Chile Country Brief -
June 2008
The Bilateral Relationship
Australia and Chile have a strong bilateral relationship, based on many shared interests and cooperation in a range of international fora. Both countries are major Southern hemisphere mining and agricultural economies, with a distinct Asia Pacific orientation. As members of the Cairns Group, Australia and Chile work to ensure that agricultural trade reform issues are a priority in the WTO Doha Round. Within APEC, Australia and Chile cooperate to promote trade and investment liberalisation in the Asia Pacific region. On 27 May 2008 Australia and Chile concluded a Free Trade Agreement (FTA). We also have many common interests in regional and global issues ranging from the environment, the Antarctic and illegal fishing, through to disarmament and regional security.
Senior government and business visitors between the two countries have increased greatly over the past five years. The Hon John Murphy MP, Parliamentary Secretary for Trade, visited Chile in April 2008. The Hon Maxine McKew MP, Parliamentary Secretary for Early Childhood Education and Childcare, visited Chile in June 2008. In September 2007, the Chilean President, Michelle Bachelet, visited Australia during APEC 2007, while the Chilean Ministers for Finance, Agriculture, Foreign Affairs and Mining and Energy have visited Australia during 2006 and 2007. During the visit by the Chilean Minister for Mining and Energy (November 2006), Australia and Chile signed a Memorandum of Understanding (MOU) on cooperation in mining and related services. An Australian Parliamentary Delegation led by the then Speaker, the Hon David Hawker MP, visited Chile in November 2006.
In July 2005, Chile’s then President Lagos, along with the then Chilean Ministers for Foreign Affairs and Trade, Mining and Agriculture visited Australia. During the visit by President Lagos, Australia and Chile signed a MOU establishing a work and holiday visa program (in November 2006 the number of visa places allocated under this program was increased from 100 to 500 for each country). Under the program, young Chileans and Australians with appropriate qualifications and language skills can explore living and working in one another’s countries. A statement of intent to negotiate a Nuclear Technical Cooperation MOU was also signed in 2005 during President Lagos’ visit. The MOU would facilitate research and development cooperation through joint projects and the exchange of information and personnel.
Former Prime Minister Howard and the then Ministers for Foreign Affairs and Trade (Mr Downer and Mr Vaile) visited Chile in November 2004 for the annual APEC Leaders and Ministerial meetings. Chile's then Defense Minister (and now President), Michelle Bachelet, visited Australia as a guest of the Australian Government in May-June 2004, as did a senior delegation from the Chilean Congress, led by the Presidents of both Chambers, in late June 2004 as guests of the Parliament of Australia.
Air links between the two countries improved greatly following the introduction of the direct Qantas/Lan Airlines code share flight in July 2002. This has resulted in an increase in the number of Australian business people and tourists visiting Chile and neighboring countries.
Approximately 23,000 Chilean born persons live in Australia, the majority of whom migrated following the 1973 military coup and Australia’s Chilean community now includes a network of second and third generation Chilean Australians. In 2005, approximately 10,000 Australians traveled to Chile for short stays of less than twelve months. Around 8,000 Chileans visited Australia in 2006-07, of which 5,500 came for a holiday or to visit family and friends.
The Australian and Chilean Governments signed a bilateral social security agreement to give improved social security protection to people who have lived and/or worked in both Australia and Chile. The social security agreement also exempts Australian employers from the need to provide Chilean social security support for Australian employees sent temporarily to work in Chile. Further information is available at the Australian Taxation Office website.
Australia’s Ambassador to Chile is His Excellency Mr Crispin Conroy.
Political Overview
Background
Chile achieved independence from Spain in 1818. Under the current constitution, the President is head of state and the congress is bicameral. A constitutional amendment in 2005 reduced the Presidential term from six to four years. The Constitution also prohibits the President from serving a second consecutive term. The Chamber of Deputies has 120 members while the Senate is made up of 38 elected members.
The program of state control and nationalisation of key enterprises pursued by the government of Salvador Allende (1970-73) led to severe economic problems, shortages and widespread strikes. In response, the armed forces seized power on 11 September 1973, suspending the Constitution, dissolving Congress, imposing strict censorship, and banning all political parties. Under General Augusto Pinochet, the junta subsequently arrested, executed, tortured or forced into exile thousands of political opponents. After 16 years, Chile again held democratic presidential elections in December 1989, won by Christian Democrat, Patricio Aylwin. The governments of Aylwin, and indeed of all subsequent administrations of the centre-left Concertación coalition, have continued the economic liberalisation initiated under Pinochet. Ricardo Lagos Escobar was inaugurated in March 2000 and remained President until March 11 2006, when Michelle Bachelet succeeded him as President.
Former military dictator, Augusto Pinochet, died in December 2006 at the age of 91. Various legal suits against his estate (and his immediate family) for tax evasion and fraud are continuing.
Outlook
In the March 2006 elections, Michelle Bachelet, of the centre-left Concertación Democrática (Concertación) coalition, secured 53.5 per cent of the second-round votes, to become Chile’s first-ever female President. A moderate socialist, Bachelet is continuing the broad policy directions of her predecessor, but with greater emphasis on social justice issues. Increasing public investment in the health, transport and education sectors is amongst the Government’s priorities, as Chile benefits from high world copper prices driving strong economic growth. President Bachelet is serving a four year term. Whilst the Bachelet government is placing greater emphasis on relations in Latin America, it continues to retain its strong focus on the Asia Pacific region, and in developing and strengthening its economic ties with the Asian region, in particular.
The Concertación coalition is formed by the Christian Democrat Party (PDC), the Socialist Party (PS), the Radical Social Democrat Party (PRSD) and the Party for Democracy (PPD). Other major political parties include the Independent Democratic Union (UDI) and National Renovation Party (RN), which form the opposition alliance (Alianza por Chile).
Chile will hold municipal elections in October 2008 (Municipal Councils and Mayors) and will hold Presidential and national elections in late 2009.
Economic Overview
At a glance
For the latest economic data refer to the Chile Fact Sheet.
Policy Directions
Chile has an open economy and pursues a vigorous agenda of trade liberalisation. Most trade distortions and non-tariff barriers have been eliminated and Chile has introduced a flat tariff structure that currently stands at 6 per cent. The Central Bank of Chile maintains an independent monetary policy aimed at maintaining inflation at OECD standards (inflation is currently at around 8 percent). The peso was floated in September 1999. Privatisation over the past two decades has meant that few state-owned enterprises remain. Much of Chile's highway infrastructure was transferred to private enterprises under build-operate-transfer concessions. However, Chile's largest company, the Chilean Copper Company CODELCO, remains state-owned with no consensus on privatisation.
Chile’s strong push to engage economically with the Asia Pacific region and to build strategic alliances along the eastern seaboard of South America is reflected in their busy Free Trade Agreement (FTA) agenda. Chile has preferential trade agreements in place with 54 countries (including with ten other APEC members – the US, Canada, South Korea, Mexico, New Zealand, Singapore, Brunei, Japan, China and Peru) and an association agreement with the EU.In 2007, Chile commenced services and investment negotiations with China, building on already completed FTA negotiations on goods. It is currently negotiating with Malaysia, Vietnam, Thailand and Turkey. Chile is an associate member of Mercosur (formed by Argentina, Brazil, Paraguay, Uruguay and Venezuela). It has also recently become an associate membership of the Andean Community (comprising Colombia, Ecuador, Peru and Bolivia). It strongly supports trade and investment liberalisation within APEC. Chile pursues its market access objectives within the WTO and is a member of both the Cairns Group and G20.
Chile’s recent economic success and its liberal economic policies were significant factors in it being invited to accede to the Organisation for Economic Cooperation and Development (OECD) – a decision taken at the OECD’s May 2007 Ministerial Council meeting. Australia has strongly supported Chile’s membership of the OECD.
Economic Outlook
Chile has registered solid economic growth over the past two years (3 per cent in 2006 and 5.1 per cent in 2007) on the back of record world copper prices. Growth is expected to decrease to around 3.9 per cent 2008. Chile retains an open economy and liberal trade regime, including a floating exchange rate, inflation targeting and a structural fiscal surplus rule, all geared towards reducing economic volatility.
Record high copper prices have bolstered economic growth and sustained government revenue (the central government’s surplus for 2007 stood at 8.8 per cent of GDP). Expectations of more moderate international copper prices from mid-2008 onwards have reduced forward estimates of the fiscal surplus (projected at 3.5 per cent of GDP in 2009). The Chilean Government’s strong fiscal position has allowed for the repayment of debt, and placed the Government in a net creditor position. In May 2007, the President announced a reduction in the structural surplus target (which mandates compulsory savings of a percentage of the Government’s fiscal surplus) from 1 to 0.5 per cent of GDP in 2008, with additional resources devoted primarily to education.
Spillovers from the mining sector (particularly from copper – where Chile remains the world’s largest producer), solid economic growth and a favourable domestic investment climate have contributed to a reduction in unemployment to around 7 per cent in 2007 (from a level in excess of 11 per cent in 2004). Inflation increased in the second half of 2007 and reached 8.5 per cent in March 2008 as a result of higher food and energy prices, as well as strong domestic demand. Higher copper prices and domestic interest rates have caused the Chilean Peso to appreciate against major currencies, particularly in early 2008, prompting Central Bank intervention to stabilise the exchange rate. Lower copper prices over 2008 will help ease inflationary pressures and contribute to a reduction in upward pressure on the Chilean Peso.
Bilateral Economic and Trade Relationship
Chile and Australia share a healthy and growing economic and trade relationship. Chile is Australia's third largest trading partner in Latin America, with total two way trade of $856 million in 2007. Total merchandise trade reached $541 million in 2007 (up 40 per cent over 2006). Major exports to Chile include coal ($95 million in 2007), civil engineering equipment, specialised machinery and optical instruments. Australia’s imports from Chile totalled $341 million in 2007 and included copper, non-ferrous base metal waste, pulp and waste paper, pig iron and wood simply worked. Two-way trade in services in 2007 totalled $315 million, of which Australian exports of services to Chile were $120 million.
Australian companies are significant investors in Chile, and its relatively open business environment has made it an ideal base for Australian companies looking to expand into Latin America. There are approximately 120 Australian companies actively trading with Chile. More than half of the Australian or Australian affiliated companies with offices in Chile are related to the mining industry, though this has diversified in recent years. In 2006 total Australian investment in Chile amounted to approximately US$3 billion (based on official Chilean government statistics), and is growing. Significant Australian private sector investors include BHP Billiton (mining) and Pacific Hydro (power generation).
On 27 May 2008, Australia and Chile concluded a comprehensive Free Trade Agreement (FTA) that, upon entry into force, will eliminate tariffs on 97 per cent of existing merchandise trade. By 2015, tariffs on 100 per cent of existing merchandise trade will be eliminated under the FTA. The FTA also contains provisions with respect to services and investment liberalisation, and guarantees access to government procurement markets. The Australia-Chile FTA is Australia’s fifth free trade pact and the first with a Latin American country.
The Australia Chile FTA reflects our shared interest in the trade liberalisation agenda. It is a major step in our bilateral links with Chile. Its Co-operation Chapter is likely to see closer engagement with Chile in a range of trade-related areas. Chile was particularly interested in having this Chapter in the FTA because it sees Australia as something of an economic model and as a source of innovation for Chile’s ongoing economic growth. Australia too can also benefit from Chile’s innovation and research in areas such as mining operations and viticulture.
Since its establishment in 1998, there have been three ministerial-level meetings of the Australia-Chile Bilateral Trade and Investment Commission (BTIC) in 1998, 2001 and 2003. The BTIC aimed to generate greater awareness about mutual opportunities in the respective business communities and implement practical measures to improve the business environment. Its future, however, will now need to be re-considered, given the conclusion of the Free Trade Agreement between Australia and Chile.
Australia is currently also negotiating a bilateral Double Taxation Agreement with Chile.
In 2006-07, Austrade’s office in Santiago directly assisted over 80 Australian companies to achieve over $65m in export sales. Australia’s Senior Trade Commissioner to Chile is Mr. Nigel Warren, who is responsible for all of Austrade’s operations in Latin America. The Austrade Latin American Regional office is based in Santiago.
Major Australian Investment Activity
Mining
BHP-Billiton holds a 57.5 per cent stake in the world’s largest copper mine, Escondida, located in Northern Chile. Escondida recorded record copper production in 2006. BHP Billiton's development of major new projects continue, with the US$870 million Escondida Sulphide Leach project and US$990 million Spence copper mine. With ongoing concerns about energy supply in the North of Chile, BHP Billiton has announced the tender of a 340MW coal fired power plant, offering Australian providers the opportunity to participate in the design and construction of the plant, and the supply of coal (currently Australia's largest export to Chile and a key area of growth potential).
Australian companies are also experiencing success in small to medium sized mining concerns in Chile. The Santa Barbara mine, in which Australian company Admiralty resources has a 50 per cent stake, commenced production of iron ore in June 2006, and made its first shipment of iron ore in July. Admiralty has recently announced that Santa Barbara would invest up to an additional US$40-50 million in constructing new port and treatment facilities.
Australian company SMC Gold has had success with its Cinabrio mine north of Santiago, with profits in excess of A$3 million in the period of April - June 2006. SMC gold has announced a US$1.8 million exploration program for Cinabrio and other holdings in the area.
Equatorial Mining Limited has a 39 per cent interest in the Chilean company Minera El Tesoro, the joint venture company which owns the El Tesoro project, an open pit copper and gold mine, 160km north east of Antofagasta.
Energy
Pacific Hydro holds a 50 per cent stake in the joint venture construction of the 155 MW La Higuera plant on the Tinguiririca River. Included in this joint venture are Pacific Hydro's 2004 acquisitions from Codelco (the Coya and Pangal hydroelectricity generation plants), as well as stage 2 of the La Higuera project, the 145 MW La Confluencia. Australian company Hydro Chile has also recently entered the renewable energy market, developing a number of small run-of-river hydro projects. The Gas Valpo business, major gas Distribution Company is also owned by a group of Australian Superannuation funds.
Export Opportunities
Opportunities exist for Australian companies in the areas of mining (Technology and Services), energy (Coal, LNG, Renewable Energy – Hydro, Wind and Geothermal), agribusiness (Ovine and Bovine Genetics, Production Technologies), food and beverage (specialised), services (including consulting (engineering) vocational education and corporate training), information technology, tourism, infrastructure (Coal Fired Processing Plants, Roads, Airports and Ports), and defence (Spare Parts, Boats, Technology).
Mining Technology and Services
Australian Mining Technology and Services companies continue to have commercial success in Chile with companies such as Australian Tailing Consultants and Enthalpy Pty Ltd winning new export business in Chile. In addition sixty Australian companies took part in ExpoMin 2008 (April 14-18), the region’s largest Mining Trade Event won a range of new business (Mining Technology and Services). New Projects in the mining sector total over US$7 billion through 2012, with a number of Expansion projects offering opportunities for Australian companies. Austmine and its Chilean equivalent, MinExport, recently signed an MOU aimed at promoting co-operation at an industry level in the Mining Technology and Services sector.
Engineering and Consulting Services
Chile continues to be a magnet for Australian engineering companies across a broad spectrum of sectors. GHD has had success in a wide range of port development and upgrade projects, the largest being the development of a 70-hectare site into a port receiving facility in Valparaiso. Such is the demand for its services, Sinclair Knight Merz has increased its local staff profile to over 700. In addition, the company has expanded its consulting practice in Chile and added an Environmental Consulting division.
In 2006, WorleyParsons opened an office in Chile and acquired 50 per cent of a local engineering firm in October 2006. Also active in the services sector is Sedgeman Pty Ltd, a specialist in the design of coal fired processing plants and demand for the companies services are expected to increase due to the change in the Energy landscape in Chile. In 2007 Brisbane based Enthalphy Pty Ltd entered into joint venture to address services opportunities in the Mining sector. Specialist Australian consulting companies are well regarded in the Chilean mining market and a number of Australian companies supply services to leading customers such as CODELCO, Chile’s state owned resources company
Agribusiness
The shipment of nine Australian breeding rams (the first in three years) was delivered to Chile in late October 2006. These rams came from some of the recently approved facilities in Australia that formed part of the SAG (Chile’s quarantine authority) visit to Australia in August 2006. The Australian Government worked with SAG to conduct visits to Australia to approve eight Australian facilities (collection centres and ovine studs) that are focused on exporting to Chile.
The Chilean Minister of Agriculture visited Australia in September 2006 to review Australian technology in animal genetics and meet with Australian suppliers of animal genetics. Ovine genetics opportunities have seen new growth in Chile for Australian suppliers, specifically multipurpose merinos. In addition, Australian fine quality wool is exported to Chile and made into high quality fabric for the United States retail market.
Energy
The energy landscape in Chile continues to create opportunities for Australian companies, notably in the areas of renewable energy and coal in the short to medium term, and liquefied natural gas (LNG) in the long term. Chilean energy demand is forecast to grow at 6-7 per cent over the next 5-10 years and demand for Australian coal has the opportunity to see significant growth over the next five years due to the increased energy demands in both the commercial and residential sectors.
Chile is making significant investment in renewable energy (hydro and wind), coal and LNG projects. This is due to a continuing energy crisis in Chile and the lack of natural gas from Argentina. Austrade is working with all of the major power generators in Chile to look to Australia for new sources of coal. Chilean power generators regularly travel to Australia to meet with potential business partners. In addition to coal, an announcement was recently made (April 2007) that a second LNG plant would be built in the second region to the north of Chile. This project offers potential opportunities for Australian suppliers of LNG starting after 2010.
Pacific Hydro continues to enjoy success with run of river hydro projects. Its La Higuera project became the first project in Chile to be registered for carbon trading under the Kyoto Protocol's Clean Development Mechanism. In addition to its already operational Coya and Pangal Plants and the La Higuera and La Confluencia projects under construction, Pacific Hydro has also announced its intention to invest a further US$1 billion by 2014 to develop five run of river hydro projects with a combined capacity of 600MW. The company has established a wind energy testing station on Chiloe Island, and is using its office in Santiago as a base to develop projects in Brazil and Peru.
Franchising and Services
With Chile's growing middle class and Chileans increased disposable income, franchising has emerged as a new area of opportunity for Australian companies in Chile. Already, Australian chain Boost Juice has a Master Franchisee in Chile, and has opened outlets in two of Santiago's largest retail malls. Boost Juice hopes to open up to 20 outlets across Chile over the next four years, and possibly branch out to other markets in the region. Austrade is also working with Gloria Jean's to identify a local business partner to open branches in Chile
Additionally the general interest in Australian products and services continues to diversify into new such areas as aviation. For the first time, in April 2006, three Australian companies were represented at FIDAE, the region’s largest air show. Australian company Aerosweep Pty Ltd has started to makes sales in the market and Gippsland Aeronautics is promoting Australian made aircraft to the tourism and agriculture sector.
Retail
Australian companies Billabong and Rip Curl have established a strong presence in the Chilean surfwear market. In June 2007, the Rip Curl International Surfing Contest was held in the northern Chilean city of Arica, which brought the world’s best surfers to Chile and promoted the Australian company throughout the country.
Food and Beverage
Wine importer Adelco has finalised an order of twelve (12) Australian wines, which will be available in restaurants as well as selected supermarkets from July 2008. For the first time in a number of years Australian beef was imported into Chile by Cencosud S.A who owns the Jumbo supermarket chains. The market opportunity for Australian suppliers will continue, while bans on Argentinean beef remain in force.
Austrade worked with Jumbo supermarkets to launch an Australian food project in January 2008 that effectively focused on high end specialised food products being imported and targeted the upper end of the Chilean consumer market. The project involved over twenty Australian products and a number have been re-ordered since the twenty (20) store promotion took place. Nevertheless, the market continues to be price sensitive and problematic for Australian suppliers due to the lack of effective transport links and the imposition of a 6 per cent tariff on Australian products. Products in this sector will be more competitive when the FTA comes into force.
Education and Training
Australian educational institutions are well regarded and there is scope for expansion of the Australian presence in the Chilean education market. DFAT, Austrade and Australian Education International (which established its regional office for Latin America in Santiago in April 2004) are working to promote Australia as a quality provider of educational services. A new Expo Australia event will be held in Santiago (Oct 1,2) to promote Australian Education. Chile is Australia’s fifth largest source of foreign students in Latin America.
Vocational Education and Training (VET) reform is a major issue in Latin America, with countries considering how best to provide the vocational and technical skills required to support economic growth. Opportunities exist in consultancy services for systems design, curriculum and training package development, and delivery of Australian qualifications in Chile. Opportunities also exist for the English language sector in short-term training packages and train-the-trainer courses for organisations and businesses. Greater links between higher education providers in Chile and Australia will encourage potential research collaboration and exchange of students and academics.
Changes in Trade and Investment Conditions
Student Visas
Visa regulations introduced on 1 April 2005 have made it a much more straightforward and convenient process for a Chilean student to obtain a visa to study in Australia. All categories for the student visa for Chile are at Assessment Level 1. This has led to an increase in student visas granted to Chileans since the introduction of changes.
Work and Holiday Visa Arrangement
Reciprocal agreement between Australia and Chile was signed on 14 July 2005, introducing Work and Holiday Visa arrangements, which allow young (18-30 years old) university-trained people to work and holiday in another country for up to 12 months. Currently the annual limit for each country is 500 visas (reviewed each year). 229 Chileans were granted Work and Holiday visas in the program year 1 July 2006 to 30 June 2007.
Energy and Utilities
In January 2004, the Chilean Parliament approved laws governing new electricity transmission projects. The new laws provide incentives to investors by guaranteeing payment for establishing new networks and transporting the electricity and are expected to attract investments totalling US$3 billion over the next five years.
Taxation
Chile's Value Added Tax was increased from 18 per cent to 19 per cent in October 2003. Chile's Free Trade Agreement with the US has resulted in the progressive elimination of luxury tax to vehicle importations, and by 2007 this tax will no longer exist. In June 2003, the Foreign Investment Committee (FIC) increased the minimum amount for investments in fixed assets, technology, debt capitalisation and profit reinvestment from US$25,000 to US$250,000. The FIC also simultaneously increased the lower limit on capital invested through Chile's DL 600 Foreign Investment Statute from US$1 million to US$5 million per investor.
For further information or assistance developing business opportunities in Chile, please contact Austrade on 13 28 78 (anywhere within Australia), visit www.austrade.gov.au or e-mail info@austrade.gov.au.
Trade Successes
Note Printing Australia & Securency
In August 2006, Note Printing Australia (NPA) and Securency signed their second contract with the Central Bank of Chile for the CLP2,000 note. Under the contract, Securency and NPA will produce the note over the next five years. The Central Bank has indicated its intention to consider additional denominations in the future.
First Export of Australian Paper
The first export order for Australian paper to Chile was made by one of the largest Chilean importers of paper, Paperela DIMAR S.A. The Chilean customer currently imports US$30 million in paper and has stated that they would import significantly more paper from Australia with the removal of the 6 per cent tariff.
Education
Chile has sought Australia's cooperation under the Bilateral Trade and Investment Commission in relation to the VET sector and English teaching. Chile is Australia’s fifth largest source of foreign students in Latin America. Since 2002, there has been an average 40 per cent increase per year in the number of student visas granted to Chileans. In 2006 and 2007, there have been significant increases in enrolments by Chileans in the English Language and VET sectors. The easing of student visa regulations and the establishment of the Australian Education International office in Santiago have contributed to the increases.
Air Services Agreement a boost to trade
In September 2001, Chile and Australia entered into an Air Services Agreement providing for both passenger and freight services. It allows for an expansion of airline routes between Australia and South America with Santiago de Chile as a first destination and entry point. Direct flights between Santiago and Sydney commenced in July 2002. Since November 2005, LanChile operates five flights per week to help meet the soaring demand for travel between Australia and South America. Qantas has announced that it will commence a direct service between Sydney and Santiago in November 2008.
TradeWatch Contacts
More information on the trade and economic conditions in Chile can be sought by e-mailing the Department of Foreign Affairs and Trade at tradewatch@dfat.gov.au or on the Austrade website.
For further assistance please contact the Council on Australia Latin America Relations (COALAR) Secretariat on 02 6261 3334 or email the Department's Latin America and Caribbean Section.