Chile and Uruguay to sign free-trade agreement

The Uruguayan president, Tabaré Vázquez, announced  last month in a cabinet meeting  that Uruguay will sign a free-trade agreement (FTA) with Chile in September, streamlining the rules governing the bilateral flow of goods and services.

The Uruguayan president, Tabaré Vázquez, announced  last month in a cabinet meeting  that Uruguay will sign a free-trade agreement (FTA) with Chile in September, streamlining the rules governing the bilateral flow of goods and services.

Analysis

The new trade deal will provide a small but welcomed boost to Chile and Uruguay's exports, which have been hit in both cases by weak commodity prices and economic slowdown in major trading partners. Under the terms of the new deal, "double taxation" on investors' income from capital gains, interest, royalties and assets will be scrapped. The agreement also reportedly includes provisions concerning rules of origin, healthcare regulations, intellectual property and e-commerce.

Talks between the two countries began in February and have concluded relatively swiftly—in part due a well-developed existing framework for Uruguay-Chile trade. Both countries are signatories to the 1996 Economic Complementarity Agreement (ACE 35) between Chile and the Mercado Común del Sur (Mercosur, the Southern Cone customs union). A number of additional protocols followed, with fresh negotiations between Chile and Mercosur in 2007-08 resulting in further liberalisation in trade in services.

As a result of this existing trade integration—and the comparatively small size of their domestic markets—it is unlikely that expanded bilateral trade will make a sizeable impression on either country's trade balance.  Chilean exports to Uruguay totalled US$349m (0.5% of total exports) in 2015, while the flow of goods and services in the opposite direction reached US$200m (1.6% of the total), in both cases mainly in consumer goods, food products and chemicals.

However, when placed in a broader context, the outlook is more positive. In November Chile agreed to conduct a joint feasibility study with the Philippines into creating a bilteral FTA, which, if signed, would join Chile's 26 existing FTAs and preferential trade agreements. Chile is also likely to ratify the 12–nation Trans-Pacific Partnership (TPP) in late 2016 or early 2017.

Uruguay is currently party to multiple FTAs via Mercosur, and greater trade liberalisation between Mercosur and the Alianza del Pacífico (the Pacific Alliance, a four-member trade bloc of which Chile is part) is more likely, following the recent inauguration of centrist governments in Argentina and Brazil.

Impact on the forecast

We are unlikely to alter our forecasts for either country immediately, both of which include a mild short-term deterioration in the trade balance, but we will monitor possible indications of greater trade liberalisation within the region.

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