According to press reports, the FTA, whose full text was not made public by either side, is a comprehensive one that covers all sectors, including agriculture and services. In this column, I will explore the conditions and reasons that led to this FTA, which is yet to be ratified by the parliaments of either country.
What the World Trade Organization (WTO) calls regional trade agreements (RTAs), which depart from the non-discrimination principle of most favored nation (MFN) by granting more favorable treatment of trade among RTA members than trade with other WTO members, have become increasingly prominent in the multilateral trading system (MTS) based on the MFN principle since surging in the early 1990s. Of the 421 RTAs reported to the WTO, 230 were in force as of December 2008. Almost 90 percent of these RTAs are FTAs, which do not require members to have uniform trade policies vis-à-vis nonmembers, as opposed to customs unions (CUs), which require such uniform policies. The surge in RTAs, which cover more than half of global trade, has accelerated in recent years due to the failure to bring the eight-year-long Doha Round of multilateral trade negotiations to a successful conclusion.
The proliferation of overlapping RTAs, as a manifestation of rising regionalism, has led to debates among trade economists as to whether they are obstacles or stepping-stones to the MTS. Many economists are concerned that regionalism in terms of the “untamed tangle … spaghetti bowl of crisscrossing arrangements” breeds “incoherence, confusion, unnecessary business costs, instability and unpredictability in trade relations,” according to a recent WTO publication. They argue that overlapping RTAs render trade regimes too complex and difficult to manage. Other economists, however, believe that regionalism, as it spreads and becomes multilateral, can be a powerful catalyst for global trade liberalization leading to greater efficiency.
Both Chile and Turkey, which once had heavily protected economies under their respective import-substitution industrialization regimes, have greatly opened up to foreign trade and investment as part of their globalization. Chile has liberalized its foreign trade, which accounts for less than 0.5 percent of total world trade, unilaterally, regionally and multilaterally since 1973 by slashing its tariffs from an average of 220 percent to a flat rate of 6 percent with a realized average rate of only 2.3 percent in 2008. Its RTAs enable 95 percent of its imports to enter duty free. Chile's current 17 RTAs, consisting of FTAs and economic integration agreements, cover almost all of its foreign trade, including trade with the EU, Japan, China, South Korea, Australia, the US and Canada, outside of Latin America. It has preferential arrangements with the Andean Community and the Southern Common Market (MERCOSUR) besides several bilateral FTAs with other Latin American countries, including Mexico, as well as a preferential trade agreement with India.
Turkey has liberalized its foreign trade, which accounts for about 1 percent of total world trade, unilaterally, regionally and multilaterally since 1980, taking the most important single step with its CU, which excludes agriculture, with the EU in 1996 (see my columns “International trade in globalizing world and Turkey” (1) and (2) on July 21 and July 28, 2008). This CU allows for free trade with and applies the EU common external tariff on all industrial goods and the industrial component of processed agricultural goods. Turkey's current 15 RTAs -- the most important of which is its CU, which accounts for about half of Turkey's trade -- do not include any bilateral FTAs with countries in the Western hemisphere. Under its CU, most of Turkey's bilateral FTAs were signed in order to align its trade regime with that of the EU. Turkey's bilateral FTAs are governed legally by Article 16 of its CU agreement (Decision No. 1/95 of the EC-Turkey Association Council), which requires Turkey's non-agricultural trade regime, including preferential arrangements, to be harmonized with that of the EU to avoid trade diversion within the CU.
The origins of the Turkish-Chilean FTA date to the visit of Chilean President Ricardo Lagos to Ankara in October 2004. During the visit, the Turkish Ministry of Foreign Affairs presented its proposal and draft text of the FTA at the meetings of the Chilean and Turkish delegations. Chile welcomed Turkey's initiative and started exploratory talks, which did not get very far. They picked up speed after Chile asked to resume those talks in May 2007.
The exploratory discussions toward the FTA resumed in July 2007 in Ankara and led to the establishment of a joint study group. The first round of negotiations began in November 2007 after the joint study group issued, following its two meetings in Santiago in July 2007 and in Ankara in October 2007, its final 282-page report “Joint Study Group on the Prospective Free Trade Agreement between Chile and Turkey.” This report was preceded by an earlier 197-page report “Turkey-Chile Joint Study Group Report on the Feasibility of an FTA,” issued in July 2007, which concluded that “since Turkey and Chile consider each other as springboards to penetrate into their respective regional markets, both trade and investment opportunities offered by the prospective FTA create a win-win situation for each party.” The second and third round of negotiations followed in July and October 2008. The FTA was finalized after the fourth round of negotiations in March 2009 and signed on July 14.
The bilateral trade between Turkey and Chile, $475 million in 2008, is relatively insignificant in their total trade volumes. So, the FTA will not be that critical a factor in terms of their existing bilateral trade, in which Turkish exports of iron and steel and imports of copper are prominent, although their bilateral trade should expand. The FTA's major justification is the two countries' strong network of economic relations in their respective regions. Turkey, through its CU with the EU and its RTAs with several Balkan, Mediterranean and Middle Eastern countries, could be a gateway for Chile in Turkey's region. On the other hand, Chile, with its RTAs with all Latin American countries and its FTAs with the US, Mexico and Canada, could be a gateway for Turkey in Chile's region. Chile's web of RTAs would enable Turkish companies investing in Chile to reach an either tariff-free or almost tariff-free market accounting for 61 percent of the world population and 84 percent of the world's gross domestic product (GDP). More than 90 percent of Chile's exports go to countries with which it has RTAs. Let's hope the FTA will be mutually beneficial for Chile and Turkey.
