CHILE QUARTERLY POLITICAL, ECONOMIC AND

TRADE

REPORT JULY 2006

Delegation of the European Commission to Chile Av. Ricardo Lyon, 222 – Torre París, 3er piso 751-0125, Santiago de Chile Tel: +56 2 3352450 Fax: +56 2 3351779

This document has been elaborated by the Trade, Press and Information Section of the Delegation of the European Commission to Chile Katherine Bäuerle – Brice de la Croix – José Miguel Torres – Daniela Vatter Cheila Ramalho - Olivier Dubois Date of publication: August 8th, 2006

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TABLE OF CONTENTS DOMESTIC POLITICS.............................................................................................4 1. THE HONEYMOON IS OVER FOR PRESIDENT BACHELET..................................................................... 4 2. HEATED DEBATE OVER PROPOSAL TO REFORM THE BINOMIAL ELECTORAL SYSTEM ............................ 5 3. SCANDAL OVER THE MISIDENTIFICATION OF REMAINS OF HUMAN RIGHTS VIOLATIONS’ VICTIMS ............ 6 4. HUNGER STRIKE OF MAPUCHE ACTIVISTS FORCES GOVERNMENT TO PURSUE THEIR RELEASE ............. 6

EXTERNAL RELATIONS ........................................................................................8 1. CHILE AND THE RATIFICATION OF THE INTERNATIONAL CRIMINAL COURT (ICC) ................................. 8 2. CHILE STILL NOT WILLING TO SHINE LIGHT ON ITS VOTE FOR A UNSC CANDIDATE .............................. 8 3. BACHELET OBJECTS PROCUREMENT OF FRENCH SATELLITE ............................................................ 9 4. BOLIVIA INSISTS ON ITS DEMAND FOR ACCESS TO SEA .................................................................... 10

ECONOMY.............................................................................................................11 1. EVOLUTION DES INDICATEURS ECONOMIQUES................................................................................ 11

La Commission Marcel a présenté ses propositions concernant la réforme des retraites ....................................................................................................... 15 Les conséquences pour le Chili de l'accord sur le gaz signé entre l'Argentine et la Bolivie.................................................................................... 16 TRADE ...................................................................................................................18 1. TRADE INDICATORS AND RESULTS ................................................................................................ 18 2. TRADE NEWS………………………………………………………………………………………………26

Fishing Industry.................................................................................................................... 26

New law on artisanal fishing............................................................................ 26 Salmon industry under criticism..................................................................... 26 Wines ..................................................................................................................................... 27 Intellectual property rights.................................................................................................. 27 Free trade agreements.......................................................................................................... 28

FTA with China to be ratified by Senate........................................................ 28 FTA with Panama signed................................................................................. 28 FTA negotiations with Japan continue........................................................... 29 Peru: next FTA partner for Chile ? ................................................................ 29 Peru to join P4 Transpacific Agreement? ...................................................... 30 Chile searching for a trade agreement with Australia.................................. 30 End to a not–so-sweet sugar dispute with Colombia and announcement of a possible FTA ............................................................................................. 30 Customs services relations with neighbouring countries is a priority......... 30

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CHILE FACT SHEET General information Capital: Santiago Surface area: 757 000 km² Official language: Spanish Population: 15.2 million (last census in 2003) Exchange rate: 1€ = 689.74 CLP (July 7th)

Head of State and Head of Government: Michelle Bachelet Foreign Affairs Minister: Alejandro Foxley

Recent economic indicators 2001 63 4,314 4,590 8,840 -1,100 -1.6 33.4 2.6 7.9

GDP (US$bn) GDP per capita (US$) GNI per capita (US$) GNI PPP per capita (intern. US$) Current account balance (US$m) Current account balance (%GDP) Goods & services exports (%GDP) Inflation (%) Unemployment rate (%)

2002 65 4,255 4,250 9,420 -885 -1.3 33.9 2.8 8.9

2003 72 4,568 4,390 9,810 -594 -0.8 36.4 1.1 8.5

EU – Chile trade development

2004 89 5,573 4,910 10,500 2,908 2.0 38.3 2.4 8.8

2005 a 93 6,151 5.589 - 464 - 0,4 41.8 3.7 8.0

EU Exports to Chile

Million US $

Million US $

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8000 7000

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6000 5000

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2004

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2004

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Consumer goods

EU Exports

Intermediate Capital goods goods

EU trade with Chile, 2005:

Exports to Chile: US$ 4,734 million – total share of Chilean imports: 16% – rank: 4th – annual growth: 40% Imports from Chile: US$ 9,070 million – total share of Chilean exports: 23% – rank: 2nd – annual growth: 13% EU trade balance: US$ - 4,336 million

Major EU imports, 2005:

Major EU exports, 2005:

1. 2. 3. 4. 5.

1.

Cathodes (37%) Molybdenum (14.2%) Copper minerals (8.2%) Other refined copper (3,1%) Chemical coniferous pulp (2.9%)

2. 3. 4. 5.

Machinery for making pulp of fibrous cellulosic material (4.1%) Minibuses (2.1%) Other machinery (1.8%) Parts of Machinery for making pulp of fibrous cellulosic material (1.8%) Beta-carotene (1.6%)

Chile’s global trade: Chile’s main export destinations, 2005: 1. Asia: 35.8% 2. EU: 22.9% 3. Nafta: 22.5% 4. Mercosur: 6.3% 5. CAN: 5,2%

Chile’s main import sources, 2005 1. Mercosur: 26.8% 2. Nafta: 18.2% 3. Asia: 17.3% 4. EU: 15.6% 5. CAN: 5.6%

Sources: Central Bank of Chile, DIRECON and INE (a) all recent data subject to revision

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DOMESTIC POLITICS 1. The honeymoon is over for President Bachelet The resounding victory of Michelle Bachelet that made her Chile’s first woman President has been followed by a turbulent start once in office. The President’s aspiration was to make the 36 measures to be set in motion within the first hundred days of government an early milestone of her administration: a 4-year mandate that would be marked by a new style of government, with more dialogue and participation and, above all, with a strong social agenda. Instead, Ms. Bachelet’s first months in office have proven to be most troubled, leaving her with the fastest deterioration of public support since the center-left coalition Concertación reached power 16 years ago. Things have not been easy for the new administration: a major student revolt shook the nation last May, the gas crisis with Argentina has deepened in the past weeks and a crime wave - widely covered by the local media - has alarmed the population. Some of Bachelet’s most difficult problems were inherited from the Lagos’ administration and others are just the result of foreign developments that have affected Chile. This, however, did not spare the President from having to prove that her administration was not going off course. The proof came in the form of a cabinet reshuffle in which three ministers were replaced after only a four-month period in office. The new cabinet appointments included Belisario Velasco who replaced the experienced Andrés Zaldívar as chief of Cabinet and Interior Minister; Yasna Provoste who followed Martín Zilic as Minister of Education; and Alejandro Ferreiro who replaced Ingrid Antonijevic as Minister of Economy. The reorganization was considered an inevitable consequence of the massive students’ mobilization as well as of the serious coordination problems existing within Bachelet’s cabinet and an overall inability to carry through with her political agenda. The rapid deterioration of public support that showed an 18 point drop in the government’s approval ratings also played a huge part in the cabinet reshuffle. Critics have accused Bachelet of being a weak leader and not taking a more proactive approach to the country's pressing needs. In a recent CEP (a liberal right think tank) survey, 57% of respondents said Bachelet “acted with weakness,” while only 34% thought the President acted “with strength.” The government’s response to the month-long student demonstration was a major display of weakness and lack of coordination. The protests mobilized nearly 800,000 students in demand of free use of public transport, free access to university entrance exams and a voice in government policy. But the government’s slow response to the crisis left many people wondering about the President’s ability to lead. This perception is considered to be quite damaging for the administration at a time of great social expectations – further increased by a growing fiscal surplus thanks to copper exports - and when the government is about to face some tough negotiations with some of the more powerful unions. On 16 June, three days before her self-appointed deadline, President Bachelet declared that the 36 measures had been set in motion. For the government this marked the beginning of reforms planned around four major "transformations" proposed by the 4 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

President: a new pension system, improved quality of education, innovation and entrepreneurship and a better quality of life in urban areas. The administration’s shaky start has not, however, benefited the opposition Alianza coalition, which so far has failed to win the support of the population. The CEP survey showed that although Chileans disapprove of Bachelet’s government, they are certainly not flocking to the rightist opposition. When asked what political alliance they most identified with plurality, 32% of respondents identified the Concertación while only 16% favoured the Alianza. Moreover, Bachelet’s former presidential contender, National Renewal’s Sebastián Piñera, is the only opposition leader who made it to the list of the top ten most popular politicians. 2. Heated debate over proposal to reform the binomial electoral system In order to comply with one of the 36 commitments made by the Bachelet administration for its first 100 days in office, the government presented in mid-June a draft bill to reform the binomial electoral system which was immediately rejected by the opposition Alianza coalition. The proposal, prepared by a commission, considers the increase of the number of seats in Congress from 120 to 150, and from 38 to 50 in the Senate, on the basis of a proportional electoral system. It also considers a complete change of the voting map based on the redistribution of the electoral districts. Chile has an open-list proportional representation system for both the Senate and the Chamber of Deputies. Two seats are elected in each of the 19 senatorial and 60 deputy districts. The first seat is awarded to the most voted candidate of the most voted list. But for a list to obtain both seats, it must receive twice the votes of the second-place list. Thus, the binomial system - designed by the Pinochet dictatorship and staunchly supported by the Alianza coalition - has been long criticized for marginalizing the left in Congress and allowing the right to dominate half of the seats with a little more than a third of the vote. The party leaders of the National Renewal Party (RN) and the Independent Democratic Union (UDI) rejected the government’s proposal arguing that it was “tailored-made” for the Concertación in order to increase its representation in Congress. However, former RN’s presidential candidate, Sebastián Piñera – who said he would support reforming the binomial system during the campaign - changed his party's initial rejection by offering to negotiate the issue with the government. The Communist Party – which supported Michelle Bachelet in the run-off election in exchange for her promise to reform the binomial system – also criticized the proposal arguing that it does not guarantee total proportionality, favouring the overall vote of the Concertación. Since 1990, the Concertación has tried seven times to modify the system, but never succeeded due to rightist roadblocking. Apparently this time it will be no different, since the Concertación requires 3/5 of the votes for this constitutional reform.

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3. Scandal over the misidentification of remains of human rights violations’ victims President Bachelet’s first serious crisis since taking office had to do with the dark legacy of human rights violations that took place during General Pinochet’s rule in Chile. Last April a judicial investigation revealed that at least 48 bodies of people “disappeared” during Pinochet's regime were wrongly identified by the Legal Medical Service (SML) during the 1990s. The mistakenly identified remains were exhumed in 1991 and later returned to the families for proper burial. The Group of Families of Disappeared Detainees (AFDD), distraught by the incompetence of Chile’s judicial authorities, targeted the Justice Ministers of the Lagos administration claiming they did not take adequate measures to prevent the misidentification. The government contended that the mistakes were due to technological shortcomings: the SML lacked of sophisticated DNA testing up until a few years ago, and relied on bone and teeth identification only. The University of Glasgow’s Centre of Human Identity filed a report to the SML in 1995, which detailed the identification discrepancies. The report was hidden by the SML until July 2003. The official acknowledgement of the mistake led to a firestorm of criticisms. President Bachelet's first reaction was to defend the efforts made in recent years to identify the remains of victims of human rights abuses carried out in the Pinochet-era. However, due to the growing level of discontent, the government created a special commission to investigate the case and give support to the affected families. By the end of July, a team of 12 international experts will begin analysing what went wrong with the first identification process carried out by the state medical authorities. The team of experts will also propose a work plan for the identification of the remains. Chile's SML has acknowledged that at least 48 sets of remains found in the cemetery (Patio 29) were misidentified, but there are also doubts over the identification of 38 other sets. 4. Hunger strike of Mapuche activists forces government to pursue their release A two-month hunger strike by four Mapuche activists who were protesting against Chile’s anti-terror law has forced the Bachelet administration to find a legal solution that would lead to their release. The four Mapuche activists, who were condemned under the Pinochet-era anti-terror legislation, held a hunger strike during 13 March – 15 May, when a first agreement negotiated by two Socialist senators and the Catholic Church clergy pledged that Congress would review their cases. The protestors resumed their hunger strike a week later after accusing the government of failing to uphold the deal, but put an end to it again a few days later. The four activists were convicted of setting fire to 100 hectares of forest property in 2002 owned by the Forestal Mininco in southern Chile. They claimed the property was unjustly taken from their ancestors with the complicity of the Chilean government. In 2005, they were sentenced to10 years in prison and ordered to pay US$765,000 each in fines for violating Chile’s anti-terror law. The country’s harsh anti-terror law came under scrutiny and President Bachelet was pressed on the Mapuche hunger strike issue on several occasions during her visit to Europe last May. She promised that the anti-terrorism law will not be used during her administration. 6 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Under the agreement struck with the Socialist senators, the MPs presented an urgent draft bill that would allow the activists to be released on parole. However, the draft bill was dismissed on unconstitutional grounds, forcing the government to pursue other legal tools to soften the activists’ sentences. By the end of May, the government announced that it would present a draft bill that would exclude attacks on private property from the antiterror law, thus arson would no longer be considered an act of terrorism. If approved by Congress – as it is expected since the governing Concertación coalition has the votes for it - this legal manoeuvre would diminish the Mapuche activists’ sentences to five years in prison, making them eligible for parole. Several other Mapuche activists currently in prison would also benefit from the bill.

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EXTERNAL RELATIONS 1. Chile and the ratification of the International Criminal Court (ICC) President Michelle Bachelet attempted to give a strong signal of national independence during late July by rejecting the most recent episode of US pressure over Chilean Congress’s upcoming ratification of the International Criminal Court (ICC) – expected by the end of 2006. Chilean Minister of Defense, Vivianne Blanlot, met in Washington D.C. with US Secretary of Defense, Donald Rumsfeld, who expressed concern over Chile’s ratification of the Rome Treaty without signing an article of reciprocal immunity; a topic discussed by Michelle Bachelet and George W. Bush in Washington in early June. Rumsfeld also told Blanlot that Washington would not understand if Chile supported Venezuela’s candidacy to the UNSC calling the South American country a “disruptive element” (please see below for further information on UNSC). In response, Bachelet stated that “Chile does not accept pressure from any side and of any type… Chile has had an independent foreign policy in the past, it has one in the present, and it will have one in the future.” With regard to the Rome Treaty, Foreign Affairs Minister, Alejandro Foxley, was adamant in stating that Chile is willing to face the military sanctions that Washington might impose for not signing a bilateral agreement of reciprocal immunity under the American Servicemember Protection Act (ASPA) - a law issued by the US Congress to avoid US military personnel from being processed by the ICC. Potential sanctions on Chile may include no further access to military training, technology transfers and credit for military procurement. Nevertheless, Blanlot reassured that the US is still very keen to maintain its longstanding military relations with Chile and that both nations are willing to look into options to diminish the impact of the sanctions – one of them being a waiver by the United States. Craig Kelly, US Ambassador in Chile, reiterated that "we have excellent relations between the armed forces of both countries and we value this relationship. We will find measures to ensure that the future will be very positive". Chilean and US military forces participate in joint military exercises, exchange of expertise and experiences and Chile utilizes vast amounts of US technology. 2. Chile still not willing to shine light on its vote for a UNSC candidate Chile's decision to vote for or against Venezuela as a non-permanent member to the UN Security Council has not only been a sore topic of discussion in the last three months in Chilean media, but has also managed to strain relations with the US. Regardless of whether Chile continues to claim that the decision to support a candidate's bid for the South American seat at the UNSC will be made at the right time and in the best interest of the country, it finds itself in a tight spot - on the one hand being pressured by the US to vote for the Guatemala candidacy, and on the other being pressured to return the favour to Venezuela that voted the former Minister of the Interior, José Miguel Insulza, for Secretary General of the Organization of the American States. Moreover, during the 30th Mercosur Summit, held in Cordoba in late July, Heads of State of South America’s largest 8 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

trading bloc, reiterated in a final statement their support to Venezuela’s efforts to join the Security Council claiming it would “help bring necessary balance” to the UN. The Bachelet administration seems to be waiting for the "ideal solution" to come into view, a consensus candidate which would avoid having to face the two most likely alternatives: vote for Venezuela or abstain. The government will probably not take any decision before October but this delay will only give room to more media speculation and embarrassing statements. This was the case at the end of July when Claudio Huepe, Chilean Ambassador in Caracas, publicly suggested that Chile should support Venezuela's bid, resulting in a sanction by the Foreign Affairs Minister Foxley. The Bachelet administration was not spared again when Minister Blanlot commented Rumsfeld’s concerns on Chile's vote to the media, rather than making them privately to the President (see Ratification of ICC above). Bachelet’s procrastination over a public statement on Chile’s intentions in the upcoming ballot also reflects a domestic split on the issue. Within Chile’s ruling Concertación coalition, the Christian Democratic Party has publicly disavowed President Hugo Chávez’s campaign, while the three other coalition members – the Socialist Party, the Party for Democracy and the Radical Party - have urged support for Venezuela’s candidacy. Bachelet is now in a difficult position not only foreign but domestically, given that the administration’s final decision will necessarily leave one or more parties within her own coalition unsatisfied. The opposition Alianza coalition has also voiced its discontent with a possible vote for Venezuela, especially after its recent strategic ties with authoritarian nations such as North Korea, Iran and Belarus. 3. Bachelet objects procurement of French Satellite Four days before the deadline to ratify the purchase of the US$ 45 million satellite offered by the European Aeronautic Defence and Space Company (EADS), President Bachelet ordered the Defence Ministry to call for a new international tender process for the procurement of an observation satellite system, to start in the next six months. The satellite is to be shared by the Chilean Army, Air Force and Navy and two-thirds of the satellite's use is to be devoted to civilian purposes. Although the project continues to be of key interest for the modernization of Chile's civil and military infrastructure, Bachelet's reasons were mainly due to the lack of transparency observed in the selection process, and the urgency with which the European consortium wanted to close the deal. The Chamber of Deputies’ Defence Commission echoed the lack of transparency and the Chilean Army further objected on the cost-benefits of the investment. EADS' difficult situation back at headquarters, due to polemic stock actions sales, also made Bachelet rescind from the deal; not wanting to get involved with a company experiencing a deep internal crisis. Moreover, media report that delays in the construction of the A380 Airbus by EADS, could have given the idea to Chilean authorities that the company would not meet its manufacturing commitments. A pre-agreement with EADS Astrium had been signed right before the end of term of the Lagos administration in March 2006. The analysis of this agreement, to be dealt with during French President Jacques Chirac's State visit in May, was one of Blanlot's first tasks. 9 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

4. Bolivia insists on its demand for access to sea Last May, Bolivia's decision to nationalize oil and gas resources provoked a cautious reaction from Chilean authorities. Given the at times strained bilateral relations between Chile and Bolivia, mainly due to Bolivia's demand for maritime access, President Bachelet decided not to comment on the decision, and just made a declaration stating she respected each country's sovereign decisions. Since the nationalization, Bolivia's demand for maritime access has surfaced again in the diplomatic relations with Chile. As Bachelet has been trying to downplay Bolivia's expectations on the matter, Bolivian President Evo Morales signed a strategic energy agreement with Argentina in July which excludes the possibility of redistribution of gas to third countries, i.e. Chile, adding strength to the Bolivian diplomatic motto "gas for sea". The Chilean government’s stance towards the maritime issue has consisted in advocating for a bilateral agenda “without exclusions”. This position has raised both hopes among the government and the people of Bolivia, and strong criticism from the Chilean conservative opposition. In their last meeting held during the July Mercosur Summit, Bachelet and Morales included the access-to-sea topic in their agenda, and displayed their will to approach the issue one step at a time. However, in order to appease internal discontent, Foreign Affairs Minister Alejandro Foxley clarified that the government's position will not include any sovereignty concessions, "we are not moving a millimeter from the 1904 treaty which established the borders". Bachelet further added that Chile's bilateral treaties were not to be revised.

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ECONOMY 1. Evolution des indicateurs économiques Evolution de la croissance Le résultat de croissance au mois de Juin Suite à la relative désaccélération enregistrée dans le rythme de croissance économique en Avril, où l'"Indice Mensual de Actividad Económica" (IMACEC) avait crû de 2.8% par rapport au même mois de l'année précédente (plus faible taux de croissance économique enregistré pour ce mois en sept ans et la récession de 1999), l'économie chilienne semble avoir recouvré toute sa vigueur durant les mois de Mai et de Juin, avec des taux de croissance respectifs de 6.1% et 4.5% (toujours en comparaison annuelle). Le taux de croissance moyen accumulé pour le second trimestre s'élève ainsi à 4.4%, et à 4.7% s'agissant du premier semestre dans son ensemble: ceci consacre le plus faible résultat en trois ans pour cette dernière période en raison des résultats relativement bas des mois précédents. Les principaux facteurs explicatifs Le relatif tassement de la croissance au mois de Juin est à attribuer selon la Banque Centrale à la présence d'un jour ouvrable en moins par rapport à Juin 2005, qui retirerait selon le Ministre des Finances A.Velasco entre 0.6 et 1 point de pourcentage à la croissance mensuelle. Néanmoins les facteurs explicatifs fondamentaux qui ont permis le très important rebond de croissance en Mai sont restés à l'œuvre dans le mois qui a suivi, permettant le maintien d'une projection de croissance annuelle entre 5% et 6% de la part de la Banque Centrale, et de 5.7% s'agissant du Gouvernement. Il s'agit notamment des éléments suivants: ⇒ le dynamisme retrouvé de l'industrie manufacturière, dont l'indice de production a crû de 6.9% en comparaison annuelle en Mai, selon l'information publiée par l'Instituto Nacional de Estadísticas (INE). En effet, ce même indice avait chuté de 2.5% en Avril, ce qui représentait le plus faible résultat pour ce secteur depuis Mai 2002; ⇒ un secteur minier dont l'activité a crû de 8.3% en comparaison annuelle en Juin, ce qui représente le meilleur résultat mensuel enregistré depuis Janvier 2005. ⇒ une forte croissance des ventes de biens de consommation, qui se sont accrues de 7.2% en Mai en comparaison annuelle;

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⇒ le rôle important joué par le secteur de la construction, dont l'indice mensuel d'activité (IMACON, construit par la Cámara Chilena de Construcción) a augmenté de 7.1% en Mai par rapport au même mois de l'année précédente. ⇒ les importations de biens de capital, qui sont un des facteurs d'une croissance plus "structurelle", se sont élevées en Mai à 641.2 millions de dollars U.S, soit une hausse annuelle de 16.6%. Impact sur les finances publiques Durant la premier semestre le bon comportement de l'économie chilienne en général, et du prix du cuivre en particulier, ont permis d'atteindre un excédent fiscal cumulé de l'ordre de 4.2% du PIB. Ce chiffre met en valeur une amélioration certaine de l'état des finances publiques par rapport à la première moitié de l'exercice précédent, où l'excédent fiscal n'avait été "que" de 2.8%. S'agissant du résultat annuel, le Gouvernement prévoit un excédent équivalent à 5.3% du PIB. Les points suivants sont notamment à mettre en valeur: ⇒ Les revenus fiscaux ont augmenté de 20.2% durant le premier semestre en comparaison annuelle, et les dépenses de 6%; ⇒ Selon les données fournies par l'"Informe de Activos Financieros" du Trésor Public, le portefeuille d'investissements de l'Etat, composé à 82% d'actifs libellés en dollars, s'élevait en Juin à une somme totale de 6.984 millions de dollars U.S, dont environ 80% sont investis sur les marchés extérieurs. Enfin, la Banque Centrale a indiqué dans son "Informe de Estabilidad Financiera" publié au début du mois de Juillet (qui couvre l'évolution des finances publiques pour le premier trimestre de l'année 2006) que l'excellent comportement des finances publiques pourrait conduire pour la première fois de son histoire le Gouvernement consolidé (avec la Banque Centrale) chilien à devenir un créancier net pour un montant équivalent à 2.5% du PIB. Evolution des prix et de la politique monétaire Evolution des prix au mois d'Avril L’indice des prix à la consommation (IPC) a connu une hausse de l’ordre de 0.6% durant le mois de Juin. L’inflation cumulée durant les six premiers mois de l’année s’élève ainsi à 2.1%, et 3.9% en comparaison annuelle. Ce chiffre reflète la plus forte hausse des prix pour ce mois depuis 1995, année où l'inflation avait été de 0.7%. La hausse de l'IPC a été principalement influencée par celle de la rubrique « transports », dont l'indice des prix a augmenté de 2.4%. En effet, le secteur a pâti de la forte hausse du prix des combustibles au niveau national (+ 3.7%) durant ce laps de temps, conséquence directe de l'augmentation du prix du pétrole sur le marché international. Le sous-groupe des transports collectifs est celui qui a le plus répercuté cette hausse sur le prix final du ticket: celui des bus "interprovinciaux" a augmenté de 9.2%, contre 3% pour celui des bus collectifs à Santiago. 12 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Les autres rubriques ont fait montre de variations mineures: "Alimentation" (+0.5%), Logement (+0.2%); "Santé" (+0.2%). L’IPC « sous-jacent », qui exclut les combustibles ainsi que les fruits et légumes dans le panier de biens retenu pour la construction de l’indicateur, a augmenté de 0.3% durant le mois de Juin, ce qui représente une variation cumulée de 3.1% en 12 mois. La réponse de la politique monétaire Le Conseil de la Banque Centrale a résolu d’augmenter son taux directeur de 25 points de base pour le mois de Juillet, pour atteindre un niveau de 5.25% pour ce qui va de l'année. Toujours en conformité avec une inflation devant être contenue entre 2% et 4% à un horizon de 12 à 24 mois, le Conseil de l’institut émetteur a argumenté une telle décision sur la base des éléments suivants : ⇒ une croissance économique qui conformément aux projections contenues dans l'"Informe de Política Monetaria" du mois de Mai devrait s'accélérer durant la seconde partie de l'année; ⇒ des conditions monétaires toujours expansives en termes réels ; ⇒ une conjoncture internationale qui continue d'être favorable; ⇒ les prix élevés du pétrole qui influent de manière quasi directe ceux du secteur des transports ; ⇒ une amélioration du panorama de l’emploi salarié, favorisant le dynamisme de la consommation. La Banque Centrale a toutefois indiqué que le rythme dans l'ajustement monétaire pourrait se ralentir d'ici à la fin de l'année, étant donné notamment le faible rythme de croissance des autres composants de l'indice des prix. Evolution de la situation de l’emploi La dynamique de l’emploi au second trimestre Selon les chiffres publiés par l’INE (Instituto Nacional de Estadísticas), le taux de chômage chilien s’est élevé à 8.9% durant le trimestre mobile Avril – Juin, ce qui représente une hausse annuelle de 0.2 points de pourcentage (troisième hausse annuelle consécutive), de même que par rapport au trimestre mobile précédent. Ce résultat recoupe les évolutions suivantes: ⇒ 204.800 nouveaux postes de travail ont été créés, qui ajoutés aux postes déjà existants, aboutissent à un chiffre total de 5.989.010 personnes employées. Ces créations de postes ont toutefois été insuffisantes au regard des 242.900 personnes ayant parallèlement intégré la force de travail (pour une force de travail totale de 6.576.850 personnes). 13 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

⇒ l'emploi salarié a connu une hausse de 6.7% en 12 mois, tandis que le nombre de travailleurs indépendants a diminué de 2%; ⇒ parmi les personnes sans emploi, 83.6% sont en situation de chômage avéré, et 16.4% recherchent un emploi pour la première fois. ⇒ les femmes et les jeunes de 15 à 24 ans demeurent les deux segments de population active les plus exposés au chômage, avec des taux respectifs de 11% et de 20.6% pour le trimestre mobile en question. Ces chiffres sont révélateurs de la brèche persistante entre l'emploi féminin et masculin sur le marché de l'emploi au Chili, ainsi que des difficultés auxquelles sont confrontés les jeunes au sortir de leurs études pour décrocher un premier emploi. Evolution sectorielle Le secteur des « services communaux, sociaux et d’assistance aux personnes » est le plus dynamique en terme d'emploi, avec 1.670.000 personnes employées pour la période Avril – Juin, ce qui représente une hausse annuelle de 3.2%. Ce secteur concentre donc à lui seul 28% de la population "occupée" dans le pays. Il est suivi en importance par le secteur du commerce, qui avec 1.158.600 postes, fait montre d'une hausse annuelle de 0.4%. Enfin, c'est le secteur de la construction qui avec 494.650 places au total a exhibé la plus forte hausse annuelle, avec un taux de croissance de 9.6%.

14 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

2. Actualité Economique La Commission Marcel a présenté ses propositions concernant la réforme des retraites Le système de financement des retraites chilien, créé en 1981, a pour fondement la capitalisation individuelle, et est constitué de 3 piliers : un obligatoire et de gestion privée, un autre visant à offrir des pensions minimales après la retraite, et un dernier fonctionnant sur une base volontaire, offrant des plans de retraite complémentaires. Les contributions des travailleurs abondent des comptes individuels gérés par des fonds de pensions privés, les « Administradoras de fondos de pensiones » (AFP), créés en 1981, qui sont les investisseurs institutionnels les plus puissants du marché financier chilien. Le système de capitalisation individuelle fait désormais l’objet de nombreuses critiques : faiblesse et inégalité à la fois de la couverture, des contributions ainsi que des pensions offertes, excessive concentration des AFP et très hauts frais d’administration… Aujourd’hui vivent au Chili 1.600.000 chiliens (12% de la population) de plus de 60 ans, et en 2020 ils seront 2.500.000 (17% de la population). Les estimations montrent que, dans le système actuel, seulement un tiers recevra une pension supérieure à la minimale, tandis que le reste soit touchera une pension minimale ou d’assistance, soit ne touchera rien du tout. Sur la base de ce constat, le nouveau Gouvernement de Mme Bachelet a entrepris un chantier de réforme en profondeur du système, en constituant une Commission dirigée par M. Marcel, ancien directeur du Budget sous le Gouvernement de Mr Lagos. Cette Commission a procédé à un vaste processus de consultation de l’ensemble des acteurs concernés dans le pays, et a sur cette base présenté le 6 juillet ses propositions visant à réformer le système de retraites. Parmi les 70 propositions transmises à la Présidente Michelle Bachelet, la plus importante concerne la mise en place d'une "Pension Basique Universelle" (PBU) de base de 75.000 pesos mensuels (environ 110 euros) pour 60% de la population, les 40% les plus riches étant exclus de cette mesure. La PBU serait accordée à la fois aux personnes ne bénéficiant d'aucun type de pension, et à celles touchant une retraite inférieure à 200.000 pesos (suivant un processus dégressif pour ces derniers). La PBU, associée à des aides financières aux mères qui travaillent ainsi qu'à un fonds de pensions pour l'invalidité, remplacerait ainsi l'ancien système de "retraite d'assistance" (44.186 pesos mensuels) et de "retraite minimale garantie par l'Etat" (87.853 pesos mensuels). Outre la PBU, les principales propositions de la Commission Marcel sont les suivantes: ⇒ l'âge de la retraite pour les femmes, qui est aujourd'hui de 60 ans, serait relevé à 65 ans d'ici 2025 (avant même de recevoir les travaux de la Commission, la Présidente Michelle Bachelet a déclaré être opposée à cette mesure); ⇒ les travailleurs indépendants seraient désormais obligés de cotiser à hauteur de 10% de leurs revenus, ce qui n'est pas le cas aujourd'hui. Cette obligation serait toutefois effective après une période de transition de 5 ans; 15 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

⇒ la retraite minimale serait accessible de manière graduelle à partir de 10 ans de cotisation (contre 20 ans aujourd'hui); ⇒ l'administration des capitaux épargnés, aujourd'hui seulement aux mains des AFP, pourra être réalisée par de nouveaux acteurs comme les banques ou les compagnies d'assurance, dans un souci d'augmenter la concurrence dans le domaine. ⇒ l'investissement des capitaux à l'étranger, aujourd'hui limitée à 30%, serait étendu graduellement et sans limite dans le but d'accroître les perspectives de rentabilité des placements effectués. ⇒ certains services des organismes de retraite (non liés à la gestion des capitaux) pourraient être externalisés. L'objectif ultime de cette mesure serait de diminuer les coûts pour les AFP afférents à ce type d'opérations et d'éviter certains types de conflits d'intérêts. L'ensemble de la réforme sera financé par un fonds solidaire prélevé sur les ressources de l'Etat et ne nécessitant pas d'impôts ou de cotisations supplémentaires. Selon les estimations de la Commission, le coût total de la réforme devrait s'élever à 2,5% du PIB d'ici 2025, ce qui devrait représenter 230.000 millions US$. Selon les propositions de la Commission, le financement de la réforme serait permis par les versements décroissants des retraites basées sur l'ancien système, et par un supplément tiré des revenus du cuivre à travers la règle de l'excédent structurel. L'ancien ministre des finances du gouvernement Lagos, Nicolas Eyzaguirre, a critiqué ce mode de financement, en affirmant que la réforme rendrait définitives des dépenses à l'origine provisoires. Plusieurs membres de la "Commission Marcel" ont déclaré à la presse que selon eux le rôle de l'Etat était désormais de définir une période de transition afin que tous les bénéficiaires puissent commencer à recevoir leurs retraites selon le nouveau système en 2025. Durant la période de transition, les retraites issues du nouveau système seraient distribuées de façon progressive en fonction de critères d'âge, de revenus ou d'années de cotisations. Les conséquences pour le Chili de l'accord sur le gaz signé entre l'Argentine et la Bolivie Le Chili se retrouve aujourd'hui dans un contexte de crise énergétique ouverte. En effet, 72% de la consommation d'énergie primaire provient de l'extérieur, notamment le gaz naturel dont 97% de la consommation nationale est alimentée par les importations en provenance d'Argentine. S'agissant de ce dernier point, la diminution de la production de gaz en Argentine ainsi que la hausse de la consommation nationale ont provoqué de nombreuses coupures dans l'approvisionnement vers le Chili: on estime que ces restrictions s'élèvent à 9,8 millions de m3 par jour (environ 40% des besoins nationaux sur cette source et la moitié des volumes concernés par les contrats). Au cours du dernier mois, sur les 34 millions de m3 de gaz prévus par les contrats, moins de la moitié est parvenue au Chili, et à Santiago plus de 80% des industries ont ainsi souffert de coupures. 16 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Pour pallier la diminution de sa production, l'Argentine a signé un accord sur le gaz le 29 juillet avec la Bolivie, portant sur les exportations de gaz naturel bolivien vers l'Argentine. En vertu de cet accord, le prix du gaz exporté vers l'Argentine augmente de 56%, et passe de 3.2US$ à 7.7US$ par million de BTU (British Thermal Unit, unité de mesure énergétique). En outre, les réexportations de gaz vers le Chili sont restreintes: une clause de l'accord interdit à l'Argentine de délivrer de nouveaux permis d'exportation afin de bloquer les réexportations de gaz vers un pays tiers. Le risque était ainsi très grand de voir l'Argentine reporter la hausse de ces tarifs sur ceux en vigueur sur les contrats d'exportation vers le Chili. En effet, jusqu'à aujourd'hui, le Chili achetait le gaz à l'Argentine à moins de 2.5US$ par million de BTU. Au début du mois de Juillet, le Gouvernement Argentin a annoncé lors d'une réunion bipartite entre experts des deux pays que ce prix devrait augmenter dans une fourchette comprise entre 43% et 78%. Durant cette même réunion, l'Argentine indiquait que cette hausse se réaliserait par le biais d'une taxe appliquée aux exportations de gaz. L'annonce de cette nouvelle a provoqué de nombreuses réactions diplomatiques au plus haut niveau, la Présidente M. Bachelet qualifiant une telle mesure d'"inconcevable", tandis que le Ministre des Affaires Etrangères A. Foxley jugeait la décision argentine de "discriminatoire" et de "contradictoire". La tension a ensuite monté d'un cran après l'annonce réalisée par le Ministère de l'Economie argentin de passer d'une fourchette de 2.50 – 2.80 US$/million BTU à 4.50 4.80 US$/million BTU. En effet, les autorités chiliennes affirment qu'une telle hausse est en contradiction avec l'assurance faite par l'Argentine durant le sommet du MERCOSUR de Cordoba que le prix ne dépasserait pas les 4 US$ /million BTU. L'échange de lettres entre les deux Présidents de la République qui a eu lieu par la suite n'a donné lieu à aucune avancée. Le Gouvernement chilien a entre temps annoncé que les foyers ne devraient pas être touchés par la hausse, du fait d'un contrôle accru des mesures compensatrices des entreprises distributrices. Les principales victimes de la hausse des prix du gaz argentin seraient les grandes entreprises minières et industrielles qui négocient directement le prix du gaz avec leurs fournisseurs argentins.

17 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

TRADE 1. Trade Indicators and results In June 2006, Chile's trade balance reached a surplus of US$ 1,897 million, as a result of exports amounting to US$ 4,858 million and imports to US$ 2,960 million. This figure represents a 19% fall when compared to May 2006. The accumulated trade balance for the first half of 2006 sums US$ 10,166 million, representing a 90% increase when compared to the same period in 2005.

US$ Million fob

Trade Balance Jan-Jun 2001-2006 11,000.0 10,000.0 9,000.0 8,000.0 7,000.0 6,000.0 5,000.0 4,000.0 3,000.0 2,000.0 1,000.0 0.0

10,166.3

5,121.6 1,530.7 1,803.5

2001

5,348.8

1,784.2

2002

2003

2004

2005

2006

Source: BCCH

1.1. Exports Chile's total exports experienced a 12% decrease in June 2006, when compared to the peak reached in May. Still, June 2006 figures display a 40% rise when compared to the same month in 2005. Chile's Exports 2002-2006

US $ Million Fob

6,000.0 5,000.0 4,000.0

5,268 3,754 3,544

5,536

4,858

4,035

3,000.0 2,000.0 1,000.0 0.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2002

2003

2004

2005

2006

Source BCCH

18 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Overall accumulated exports for the first six months of 2006 increased by 38% in comparison with the same period in 2005, reaching US$ 26,995 million. The main reason for this increase can be attributed to the dynamism of the copper industry exports. Quarterly Exports 2003-2006 (US$ Million) Quarter \ Year

2003

2004

2005

2006

06/05 (%)

Q1 Q2 Q3 Q4 Total

5 282 5 283 5 153 5 805 21 524

7 484 7 927 7 933 8 681 32 025

9 388 10 100 10 062 11 025 40 574

12 566 14 430

34% 43%

Source: BCCH

Geographical breakdown During the first half of the year, Asia remained the first destination with 30.5% of total exports. When compared with the same period in 2005, Asia shows a decrease of its share of 5.2 points. The EU retained the second place with 26.9% of total exports, while NAFTA represents 22.4% and Latin America, 12%. Within Asia, the main recipients of Chilean exports are Japan, with 9.9% of the market share, China with 7.8%, and Korea with 5.4%. These figures may increase in the near future with the recently signed agreement with China and the forthcoming FTA with Japan. The participation of the U.S. amounts to 16.5% and that of Mercosur to 6.1%.

Chile's Main Export Destinations January - Jun 2006 ASIA 30.5%

OTHERS 8.3%

NAFTA 22.4%

EU 26.9%

LATIN AMERICA* 12.0%

Source: BCCH

* without Mexico 19 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Sectoral breakdown During the period January-June 2006, mining sector exports (copper, molybdenum and others) reached US$16,607 million, representing, in absolute terms, an increase of 57% when compared to the same period in 2005. This increase, well above total growth exports (38%), explains the growing relative importance of this sector (mainly led by the copper boom) in the overall exports structure (see "The dynamism of Copper", p.22). Manufactured goods exports grew by 17% and totalled US$ 7,612 million. Finally, agriculture, livestock, forestry and fishing (ALFF) exports experienced an increase of 7%, adding up to US$ 2,005 million. Exports Structure Jan-Jun 2006 Vs 2005

2,9%

3,2%

Others

100% 33,5% 80% 60% 40%

9,3%

54,1%

28,2%

Manufactures

7,4% ALFF 61,5%

Mining

20% 0%

2005

2006

Source: BCCH

Chilean exporters From January to June 2006, Small and Medium Enterprises (SME) experienced the most important growth rate among Chilean exporting firms. Micro enterprises doubled their exports in comparison with the same period in 2005. The large exporting firms remain the main actors of Chilean exports, as they accounted for 89% of total exports.

20 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Growth of Chilean exporters by enterprise size Jan-Jun 2006 (12 month variation) 120% 108%

100% 80% 60% 40% 20%

50%

40% 18%

0% s es ises ises prise terpris t erpr trepr e nt er m en ro en a ll e n iu ic m d M S Large e So urce: Natio nal Custo m Service M

Despite these good results, Chilean exporters displayed a decrease in confidence. According to a July survey compiled by the Adolfo Ibañez University, the indicator related to global confidence fell from 76% to 59% over the last six months. Among the exporters, the main topics of concern were the problems caused by the depreciation of the US dollar against the Chilean peso (for 73% of exporters), and the increase in oil prices (for 63%). According to the survey, although almost all of the companies believe their exports will at least remain steady over the forthcoming twelve months, only 25% expect a rise in profitability, while a third even anticipate a fall.

21 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

The dynamism of Copper Chile is the world's first producer of copper, accounting for more than 37% of world production. Chile also benefits from the most important reserves of this mineral, with one third of the world reserves. National production reaches an annual 5.3 million tons. In 2005, copper exports alone amounted to US$ 18,306 million, representing 45% of the total exports for that year. During the first six months of 2006, this commodity accounted for 53% of total exports, reaching US$ 14,417 million. This is the best result in the history of Chilean exports, and it represents a 75% rise when compared to the same period in 2005. Although copper exports did not experience much variation in terms of volume, a boost in value was caused by the unprecedented rise in copper prices. Copper exports during the first three months of 2006 equalled Chile's total exports of this commodity in 1999.

400

3500

350

3000

300

2500

250

US$ millions

c / pound

Copper: international prices and Chilean exports

2000

200

1500

150 100

1000

50

500

0

Copper price Copper exports

0 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Source: BCCH and Cochilco

The rise in copper prices was due to a combination of factors. First, a slowdown in the discovery of new copper layers worldwide led to a growing virtual scarcity of this mineral, causing an increase of its market value. Second, the economic growth experienced by China required increasing quantities of the red metal for its internal demand, with a direct effect on prices. Finally, the dynamism of the sector attracted pension funds investors as well as financial speculators, who forsook the volatility of currency markets to turn to the more stable minerals markets. According to the Chilean Copper Commission (Cochilco), copper prices will remain high for at least two years, with an average price above US$ 2.42 per pound for 2007. However, in the long run, the price of this commodity should revert to normal standards, with an expected price of only US$ 1 per pound over the next 10 years.

22 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

1.2. Imports In June 2006, imports amounted to US$ 2,960 million, a 7.4% fall compared to May 2006 but an increase of 22.8% compared to June 2005.

US $ Million Fob

Chile's Imports 2002-2006 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0

2,931

2,902 2,396

3,197

2,961

2,442

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2002

2003

2004

2005

2006

Source BCCH

During the first six months of 2006, accumulated imports totalled US$ 16,829 million, rising by 19% in comparison to the same period in 2005. The main ground for this increase has been the appreciation of the Chilean peso against the US dollar, along with internal demand that has continued to grow at a regular pace. Quarterly Imports 2003-2006 (US$ Million) Quarter / Year

2003

2004

2005

2006

06/05 (%)

Q1 Q2 Q3 Q4 Total

4 234 4 500 4 548 4 721 18 002

4 989 5 321 6 122 6 573 23 005

6 781 7 358 8 114 8 142 30 394

8 229 8 600

21% 17%

Source: BCCH

Geographical breakdown During the two first quarters of 2006, Latin America accounted for almost one third (31.6%) of Chilean foreign purchases. NAFTA countries added up to 19.2% of total imports, of which 15.4% corresponds to the US. Other suppliers were Asia and the EU with 18.5% and 14.3% respectively. The rest of the world made up for 16.3% of total Chilean imports. 23 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Within Asia, the main providers were China with 8.2%, followed by South Korea with 3.9%, and Japan with 2.8%. The share of imports from the U.S. accounted for 15.4%. Mercosur imports amounted to a share of 24.6%, with Argentina (12.3%) and Brazil (11.3%) as the main suppliers. Chile's main import suppliers Jan-Jun 2006 OTHERS 16.3%

NAFTA 19.2%

ASIA 18.5%

EU 14.3%

LATIN AMERICA* 31.6%

Source: BCCH

* without Mexico

Sectoral breakdown Between January and June 2006, intermediate goods accounted for 56.5% of Chilean imports, reaching US$ 9,502 million. This figure represents a 24% increase when compared to the same period in 2005. Capital goods amounted to US$ 3,320 million, displaying an increase of 9% and consumer goods summed US$ 2,684 million, representing a 23% rise, compared to 2005 figures. Imports Structure Jan-Jun 2006 vs. 2005 Others 100%

8,6%

7,9%

21,7%

19,7%

54,3%

56,5%

15,5%

15,9%

2005

2006

Capital goods

80% 60%

Intermediate goods

40% 20% 0%

Consumer goods

Source: BCCH

24 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

2. EU-Chile Trade -

EU Exports to Chile: from January to June 2006, exports to Chile equalled some US$ 2,412 million, a 4% increase when compared to the same period last year. Exports in consumer goods rose by 32%, reaching US$ 354 million. Exports in intermediate goods amounted to US$ 1,214 million, reflecting a 13% increase. As for capital goods, exports to Chile summed US$ 843 million, representing a 14 % decrease.

-

EU Imports from Chile: imports from Chile added to some US$ 7,259 million during the period January-June 2006. This represents a 50% increase when compared to the same period in 2005 and can be explained by a 77% rise in mining imports, which reached US$ 5,401 million. In the meantime, industrial imports increased by 11% reaching US$ 1,371 million, and agricultural imports decreased by 13%, amounting to US$ 462 million.

During the period January-June 2006, the accumulated trade balance derived from the above-mentioned figures equals some US$ 4,846 million in deficit for the EU.

25 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

2. Trade news

FISHING INDUSTRY Fishing Industry New law on artisanal fishing Undersecretary of Fisheries, Carlos Hernández, is currently preparing new legislation on artisanal fishing, one of his present priorities as the sector needs to start adopting better practices and achieve higher standards in management, employment, environment and hygiene levels. The Undersecretary's main goal is not solely increasing artisanal fishermen quotas but also providing the appropriate legal framework to promote the sustainable development of the sector, and with this, boost their participation in the production chain. The private sector has been calling for better regulation, since the number of allowed fishing boats is too high in comparison with the available fish stock and artisanal and small scale fisheries are the ones that suffer the most from this situation. The new legislation will include the definition of "capture sections" and "artisanal fishing", which will acknowledge the existing diversity of Chilean artisanal fishermen, and provide a sound framework for sustainable fishing. The bill will provide trade unions with some control over the resources. Similarly, the law will establish commercial areas in order for artisanal fishermen to secure a fair price for their products and consequently improve their social conditions. The bill is expected to be sent to Congress by August or September 2006, but Parliament is already working on the issue. MP Patricio Vallespín, President of the Parliament's Commission on Fisheries and Aquiculture, stressed the importance of achieving an appropriate coexistence between aquiculture and fishing off the Chilean coast. Salmon industry under criticism Salmon farming is one of the most dynamic sectors in Chile. Over the last decade, it has increased by an annual growth rate of 15% and currently accounts for 20.2% of global Chilean food exports, employing some 53,400 people. The industry has brought enormous international investments to Chile's southern region, where it is primarily based. Salmon exports reached US$ 1.7 billion in 2005 and are estimated to reach US$ 2 billion this year, representing a rise in revenues of 16.2% and setting a new record for the industry. Chile is even expected to surpass Norway soon as the world's leading producer of farmed salmon. According to the National Institute of Statistics, the industry can further expound exports of related value-added services such as medicines, vaccines, equipment and technology. These developments should bring an income of some US$ 2.8 billion by 2010, surpassing fruit exports revenues. However, salmon fishing has been harshly criticised by environmental groups. A study by the NGO Ecoceanos reported a series of infractions related to working hours, hygiene and safety conditions. In fact, 63% of the inspections carried out last year led to sanctions, while the overall infraction rate in the sector is around 80%. This situation has led Parliament to demand an investigation on labour and environmental conditions in the salmon industry, and has strongly suggested for the sector's enterprises to invest on better 26 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

safety conditions for their workers, with special attention to those most at risk, namely the divers. Domingo Jiménez, manager of the enterprise Pesquera Coloso, emphasized to the local press how crucial the legislative role of the Fisheries Undersecretariat is for the environmental regulation, as it provides the adequate tools to determine the capacity of salmon farms and their sustainability.

WINES Wines Although the Chilean wine industry remains increasingly successful in world markets, for the first time since 1994, it has experienced an export decrease in value over the last 12 months. The industry reported flat exports in the first half of 2006, with an increase of only 0.7% in volume when compared to the same period in 2005, and 4.3% more than the previous year in value (US$ 424 million). A weak US dollar, higher production costs, increasing international competition from countries such as Spain, Australia and Argentina, and a general oversupply of wine in the international market are among the main factors behind these figures. According to the risk assessment consultant group Feller Rate, "as soon as there is a liquidation of the existing raw materials and grape prices decrease, vineyards can expect to recuperate their margin in the third semester". With regard to bottled wine exports, between January and June 2006, the accumulated results increased by 3.8% in volume, 5.7% in value and 1.8% in price, in comparison to the first half of 2005. During the same period, bulk wine registered a decrease in volume and in value of 3.8% and 2.9% respectively, but experienced a slight increase of 1.4% in price. The recent wine reform announced by the European Commission has given initial hope to Chilean wine producers, as it is expected by some to provoke a rise in bulk wine prices, which accounts for 30% of Chile's wine exports in volume and 10% in value. But as local media have pointed out, Chilean wines could also face growing levels of competition as a consequence of this European reform.

INTELLECTUAL PROPERTY RIGHTS Intellectual property rights Chile has been criticized by trade partners of poor protection in intellectual property rights, in comparison to international standards. A 2006 report from the Office of the US Trade Representative (USTR) concluded that existing legislation was lacking adequate protection measures with regard to pharmaceuticals and the piracy of movies, music and software. Since 2005, the USTR has decided to keep Chile in its watch list (Special 301) due to its poor performance in protecting IPR. In an attempt to respond to continued criticism, a new law came into force last March adapting Chilean legislation to the WTO's TRIPS agreement Moreover, a proposal for a 27 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

new IPR bill was sent to Congress to adjust the new IPR law to the FTA between Chile and the US. One of the main topics of the new legislation is the so-called 'linkage' issue. The problem under the current law stems from the need to obtain approval from both the local public health authority (Instituto de Salud Pública ISP) and the Patent Office (DPI) to actually be able to register a patent. However, in practice, once the ISP granted permission, the product could be easily copied even before the granting of the patent, shortening the period of exclusive protection of pharmaceutical companies. But to some extent, the latter's lobbying efforts have proven fruitful. The new legislation should allow for competitors to obtain sanitary authorization before the expiration date of patents, but only insofar as they are not commercialized. The bill, approved by the Chamber of Deputies, is currently under discussion in the Senate.

FREE TRADE AGREEMENTS Free trade agreements Chile's development strategy has succeeded in opening the country to external trade, thus promoting its integration in the world. During the last three decades, Chile has conducted a policy of progressively removing trade and financial barriers, beginning with the unilateral reduction of tariffs, and since the 90s, continuing with the signing of free trade agreements with more than 40 countries and groups of countries, including the US, the European Union and most recently with China. FTA with China to be ratified by Senate The FTA with China was signed on November 2005 and was supposed to enter into force on 1 July 2006, but the ratification process by the Chilean Parliament suffered delays. The Parliamentary Commission finally approved the text on 11 July and so did Parliament a week later. The FTA will be discussed by the Senate in August and it is foreseen to enter into force in the last months of 2006. Foreign Affairs Minister Foxley asked Parliament to carry out a thorough but speedy discussion on the FTA in order for President Bachelet to attend the November APEC meeting with a ratified treaty in hand. Foxley reminded Parliament of the key role of this FTA, as a catalyst in making Chile a platform for trade, business and services between Latin America and the Asia Pacific region. The FTA will imply an immediate elimination of duties for 92% of Chilean exports, and the elimination of duties for 50% of imports from China. Currently, only 500 enterprises have trade relations with China. FTA with Panama signed The FTA with Panama is Chile's most recent trade agreement and the first to be signed by President Bachelet in June. This FTA is especially important given that both countries share the vision of economic integration which small countries must obtain in order to have a greater role in the world economy. The agreement is still to be ratified by both Chambers of the Parliament. It foresees the elimination of tariffs on 98% of goods traded 28 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

between the two nations over a maximum period of 15 years for Panama and 10 years for Chile. Two cooperation protocols are attached to this FTA, one on labour-related matters and another on environmental issues. Although Panama is a relatively small market (3 million inhabitants), 92% of Chilean exports are non traditional products, representing a diversified market for Chile. During 2004 and 2005, there was a high increase of exports to Panama in industrial products, specifically chemicals. This has led authorities to believe that the FTA will prove attractive in terms of diversification of products and exports growth. Direcon figures for 2005 show that trade between Chile and Panama reached US$ 122 million, with a US$ 100 million surplus for the Chilean trade balance. Copper, wines, wood boards and refined gasoline were among the main export products. Chile's imports included mainly boats, fishing nets, perfumes, rum, radar equipment and medical supplies. FTA negotiations with Japan continue Chile concluded the third round of FTA talks with Japan in Tokyo in July. Despite initial setbacks, both countries continue to express their commitment towards a global agreement in the long-run, which would not only be centered on specific products and commodities. In Prime Minister Koizumi's view, Chile is a priority for Japan, since it can act as a springboard for Japan’s interests in the Latin American region and plays a strategic role in ensuring supplies of copper and other natural resources. But Minister of Foreign Affairs Alejandro Foxley declared at the end of June that his government would consider postponing negotiations should Japan fail to put a more flexible offer on the table. In fact, Japan insists on excluding agricultural products and proposes the elimination of import duties over periods of up to 20 years. Mr. Ogawa, Japanese Ambassador in Chile, responded that if negotiations were to be postponed, the Japanese interest would fade, especially in terms of investments and technology transfer. The next round of talks is scheduled to begin in Santiago at the end of August 2006. Japan is Chile's second trade partner, accounting for 11% of Chilean exports, and 2.7% of Chilean imports. Peru: next FTA partner for Chile ? During his visit to Chile in June, Peruvian President Alan García and Chilean Foreign Affairs Minister Foxley both expressed their will to advance talks towards the conclusion of an FTA. Chile and Peru already have an economic complementarity agreement since 1998 (known as ACE 38) which has boosted bilateral trade. In 2005, Peruvian exports to Chile exceeded US$ 635 million, while Chilean exports reached US$ 470 million. Chilean investments in Peru are estimated at some US$ 4 billion. Under the ACE 38, some 83% of bilateral trade is tariff free. Expanding the agreement towards an FTA would yield new investment flows as well as providing a stronger legal framework with a sound dispute settlement mechanism. The FTA also envisages sectors such as services and public procurement. Recently nominated Peruvian Minister of Foreign Affairs, García Belaúnde, confirmed that one of the priorities of Peruvian bilateral relations with Chile is to conclude talks for an FTA. As Carlos Furche, Head of Direcon, stated, "Peru and Chile together can be a great power in mining, food and fisheries in the South Pacific". The Chile-Peru FTA text is estimated to be ready within the next few months. 29 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

Peru to join P4 Transpacific Agreement? The Chilean-Peruvian Entrepreneurial Council is not only pushing for the signing of an FTA but also for Peru to join the P4 economic association agreement established between Chile, Singapore, New Zealand and Brunei. Hernán Sommerville, President of the Confederation of Production and Commerce (CPC) says this is the opportunity for both countries to face the challenges of the Asia Pacific region together. New Zealand's Minister of Agriculture Jim Anderton declared he saw no reasons why this agreement could not be expanded to Peru, or even to Australia, when asked whether Peru would be considered in the P4. Chile searching for a trade agreement with Australia With the purpose of tightening commercial relations with Australia, Minister of Foreign Affairs Alejandro Foxley will be visiting the continent to advance talks towards a potential trade agreement. Talks could contemplate a bilateral FTA or enlarging the P4 Transpacific Association Agreement to include Australia. The Australian Ambassador in Chile, Crispin Conroy, stated that negotiating an FTA with Chile is not a priority at the present time (bilateral trade accounts to some US$ 300 million), but that their priority is to achieve an agreement to avoid double taxation. This matter is of importance since there are close to 70 Australian companies located in Chile. End to a not–so-sweet sugar dispute with Colombia and announcement of a possible FTA Colombian Ambassador in Chile, Jesús Vallejo Mejía, revealed to local press his country's desire to achieve an FTA with Chile. In a meeting in late July between Colombian Trade Minister Jorge Botero, and Chilean Foreign Affairs Minister Alejandro Foxley, both officials agreed to start negotiations towards the drafting of an FTA. The announcement was made after both countries succeeded to put an end to a five-year sugar dispute. Starting on 1 January 2007, Chile is now offering a quota of 6,000 tons for sugar and of 15,000 tons for blends and in exchange, Colombia will reduce its tariffs on Chilean products –set in retaliation to Chilean protective measures and in force since 2004including: wines (20%), tobacco (20%), vehicles (35%), juice powder (10%) and fruits (grapes, apples, pears, 15%). Chile already has a bilateral economic complementary agreement (ACE 24) with Colombia, and therefore gains from an FTA are foreseen mainly in the areas of services, investments and public procurement. Both government authorities estimate that the agreement can be concluded by the end of this year or the beginning of 2007. The issue will be high on President Bachelet's agenda when she will visit Colombia early in August. Customs services relations with neighbouring countries is a priority According to Foreign Minister Alejandro Foxley, Chile has gained international credibility and a sound reputation in terms of economic and political stability which has allowed for greater opportunities of economic expansion, not only at a national level, but also with the 30 DELEGATION OF THE EUROPEAN COMMISSION TO CHILE QUARTERLY REPORT August 2006

potential of acting as a springboard towards other larger Latin American economies (between 1990 and 2005, Chile received some USD 70 billion in foreign investments). Thanks to Chile's network of free trade agreements, 90% of exports face zero duties on foreign markets. However, obstacles are still being faced in terms of technical barriers to trade (TBT), customs regulations, and discriminatory access to markets among others. In this regard, achieving greater coordination among customs services with neighbouring countries is one of the goals of the Chilean National Customs Service (Servicio Nacional de Aduanas, SNA). Sergio Mujica, Director of the SNA was pleased by the outcome of a meeting held with his Bolivian counterpart Marcia Morales, Executive President of the National Customs of Bolivia, in La Paz in late July. The meeting aimed to coordinate a series of measures between the two countries to facilitate and oversee foreign trade exchanges. One of these measures was the commitment for cooperation and information exchange. This will allow for both Bolivian and Chilean customs officers, at border control points, to possess updated online information. With the aim to provide follow-up to the July meeting and have hands-on training, a second event is foreseen by mid August in the northern city of Iquique, where the main objective is to fine-tune work in frontier areas, especially in terms of the detection of smuggling of merchandise. Mujica has also been working extensively with his counterpart in Argentina, specifically in terms of coordination and collaboration of information sharing. In the case of Argentina, Chile is already preparing electronic land traffic manifests of vehicles, passengers and loads and towards the end of the year, both customs services are hoped will have integrated systems so that customs officers will have speedy access to such information.

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