Trade Policy

Chile Table of Contents

One of the fundamental economic goals of the military regime was to open up the economy to the rest of the world. However, this was not the first attempt at liberalizing international trade in Chile. Between 1950 and 1970, the country went through three attempts at trade liberalization without ever reaching full liberalization. Moreover, all three attempts quickly ended in frustration and in a reversion to exchange controls, the use of multiple exchange rates, and massive quantitative restrictions. A particularly interesting feature of the three attempts at liberalization is that, although they took place under three different exchange-rate systems, they all collapsed, at least in part because of a highly overvalued real exchange rate.

Starting in 1974, Chile adopted unilaterally an open trade regime characterized by low uniform import tariffs, a lack of exchange or trade controls, and minimum restrictions on capital movements. Starting in 1979, Chile's trade policy became highly liberalized; subsequently, there were no quantitative restrictions, licenses, or prohibitions. A uniform import tax varying between 10 percent and 35 percent took effect, and, until 1980, real exchangerate overvaluation generally was avoided. By 1990 Chile was the only country, according to the World Bank, whose index of liberalization reached the maximum possible level of 20, indicating an absence of external-sector distortions.

In 1973 import tariffs averaged 105 percent and were highly dispersed, with some goods subject to nominal tariffs of more than 700 percent and others fully exempted from import duties. In addition to tariffs, a battery of quantitative restrictions were applied, including outright import prohibitions and prior import deposits of up to 10,000 percent. These protective measures were complemented by a highly distorting multiple exchange-rate system consisting of fifteen different nominal exchange rates. By August 1975, all quantitative restrictions had been eliminated, and the average tariff had been reduced to 44 percent. This process of tariff reductions continued until June 1979, when all tariffs but one (that on automobiles) were set at 10 percent. In the mid-1980s, in the midst of the debt crisis, temporary tariff hikes were implemented; by 1989, however, a uniform level of 15 percent had been established.

During the early period (1975-79) of the military regime, the opening of Chile's external sector was accompanied by a strongly depreciated real exchange rate. In 1979, however, the authorities adopted a fixed-exchange rate policy that resulted in an acute overvaluation of the Chilean peso, a loss in international competititiveness, and, in 1982, a deep crisis. In 1984-85 this situation was reversed, and a policy of a depreciated and highly competitive real exchange rate was implemented. The combination of these two policies--low tariffs and a competitive real exchange rate--had a significant impact on Chile's economic structure. The share of manufacturing in GNP dropped from almost 29 percent in 1974 to 22 percent in 1981. Productivity in tradable sectors grew substantially, and exports became highly diversified. Chile had also diversified its export markets, with the result that no individual market bought more than 20 percent of the country's total exports. By the early 1990s, exports had become the engine of growth, and the Chilean trade reform was winning praise from multinational institutions and observers of different ideological persuasions. Largely thanks to the boom in exports between 1986 and 1991, particularly the increasing growth in exports of fresh fruits and manufactured products, Chile experienced the highest rate of GDP growth in Latin America (the "Chilean miracle"), with an annual increase of 4.2 percent.

In what was perhaps the surest sign of the success of trade reform, the new democratic government of President Patricio Aylwin Azócar (1990-94), elected in December 1989, decided to continue the opening process and reduced import tariffs to a uniform 11 percent. Interestingly, Aylwin's economic team, including the minister of finance and the minister of economy, development, and reconstruction, had been relentless critics of the trade reform process during its implementation in the mid- and late 1970s.

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Source: U.S. Library of Congress