The Chile-Paraguay FTA Could Create Deeper Ties For Latin America And Opportunities For Investors

The Chile-Paraguay FTA Could Create Deeper Ties For Latin America And Opportunities For Investors

Chile and Paraguay recently began negotiations on a free trade agreement (FTA) that, once completed, could further solidify Chile’s position as a global beacon of trade liberalization and mark Paraguay’s first foray into bilateral free trade deals; thus, heralding an era of deeper and more diverse economic relations between the two South American nations.

Once the deal has been signed, it will mark the culmination of Chile’s efforts to establish free trade regimes with all active members of the Southern Common Market (Mercosur), and as such will represent an important watershed in regional integration.

To understand what advantages the Chile-Paraguay FTA promises to bring, it’s first worth considering Chile’s status as a promoter of free trade and Paraguay’s approach to trade liberalization and economic diversification.

Chile: The Global Free Trade Beacon

Chile’s status as a bastion of free trade has been well-established for decades now, with the spindly coastal nation enjoying some semblance of free trade with almost every mainland country in Latin America.

That includes FTAs with Mexico and Central America, “economic complementation agreements” (ECAs) with Bolivia, Venezuela, Ecuador and Mercosur, and a partial agreement with Cuba. Similar agreements struck with Colombia and Peru have since been expanded into full FTAs. The country also has FTAs in place with Australia, Brunei, Canada, the European Union and others.

Striking an FTA with Paraguay will represent the completion of the country’s free trade association with Mercosur’s active membership, which also includes Argentina, Brazil and Uruguay.

While Chile has had an ECA in place with Mercosur members since 1996, it has since struck individual FTAs with Uruguay (2016), Argentina (2017) and Brazil (2018). An ECA will generally include the likes of dual taxation treaties and investment protection mechanisms but falls short of a full FTA.

In completing the process of liberalizing trade with Mercosur, Chile will effectively form a bridge between that association and the Pacific Alliance, which includes Chile, Colombia, Mexico and Peru, and which is looking to confer associate member status on Australia, Canada, New Zealand and Singapore.

As such, the economic benefits on offer extend far beyond simply bolstering trade between Chile and Paraguay, with the deal feeding into Chile’s ever-growing and interconnected constellation of FTAs.

Paraguay Steps Beyond Regional FTAs

While Chile has positioned itself among the vanguard of the global free trade movement, Paraguay’s activity in this regard has been significantly lower.

The Chile-Paraguay FTA is a landmark for the landlocked nation, with its current free trade and trade liberalization arrangements primarily based on regional agreements.

In addition to Mercosur, that includes involvement in the likes of the Latin American Integration Association (LAIA), the Latin American and Caribbean Economic System (SELA), associate membership of the Andean Community and numerous other associations. However, for the most part, those arrangements fall short of being full FTAs.

To some extent, that makes Paraguay’s entrance into the FTA all the more momentous to me, because the commercial dividends it can expect to enjoy stand to inspire the country to continue along the free trade path. Meanwhile, the negotiations come on the heels of Paraguay’s attempts to diversify its economy more generally.

When he spoke to La Nación in 2019, the president of the Central Bank of Paraguay’s parent bank, José Cantero, highlighted the country’s projected 4% growth for that year and credited it in part to a dynamic manufacturing sector. Bloomberg reported (paywall) that it could retake its position as one of the fastest-growing Latin American economies in 2020.

As Cantero pointed out, the services sector has long been a crucial economic backbone, but I expect significant developments in other sectors that could help the economy become more diverse and believe these should continue to be promoted.

What The Chile-Paraguay FTA Means For Trade And Investment

Since the signing of the ECA between Chile and Mercosur in 1996, bilateral trade between Paraguay and Chile has multiplied.

That forms an impressive base upon which to build the new FTA. Chile’s International Economic Relations Undersecretary Rodrigo Yáñez emphasized his hopes that both countries agree to the coming deal.

“With the negotiation of this agreement, we seek to reach a deeper level of integration, working for an inclusive trade in matters such as gender, SMEs, environmental and labor issues,” Yáñez said at the opening of the initial talks in early October.

A look at trade between Chile and Paraguay highlights a relationship that is ripe for greater integration and economic diversification.

Of the $627 million (USD) in goods exported from Paraguay to Chile in 2018, 52% were bovine meat products, while a further 33.5% were soybean meal. Other significant export products included corn, rice and medicines.

Goods imported directly from Chile by Paraguay are also largely related to foodstuffs, clothing and cars, and $609 million in goods were imported in 2018. Among the main products Paraguay imported were wine, processed foods and medicines.

Yet my hope is that the FTA could also bring agreements and opportunities for businesses in cross-border services, e-commerce, telecommunications and many other up-and-coming or high-growth sectors.

Meanwhile, mechanisms will be implemented to help SMEs in both countries insert themselves better into bilateral and global value chains.

It is early days in negotiations between the two countries; however, for both countries, I believe the agreement promises to be a boon for trade, while for investors looking at entering South America, it makes both markets — particularly Paraguay’s — considerably more enticing.

For anyone already invested in or looking to invest in Chile or Paraguay, understanding how this new agreement could affect your business will be essential. You will need to plan for the likely repercussions — whether those include an uptick in trade that demands expanded production capacity or an increase in competition that calls for diversification or moves to secure a larger share of your market. To that end, to prepare, it makes sense to seek out expert analysis and professional support.

www.prensa.cancilleria.gob.ar es un sitio web oficial del Gobierno Argentino