After launching free trade negotiations with Chile, China is considering the feasibility of inking more free trade agreements with other Latin American countries and organizations such as Mercado Commun del Sur (Mercosur), according to senior trade analysts and insiders.

"Without any hiccups, China and Chile are very likely to reach a free trade deal before the end of 2005. This is likely to facilitate more free trade talks between China and other Latin American countries," said Lu Guozheng, a senior researcher with the Department of the Americas and Oceanic Studies, under the Chinese Academy of International Trade and Economic Co-operation (CAITEC), the think tank affiliated with the Ministry of Commerce.

Lu's opinion was echoed by an insider close to the Ministry of Commerce, who said that the ministry is considering launching a feasibility study on free trade with Mercosur.

Mercosur has four members-Brazil, Argentina, Paraguay and Uruguay.

China and Chile started trade talks on November 18, during Chinese President Hu Jintao's visit to the Latin American country.

Chilean President Ricardo Lagos Escobar described the decision as an "important step" for Chile, which became the first Latin American nation to start free trade talks with the world's most-populous country.

Chile has already formally recognized China as a full market economy.

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

According to China Customs statistics, total trade volume between China and Chile reached US$3.89 billion in the first three quarters of 2004, rising 53.6 per cent over the previous year. China exported goods worth US$1.22 billion to Chile and imported US$2.67 billion worth of products in the period.

Between 1999 and 2003, China's imports from Chile grew 50.4 per cent annually.

"Inking a free trade agreement with Chile will enable China to expand its exports to Chile and smooth China's imports of copper from Chile, the world's major copper producer," Lu told China Business Weekly.

More importantly, a free trade agreement with Chile - expected to be China's first bilateral free trade deal - will make China better understand the practice of free trade, so that more free trade talks may be possible, Lu said.

Expanding FTA

Chile's rising trade ties with China is part of the whole booming picture of China's trade with Latin America.

Statistics from China Customs indicate that last year, mutual trade between China and Latin American countries reached US$26.8 billion, rising 50.4 per cent year-on-year.

In 2003, China's import volume increased 40 per cent, but its import growth rate from Latin American countries was 79.1 per cent. Most Latin American countries kept trade surpluses against China, including US$3.7 billion for Brazil and US$2.3 billion for Argentina.

According to a recent report by the United Nations Economic Commission for Latin America, the economic growth rate of Latin American countries will reach 4.7 per cent this year, shaking off three years of economic recession. China has become a pivotal factor of the region's economic recovery.

"Latin American countries have very low domestic deposit rates and foreign investment into these countries has not been ideal in recent years. The rapidly rising surplus of Latin American countries against China has become their major economic engine," said Yang Zhimin, a researcher with the Institute of Latin American Studies under the Chinese Academy of Social Sciences.

Yang said that several Latin American countries showed their strong willingness to launch free trade talks with China before or during Hu's visit to Latin America, with Brazil and Argentina also acknowledging China's full market economy status.

China, however, has only agreed to talk with Chile, who showed the intention of entering into free trade negotiations with China last year.

China's attitude towards bilateral free trade agreements, particularly with Latin American countries, is quite cautious, Yang told China Business Weekly.

He added that the focus of China's efforts on free trade agreements so far is still with ASEAN (Association of Southeast Asian Nations).

ASEAN leaders will reach a free trade pact in goods with Chinese Premier Wen Jiabao in Laos today, marking that the free trade arena between China and ASEAN concerning goods has officially launched. Free trade negotiations between China and ASEAN have taken three years.

"Latin American countries have varying social and economic development status. Launching more bilateral free trade talks is quite challenging," said Zhang Yong, a researcher with the Institute of Latin American Studies.

Wang Li, a CAITEC researcher, said Chile has better economic conditions and has long pursued free trade policies with China, so negotiations with Chile will be easier and faster than with other countries.

Chile has signed free trade agreements with 25 countries, including Canada, Mexico, the United States, South Korea, the European Union, Switzerland, Norway and Finland.

After China has reached a free trade agreement with Chile, and its free trade pact with ASEAN countries has been put into practice for some time, Chinese policy-makers may seek to begin talks with more Latin American countries, the insider close to the Ministry of Commerce said.

Benefits only?

Reaching free trade agreements with Chile and other Latin American countries can ensure the supply of raw materials - copper, ore, oil, and soybean - China urgently needs to boost its booming export-oriented economy.

For Latin American countries, besides expanding their exports to China, the deals can attract more foreign investments.

Hu pledged, during his visit to Brazil earlier this month, that China will invest US$10 billion in Brazil within two years.

According to various contracts and letters of intent Chinese officials and entrepreneurs have signed with their Argentina counterparts during Hu's visit, which took place after his visit to Brazil, Chinese enterprises may invest up to US$20 billion in Argentina's mining and manufacturing industries over the next decade.

With possible free trade deals, both China and Latin American countries can reduce their heavy reliance on the US market.

Due to the close trade links between South American countries, the expected Sino-Chilean free trade agreement can help more Chinese goods further penetrate the continent, where Chinese goods remain relatively rare although market acceptance is high, Zhang told China Business Weekly.

"Inking free trade agreements with Chile and, possibly, other Latin American countries, can also ensure China has a foothold in the ongoing process to push the Americas' free trade area. If the Americas free trade area is sealed, Chinese goods can penetrate the North American market with less barriers," Yang said.

Despite the benefits, some challenges still remain.

Although some Latin American countries show enthusiasm to talk about free trade agreements with China, local manufacturers and labour groups on the continent are more concerned over the impacts of low-cost Chinese goods upon their market. They are worried about depriving local people of their jobs.

Lu said some Chinese service sectors have been resisting free trade efforts, including those with Latin American countries.

Even if China reaches agreements with Chile and other Latin American countries, its exports to those countries are unlikely to increase as fast as the imports from those countries. As a result, China will suffer rising trade deficits against those countries, Zhang said.

Future investment of Chinese enterprises in Latin American countries may also meet various legal and environmental challenges, said Lu.

He added that many Chinese investments in Latin American countries, such as that of Capital Steel in Peru's ore mines, have not been very successful.

But Lu said these investments failed to achieve the anticipated success partly because most Chinese investors - large State-owned conglomerates - have poor management systems and slow decision-making processes.

However, this is expected to change with the reform of China's State-owned sector and the strengthening of private Chinese enterprises.

Yang said China's expected rising deficit against Latin American countries is not a big problem because the trade volume between China and Latin American countries only accounts for a small portion of its overall foreign trade.

In 2003, the trade volume between China and Latin American countries was less than 3.4 per cent of China's total international trade, which surpassed US$800 billion.

"If the deficit brings high-quality raw materials for us, it is worthwhile," Yang concluded.

(Business Weekly 12/02/2004 page9)