RESTRICTED
WORLD TRADE WT/TPR/G/28
12 August 1997
ORGANIZATION
(97-3372)
Original: Spanish
TRADE POLICY REVIEW MECHANISM
CHILE
Report by the Government
Pursuant to the Agreement Establishing the Trade Policy Review Mechanism (Annex
3 of the Marrakesh Agreement Establishing the World Trade Organization), the Chilean
Government's policy statement is attached.Note:   This report is subject to restricted circulation and press embargo until the end of the
meeting of the Trade Policy Review Body on Chile.
CONTENTS
Page
I. INTRODUCTION  1II. GENERAL FEATURES  1III. MACROECONOMIC ENVIRONMENT  2
IV. TRADE ENVIRONMENT  4
1. Performance of the external sector during the period 1991-1996  4
2. Trade policy  5
V. INSTITUTIONAL ENVIRONMENT  8
1. Tax environment  8
2. Reform of the State  9
3. Competition policy  94. Reform of the financial sector 10
5. Investment 10
VI. CONCLUDING REMARKS 11
I. INTRODUCTION
The Chilean economy has undergone far-reaching transformations over the past two
decades.  From a heavily regulated import-substitution-oriented economy at the beginning ofthe 70s, it has switched to the consolidation of a development strategy based on the expansion
of Chile's markets through exports, private investment incentives and a balancing of the
principal macroeconomic variables.
Chile has a small economy, open to foreign trade, whose growth is essentially based
on a high rate of investment and the performance of the export sector, reflecting its solidityand the efficient allocation of productive resources.
The multilateral trade system, based on clear and transparent regulations, is one of the
pillars of the economic development strategy adopted by Chile.
In formulating its economic policy at the domestic level, the Government placed
emphasis on stability, both economic and institutional, by creating and developing an
appropriate regulatory framework designed to favour private initiative while at the same time
safeguarding the guiding principles of equality and development with equity.
In tackling the challenges of development over the next decades, the current
administration plans to encourage reforms aimed at increasing the productivity and improvingthe competitiveness of the Chilean economy by further opening up its trade and stimulating
investment in physical and human capital.  To that end, through various legal initiatives, the
Government has set itself the priority of increasing investment in infrastructure and education.II. GENERAL FEATURES
              Chile is a unitary, democratic, presidential republic with separation of State powers.
It has a bicameral Congress and an autonomous Judiciary, and has independent surveillance
bodies to oversee  Government activities, such as the Office of the Comptroller General of theRepublic, the Constitutional Court and the State Defence Council.  Moreover, it has a
tradition of democracy, albeit interrupted from 1973 to 1989.
For administrative purposes, Chile is divided into 13 regions with its capital,
Santiago, belonging to the so-called Metropolitan Region.  This region is predominantly
urban (97 per cent) and accounts for almost 40 per cent of the total population and more than40 per cent of GDP.  Only 16.5 per cent of the country's population is rural.
According to estimates based on the 1992 Census, the population should reach
14,622,354 in 1997, with a density of 19.1 inhabitants per km 2.  The average population
growth rate is 1.64 per cent.
As regards social development, according to the most recent studies, during the
period 1992-1996 the number of persons living below the poverty line fell from 4,351,579 to
3,345,176 thanks to sustained economic growth coupled with target-oriented social policies.
However, income distribution figures show that growth has not benefited the differentpopulation groups to the same degree.
At the same time, social indicators have improved significantly.  Illiteracy does not
exceed 4 per cent, live expectancy at birth is close to 78 years and infant mortality in 1994
was 11 per thousand live births.  Progress has also been made in overcoming the problem of
undernutrition among children in that 95.7 per cent of the population now receive primaryeducation, and 79.2 per cent receive secondary education.
III. MACROECONOMIC ENVIRONMENT
              Fiscal policy is formulated by the Government through the Ministry of Finance.  The
Central Bank of Chile is responsible for the administration of monetary and exchange policy
in accordance with the relevant constitutional organic law.  The full autonomy of the central
bank is enshrined in the Political Constitution of the Republic.
The priority of macroeconomic policy is to ensure that the basic indicators remain
balanced by controlling the liquidity of the financial system and the inflation rate on the
domestic front, and  seeking a sustainable current account position on the external front.  TheCentral Bank of Chile achieves this by adjusting the interest rate.  Meanwhile, exchange
policy focuses on stabilizing the exchange rate at its long-term value.
Fiscal policy focuses on maintaining a balanced budget with a growth rate that is
consistent with GDP growth and with the country's basic macroeconomic objectives.  The
share of fiscal expenditure allocated to social policies, i.e. education, health, housing, socialsecurity and poverty alleviation programmes, is about 67 per cent of the State budget.
This stabilization effort has led to an av erage GDP growth rate for the period 1991 to
1996 of about 7 per cent, which is partly due to the increase in the rate investment (growth
fixed capital formation), which for the same period was about 25.6 per cent of GDP onaverage.  This investment, in its turn, was largely financed by an increase in domestic saving,
which grew from 12 per cent of GDP in the mid-80s to an average of 25 per cent in the 90s.Chart 1 above shows the evolution of GDP over the period under consideration.  The
annual GDP growth rate was positive throughout , varying between 3.3 per cent of 11 per cent.
It actually declined between 1992 and 1994 before resuming once again a level close to the
economy's annual growth potential, estimated at about 7 per cent for Chile.
Chart 2 shows an effective decline in the inflation rate from 18.7 per cent in 1991 to
6.6 per cent in 1996.  The estimated rate for 1997 is 5.5 per cent.  This trend is largely due to
the decline in the rate of price increase in the tradeables sector.  It should be stressed that thedecline in inflation was gradual, and it was therefore possible to avoid sudden price
fluctuations.
The current account deficit has been stabilized at a sustainable level of 4 per cent of
GDP or less, estimated to be the level that th e economy is capable of absorbing.  Meanwhile,
the real exchange rate appreciated steadily from 1991 at an average annual rate of 4.4 per centowing to the increase in productivity of the tradeables sector and the strong inflow of capitalinto the country.  Finally, a sensible fiscal policy enabled average fiscal retrenchment to
increase to 4.9 per cent of GDP between 1991 and 1996.
In view of the rapid increase in GDP and domestic demand, the monetary authority
introduced policies over the past few years aimed at cooling down the economy to avoid
overheating by increasing  the interest rates of Central Bank bonds.  More recently, however,monetary policy has tended towards a gradual relaxation of liquidity restrictions introduced at
the end of 1995 through a progressive lowering of interest rates.
The medium-term macroeconomic objective is to maintain the balances achieved and
to make further progress in ensuring economic growth and lower inflation.  To that end, the
monetary authority will continue to focus its efforts on achieving a level of activity that isconsistent with the potential growth of economy, ensuring the participation of both the public
and private sectors in overcoming the challenge of price stabilization and sustained growth.
IV. TRADE ENVIRONMENT
              As mentioned at the beginning of this Report, the Chilean economy is small and
open, and its trade policy is directed towards further opening up.  This has been possible
thanks to the unilateral reduction or elimination of protective measures, the introduction of
trade facilitation mechanisms, improvement of the regulatory framework, active participationin the multilateral trade system and the conclusion of trade agreements at the subregional and
bilateral levels.
1. Performance of the external sector during the period 1991-1996
              As a result of the country's integration into international markets, foreign trade surged
during the period 1991-1996 both in terms of volume and value of exports and imports, as can
be seen in Chart 3.  The year 1996 saw a fall in the value of exports of 4.9 per cent as a result
of the fall in the international price of two principal exports, copper and cellulose.Nevertheless, the volume of goods traded that year increased 13.7 per cent and trade grew 3.4
per cent.
In 1996, the balance of payments showed an increase in net international reserves of
US$1,180.8 million owing to capital flows in the form of direct foreign investment andportfolio investment, attracted both by the interest rate differential and the improbability of a
devaluation of Chilean peso.
Trade in services showed increasing vitality, with the result that exports of non-
financial services represented 23.8 per cent of exports of goods during the period 1991-1996.
The most important subsectors were tourism, port services, freight and insurance.
The main goods exported were copper (39.3 per cent), fresh fruit (7.8 per cent),
cellulose (4.4 per cent) and fish flour (4 per cent).  However,  the share in trade of non-traditional exports with higher valued-added, such as food, forestry products and other
industrial goods, is growing.  Thus, the share of natural resource product exports in overall
exports decreased from 62 per cent in 1991 to 57 per cent in 1996.  At the same time, therewas an increase in the share in overall exports of processed natural resource products (28.5
per cent to 32.2 per cent) and industrial goods (9.6 per cent to 10.8 per cent).
According to the latest statistics, there are four main macro-markets of destination for
Chilean exports.  The first of these is Asia, which accounts for about one third of total
exports.  Chile's principal Asian partner is Japan, although trade with the People's Republic ofChina, Philippines and Hong Kong-China has increased considerably.  Trade with theEuropean Union accounts for a quarter of overall trade, with the United Kingdom (5.8 per
cent) and Germany (4.8 per cent) as the leading partners.  As regards Latin America, there has
been a marked increase in exports to Brazil and Argentina, whose share in overall exports is6.1 per cent and 4.6 per cent respectively.  In the market comprising the NAFTA countries,
trade with Canada has been the most dynamic:  although its share is small compared to the
other NAFTA countries, in 1996 it increased 45.4 per cent over the previous year. However,the most important partner remains the United States, which accounts for 16.7 per cent of
Chile's total world exports.
As regards imports, the main markets of origin are:  NAFTA (30.5 per cent), Latin
America (26.5 per cent), European Union (19.8 per cent) and Asia (15.5 per cent).  Within
these macro-markets, imports from the United States (23.1 per cent), Argentina (9.2 per cent)and Brazil (6 per cent) lead the way.
As a result of these trends, the trade balance for 1996 was negative.  This is largely
explained by the deficit with the United States, Argentina and Mexico, since trade with the
European Union and Asia was positive on aggregate.
2. Trade policy
              Chile began to liberalize its trade in the middle of the seventies, and continued to
extend the process over the next two decades, strengthening its international ties through
multilateral and bilateral agreements.  At the same time, its pursued its unilateral efforts to
open up the economy through tariff reductions and a uniform tariff, currently 11 per cent ad
valorem.
At the domestic level, the Agreements reached with the framework of the WTO
entered into effect in January 1995.  The country now has a set of clear, transparent and non-
discriminatory regulations, and has adopted a number of measures to facilitate trade.  These
include the modernization of the National Customs Service, of the financial system and oftelecommunications, as well as investment in infrastructure.
As regards its strategy of integration into international markets, Chile, a founding
member of the GATT and subsequently the WTO, favours the multilateral trade system as a
means of developing links with its trade partners.In keeping with that approach, the Chilean Government's trade strategy combines
unilateral opening up with multilateral economic negotiation.  At the regional level, the
Government of Chile subscribes to the principle of open regionalism  as a tool for the
creation of trade in accordance with the relevant multilateral regulations.
(a) Unilateral opening up
              Since its last Trade Policy Review, Chile has lowered its ad valorem  tariff applied
uniformly to all imports by 4 per cent.  Indeed, in June 1991, the tariff was reduced from 15
per cent to 11 per cent.
The ad valorem  tariff bound by Chile in the framework of the Uruguay Round trade
negotiations dropped from 35 per cent to 25 per cent with the exception of certain agricultural
products (wheat, wheat flour, sugar, oils and dairy products), which were reduced to 31.5 per
cent.  In connection with the liberalization plans adopted in the framework of an Asia-PacificEconomic Cooperation Council (APEC), Chile advanced its bound tariff reduction schedule
by four years, as a result of which the binding came into effect as of 1996 instead of 2000 as
originally stipulated.
The Executive has announced that it will submit a bill to Congress providing for a
tariff reduction of some 3 per cent.  This new reduction will become a reality provided it can
be fully compensated through increases in other forms of tax revenue.
(b) Multilateral trade system
              Chile has been a member of the multilateral trade system ever since the GATT came
into existence.  Most of its current trade is governed by the provisions of the WTO
Agreements, which form an integral part of its domestic legal system.
Chile considers that the WTO should be a dynamic, future-oriented multilateral
organization capable of incorporating the new dimensions of international trade into itsagenda at the appropriate time in order to en courage the creation of trade flows contributing
to the prosperity of its Members.  Thus, during the preparatory work for the Singapore
Ministerial Meeting, Chile supported the creation of working groups to address, separatelyand in an exhaustive manner, the issues of inve stment and competition policy in terms of their
relation to trade, without prejudging the result s, in order to lay the foundations for the
development of new multilateral disciplines in the future if necessary and desirable.
With respect to the negotiations that have taken place on trade in services, Chile made
substantive contributions in the area of basic telecommunications, fully respecting themost-favoured-nation clause.  Similarly, it made conditional offers in the field of maritime
transport, and hopes that the negotiations on financial services currently under way will reach
a satisfactory conclusion.  As regards professional services, Chile is particularly interested inthe discussions of the relevant WTO Working Group.  Thus, the recommendations issued by
that Group will be used as a reference for future negotiations, and will be seen as disciplines
aimed at facilitating trade in professional services.
Chile is of the opinion that trade liberalization efforts at the multilateral level should
be revived as a means of increasing economic growth and development opportunities.  Thus,it supports the inclusion in the future WTO calendars of negotiations of a horizontal nature
leading to the elimination of tariff barriers affecting trade in non-agricultural goods in
general, together with the planned negotiations in the agricultural and services sectors.Chile considers that the accession to the WTO of new members  is essential to the
continued strengthening of the multilateral trade system, and is concerned at the lack of
progress over the past two years in the accession procedures currently under way.
(c) Regional and bilateral initiatives
              The development of closer economic and cultural relations with the countries of Latin
America is one of Chile's foreign policy priorities,  reflected in the Economic
Complementarity Agreements (ACE) and the Partial-Scope Agreements (AAP) concludedunder the auspices of the Latin American Integration Association (LAIA).  These agreements
establish tariff preferences with Bolivia (ACE) and Peru (AAP).  Free-trade agreements with
Mexico (1991), Venezuela (1993), Colombia (1993) and Ecuador (1994) have liberalizedmore than 90 per cent of reciprocal trade in each case.  An association agreement with
MERCOSUR, which entered into force in Oc tober 1996, will liberalize the entire tariff
universe.  The bulk of trade will be free of customs duties within eight years, i.e. by 2004.
At the same time, Chile is negotiating the di smantling of the lists of exceptions in the
Agreement with Venezuela, having recently completed such negotiations with Colombia.  Itis hoped that by the end of this year, the agreement with Mexico will be extended to cover,inter alia,  services and investment.  An agreement on free trade in goods is currently being
negotiated with Peru, while in the case of Bolivia, the range of products covered by
preferences has been extended.
In the wake of the decision of the 1994 Miami Summit to work towards the
establishment of a Free Trade Area of the Americas (FTAA), Chile participated in the 12working groups responsible for doing the necessary technical groundwork.  The negotiations
are expected to begin formally at the Second Summit of the Americas to be held in April 1998
in Santiago.
5 July 1997 saw the entry into force of a far-reaching free-trade agreement with
Canada under which more than 80 per cent of reciprocal trade was freed from customs dutieswith immediate effect.  The agreement covers investment and services, and provides for
mutual exemption from anti-dumping duties.
Chile is an active party to APEC.  It should be stressed that the 18 APEC member
countries together account for 50 per cent of Chile's total exports.  As a member of APEC,
Chile has undertaken to liberalize its trade in goods and services, and investment, by 2010,and has indicated that it intends to do so through the conclusion of bilateral or plurilateral
free-trade agreements.
Since February 1996, Chile has participated in the Organization for Economic
Cooperation and Development (OECD) as an observer in the Trade Committee and the
Committee on International Investment and Multinational Enterprises.
Finally, in June 1996, Chile concluded a Framework Cooperation Agreement with the
European Union and its member States, the ultimate objective of which is to form anassociation between the two parties. The se ction on trade provides for progress towards
complete liberalization of trade both in goods an d services.  This is to be achieved in two
stages:  the preparatory stage and the association stage.  The first stage is already under way.
Taking account of all of the instances of trade liberalization mentioned above and the
current trade structure, an estimated 90 per cent of all trade should be covered through thisstrategy by the year 2010.  This is reflected in Chart 4, which shows that approximately 22
per cent of Chile's trade is with the countries of the European Union, 24 per cent with Asia,
25 per cent with North America and 20 per cent with the rest of America.V. INSTITUTIONAL ENVIRONMENT
1. Tax environment
              The efficiency of the Chilean tax system is reflected in the low incidence of tax
evasion, the absence of any elements that could distort productive decisions, and low
administrative costs.
The Chilean tax system is also equitable, in that income tax is progressive.
During this decade, a number of tax changes have been introduced in order to make
up for certain shortages in the social expenditure area without harming the tax structure or
affecting public finances, while at the same time progressively improving the positive aspects
of the system in terms of efficiency and fairness.  In 1990 VAT was increased from 16 percent to 18 per cent (Congress is currently discussing whether to maintain that level or to
reduce it to 17 per cent), and a number of other changes were introduced involving, in
particular, an increase in the number of tax payers covered by the effective income regime.  In1993, accrued profits once again replaced profits actually received as a basis for the taxationof enterprises, and mechanisms were introduced to encourage saving and investment.  In
1995, taxes on cigarettes and gasoline were increased, and new legal restrictions were
introduced on the personal use of corporate goods for the purpose of evasion.
A number of reforms emanating from the tariff reduction bill being prepared by the
Government (see Section IV) are currently under consideration.  As mentioned, this reductionmust be compensated entirely through tax revenue, i.e. through a number of measured
increases in indirect taxes and a series of measures to combat evasion of such taxes.
A tax reform bill is also being drawn up for 1998 with a view to further increasing the
efficiency and fairness of the tax system by simplifying the way in which it operates,
enhancing the efficiency of tax control and reducing administrative costs to a minimum bothfor the tax authorities and the tax payers.  This reform should have a neutral effect on fiscal
accounts so as not to jeopardize the macroeconomic balances.
2. Reform of the State
              Government policy in this area has tended towards privatization of enterprises
operating in competitive markets, or in regulated markets where State presence is not required
to ensure the supply of goods or services.
Pursuing this privatization policy, begun in the 70s and covering revenue-earning
enterprises as well as a large number of service enterprises, the State disposed during the
period 1991 to 1996 of half of its shares in the Iquinque Duty-Free Zone as well as most of itsshares in companies involved in maritime, air and land transport.  In 1996, the main State
electrical company was transferred to the private sector, and efforts are currently being made
to speed up the privatization of the last State electrical concern.
The Legislative is currently studying a number of bills relating to port-service and
health enterprises.  The Government's privatization strategy is not necessarily directedtowards transferring all State property into private hands, but rather, towards finding an
efficient combination of private capital and State participation which can differ for each case.
This policy may result in pure and simple privatization just as it may generate companies,joint ventures, franchises and other types of business partnerships.  However, the intention of
the authorities is that the control of these enterp rises should be in private hands with the Stateplaying only a regulatory role while continuing to share in their ownership by maintaining a
minority interest.
One of the most interesting projects involvin g private equity participation has been in
the field of infrastructure.  Aware of the importance of road and port infrastructure in the
development of the country, the Government introduced a system of concessions to theprivate sector in which the private companies themselves provide the necessary capital for the
work and maintenance.  Thus, the State does not have to allocate resources to that sector and
may use them for social projects.
In the mining sector, the Government announced its intention to maintain its
ownership of the Chilean Copper Corporat ion (CODELCO), the main copper-producing
company of Chile.  However, considerable domestic and foreign private capital investments
have been made in that sector, and many more are planned.
3. Competition policy
              Ever since 1959, Chile has had regulations in support of free competition.  As of
1973, these regulations became fully applicable at the institutional level with the
establishment of a judicial mechanism for investigation, prosecution and punishment of anti-
competitive practices.
This mechanism operates both at the national and regional levels through the
investigating body, the National Economic Prosecutor's Office, and the institutions with
decision-making power, i.e. the Regional Preventative Commissions and the ResolutoryCommission, to which the Prosecutor's Office and the parties affected by any anti-competitive
act may turn.  Some of the rulings of the Resolutory Commission, such as those imposing
fines, dissolving companies or banning them from certain professional functions may bebrought before the Supreme Court.
The relevant legislation was merged into a single text in 1980.  At the same time, the
State eliminated all regulations relating to pricing with the exception of those concerning
certain basic public utility services.
Studies have just been completed on a bill to be submitted to Congress in the near
future for legislative approval.  This bill strengthens the National Economic Prosecutor's
Office, granting it increased resources with which to carry out its task of controlling,preventing and punishing anti-competitive practices as rapidly and as efficiently as possible.
At the same time, consideration is also being given to the possibility of restructuring the
Prosecutor's Office and giving it the wherewithal to fulfil the task of supervising andcontrolling practices which could hinder competition.
4. Reform of the financial sector
              The Chilean financial system is highly competitive and well integrated with the
outside world.  Over the past years it has also undergone various far-reaching reforms in its
institutional structure aimed at revitalizing the way in which it operates.
Thus,  thanks to the so-called capital market reforms, institutional investors such as
pension funds, insurance companies and mutual funds were given access to new and
improved financial instruments while maintainin g appropriate safeguards.  At the same time,
a solid body of regulations governing conflicts of interests and insider information wasintroduced with a view to ensuring the transparent functioning of the market.The banking system operates efficiently, and its solvency and stability are steadily
improving.  Nevertheless, a reform aimed at acquiring new business, facilitating the
internationalization of operations of banks established in Chile, bringing capital adequacyregulations into line with the suggestions of the Basle Committee, and basing the granting of
licences on standardized criteria is currently in the final stages of legislative approval.
5. Investment
              Chile maintains and has continued to develop an open and transparent trade policy for
goods and services, coupled with a comparable investment regime.  The legal and institutional
system favours foreign investment, a fact which, together with the country's political and
macroeconomic stability, accounts for the average annual growth rate in investment flowsinto the country of some 34 per cent during the period 1991-1996.  This is a clear reflection of
investor confidence in Chile.
The foreign investment regime provides access to a broad range of economic
activities both in goods and services production, and non-discriminatory treatment of natural
and legal persons is enshrined in Chile's Constitution.
During the period 1991-1996, 40 per cent of foreign investment went to the mining
sector, while a growing share, averaging 29 per cent per annum, went to the services sector,
chiefly to tourism and telecommunications.
Similarly, starting in 1992, there was a significant increase in Chilean investments
abroad.  This was due to new measures aimed at deregulating the exchange market andimportant liberalization initiatives in the rest of Latin America.  Thus, close to 90 per cent of
Chilean investments were made in that region, principally in the financial and services
sectors.
Another form of investment that is on the increase involves the placement by certain
Chilean firms of ADRs (American Deposit Receipts) on the New York Stock Exchange,further contributing to the promotion of the policy of internationalization and opening up of
the Chilean economy.
On the domestic front, investment has remained stable, oscillating between 25 per
cent and 29 per cent of GDP.  This has been possible essentially thanks to the savings of
enterprises and of contributors to pension funds through the Pension Fund Administrators
(AFP).  The AFP have the authority to invest on be half of their contributors in low-risk assets,
thereby contributing to the dynamism of the economy and the expansion of the stock market.
VI. CONCLUDING  REMARKS
              Chile is a developing country whose main source of growth is foreign trade.  After
going through a long and difficult process of transforming production during the 70s and 80s,
Chile has begun to consolidate its development strategy based on increased international
integration led by private initiative and structured around unilateral, bilateral and multilateralinitiatives.
The multilateral strengthening of trade is one of Chile's trade policy priorities.  A
strong, law-based multilateral trade system provides the perfect basis for the expansion of
international trade and the best guarantee that the rights and obligations of its members will
be respected, regardless of their size and relative weight.
Chile takes the view that the multilateral trade system can only be efficient and
continue to grow and acquire strength if it is based on legal regulations.  This requires anadded effort to eliminate from the system all traces of arbitrary discrimination, such as the
possibility of applying selective safeguards, anti-dumping duties without proper disciplines,
exceptions to MFN treatment in the Genera l Agreement on Trade in Services and the
proliferation of quantitative restrictions, particularly in agriculture.  Similarly, recourse to
unilateral and extraterritorial measures provided for in certain domestic legislations
undermines the protection, certainty and stability provided by the rules of international law.
Aware of the importance of free trade to Chile's development, the Government has
extended its legislative reforms to favour even greater liberalization of trade in goods andservices and of investment flows.  It is the Chilean Government's intention to continue this
liberalization process by all the means placed at its disposal by the multilateral trade system
while at the same time working on the domestic front to modernize its instruments andinstitutions in conformity with the objectiv e of promoting the internationalization of the
economy on the basis of a strategy of development with equity.