country focus
With demand for copper falling in China, Chile works to diversify its exports
CHILE
The Andean country is exploring new exports as the US-China trade war deepens and the Chinese economy slows
By Lucien Chauvin
More than a year into the US-China trade war, the global economic casualties continue to mount. Less visible is how the hostile trade environment is shifting long established trading patterns as countries seek to minimize economic consequences, betting that newfound markets and products may provide long-term benefits.
That’s no more apparent than in Chile. From new trade agreements to expanding agricultural production, the Andean country is scrambling to identify new exports and trading partners to offset the trade war’s consequences, at least partially.
And with good reason. With the exception of tiny Suriname, no other Latin American nation is more dependent on exports to China, which accounts for roughly 8% of the country’s GDP, according to the United Nation Economic Commission for Latin America and the Caribbean.
Chile’s export earnings amounted to $75 billion in 2018, up about $5 billion from the previous year. China accounted for almost a third of the total, followed by the US, Japan and South Korea.
No one expects Chile to escape the trade war’s collateral damage. It’s already feeling the pain. Copper is Chile’s main export, representing nearly 50% of all export earnings, with China the biggest customer. As the trade war has escalated, the Chinese economy has slowed, along with its demand for copper.
That was evident in July when the country registered a $29 million trade deficit, its first in nine months, with export earnings down 4.6%, according to the central bank. Both the government and private sector attribute the shortfall to the trade war. Meanwhile, Chile’s economy expanded 1.7% in the first half of 2019, making the 3% target for the year nearly impossible to meet.
“Our exports are heavily influenced by copper and the price of copper is down along with the current forecast for world growth,†says Rodrigo Yañez, Chile’s Under Secretary of International Economic Affairs.
Still, Chile sees some opportunities that could cushion the blow to its economy. While China’s industrial production has slumped, Chinese consumers remain relatively resilient. That has Chilean exporters betting that they can tap into China’s appetite for agricultural products.
“Distortions are creating some opportunities for Chile,†says Yañez, acknowledging that “Chile needs to continue opening markets, diversifying its export basket, particularly in the area of services, providing more value added to production to take advantage of non-copper products.â€
Yañez says many of the new opportunities will remain even after the US and China resolve their dispute but cautioned that increased volume and price for its non-traditional exports cannot make up for a prolonged slump in copper.
Salmon, which accounted for $5.5 billion in exports last year, could hold the most promise. China was the fourth biggest customer for Chilean salmon exports last year, after the US, Japan and Russia. And the market is expanding. Salmon exports rose 6.1% in the first quarter to $1.6 billion, with China accounting for a big share.
“Increase in demand from China has been impressive,†says Arturo Clément, president of national salmon association, SalmonChile. “China continues to grow by rates above 40%.â€
Cherries are another popular item in Chinese households. They account for $1.2 billion a year in exports, with China absorbing around 80% of production.
Chile’s cherry exports to China arrive almost entirely after the US season has ended. The industry is working to plant new varieties that would enable harvests to extend earlier and later, creating a much larger export window. Farmers are replacing apple trees and grape vines with cherries, and new technologies are allowing for areas once difficult for cherry trees to be planted.
Exporting companies and the Chilean government are also working on opening new markets, including increasing sales to the US and tapping into Europe, where demand is negligible today.
How well Chile fares also depends on the competition. It’s not the only country looking to establish new export beachheads. Consider pork, Chile’s biggest meat export which totaled $540 million last year. Faced with steep tariffs in China, US producers are chasing new customers and finding them in in Colombia, South Korea and Vietnam, where Chile has long been a supplier.
“The increased participation from US pork producers in South Korea has had an impact on price for our (pork) exports,†says Yañez.
Chile is also trying to position itself as a key service provider in the mining industry, using its expertise in everything from environmental management to techniques for underground mine construction. It already exports mining services to Mexico and Peru and is breaking into the Canadian market. Exports of services are approaching $1 billion and range from architectural and engineering services to information and communication technology.
Chile is also betting that trade agreements with other countries can help alleviate the pressure on exports. Chile has more trade agreements than any other country in the Americas – 26 agreements involving 64 countries.
In early August, it added another with implementation of a comprehensive economic partnership agreement with Indonesia. Chile is also working on new deals with the Southeast Asia block (Asean), countries in the Middle East and Northern Africa (Mena) and the Eurasian Economic Commission (EEC), which is led by Russia.
The Chile House of Representatives approved the 11-country Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), which should be implemented before the end of this year.
Chilean authorities are also working with partners in the Pacific Alliance – Colombia, Mexico and Peru – on building ties to promote trade, including a joint trade office in Turkey. More than 90% of goods move freely among alliance members.
Still, no one believes trade agreements, much less salmon, can inoculate Chile from the severe damage of a protracted US-China trade war. If it drags on, even Chinese consumers will start cutting back. “We have not been affected so far, but the trade war is getting worse and it could have a negative impact on demand if it continues’†says SalmonChile’s Clément.“Trade wars are not good for anyone.â€
