Executive Summary

The Canada-Chile Free Trade Agreement (CCFTA) entered into force on July 5, 1997, and was path-breaking in many respects for both Canada and Chile. For Canada, it was the first free trade agreement concluded with a major South American country and the most economically-significant trade agreement since the North America Free Trade Agreement (NAFTA). For Chile, it was the first comprehensive free trade agreement concluded with a leading industrialized country.

Fifteen years later, the CCFTA provides sufficient retrospective to assess what the agreement has achieved, and to what extent the agreement has delivered on its potential. During this period, there have been numerous developments in trade theory, regarding in particular the importance of variety and the impact of trade liberalization on new and existing products; hence, the CCFTA constitutes a source of empirical evidence on the significance of an FTA at the "extensive margin" (the introduction of new products into a trading relationship) as well as at the "intensive margin" (change in the volume of trade of currently traded products). Finally, Chile has been very active in signing FTAs since the CCFTA, completing 18 more FTAs after the CCFTA including those with the EU, the U.S., Mexico and China; in this regard, the CCFTA provides an interesting platform to assess the tariff preference erosion effect from the accumulation of FTAs.

In essence, the CCFTA delivered on its promises by allowing both countries to expand their bilateral trade significantly, both in terms of existing trade (intensive margin) and in terms of new trade (extensive margin), and to generate significant income gains:

  1. On average, bilateral trade flows between the two countries grew 12.2 percent faster than would have been the case in the absence of the CCFTA;
  2. Canadian exports to Chile grew by an average of 5.4 percent between 1997 and 2011, compared to only 1.7 percent for Latin America as a whole;
  3. Chile became the third most important destination for Canadian exports to Latin America after Mexico and Brazil in 2011, compared to seventh in 1997;
  4. The majority of trade gains came from new trade - products that were not traded prior to the CCFTA and for which the CCFTA reduced the entry threshold. The new products accounted for 90 percent of the net increase in the value of Canadian exports to Chile.
  5. The CCFTA generated benefits beyond the traditional benefits associated with tariff elimination. This suggests that measures to liberalize investment and services, which are common in today's new generation of free trade agreements, along with the added certainty following the trade deal, could have a significant effect on two-way trade in goods over and beyond the effect induced by lower tariffs.
  6. Canada's overall economic welfare gains from the CCFTA were approximately a quarter of a billion dollars (or $250 million) annually; and
  7. While Canada's market share in Chile rose after the implementation of the CCFTA, its preference advantages in Chile were eroded by subsequent FTAs between Chile and third countries.

The CCFTA is working as intended, encouraging greater trade between the two countries.

The value of Canadian exports to Chile more than doubled to reach $819 million in 2011 from $392 million in 1997, increasing at an annual rate of 5.4 percent during the past 15 years, and outperforming exports to other major South American countries such as Argentina and Brazil with which Canada did not have preferential trade arrangements. Over the same period, Canadian merchandise exports to the whole Latin American region grew only by 1.7 percent. As a result of this exceptional growth, Chile emerged as the third-most important destination for Canadian exports to Latin America only after Mexico and Brazil in 2011; whereas in 1997, Chile ranked only as the seventh-most important market in Latin America.

Growth of Canadian merchandise imports from Chile since the CCFTA was even more impressive. Total Canadian merchandise imports from Chile grew six fold to reach $1.9 billion in 2011 up from only $326 million in 1997. Even excluding precious metals, which accounted for roughly 50 percent of the total net increase in imports from Chile and were not targeted by the CCFTA, imports from Chile more than tripled.

Canada's export gains to Chile were broad-based and included ores, machinery and equipment, mineral fuels and oils, iron and steel products, plastics, animal fast and vegetable oils, chemical products, pharmaceutical products, precision and medical equipment, and tools of base metal, while import gains from Chile were concentrated in precious stones and metals, copper, fish, and edible fruits and vegetables.

Overall, the results of advanced econometric research indicate that, on average, bilateral trade flows between the two countries grew 12.2 percent faster than would have been the case in the absence of the CCFTA.

The majority of trade gains came from new trade, products that were not traded bilaterally prior to the CCFTA.

After Brazil, Chile is the second-most popular destination in South America for Canadian exporters. The number of Canadian firms that exported to Chile following the implementation of the CCFTA more than doubled to reach 1,281 in 2010 compared to pre-FTA levels.

The number of products that Canada exported to Chile also more than doubled to reach 1,759 products in 2011 from 848 products in 1996. Taking into account the fact that 267 products dropped out of the export mix, there were actually 1,178 new products added to the portfolio of Canadian exports to Chile in 2011. In terms of value, 90 percent of the net increase in the value of Canadian exports to Chile came from the new products that were not exported in 1996.

The number of products that Canada imported from Chile nearly tripled from 454 products in 1996 to 1,210 products in 2011. There was a net increase of 756 products imported from Chile, with 922 new products added and 166 discontinued. In terms of value, more than 76 percent of the net increase in the value of imports came from the new products that were not imported prior to the trade agreement.

CCFTA generated benefits beyond the traditional benefits associated with tariff elimination.

Most of trade growth occurred in products that were duty-free prior to the CCFTA and products that experienced tariff reductions of more than 10 percentage points. The expansion of trade in duty free products means that the effects of "new generation" trade agreements, such as the CCFTA, often extend beyond the traditional benefits associated with tariff elimination and reduction. Measures to liberalize investment and services, along with the improved certainty following the trade deal could have a significant effect on two-way trade in goods over and beyond the effect induced by lower tariffs.

The numerous FTAs signed by Chile following the CCFTA limited the continued expansion of Canadian exports.

Chile was very active in signing FTAs following the CCFTA, completing 18 more FTAs with, among others, the EU, the U.S., Mexico and China. While these FTAs led to an erosion of Canada's tariff preference in the Chilean market and constrained the continued expansion of Canadian exports to Chile, the effects of this erosion seemed to be largely limited to the expansion of Canada's exports of existing products and had only little inhibition on the increase of new Canadian exports to Chile.

This can be explained by the fact that consumers in both countries highly appreciated the new varieties introduced under the CCFTA. At the same time, Chile is a relatively small economy with a population of 17 million, and the expansion of the trade volume for each new Canadian product was constrained by a small Chilean market and the competitive pressures from third countries.

Canada's overall economic welfare gains from the CCFTA were around a quarter of a billion dollars (or $250 million) annually.