR and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Labor and Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Congress and the U.S.-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The U.S.-Chile FTA in Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Labor Dispute Settlement Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investment and Capital Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Temporary Business Personnel and Workers . . . . . . . . . . . . . . . . . . . . . . . 20
Key Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Major Points of Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix 1. US-Chile Merchandise Trade, 1985-2002 . . . . . . . . . . . . . . . . . . . 23
Appendix 2. Major U.S.-Chile Product Trade and Tariff Rates, 2002/03 . . . . . 24
Appendix 3. Chile’s Multilateral, Regional, and Bilateral Trade Agreements . . 25
List of Figures
Figure 1. Growth in Chilean Trade with Major Partners, 1993-2001 . . . . . . . . . . 7
Figure 2. Chile Direction of Trade, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 3. U.S.-Chile Merchandise Trade, 1992-2002 . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. Chile: Selected Economic and Financial Indicators . . . . . . . . . . . . . . . 5

The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues
On June 6, 2003, the United States and Chile signed a long anticipated bilateral
free trade agreement (FTA) in Miami, Florida, concluding a 14-round negotiation
process that began on December 6, 2000.1 The House Ways and Means and Senate
Finance Committees held informal markups on the draft implementing legislation on
July 10, 2003. On July 15, the U.S.-Chile Free Trade Agreement Implementation Act
(H.R. 2738/S. 1416) was sent to Congress. The next day, the House and Senate
Judiciary Committees approved the bill by voice vote. On July 17, the House Ways
and Means and Senate Finance Committees also approved it by voice vote. On July
24, the House debated and passed H.R. 2738 (270-156) under the fast-track rules,
which require an up or down vote without amendment, as stipulated in the Trade
Promotion Authority (TPA) language in the Trade Act of 2002 (P.L. 107-210, sec.
2103).2 The Senate is expected to debate and vote on the companion bill, S. 1416,
the week of July 28 under the same fast-track procedures.
The bilateral negotiation was a challenging exercise for both countries and
although a broad-based agreement was struck, there are a few issues that remain
somewhat contentious for many Members of Congress, as expressed at hearings in
both the House and the Senate. Overall, because there are now multiple FTAs being
contemplated, there is a concern over the possibility of one bilateral FTA being
considered a “template” for others that follow. A summary of the relevant issues
appears in the back of this report, which provides background and analysis on Chile’s
economy, trade relations, and the bilateral FTA and will be updated periodically.
1 The two countries announced on December 11, 2002 that an agreement had been reached
and President Bush formally notified the 108th Congress on January 30, 2003 of his intention
to sign the agreement.
2 Trade promotion authority, formerly known as fast-track trade negotiating authority, is an
expedited process for congressional consideration of trade agreements. It provides that
Congress will consider trade agreements within a mandatory deadline, under limited debate,
and with no amendments as long as the President meets requirements set in the law. The
fast-track language itself may be found in section 151 of the Trade Act of 1974(19 U.S.C.
2191-2194; P.L. 93-618, as amended.)
See also: CRS Issue Brief IB10084, Trade
Promotion Authority (Fast-Track Authority for Trade Agreements): Background and
Developments in the 107th Congress
, by Lenore Sek and CRS Report RS21004, Fast-Track
Negotiating Authority for Trade Agreements and Trade Promotion Authority: Chronology
of Major Votes
, by Carolyn C. Smith.

CRS-2
Why a U.S.-Chile FTA?
Trade agreements evoke strong reactions from supporters and opponents alike.
Nowhere is this debate more alive than in the U.S. Congress, which for eight years
was at an impasse over passage of trade promotion authority (TPA) until it renewed
TPA in August 2002 as part of the Trade Act of 2002 (P.L. 107-210). Without TPA,
the politically charged nature of trade negotiations made passage of implementing
legislation for multilateral and regional agreements more uncertain. In addition to
complex multilateral trade arrangements, the United States has pursued simpler
bilateral agreements that were expected to be less politically sensitive and therefore
more likely to gain congressional approval, especially if TPA had not been renewed.
On September 28, 2001, for example, President Bush signed into law the
implementing legislation for the U.S.-Jordan FTA (P.L. 107-43). Bilateral FTAs
with Singapore and Chile were pursued with the expectation of similar support.
Opposition to bilateral FTAs, however, has heated up for both economic and
political reasons. Economists, even those who support free trade, point out that
bilateral (and regional) agreements are poor substitutes for multilateral arrangements.
Although both countries in a bilateral arrangement may see their welfare improve
through trade creation, the agreement may also cause trade (and investment)
diversion, which can negatively affect those both in and outside of the agreement.
Although trade diversion is often difficult to assess, it is a real consideration in
pursuing negotiations below the multilateral level.3
In addition to economists’ questions over the trade effects of bilateral
agreements, there is vehement opposition by various interest groups. Perhaps first
among many are the import-competing industries that bear the brunt of the
adjustment costs of a trade agreement. Despite the welfare gains to society as a
whole (e.g. more efficient resource allocation, lower priced imports, greater selection
of goods), those industries subject to increased competition face potentially serious
pressure to adjust their operations to become more efficient, lower-cost producers.
Competition is generally accepted as a tenet of doing business in a market economy,
and on a national level, these adjustment costs may be small and lead to greater
productivity. When the rules change because of trade agreements, however, affected
workers and industries resist strongly and their concerns are an integral part of the
trade liberalization debate.
Strong criticism of virtually all trade agreements also arises from groups arguing
that any arrangement is unacceptable unless it includes strong provisions addressing
the impact of the trade agreement on labor and environmental conditions. When
joined with other groups protesting “globalization” in general, a formidable coalition
is created. Collectively, these interest groups raise the question of whether trade
agreements enhance the social welfare of participating countries. Given the intensity
of debate and amount of effort and resources needed to consummate an FTA, some
questioned whether the marginal gains from a U.S.-Chile bilateral agreement would
3 For a discussion, see: CRS Report RL31072, Regional Trade Agreements: An Analysis of
Trade-Related Impacts
, by Gary J. Wells. August 3, 2001.

CRS-3
be justified given that Chile is a small and distant U.S. trade partner, and already has
a relatively open economy.
Advocates of the U.S.-Chile FTA responded that it offered both economic and
political gains, with Chile seen as a potential strategic foothold in South America, a
region historically linked closely with Europe and Asia.
From an economic
perspective, U.S. business interests considered Chile a prime target for expanding
exports and repeatedly stressed the need to reduce the higher tariffs they faced
relative to Canada and other countries that already had FTAs with Chile. Lower-cost
U.S. imports from Chile also provided benefits to individual and business consumers.
Further, some of Chile’s exports to the United States have zero or low tariffs already,
suggesting that the adjustment costs to import-competing firms could be low (see
appendix 2). U.S. investors also saw Chile’s political and economic stability as
attractive for foreign investment.
From a trade strategy perspective, it was argued that a U.S.-Chile FTA would
support U.S. initiatives with the Free Trade Area of the Americas (FTAA), currently
under negotiation, by encouraging greater Chilean support for U.S. issues and
perhaps even helping define key negotiating parameters (e.g. labor and environment
provisions) that could be precedent-setting.4 The U.S.-Chile FTA was also offered
as a compelling case for passage of TPA legislation, which would serve as a signal
to Latin America and the rest of the world of the U.S. commitment to pursue and
complete trade agreements.
Chile also saw a logic in prioritizing an FTA with the United States because
export promotion has been a building block of its growth and development strategy.
Guaranteed access to the large U.S. market offers opportunities for increased and
perhaps more diversified trade. Chile also envisioned increased foreign investment
as an attendant benefit of the FTA, and argued that its well-established track record
on economic and trade reform made it the Latin American country most ready to
negotiate a bilateral FTA. In short, despite its relatively small economy, Chile
presented itself as a country ready, willing, and able to negotiate a mutually
beneficial FTA with the United States.
In addition to the benefits that were expected to accrue to U.S. businesses,
investors, and consumers, an FTA with Chile was also seen as an opportunity for the
United States to support economic and trade reform in Latin America, for which
Chile had become a regional model. Trade was a big part of the economic growth
and development story in Chile, and linked directly to increased productivity, higher
standards of living, greater diffusion of technology, and overall modernization of the
country. Therefore, the United States, it was argued, should support these gains
because they are a foundation for continued economic, social, and political stability
and progress in the region. Trade agreements were also presented as playing a role
in development and have the added benefit of “locking in” reforms, lending a sense
4
The FTAA would include 34 nations of the Western Hemisphere and is scheduled for
completion by January 2005. See: CRS Report RS20864, A Free Trade Area of the
Americas: Status of Negotiations and Major Policy Issues
, by J. F. Hornbeck.

CRS-4
of permanence to economic and political conditions that is conducive to attracting
and keeping foreign trade and investment.
Clearly, there were competing viewpoints on the desirability of a U.S.-Chile
FTA. A look at Chile’s economic development is one way of addressing many, if not
all, of the issues highlighted above precisely because Chile has been an early and
aggressive reformer of economic and trade policy in Latin America. In this light, to
the extent that the welfare of Chilean society has improved with economic openness,
it may be one indication that freer trade can support a broad array of economic and
political goals. It is with this approach in mind that this report integrates a discussion
of Chile’s economic growth and development with trade policy issues raised in both
the United States and Chile.
Economic Reform in Chile
Chile has become one of the most open, reformed, and developed economies
in Latin America, a rebuilding process initiated under the military dictatorship of
Augusto Pinochet (1973-90) and accelerated under civilian government following the
return of democratic rule in 1990. Chile transformed its state-dominated economy
into one grounded in market-based economic principles, first by stabilizing the
economy and then restructuring it (e.g., lifting price controls, deregulating labor
markets, privatizing state enterprises, reducing trade and exchange rate restrictions).
As part of the process, Chile weathered some devastating domestic setbacks,
including the 1982 economic collapse, followed by the sudden onset of the Latin
American debt crisis.
Chile survived it all, however, and eventually thrived
economically, although not without incurring significant social costs along the way.5
Economic reform has continued into the 21st century and actually coincided with
a period of strong economic growth that held for most of the last decade (see table
1
). Currently, Chile is adjusting to the slower economic growth experienced both at
home and abroad over the past two years, including a prolonged recession and
financial crisis in neighboring Argentina. In 2002, Chile’s gross domestic product
(GDP) rose by only 1.7%, which was higher than many of its neighbors. Although,
this reflects a slower growth rate compared to average economic growth of over 5%
in the late 1990s, Chile’s economy has proven resilient in the face a global economic
downturn and contagion from the Argentine financial crisis.
Chile’s current macroeconomic management rests on three policy pillars: a
flexible exchange rate; inflation-targeting monetary policy; and strict fiscal discipline
aimed at generating a public sector surplus. On the positive side, tight fiscal control
has kept Chile’s public external debt position relatively low, helping restrain inflation
to 2.4% in 2002 and leaving room for monetary policy to support economic growth
as well as price stability. Productivity levels have been sufficient to see real wage
5
A detailed summary of this process with an emphasis on trade policy may be found in:
CRS Report 97-56, Chilean Trade and Economic Reform: Implications for NAFTA
Accession
, by J. F. Hornbeck. October 17, 1997. pp. 1-9.

CRS-5
growth, as well. On the negative side, unemployment has remained around 9%, a
nagging problem facing Chilean policy makers.
Trade reform began in the 1970s and helped transform the economy. By
dismantling its multilevel tariff schedule and reducing nontariff barriers, Chile sought
to engage foreign markets more aggressively and open itself to international
competition. The uniform average nominal import tariff rate fell from 105% in 1973
to 15% in 1988, and to 11% in 1991 under civilian government. Chile then reduced
the tariff rate by 1 percentage point each year until it reached 6% on January 1, 2003.
Although not without adjustment costs, the competitive pressures of trade reform
have clearly increased productivity and economic growth.
Table 1. Chile: Selected Economic and Financial Indicators
1996
1997
1998
1999
2000
2001
2002
GDP Growth (%)
7.4
6.6
3.2
-1.0
4.4
2.8
1.7
Inflation - CPI Avg. (%)
7.4
6.1
5.1
3.3
3.8
3.6
2.4
Unemployment Rate (%)
6.5
6.1
6.2
9.7
9.2
9.2
8.8
Fiscal Balance (% of GDP)
2.4
1.9
-0.1
-2.2
-0.9
-0.9
——
Current Acct Bal (% of GDP)
-5.1
-4.5
-5.2
-0.1
-1.3
-1.4
-1.8
Terms of Trade (% change)
-15.5
2.6
-12.6
0.9
-0.1
-8.0
——
Foreign Exchange Res. ($bil)
15.5
17.8
16.0
14.7
14.7
14.4
15.6
Data Source: International Monetary Fund and Central Bank of Chile.
Continuing a trend since the mid-1980s, Chile has recently made a number of
simplifying capital market reforms, including abandoning its exchange rate band in
favor of a floating system, eliminating many controls on foreign capital, including the
one-year, non-remunerated reserve requirement, and reducing and equalizing capital
gains treatment of domestic and foreign investment.6 Changes in capital controls and
exchange rate management have been essential to spurring Chile’s export-led growth.
Privatization and deregulation have also progressed beyond financial services to
include telecommunications, energy, and selected public infrastructure, with Chile
also leading Latin America in the divestiture of public-owned enterprises.
Chile’s record of reform, growth, and development corresponds with increased
measures of income and social well being. In 2001, Chile’s per capita income level
was second only to Argentina’s in Latin America and will likely be first once data
reflect Argentina’s financial crisis. In addition, Chile’s human development index
(HDI) for 2002 ranked second in Latin America behind Argentina and ahead of the
much larger economies of Brazil and Mexico.7
Welfare gains for the poorer
6 Latin American Monitor: Southern Cone. June 2001, pp. 4-5 and Central Bank of Chile,
Press Release, April 16, 2001.
7 The Human Development Index (HDI) is a composite measure of average achievement
(continued...)

CRS-6
segments of Chilean society are also being seen, with a relatively low child mortality
rate and absolute measures of poverty declining over the past decade and registering
lower than most other Latin American countries.8 High unemployment and a skewed
income distribution in line with the rest of the region, however, point to the need to
increase the quality and quantity of workforce participation, which is related to
improving education, health care, and other public policies.
Chile’s Trade Policies and Relations
Over the past decade, Chile’s increasingly expansive and independent trade
policy portrays a strategy that is commonly referred to as “open regionalism.” This
approach combines unilateralism with the formation of sub-regional integration
groups open to future expansion, such as the Andean Community and the Southern
Common Market (Mercado Comun del Sur — Mercosur), among others, while also
leaving open the possibility for bilateral and extra-regional trade agreements. As
pointed out in one study, it differs from earlier, fundamentally unsuccessful, attempts
at economic integration in Latin America by emphasizing trade opening rather than
collective sub-regional protectionism.9
The “open regionalism” policy took shape in the early 1990s when Chile signed
economic complementarity agreements (simplified free trade agreements) with
Bolivia, Mexico, Venezuela, Colombia, and Ecuador under guidelines set out by the
Latin American Integration Association (Association Latinoamericana de Integracion
— ALADI). Similar arrangements followed with Peru and Argentina. Chile has
signed FTAs with Canada, Mexico, and Central America. In April and October 2002
respectively, Chile completed negotiations for an FTA with the European Union and
South Korea. It is currently courting other countries including Japan, New Zealand,
and Singapore, and closing in on an agreement with the European Free Trade
Association (EFTA), see appendix 3. All are considered part of a strategy to open
industrial economies further to Chilean exports. Chile joined Mercosur as an
associate member in 1996, limiting its commitment largely because of Mercosur’s
higher common external tariff. Chile is also an active participant in the World Trade
Organization (WTO), seeing it as the venue to settle controversial issues less suited
to regional or bilateral discussions.
7 (...continued)
in human development (education, income, and life expectancy). Worldwide, Chile ranked
38 compared to Argentina (34), Uruguay (40), Costa Rica (43), Mexico (54), Venezuela
(69), and Brazil (73). Argentina’s rank may fall precipitously once corrected for its current
financial crisis. See: United Nations, Human Development Report 2002, p. 149.
8 Less than 2% of Chile’s population lives on less than $1.00 per day compared to 10% in
Brazil, 8% in Mexico, and 15% in Venezuela. The under-5 mortality rate for Chile is 12 per
1,000 compared to Argentina (19), Brazil (36), Mexico (29), and Venezuela (22). See: The
World Bank. 2003 World Development Report, pp. 58-59 and 112-14.
9 Weintraub, Sidney. Development and Democracy in the Southern Cone: Imperatives for
U.S. Policy in South America
. Washington, D.C. Center for Strategic and International
Studies, 2000. pp. 2-3.



























































































































































































































CRS-7
Trade data reflect Chile’s open and independent trade policy. Its exports to the
world expanded by 89% over the eight years 1993-2001 (see figure 1) and imports
grew by 56%. Although Chile is not part of the Andean Community or a full partner
of Mercosur, its fastest export growth has been intra-regional, a testament to Chile’s
trade strategy that combines unilateral reductions in tariff and nontariff barriers with
an aggressive effort to enter into bilateral arrangements. From 1993 to 2001, Chilean
exports expanded by 126% to Latin America, compared to 100% to the United States,
43% to Japan, 70% to the rest of Asia, and 71% to the European Union. Chile’s
trade with Canada points to another interesting trend. Although the dollar value of
exports is very small, it grew by some 380%, an issue that was not lost on many U.S.
business advocates of a U.S.-Chile FTA, who argued that the Chile-Canada FTA put
U.S. firms at a competitive disadvantage until a similar or better agreement could be
reached with the United States.
Figure 1. Growth in Chilean Trade with Major Partners, 1993-2001
As seen in figure 2, Chile has diversified export markets, which not only
increases opportunities for trade, but also reduces dependence on a few markets and
thereby softens exposure to foreign shocks (e.g. Argentina). Its largest export market
is the European Union, which accounted for 23% of exports in 2002, followed by the
United States with 20%, and Latin America with 19%. Japan accounted for 11% of
Chilean exports and the rest of Asia 17%. These figures reflect some relative change
over the past decade, as seen in the growth patterns in Figure 1. There was a
decrease in the European Union’s and Japan’s share of Chilean exports, as well as
to Latin America. Although Chile’s exports to Latin America had been rising during
the 1990s, slow regional growth at the turn of the century reduced its export market
share.
The export shares to Asia and the United States, two areas that have






































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































CRS-8
experienced relatively faster growth, have risen recently. There was also a large
increase in Chilean export share to Canada, although from a very small base.
Figure 2. Chile Direction of Trade, 2002
Latin America is Chile’s largest importing area, accounting for 35% of imports,
followed by the EU with 18%, the United States with 15%, and Asia with 13%.
Japan and Canada follow at a distance with 3% and 2%, respectively. The EU trade
presence in Chile has declined over the past decade, as it did with other Latin
American countries. The relative importance of the United States suggests that Chile
has had a strong incentive to pursue a bilateral FTA, other than a general preference
for expanding its export base.
Chile’s open regionalism and export driven trade policy have been challenged,
however, for not focusing enough on diversifying the country away from minimally
refined agriculture and mining products (copper, fish, grapes, and wood).
Manufactured products account for less than 15% of total exports,10 suggesting two
potential problems. First, relying on traditional commodities can provide strong
export earnings, but earnings are unpredictable given the volatile nature of
commodity prices (see Chile’s swings in its terms of trade in Table 1).
Second, little movement toward a manufacture-based, value-added approach to
export promotion can limit long-term economic growth, a point developed by an
Inter-American Development Bank (IDB) study arguing that the relatively poor
10
Inter-American Development Bank (IDB). Integration and Trade in the Americas:
Periodic Note, December 2000. Washington, D.C. p. 14. At the other end of the spectrum,
manufactured goods account for 71% of Mexico’s exports, reflecting the large amount of
maquiladora trade with the United States.

CRS-9
income growth performance of commodity exporting countries can be traced to this
lack of export diversification. Although many Latin American countries have
expanded their intra-regional trade, deepening integration with developed economies
seems necessary to achieve greater export diversification. The large gains in export
manufactures of Mexico and the Central American countries in the 1990s, for
example, were related, in some measure, to preferential trade arrangements with the
United States.
Other Latin American countries had much slower growth of
manufactured exports.11 Whether Chile will adopt export diversification as part of
its long-term development strategy is unclear, but Chile’s efforts to develop trade
relationships with developed economies, including the U.S.-Chile FTA, would seem
to be an important component of such a goal.
On Chile’s import side, most from developed countries are capital goods,
highlighting the link between an open trade policy (lower tariffs on capital goods)
and development (capital goods form the investment base for other production).
Importantly, there is strong competition in the Chilean capital goods market from
firms around the world. Given Chile’s many trade negotiations underway, there was
pressure exerted by U.S. firms to expedite the Chile-FTA. A closer look at the
structure of U.S.-Chile trade suggests there is potential for mutual benefit from
strengthening trade ties between the two countries.
The U.S.-Chile Bilateral Trade Relationship
The United States is Chile’s largest single-country trading partner, accounting
for 20% of Chilean exports and 15% of imports in 2002. By contrast, Chile is the
United States’ 34th largest export destination and 36th largest import contributor,
accounting for 0.3% of U.S. trade (2002 data). Chile’s relatively small share of U.S.
trade has actually slipped slightly in recent years, but its increasing openness to U.S.
trade is evident in the numbers. In 2002, Chile’s per capita imports from the United
States were $163, higher than other major South American countries considered less
liberalized in their trade policies such as Argentina ($44) and Brazil ($71).12
Trends in U.S.-Chile merchandise trade are shown in figure 3 (data appear in
appendix 1) and mirror the trend in Chile’s economic growth. U.S. exports grew
significantly in the first half of the last decade, rising by 77% from 1992 to 1997.
After that, they fell precipitously for two years, coinciding with the precipitous fall
in Chile’s economic growth from 7.4% in both 1996 and 1997 to 3.4 % in 1998 and
-1.1% in 1999 (see Table 1). As economic growth picked up again in 2000, rising
to 5.4%, so too did the demand for U.S. goods, but economic and U.S. export trends
faltered again in 2001 and 2002, with the United States running a merchandise trade
deficit with Chile for the first time since 1988. In 2002, U.S. exports were not much
above levels ten years earlier. This pattern parallels declining exports levels to Latin
11 Ibid., pp. 12-15.
12
See: CRS Report 98-840 E, U.S.-Latin American Trade: Recent Trends, by J. F.
Hornbeck, p. 4.



































































































































































































































































































































































CRS-10
America, as a whole, reflecting weakening economic conditions and therefore
demand for imports in general.
U.S. imports from Chile have grown steadily since 1992, reflecting continuing
U.S. interest in Chilean products and the extended expansion of the U.S. economy.
U.S. imports grew by 172% from 1992 to 2002, a higher rate of import growth than
from either Latin America, excluding Mexico (107%), or the world (118%). The
United States maintained a trade surplus with Chile from 1989 until 2000; in 2001
the trade balance turned to a deficit equal to 6% of total trade between the two
countries and 18% in 2002.
Figure 3. U.S.-Chile Merchandise Trade, 1992-2002
Major U.S. products exported to Chile are mostly capital goods (see Appendix
2). These include: machinery (31%), particularly computers, office machinery, and
industrial equipment such as gas turbines and bulldozers; electrical machinery (16%)
including television and radio transmission apparatus, telephone equipment, spare
parts, integrated circuits, sound recording equipment and media; vehicles (8%)
mostly trucks and passenger cars; aircraft and parts (5%), and optical/medical
instruments (5%). In recent years, the U.S. export trends have exhibited a slowing
in transportation equipment such as airplanes and automobiles, and an increase in
computer and electronic equipment relative to other goods.
The top five U.S. imports from Chile are natural resource based goods that
reflect some refining of the basic resource, but little value-added manufacturing
activity. They account for nearly 70% of total imports from Chile and include:
copper articles (19%), mostly refined alloys; edible fruits and nuts (18%), most of

CRS-11
which are grapes; fish (15%), mostly salmon; wood (13%), various types of lumber;
and beverages (4%), virtually all wine. Recent trends have seen an increase in grape
and fish imports, with a steady level or slight decline in demand for copper, wood,
and wine products relative to other goods.
Review of Negotiations and Policy Issues
The U.S.-Chile FTA was completed on December 11, 2002, following two years
and 14 rounds of negotiations. USTR Robert Zoellick signed the agreement for the
United States on June 6, 2003 and both the Trade Subcommittee of the House Ways
and Means Committee and the Senate Finance Committee held related hearings in
June 2003. As part of the congressional consultation process, the United States
International Trade Commission (ITC) released in June 2003 a comprehensive study
assessing the likely impact of the FTA on the U.S. economy, providing both
quantitative and qualitative estimates of the FTA’s possible effects.
The overall estimate of the ITC study was that by 2016, when the full effect of
the tariff eliminations would be felt, U.S. exports to Chile would increase in a range
between 18% and 52%; U.S. imports would rise between 6% and 14%. The study
notes that this would be very small relative to total U.S. trade and that the economy-
wide effects on trade, production, and overall economic welfare would be small to
negligible (in a range of negative 0.001% to a positive 0.003% of GDP). This is in
keeping with general expectations from the outset of the negotiations that recognized
the limited benefits that could be achieved by the FTA given Chile is already a
relatively small open economy with a relatively small trade position with the United
States. The ITC finding, however, serves as an estimate of confirmation, focusing
largely on the implications of tariff reduction, which may be quantified, unlike
changes in many nontariff barriers.13
The rest of this section briefly summarizes the major policy issues that had to
be reconciled in the negotiating process and references the ITC’s conclusions with
respect to each major issue area, where applicable.
Tariffs and Market Access
For the United States, market access and particularly reducing tariff rates, was
a central goal of the negotiations. For countries that have trade agreements with
Chile, such as Canada, the uniform 6% tariff is being phased out on most goods, an
advantage the United States wanted to eliminate. On the other side, the primary U.S.
imports from Chile face varying levels of tariffs, although some goods enter the
United States duty free under normal trade relations (see Appendix 2 for U.S. tariff
treatment of major Chilean exports). The major U.S. imports from Chile do not
13 United States International Trade Commission. U.S.-Chile Free Trade Agreement:
Potential Economywide and Selected Sectoral Effects.
USITC Publication 3605. June
2003. pp. xiii-xv. In addition to a review of the literature, the study bases its conclusions
on a computable general equilibrium model (CGE) that estimates the “likely impact of a the
U.S.-Chile FTA for 22 aggregated sectors.” See pp. 2-3, 53-55, and Appendix C.

CRS-12
qualify for duty-free treatment under the Generalized System of Preferences (GSP),
a preferential trade arrangement made by developed countries for developing country
imports. The United States and Chile negotiated tariff reduction phase-out schedule
on a product-by-product basis that differentiated treatment for sensitive products, as
was done in the North American Free Trade Agreement (NAFTA).
The ITC identified the major sectors that would likely benefit the most from the
FTA. The quantitative analysis estimates the likely increase in U.S. exports and
imports for the year 2016, when the full effect of the tariff reductions would be felt.
The estimated ranges of increase in U.S. exports for the most affected sectors are:
1) motor vehicles and transportation equipment (35%-215%); 2) textiles, apparel, and
leather goods (29%-101%); and 3) coal, oil, gas, and other minerals (26%-72%). For
U.S. imports, the range estimates for most affected sectors are: 1) dairy products
(169%-575%); 2) textiles, apparel, and leather goods (77%-372%); and other crops
(55%-114%), particularly avocados when the tariff rate quota is eliminated in 12
years. In all cases, the increases are estimated to be large on a percentage basis
because of relatively high tariff or tariff equivalent barriers on these goods. Because
the changes are computed from relatively small bases on a dollar value basis,
however, the effects on industry production are expected to be small.14
Services Trade
Services are an important part of U.S. exports and are a key negotiating area in
trade agreements. The United States is a leading provider of financial (insurance,
banking, securities) and telecommunications services. The U.S.-Chile FTA would
lower barriers and would enhance disciplines with respect to the provision of these
services, but would not alter significantly U.S. imports of these services, nor would
there likely be a large change in the U.S. export position. First, Chile has only a
small presence in the United States with respect to these services and second, Chile
is a relatively small market for U.S. services and has been relatively open for some
time.15
Trade Remedies
In addition to tariff reductions, trade remedies presented negotiators with
significant challenges. In the United States, low tariffs on most products have caused
domestic industries to rely on trade remedy laws to fight import competition.
Perhaps the most controversial issue was the application of U.S. antidumping statutes
(investigations to determine if goods are being sold at less than fair value), which
Chile expressed a desire to address in the bilateral FTA. This was not a new issue
and was tackled in the Canada-Chile FTA, which provides for the “reciprocal
exemption from the application of anti-dumping laws,” except under “exceptional
14 Ibid., pp. xv-xviii and 46, 51, and 57. The report has a detailed discussion of the FTA’s
possible effects by sector and commodity.
15 Ibid., pp., 94-101.

CRS-13
circumstances.”16 The thrust of that agreement appears not to force the elimination
of antidumping remedies, but to make their use a last rather than first recourse, under
WTO guidelines.
Chile’s sensitivity to U.S. antidumping investigations was based on their
“frequent and at times unjustified use,”17 and Chile argued that just the filing of
dumping charges initiated a process with significant unrecoverable costs regardless
of the investigation’s outcome. In recent years, antidumping investigations were
concluded on Chilean salmon, mushrooms, grapes, and raspberries. The ITC ruled
that there was reasonable indication that material injury was caused to U.S. producers
in the cases of salmon, mushrooms, and raspberries, but not for grapes.18 The United
States indicated that trade remedy laws would not be negotiated unless otherwise
directed by Congress and the Bush Administration, and extended an offer to Chile
to make the process more transparent. Chile responded with concrete proposals to
make this suggestion operational.19 The United States also had NTB concerns over
Chile’s price band system used to maintain domestic agricultural prices and its
sanitary and phytosanitary regulations that restrict imports of U.S. agricultural and
meat products.20
IPR and Investment
Among the other issues of special interest to the United States were intellectual
property rights (IPR) and investment provisions. Chile has signed the Trade Related
Intellectual Property Rights (TRIPS), but its congress has yet to pass legislation
implementing the provisions.
In addition Chile has also signed two World
Intellectual Property Organization (WIPO) treaties, but has failed to conform fully
to these obligations, as well. The U.S.-Chile FTA reaffirms obligations under TRIPS
and adds another layer of important protection for U.S. industries, which if enforced
would potentially increase revenues to a number of industries including: motion
picture, sound recording, business software, book publishing, pharmaceuticals, and
agricultural chemicals, among others.21
Chile is known for its transparent and high level treatment of foreign investment
and has eliminated restrictions on capital inflows that existed in the 1990s (see next
section). As a WTO member, it is a signatory to both the WTO Agreement on Trade
Related Investment Measures (TRIMS) and the WTO General Agreement on Trade
in Services (GATS), both of which affect investment rules. The U.S.-Chile FTA
16
Government of Canada, Canada-Chile Free Trade Agreement, February 1997.
Antidumping was also addressed in the Chile-Mexico FTA.
17 On Chile’s trade agreements, see: [http://www.direcon.cl/acuerdos/index.htm]
18 ITC antidumping rulings may be viewed at: [http://www.usitc.gov/7ops/7opsindex.htm]
19 Conversations with office of the USTR, August 17, 2001 and Embassy of Chile, May 9,
2002.
20 Office of the United States Trade Representative. 2002 National Trade Estimate Report
on Foreign Trade Barriers
. pp. 38-39.
21 USITC, op. cit., pp. 109 and 118.

CRS-14
goes beyond these rules and provides U.S. investors with strong protection. As
important as these provisions are for the United States, the ITC estimates that
because of Chile’s historically open economy and small investment market, the FTA
might foster increased U.S. investment in Chile, but it is unlikely to be significantly
higher than would otherwise be the case.22
Labor and Environment
Labor and environment provisions have become accepted as legitimate, but
difficult issues to resolve in trade agreements. At the heart of the matter is whether
a difference in environmental and labor standards between developed and developing
countries creates economic and social issues that should be addressed in trade
agreements. This has led to a strong divergence of opinion, both among groups
within the United States, and between developed and developing countries.
Advocates of including labor and environment provisions in trade agreements
argue that developing countries enjoy an “unfair” competitive advantage because
their lower standards translate into lower costs, which in turn are reflected in lower
prices for goods that compete with those produced in developed countries.23 Over
time, this argument suggests that the difference in standards leads to investment and
jobs moving abroad to take advantage of the lower production costs. On the other
hand, many studies show that these costs are usually not high enough to determine
business location, where productivity remains the primary factor.24 There are also
social concerns to the labor and environmental issue that relate directly to the human
impact of diminished health and living conditions caused by pollution, poverty, and
unsafe working conditions. Given countries’ different levels of development and
therefore capacities to address these issues, there is considerable disagreement over
how far a trade agreement should go in engaging these domestic policy issues.
Developing countries, including Chile, have expressed two basic concerns
regarding the inclusion of environmental and labor provisions in trade agreements:
1) that their sovereignty may be undermined if such agreements endorse higher
standards; and 2) that such provisions may be used to justify disguised protectionism.
Free trade advocates in the United States and other developed countries have
expressed similar sentiments in opposition to placing environmental and labor
provisions in trade agreements.
22 Ibid., pp. 103-108.
23
The difference is that the social costs associated with environmental degradation,
pollution, poor working conditions, and low wages are not captured in the production
process.
Through legal and regulatory measures, developed countries require that
businesses bear many of these costs, which are then reflected in the final (relatively higher)
price of the good or service in the market place.
24 See: CRS Report 98-742, Trade with Developing Countries: Effects on U.S. Workers, by
J. F. Hornbeck. September 2, 1998, pp 11-13. Productivity and wage levels are, however,
highly correlated. See: Rodrik, Dani. Sense and Nonsense in the Globalization Debate.
Foreign Policy. Summer 1997, Number 107. pp. 30-33.

CRS-15
Labor and environment provisions in trade agreements have evolved over time.
NAFTA’s side agreements set a precedent in both labor and environment provisions
that all parties: 1) not relax standards to attract investment or reduce costs of exports;
2) strive to improve standards over time, and; 3) enforce effectively their laws and
regulations. The U.S.-Jordan bilateral FTA (the implementing legislation was signed
into law by President Bush on September 28, 2001 — P.L. 107-43) took labor and
environmental provisions a step farther. It includes most key features of the NAFTA
side agreements, but moved the provisions to the main body of the text, thereby
placing these provisions under the dispute resolution process of the entire agreement.
Significantly, this includes language stating that an affected party may take “any
appropriate and commensurate measure,” including trade sanctions if the dispute
remains unresolved.25
Chile recognized the importance of labor and environment provisions when it
included them in the 1996 FTA with Canada, but kept them equally general in
NAFTA-like side agreements. The labor and environment provisions differ from the
Jordan model by their placement in a side agreement and their reliance on less
stringent dispute resolution options, emphasizing monetary assessments rather than
trade sanctions.26 During the negotiations, it was unclear whether the Chile-Canada,
U.S.-Jordan, or some new or hybrid model would work for the U.S.-Chile FTA. U.S.
negotiators looked to guidance in the TPA legislation and the core debate focused on
dispute resolution and enforcement mechanisms, particularly the use of trade
sanctions in cases of noncompliance. Chile was on record, however, as flatly
rejecting inclusion of any language that allows for the use of trade sanctions.
Congress and the U.S.-Chile FTA
In recent years, the United States has signed bilateral FTAs with Jordan,
Singapore, and Chile. All three have common elements, but each reflects country
specific issues. A recurring question for the U.S. Congress with respect to the trade
negotiation process has been, to what extent does one agreement become a model for
another? When the U.S.-Chile FTA was signed in December 2002, United States
Trade Representative Robert Zoellick announced that it could serve as a “template”
for CAFTA.27 Since then, many Members of Congress have raised concerns over this
prospect and in particular, over how labor and financial transfers are handled in
dispute settlement procedures, as well as language governing the temporary entry for
business persons. This section provides a brief summary of the provisions in the
U.S.-Chile FTA and amplifies the debate over three of the more controversial aspects
of the agreement.
25 See: CRS Report RS20968. Jordan-U.S. Free Trade Agreement: Labor Issues, by Mary
Jane Bolle. pp. 2-3 and CRS Report RS20999. U.S.-Jordan Free Trade Agreement:
Analysis of Environmental Provisions
, by Mary Tiemann. pp. 2-3.
26
Government of Canada. Canada-Chile Free Trade Agreement. Article by Article
Chapter Summaries. February 1997.
27 Washington Trade Daily, US, Chile Reach FTA, December 12, 2002.

CRS-16
The U.S.-Chile FTA in Brief
If the U.S.-Chile agreement is implemented, Chile would join a select group of
only four other countries that have an FTA with the United States (Canada, Mexico,
Jordan, and Israel). Market access was a critical provision. Duty free access was
negotiated for all goods traded between the two countries. Fully 87% of bilateral
trade in consumer and industrial products would become duty-free immediately, with
others receiving reduced tariff treatment over time. Some 75% of U.S. farm exports
would enter Chile duty-free within four years and duties on all goods would be fully
phased out within 12 years after implementation of the agreement. With a few
exceptions, the agreement would also increase market access for a broad range of
services, with new opportunities for the financial services sector.28
Exports subsidies on agricultural products would be eliminated, but either
country would be able to respond in-kind if damaged by third party export subsidies.
There is also a safeguards provision to address possible surges in agricultural imports
from Chile.29
Importantly, the chapter on trade remedies deals only with the
safeguards provision, so there would be no expected change to the antidumping and
countervailing duty options currently available to both countries under WTO rules.
For Chile, 95% of its export products would gain immediate duty-free status and
only 1.2% would fall into the longest 12-year phase-out period. Other important
market access gains would include phasing out the luxury tax on automobiles over
four years, less restrictive treatment of textile and apparel products that meet rules
of origin criteria, and reduction over time of Chilean price bands, a provision not
included in either of the FTAs Chile negotiated with Canada and the European
Union.
Other achievements of importance to the United States include consolidating
and stabilizing rules governing openness of services trade, telecommunications,
intellectual property rights (IPR), e-commerce trade, and investment. These areas
were of much greater interest to the United States than Chile and reflect gains for
highly competitive U.S. industries. There would be few exceptions to the new
services rules, benefitting firms working in financial, telecommunications, computer,
and professional services. Chile’s approach to IPR would also be adjusted to
accommodate U.S. concerns over software, music, text, and videos. A new e-
commerce chapter addresses the growing trade in digital products.
The U.S.-Chile FTA still faces a few broad questions from the U.S. Congress,
in addition to specific concerns that individual Members may have. Three that have
received repeated attention involve the treatment of labor and financial transfers in
dispute settlement, and the temporary entry for business persons.
28 The full text of the agreement has 24 chapters filling hundreds of pages. The entire text
may be found at: [http://www.ustr.gov].
29 CRS Agriculture Policy and Farm Bill electronic briefing book, Agriculture in the U.S.-
Chile Free Trade Agreement
, [ http://www.congress.gov/brbk/html/ebagr53.html].

CRS-17
Labor Dispute Settlement Provisions
A key controversy surrounds the treatment of three labor provisions in the
agreement, which labor advocates argue is a step backward from the provisions
agreed to in the U.S.-Jordan bilateral (as well as the Generalized System of
Preferences and Caribbean Basin Trade Partnership Act, which currently govern
much of the U.S. trade with Latin America). Specifically, provisions: 1) requiring
effective enforcement of domestic labor laws, 2) reaffirming commitments to ILO
basic principles, and 3) requiring parties to strive to ensure the “non-derogation”
from domestic standards (not weakening or reducing protections to encourage trade
and investment) are treated differently.30
In the first case, failure to enforce domestic labor laws could be formally
challenged in the dispute resolution process as defined in the FTA (Article 22.16(1)).
In the case of the other two provisions, which are supported in principle, such
recourse would not be available. The USTR points to cooperative mechanisms for
improving workers’ rights in the FTA,31 but labor advocates argue that unless all
three are enforceable, the FTA provides “a meaningful trade discipline where — and
only where — the country’s labor laws are adequate. Otherwise we would simply
lock in low and unacceptable labor standards through our trade agreements.”32
Although Chile has a sound record in support of basic labor rights, such
differentiated treatment has been challenged as inadequate for use in other countries,
particularly those in Central America,33 and so raises a question for some as to
whether the Chile agreement does or should constitute a precedent.
In addition, in the one case where the formal dispute resolution process may be
invoked, it is differentiated from disputes related to commercial issues. Ultimately,
if a commercial dispute remains unsettled, the country faces the possibility of
suspension of benefits under the FTA “of equivalent effect” (Article 22.15(2)),
resulting in the raising of tariffs, or payment of a monetary assessment equal to 50%
of what a dispute panel determines is “of equivalent effect.” This article does not
apply to the disputable labor provision. The difference is that the option for failing
to resolve a labor dispute is a monetary assessment, which would be capped at $15
million per year, with recourse to an equivalent dollar value of suspended benefits
(higher tariffs) if the monetary assessment is not paid. The monetary assessment
would also be paid into a fund and expended for “appropriate labor initiatives.”
Labor advocates argue that by capping the assessment at $15 million and having the
30 For more background on these issues, see: CRS Report RS21560, Free Trade Agreements
with Singapore and Chile: Labor Issues
, by Mary Jane Bolle.
31 USTR. Response to the Labor Advisory Committee (LAC) report on the proposed FTAs
with Singapore and Chile. Undated. May be found at USTR web site.
32 Polaski,, Sandra. Carnegie Endowment for International Peace. Testimony Before the
Senate Committee on Finance on the Implementation of the U.S. Bilateral Free Trade
Agreements with Singapore and Chile
. June 17, 2003. p. 2.
33 Polaski, Sandra. Issue Brief: Central America and the U.S. Face Challenge — and
Chance for Historic Breakthrough — on Workers’ Rights
. Carnegie Endowment for
International Peace. February 2003. pp. 1-2.

CRS-18
assessment paid into a fund in the offending country render the labor provisions
ineffective. The USTR argues that for a small country like Chile, such a fine would
be significant relative to the dollar value of the trade benefits it would receive. 34
From a congressional perspective, there is an additional question of whether
differences in the treatment of the three labor provisions in some way fail to meet in
full the principal negotiating objectives of Congress as outlined in TPA legislation.
Although the three provisions are not accorded the exact same treatment in the FTA,
neither are they in the TPA language. Section 2102(b)(11) of the Trade Act of 2002
(TPA) states that among the principal labor negotiation objectives is the provision
to ensure that a party to a trade agreement with the United States does not fail to
effectively enforce
the environmental or labor laws.” This may be contrasted with
the apparently weaker objective “to strengthen the capacity of United States trading
partners to promote respect for core labor standards,” and, in Sec. 2102(a)(1)(7) to
strive to ensure that they do not weaken or reduce the protections afforded in
domestic environmental and labor laws as an encouragement for trade.”
There is a final point. Although the TPA provisions seem to differ with respect
to treatment of these three labor provisions, under the dispute resolution provision
(sec. 2102(b)(12)(G)), a principal negotiating objective also listed is “to seek
provisions that treat United States principal negotiating objectives equally” with
respect to the ability to resort to dispute settlement, the availability of equivalent
procedures, and the availability of equivalent remedies. Whereas the labor groups
have argued that this is not the case with labor and commercial disputes, the USTR
has responded that this standard has been met since both commercial and labor
disputes are subject to monetary assessments and suspension of benefits. The dispute
settlement procedures do operate slightly differently, however, and it may be a matter
of interpretation as to whether there is a problem in their meeting congressional
negotiating objectives.35
Investment and Capital Controls
A second controversial provision in the agreement involves the exceptions
related to Chile’s use of capital controls, again set out in the dispute resolution
language. During the 1990s, Chile became famous for regulating capital inflows,
discontinued in 2001, in an attempt to exert better monetary control in hopes of
34 See: USTR, op. cit., and Report of the Labor Advisory Committee for Trade Negotiations
and Trade Policy (LAC). The U.S.-Chile and U.S.-Singapore Free Trade Agreements.
February 28, 2003. pp. 5-9 and Lee, Thea M. Testimony of the AFL-CIO Before the U.S.
House of Representatives Committee on Ways and Means, Subcommittee on Trade on the
Implementation of U.S. bilateral Free Trade Agreements with Singapore and Chile
. June
10, 2003. pp. 2-3.
35 It should also be noted that under the principal negotiating objectives with respect to labor
is the provision: 1) “to recognize that parties to a trade agreement retain the right to exercise
discretion” in investigating and prosecuting compliance matters; 2) that “a country is
effectively enforcing its laws” if its reflects reasonable action as being taken; and 3) “no
retaliation may be authorized based on the exercise of these rights or the right to establish
domestic labor standards.” Sec. 2102(b)(11)(B).

CRS-19
avoiding a future currency crisis. There is an ongoing debate over the efficacy of this
policy, but many economists view it as having had some stabilizing effect on Chile’s
financial system and succeeding in ameliorating financial contagion effects from the
1990s Asian crisis.
As part of the investment chapter of the U.S.-Chile FTA, the United States
negotiated to ensure the free flow of U.S. transfers between the two countries, which
has been a standard concept in U.S. bilateral investment treaties.36 This took the
form of addressing remittances in two provisions related to short-term and long-term
capital investment. Recognizing Chile’s history with capital controls, the basic tenet
of free transfers stipulated in the investment chapter would be amended in the dispute
settlement process to address any future possibility that Chile might reinstate capital
controls.
Specifically, the United States negotiated positions that would give U.S.
investors better treatment in dispute resolution than afforded other foreign investors.
The first provision (Annex 10-F of the U.S.-Chile FTA) deals with the treatment of
long-term investments under Chile’s Decree Law 600 (D.L. 600). This law provides
an investment option in the form of a contract with the Government of Chile that
stipulates certain rights of the investor, but also requires that foreign direct
investment (FDI) remain in country for a minimal period of one year (three years at
one point). Should a dispute arise, the provision in the U.S.-Chile FTA basically
would allow the investor the option to make a claim in international arbitration as
opposed to having to work through the domestic Chilean court system as set out in
D.L. 600. It is the less controversial provision of the two.
The second provision (Annex 10-C of the U.S.-Chile FTA) addresses Chile’s
Ley de Encaje, which governs the treatment of short-term capital investment. Simply
stated, this law, which was made nonoperational in April 2001, required that any
short-term capital investment made in Chile had to be accompanied by a
nonremunerated deposit to be placed in the central bank for one year.37 If the capital
remained in Chile for at least one year, the deposit was returned in full. The law also
required that if there were an investor dispute these restrictions, a claim could not be
made until one year after the event which set the claim in motion. The United States
agreed to the one-year rule (higher than the “normal” six-month cooling off period),
with two exceptions that would allow for an immediate filing of claims by U.S.
investors with disputes. The exceptions would apply to: 1) transfers of earnings from
FDI, and 2) payments on debt issued in a foreign market (to cover U.S. inter- and
intra-firm lending between affiliated enterprises).
The U.S.-Chile FTA provisions do not eliminate Chile’s right to use its capital
control laws per se, including the Ley de Encaje, but do extend certain additional
36 See: U.S. Department of State. Fact Sheet: Bilateral Investment Treaty Program.
January 22, 2001. [http://www.state.gov/e/eb/rls/fs/197pf.htm]
37 Historically, the deposit fluctuated between 10% and 30% of the investment. According
to the Embassy of Chile, the law is still in effect, but the regulations have been struck by the
Central Bank of Chile, effectively making the law nonoperational. The Chilean government
could reactivate these regulations.

CRS-20
rights to U.S. investors. This could be viewed as a compromise given the United
States has agreed to recognize Chile’s “one-year rule” in principal that delays the
filing of a claim. Others have argued that permitting U.S. companies to use the
dispute resolution process to recover losses that may have occurred from the
implementation of capital controls effectively serves to restrict Chile’s ability to use
those controls and thereby restricts its ability to conduct its own monetary policy.
Given that the Chilean government has eliminated the Ley de Encaje and that Chile
is technically not restricted from reimposing it, it is not clear that the FTA exceptions
to Chile’s dispute settlement regulations under this law constitute such an invasion
of domestic control. These provisions might also be evaluated in light of their effects
on U.S. investment in Chile, which is a significant goal of the FTA from the Chilean
perspective.
Temporary Business Personnel and Workers38
Key Provisions.
Chapter 14 of the U.S.-Chile FTA creates separate
categories of entry for citizens of each country to engage in a wide range of business
and investment activities on a temporary basis, i.e., nonimmigrants. The FTA
addresses four specific categories of temporary nonimmigrant admissions currently
governed by U.S. immigration law: business visitors; treaty traders; intracompany
transfers; and professional workers. These categories parallel the visa categories
commonly referred to by the letter and numeral that denotes their subsection in
§101(a)(15) of the Immigration and Nationality Act : B-2 visitors, E-1 treaty traders,
L-1 intracompany transfers, and H-1B professional workers.39 Neither Party would
be allowed to require labor certification or other similar procedures as a condition of
entry and would not be able to impose any numerical limits on these categories, with
some exceptions noted for the professional workers (including an annual cap of
1,400).40
The FTA clearly states the desire to facilitate the temporary entry of persons
fitting these categories, provided the person complies with applicable immigration
measures for temporary entry (e.g., public health and safety as well as national
security). Chilean citizens who are business visitors, for example, would be able to
enter the United States for business purposes on the basis of an oral declaration or
letter from the employer specifying the principal place of business, detailing in the
FTA an admissions policy not currently specified in statute.
Title IV of S. 1416/H.R. 2738 would amend several sections of the Immigration
and Nationality Act (INA, 8 U.S.C.).
Foremost, the bills would amend
38 This section was written by Ruth Ellen Wasem, Specialist in Social Legislation.
39
For background, see CRS Report RS20916, Immigration and Naturalization
Fundamentals, and CRS Report RL31381, U.S. Immigration Policy on Temporary
Admissions
, both by Ruth Ellen Wasem.
40 For a discussion of the labor market requirements for employment-based visas, see: CRS
Report RS21520, Labor Certification for Permanent Immigrant Admissions; CRS Report
RL30498, Immigration: Legislative Issues on Nonimmigrant Professional Specialty (H-1B)
Workers
; and CRS Report RS21543, Immigration Policy for Intracompany Transfers (L
Visas): Issues and Legislation,
all by Ruth Ellen Wasem

CRS-21
§101(a)(15)(H) of INA to carve out a carve out a portion of the H-1B visas — to be
designated the H-1B-1 visa — for professional workers entering through the FTAs.
In many ways the proposed FTA professional worker visa requirements parallel the
H-1B visa requirements, notably having similar educational requirements. The H-1B
visa, however, specifies that the occupation require highly specialized knowledge,
while the proposed FTA professional worker visa specifies that the occupation
require only specialized knowledge.
The bills would also amend §212 of INA to add a labor attestation requirement
for employers bringing in potential FTA professional worker nonimmigrants that is
similar to the H-1B labor attestation statutory requirements.
The additional
attestation requirements for “H-1B dependent employers” currently specified in §212
are not included in the labor attestation requirements for employers of the proposed
FTA professional worker nonimmigrants.
S. 1416/H.R. 2738 contains numerical limits of 1,400 new entries under the
proposed FTA professional worker visa from Chile. The bills do not limit the
number of times that an alien may renew the FTA professional worker visa on an
annual basis, unlike H-1B workers who are limited to a total of 6 years. The bills
would count an FTA professional worker against the H-1B cap the first year he/she
enters and again after the fifth year he/she seeks renewal.
Although the foreign
national holding the proposed FTA professional worker visa would remain a
temporary resident who would only be permitted to work for any employer who had
met the labor attestation requirements, the foreign national with a FTA professional
worker visa could legally remain in the United States indefinitely.
On July 10, 2003, the House Judiciary Committee held a “mock” mark-up of the
USTR’s draft language. Chairman Sensenbrenner took the lead in stating that
“immigration policy does not belong in free trade agreements,” citing Congress’s
plenary authority over immigration policy in Article 1, §8 of the U.S. Constitution.
Members on both sides of the aisle expressed agreement with Chairman
Sensenbrenner’s position, with several Members going further to state that the draft
language was an “insult to Congress.”
The House Judiciary Committee
recommended including the FTA professional workers in the H-1B nonimmigrant
visa and counting an FTA professional worker against the H-1B cap the first year
he/she enters and again after the fifth year he/she seeks renewal. These
recommendations are reflected in the legislation as introduced.
Title IV of S. 1416/H.R. 2738 would also amend the INA to include Chile
citizens as E-1 treaty traders and E-2 treaty investors.
Major Points of Debate. The USTR maintains that ensuring cross-border
mobility of professionals and other business persons is critical for U.S. companies
in developing new markets and business opportunities abroad. The USTR further
argues that the temporary business personnel provisions in the FTAs are not
immigration policy because they only affect temporary entry. The USTR points out
that it issued a notice of intent to negotiate provisions to facilitate the temporary entry
of business persons in October 2001 and that it briefed congressional staff on the
FTA provisions on numerous occasions.

CRS-22
Others express concern that the USTR has overreached its negotiating authority
by including immigration provisions in the FTAs. Critics maintain that the USTR’s
assertion that temporary entry of foreign business personnel and professional workers
is not immigration policy is disingenuous. More generally, some point out that these
provisions would constrain current and future Congresses when they consider
revising immigration law on business personnel, treaty investors and traders,
intracompany transfers, and professional workers because the United States would
run the risk of violating the FTA.
The specific issue of FTA professional worker is sparking the most debate. The
Labor Advisory Committee, one of six private sector advisory committees for the
USTR, is critical of the provisions on the temporary entry of business personnel and
professional workers because it appears to enable workers from Chile who have no
direct employment except a service contract to enter the United States.41 Others have
expressed concern that professional workers from Chile would be held to a less
stringent standard than existing H-1B law (specialized knowledge versus highly
specialized knowledge
) and that the stricter attestation requirements for H-1B
dependent employers would also be omitted.
The USTR argues that it is incorrect to assert that the labor attestations required
under the FTA would be less rigorous than the LCA called for under current U.S.
law. According to the USTR, the labor attestation required under the FTA also is to
be modeled after the LCA that the Department of Labor requires under the existing
H-1B visa program, and (as is the case under the H-1B program) fees may be
collected along with the labor attestations.42
The USTR states that the labor
attestations, education and training fees, and numerical limits provisions have been
added to the FTAs in response to congressional concerns.
Issues surrounding legal authority to enforce immigration law are also arising.
Some are questioning whether §106 and §107 of the legislation would enable an
international panel to overrule decisions by officials in the Department of Homeland
Security or by the Attorney General to reject visa applicants from Chile and
Singapore. USTR responds that the panel that would be established by the FTA
would be bi-national and would only deal with cases brought by a Party to the
agreement in which there is alleged to be a pattern of violations.43
41 Report of the Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC).
The U.S.-Chile and U.S.-Singapore Free Trade Agreements. February 28, 2003. p. 9-11.
42 Letter. U.S. Trade Representative to Mr. George Becker, Chair, Labor Advisory
Committee on Trade Negotiations and Trade Policy. c. March 2003.
43 For more analysis, see CRS Electronic Briefing Book on Trade, “Immigration Issues in
the Free Trade Agreements,” at [http://www.congress.gov/brbk/html/ebtra135.html].

CRS-23
Appendix 1. US-Chile Merchandise Trade, 1985-2002
(in US $ millions)
U.S.
U.S.
Trade
Trade
% Growth in
% Growth in
Year
Exports
Imports
Balance
Turnover
U.S. Exports
U.S. Imports
1985
682
745
-63
1,427
—— —
—— —
1986
823
820
3
1,643
20.7%
10.1%
1987
796
981
-185
1,777
-3.3%
19.6%
1988
1,066
1,181
-115
2,247
33.9%
20.4%
1989
1,414
1,292
122
2,706
32.6%
9.4%
1990
1,664
1,313
351
2,977
17.7%
1.6%
1991
1,839
1,302
537
3,141
10.5%
-0.8%
1992
2,466
1,388
1,078
3,854
34.1%
6.6%
1993
2,599
1,462
1,137
4,061
5.4%
5.3%
1994
2,774
1,821
953
4,595
6.7%
24.6%
1995
3,615
1,931
1,684
5,546
30.3%
6.0%
1996
4,132
2,256
1,876
6,388
14.3%
16.8%
1997
4,368
2,293
2,075
6,661
5.7%
1.6%
1998
3,979
2,453
1,526
6,432
-8.9%
7.0%
1999
3,078
2,953
125
6,031
-22.6%
20.4%
2000
3,455
3,228
227
6,683
12.2%
9.3%
2001
3,131
3,555
-424
6,686
-9.4%
10.1%
2002
2,612
3,781
-1,169
6,396
-16.6%
6.4%
Data Source: U.S. Department of Commerce.

CRS-24
Appendix 2. Major U.S.-Chile Product Trade and
Tariff Rates, 2002/03
(% of total dollar value)
NTR
Free
Major U.S.
% of
Tariff
Major U.S.
% of
Tariff
under
Exports
Total
Rate
Imports*
Total
Rate**
GSP#
Machinery:
34%
6%
Edible Fruit and
20%
- Computers,
(7%)
Nuts:
- Office mach.
(5%)
- grapes (0806)
(12%)
$1.13-
no
- parts
(5%)
1.80/m3
- gas turbines
(2%)
- fruit (0809)
(3%)
$.002-
no
.005/kg
Electrical
14%
6%
Copper:
17%
machinery
- refined (7403)
(15%)
1%
no
- unref. (7402)
( 2%)
free
Vehicles (new)
8%
6%
Fish (mostly
salmon):
13%
- fillet (0304)
(11%)
free
- fresh (0302)
( 1%)
free
- frozen (0303)
(1%)
free
Aircraft
2%
6%
Wood (lumber)
free
- (4407, 4409,
15%
4411)
Medical
6%
6%
Beverages:
4%
instruments
- wine (2204)
(4%)
$.063/lit.
no
Plastic
5%
6%
Organic
4%
Chemicals:
- methanol(2905)
(4%)
8%
no
Organic
2%
6%
Oil:
chemicals
- not crude(2710)
2%
$.525/bbl
no
Other
27%
6%
Other
25%
Total
100%
Total
100%
Data Source: U.S. Department of Commerce.
*By HTS number = Harmonized Tariff Schedule of the United States. Note, HTS numbers are not
provided on U.S. exports, which are subject to Chile’s 6% nominal uniform import tariff rate.
**NTR is the general or normal tariff rates (also known as most favored nation rates) applied to
products not given preferential tariff treatment.
#GSP = Generalized System of Preferences or preferential tariff treatment given to select developing
country imports by developed countries. Some imports receive GSP treatment only if the exporting
country is considered a “least developed country.” Because Chile does not qualify under this
designation, most of its exports to the United States are not eligible for GSP treatment.

CRS-25
Appendix 3. Chile’s Multilateral, Regional, and
Bilateral Trade Agreements
Agreement
Date Effective
Type
WTO (GATT)
January 1995
multilateral free trade agreement
(FTA)
APEC
November 1994
regional association
Mercosur
October 1, 1996
regional customs union
(associate member)
FTAA
negotiating (January 1,
regional FTA
2005 deadline)
LAIA
January 1980
regional association

Bolvia
July 1, 1993
economic complementarity
agreement#, FTA to be negotiated

Venezuela
July 1, 1993
economic complementarity agreement

Colombia
January 1, 1994
economic complementarity agreement

Ecuador
January 1, 1995
economic complementarity agreement

Peru
July 1, 1998
economic complementarity agreement

Argentina
signed May 19, 2000
economic complementarity agreement
Canada
July 5, 1997
bilateral FTA
Mexico
1998
bilateral FTA
Central America*
signed October 18,
FTA framework agreement
1999
European Union
February 1, 2003
FTA
European Free
under negotiation
FTA
Trade Association
Japan
pre-negotiation impact
bilateral FTA
studies completed
Singapore
under discussion
bilateral FTA
New Zealand
under discussion
bilateral FTA
South Korea
negotiations concluded
bilateral FTA
October 24, 2002.
United States
negotiations concluded
bilateral FTA
December 11,2002
# limited trade agreement negotiated under guidelines see forth by the Latin American Integration
Association (LAIA), known in Spanish as the Asociación Latinoamericana de Integración (ALADI).
* Guatemala, Honduras, Nicaragua, El Salvador, and Costa Rica (ratified January 2002).
Data source: Organization of American States. Foreign Trade Information System. This may be
found at: [http://www.sice.oas.org] and Embassy of Chile.