China is expected to start free trade negotiation with Chile within this year. It will not only enable the country to better use raw materials from South America and gain access into the vast markets in the continent, but will also make it better prepared for more bilateral free trade pacts, a necessary step when global free trade negotiations are blocked.

In addition, it is very likely to become the first bilateral free trade area (FTA) for China to agree upon, given the urgent free trade needs on both sides and the importance the two countries' leaders are assigning to the issue.

The importance of holding FTA talks with Chile was declared by Vice-Premier Hui Liangyu during his visit there from April 22 to 25, but feasibility studies were actually launched last year.

On April 23, Hui and Chilean Foreign Minister Soledad Alvear declared that the two countries will formally launch FTA negotiations in November, when the Asia-Pacific Economic Cooperation summit is held in Chile.

The contents of the FTA study were already agreed upon at an expert meeting held last April 15-16 in Santiago. It covers goods, services and mutual investments.

Chile is the third-largest trade partner of China in Latin America, following Brazil and Mexico.

In 2003, total trade volume between China and Chile measured US$3.53 billion, rising 37.5 percent over the previous year.

China exported goods worth US$1.28 billion to Chile and imported commodities worth US$2.24 billion in 2003.

In the past five years, China has maintained a steady trade relationship with Chile. Customs statistics show between 1999 and 2003, China's imports from Chile grew 50.4 percent annually. In 1999, Chile's exports to China were only US$359.1 million, but in 2003, the figure grew to US$2.24 billion, rising 43.2 percent over the previous year.

The momentum continued this year. In the first two months, bilateral trade volume between China and Chile increased by 47 percent to US$680 million, according to Chinese customs statistics.

China's major imports from Chile are copper and pulp, and its exports to the nation are mainly low-value manufactured goods such as garments and home appliances.

Despite China's continuous trade deficit against Chile, the trade relationship with the latter is highly beneficial to China.

First of all, the deficit is not very big, and secondly, China's imports from Chile are mainly raw materials China urgently needed to boost its booming export-oriented economy. The Sino-Chilean trade relationship is therefore highly complementary.

Signing a free trade deal with Chile can help China make better use of Chilean raw materials. On the Chilean side, China's inexpensive manufactured goods can also help consumers to lower their living costs.

Due to the close trade links between South American countries, the expected Sino-Chilean FTA can also help more Chinese goods penetrate further into the continent, where Chinese goods remain relatively rare while the market acceptance is high.

To explore the market in South America is an important step towards realizing China's trade diversification.

For rising Chinese investors seeking overseas investment, Chile and some South American countries are also good places. Their labor costs are not very high and infrastructure is satisfactory.

The United States, after successfully pushing through the North American Free Trade Agreement, has begun to promote free trade talks throughout the Americas. That will give South American goods easy access to the US market.

In fact, most South American goods are already entering the US and Canadian markets more easily than countries outside that continent.

Investing in the manufacturing sector in Chile and other South American countries and organizing production with Chinese experience focused on how to keep costs low, Chinese manufacturers can win greater US market shares while avoiding the rising anti-dumping accusations.

But why Chile, instead of Brazil or Mexico -- China's No 1 and No 2 trade partners in South America?

To start with Chile for a free trade pact is a delicate choice on the part of Chinese policy-makers.

First of all, Brazil is facing economic restructuring after its new government debuted last year. Mexico, close to the United States, does not put its trade relationship focus on East Asia. To start with Mexico over free trade may also be considered a challenge to the United States.

Secondly, Chile's market is highly opened and it relies heavily on foreign trade. With successful foreign trade, Chile's gross domestic product (GDP) kept an annual growth rate of 7.3 percent between 1985 and 1997. The Chilean Government has long been aware that for a small country like itself, free trade and investment are very important. With that idea in mind, the Chilean Government has positively promoted FTA talks with other countries.

It has signed FTA deals with more than 25 countries, including Canada, Mexico, the United States, the Republic of Korea, the European Union, Switzerland, Norway and Finland. It is expected that after all FTA deals take effect, they will bring an additional two percentage points to its GDP growth and create 11,000 new jobs in Chile.

Chile has long benefited from FTAs. In 1992, Chile and Mexico reached a free trade deal, and between 1992 and 2000, bilateral trade between the two grew 500 percent.

The Chilean Government is very positive about launching new FTA talks with other countries. So far, 75 percent of Chile's foreign trades has been covered by various free trade pacts. It is negotiating with Bolivia for a FTA and is preparing for talks with India, Singapore, Australia, New Zealand, Japan and China.

It is expected that 90 percent of its foreign trade will be covered by FTAs.

In fact, China's plan to launch FTA talks with Chile is also aimed at acquiring more FTA knowledge and experience.

The ongoing free trade talks between China and ASEAN (Association of Southeast Asian Nations) involve a multi-lateral FTA.

Given the deep experience Chile has in pushing FTAs, China can learn a lot from the expected negotiations with that country.

On the other hand, global free trade talks have stalled after last year's World Trade Organization (WTO) Cancun Meeting failed to reach any official proclamation. Bilateral trade blocs are increasingly replacing the role of the WTO.

Meanwhile, China's interests in FTAs are increasingly strengthening due to its rising manufacturing capabilities. Last year, China's total trade volume hit US$239.85 billion, rising 38.2 percent over the same period of last year. It has become the world's fourth-largest trader, following the United States, Japan, and Germany.

Given the necessity of signing a Sino-Chilean FTA, the slowdown of WTO talks, and Chile's positive attitude and deep experience, it is very likely that the two countries can strike a free trade deal, probably the first FTA deal for China.

(The author is a senior researcher with the Department of America and Oceanic Studies under the Chinese Academy of International Trade.)

(China Daily May 10, 2004)