I. COMMERCIAL OVERVIEW Overview of Import Market Chile continues to be an outstanding example of how free trade policies and promotion of foreign investment can generate economic growth in Latin America. The country has experienced ten consecutive years of economic growth, and remains committed to an open domestic market and continued trade expansion. Since 1985, annual gross domestic product growth has averaged 6.1 percent, the highest in the region, reaching a record 10.3 percent in 1992. Unemployment during 1993 was 4.5 percent, the lowest in 30 years. Steady but somewhat slower growth is expected in 1994, owing to high domestic interest rates and 1993 declines in world commodity prices for Chile's major exports: copper, fishmeal, and cellulose. Continued success on the economic front has been bolstered by Chile's smooth return to democratic rule in 1990. On March 11, 1994, Eduardo Frei, Jr. took office as Chile's new President in Chile's first transition in 24 years from one democratically-elected president to another. President Frei is committed to expanding trade through diversification of exports; encouraging foreign investment and further privatization; and developing strong domestic programs to further raise living standards for all of Chile's 13.4 million people. Because of its liberal import policies and expanding economy, Chile is an attractive market for a wide range of U.S. products and services. In the last eight years, U.S. exports to Chile have almost tripled, and this dynamism is stronger than ever -- from 1991 to 1992, the value of U.S. exports to Chile rose by 25 percent. The United States is Chile's most important supplier of imported goods. Its share of Chile's total imports rose from 20.5 percent in 1992 to 23.5 percent in 1993. (The main competitors, Brazil and Japan, each captured about ten percent of the market in 1993). During 1993, for each of 402 goods categories, U.S. export revenues exceeded US$1 million. Corn, fertilizer, computer parts and accessories, communications transmitters, and construction vehicles topped the list of U.S. exports to Chile. If a U.S.-Chile FTA came to pass, zero-tariff bilateral trade would enable the U.S. to build on its position as the largest supplier of imported goods to Chile. Brief Synopsis of Commercial Environment Since 1980, when Chile's investment law, DL 600, went into effect, the country's official policy has been to welcome foreign investment. Some restrictions do remain. For example, foreign capital must remain in Chile for one year following the actual investment, before it can be repatriated. Profits, however, may be remitted when earned. Foreign investment is also subject to pro forma screening by the government of Chile, and royalty contracts must be approved by the Central Bank. Protection of intellectual property rights is generally good, with the principal exception being patent protection for pharmaceuticals. In his inaugural address, President Frei called for more open markets throughout Latin America. This is consistent with Chile's regional trade expansion approach. Since 1991, for example, Chile has signed free trade agreements with Mexico, Colombia, and Venezuela. By 1998, almost all bilateral tariffs with these countries will be reduced to zero. More modest preferential trade arrangements have also been reached with Argentina, Bolivia, and Peru. A free trade agreement with Ecuador is in the offing; and Chilean officials have announced their intent to negotiate a trade liberalization agreement with MERCOSUR, the group that includes Argentina, Brazil, Uruguay, and Paraguay. The United States remains Chile's main target for a free trade agreement, whether by accession to NAFTA or by a separate bilateral arrangement. United States Trade Representative, Mickey Kantor, has also indicated that Chile will be the next nation with which the United States will negotiate a free trade arrangement. Host Country Business Attitude Toward the U.S. Chile continues to be one of the most open markets in Latin America for U.S. products and investment. Chile generally has few import barriers and low tariffs. Foreign firms operating in Chile generally enjoy the same protection and operate under the same conditions as local firms. Customs duties in Chile are relatively low. The vast majority of imported goods are taxed at a flat rate of 11 percent. Some products from Latin American countries in Latin America Free Trade Association enter with lower duties. Both imported and domestically produced goods are levied an 18 percent Value Added Tax (VAT). The tax is applied to the CIF value of the imported product plus the 11 percent import duty. Major Business Opportunities The best prospects for U.S. sales to Chile in 1994 include aircraft and parts, avionics, and ground support equipment. The new airport in Santiago and the upgrading of other airports and air traffic control systems will provide commercial opportunities to U.S. suppliers. Major projects in mining continue to offer U.S. exporters opportunities to sell construction and mining equipment and services, especially trucks, dump trucks, and loaders. A proposed new natural gas pipeline from Argentina to Chile would require engineering services, pipeline equipment, supplies, and pipeline operation services. In addition, demand for industrial chemicals, fertilizers, and computer equipment and services will grow in 1994. Chilean consumers of these products tend to prefer U.S. suppliers. The local telecommunications sector is growing rapidly, and industry specialists anticipate that sales of U.S.-made telecom equipment will rise by 30 percent in 1994. In the aftermath of the environmental law's enactment, demand for air and water pollution and waste management products and services will increase sharply. Finally, the growth in local incomes has made franchising an excellent opportunity for U.S. firms. Major Roadblocks to Doing Business Chile generally has few barriers to imports or investment. Nevertheless, treatment in some areas diverges from this norm. Under the "price band" system, imports of certain commodities (currently wheat, vegetable oils, and sugar) are subjected to duties designed to maintain a minimum domestic price. As for investment, firms that invest via D.L. 600, Chile's foreign investment law, must wait one year after investing before they can remit their capital. In addition, 30 percent of all external credits, except supplier credits, must be placed in a non-interest-bearing reserve account, known as the "encaje," at the Central Bank for one year. (Alternatively, investors may pay the Central Bank an amount equal to the interest that would be foregone.) Chile's intellectual property regime is generally compatible with international norms, but its protection of patents remains deficient. A 1991 patent law substantially improved Chile's protection, providing a patent term of 15 years (the term in the United States is 17 years). However, the law does not provide protection for pharmaceutical patents filed before the law's promulgation. Because of the long lead times involved in the marketing of new pharmaceutical products, the law will not prevent the companies from pirating foreign pharmaceutical patents for several more years. In addition, the registration procedures required by the health ministry to market new drugs are more onerous for the first-to-file, which tend to be foreign firms. Finally, the Central Bank reserves the right to disallow access to the inter-bank foreign exchange market for payments for the use of patents that exceed five percent of sales. The patent law also does not consider plant and animal varieties as patentable subject matter. U.S. representatives of the computer software, video game, and recording industries have indicated dissatisfaction with aspects of Chilean copyright law or enforcement. Chile does not have a sui generis statute for protecting the design of semiconductors, nor does it have comprehensive trade secret protection.