The Politics of Free Trade Agreements
In Search of Natural Resources: a case-study of the Chilean Copper Industry in the light of China’s Search for Copper
J.T. (Jelke) Morriën (10.21.78.94)
Master Political Science: International Relations, University of Amsterdam, The Netherlands
Master Thesis Political Science – University of Amsterdam Research Project – Global Politics of Investment and Trade
Supervisor – Professor dr. J.W.J. (Jeffrey) Harrod Second Reader – R. (Roel) van Engelen MSc, MA Master Thesis – Final
2 | P a g e TABLE OF CONTENT
LIST OF ABBREVIATONS ... 4
1. INTRODUCTION ... 7
1.1. Introduction ... 7
1.1.1. Introduction to the Topic ... 7
1.1.2. Motivation ... 8
1.1.3. Aim of the Research ... 9
1.2. Methodology ... 9
1.2.1. General Methodology ... 9
1.2.2. Case Study Selection: the Chilean Copper Industry ... 10
1.2.3. Structure of the Research ... 11
2. THEORATICAL FRAMEWORK ... 12
2.1. Introduction ... 12
2.2. Dependency Theory ... 13
2.2.1. Introduction to the Dependency Theory ... 13
2.2.2. The Dependency Theory in Today’s context ... 16
2.3. Politics of Free Trade (Agreements) ... 18
2.3.1. Introduction to Classical Liberal Economy and Neoliberalism ... 18
2.3.2. The Ideology of Free Trade ... 19
2.3.3. Bilateral Free Trade Agreements: North-South and South-South ... 20
2.4. Issues of the Theoretical Framework ... 22
2.5. Conclusion ... 24
3. CHILE’S PRIDE: CHILE AND THE COPPER INDUSTRY ... 25
3.1. Introduction ... 25
3.2. Profile of Chile ... 25
3.2.1. Brief Introduction to Chile ... 25
3.2.2. Neoliberal Profile of Chile ... 26
3.2.3. Chile’s FTAs ... 27
3.2.4. Corruption and Elite ... 29
3.3. Chile’s Copper Industry ... 30
3.3.1. Introduction to the (Global) Copper Industry ... 30
3.3.2. Production Process of Copper ... 31
3.3.3. Reserves and Renewability of Copper... 32
3.3.4. Copper Imports and Exports (Globally and China-Chile)... 34
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3.3.6. Codelco-MinMetals Agreement ... 38
3.3.7. Pricing of Copper... 40
3.3.8. The relation between the Copper Mining Industry, GDP, FDI and Revenue Relocation . 45 3.3.9. Chile’s Dependency on the Copper Industry ... 48
3.3.10.Conclusion to the Chilean Copper Industry ... 50
3.4. Conclusion ... 51
4. CHINA’S HUNGER: CHINA AND THE CHILEAN COPPER INDUSTRY ... 52
4.1. Introduction ... 52
4.2. Profile of China ... 52
4.2.1. Brief Introduction to China ... 52
4.2.2. The Asian Century and The Economic Soul of China ... 53
4.2.3. China’s Increased Interest in Latin America ... 54
4.3. The Bilateral Free Trade Agreement between Chile and China ... 55
4.3.1. Introduction ... 55
4.3.2. The Agreement in Advance: What did Chile expect? ... 56
4.3.3. The Chile-China Free Trade Agreement in-depth ... 57
4.3.4. The Impact of Being a ‘FTA-Frontrunner’ ... 58
4.3.5. Why the Chile-China Free Trade Agreement was signed ... 59
4.3.6. Conclusion ... 61
4.4. Fear of China: Peaceful Panda or Roaring Dragon? ... 61
4.4.1. Introduction ... 61
4.4.2. From Western Hegemony to Chinese Hegemony? ... 61
4.4.3. Discourse Difficulties: China, a Dragon in Panda’s clothing or vice versa? ... 65
4.4.4. How China Operates: Stakes in Consortia ... 66
4.5. Conclusion ... 68 5. CONCLUSION ... 69 6. REFERENCES ... 74 6.1. Secondary Sources ... 74 6.2. Primary Sources ... 76 6.2.1. Reports ... 76 6.2.2. Websites ... 79 6.2.3. Data ... 84 7. APPENDICES ... 86
4 | P a g e LIST OF ABBREVIATONS
ADBI Asian Development Bank Institution
APEC Asian-Pacific Economic Cooperation
BBVA Banco Bilbao Vizcaya Argentaria Research
BGS British Geology Survey
BTA Bilateral Trade Agreements
CC-FTA Chile-China Free Trade Agreement
CIA Central Intelligence Agency
Cochilco La Comisión Chilena del Cobre
Codelco Corporación Nacional del Cobre de Chile
COHA Council on Hemisphere Affairs
COMEX New York Commodities Exchange
CRS Congressional Research Service
CSIRO Commonwealth Scientific and Industrial Research Organisation
CSU California State University
CuPIC Copper Partners Investment Company Ltd
DIRECON Dirección General de Relaciones Económicas Internacionales.
EU European Union
EUC European Commission
FDI Foreign Direct Investment
FRIDE Fundación para las Relaciones Internacionales y el Diálogo Exterior
- European Think Thank for Global Action
FTA Free Trade Agreement
GATT General Agreements on Trade and Tariffs
GDP Gross Domestic Product
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IAD Inter-American Dialogue
IADB Inter-American Development Bank
Ibid Ibidum
ICSG International Copper Study Group
IISD International Institute for Sustainable Development
IMF International Monetary Fund
ISI Import-Substitution-Industrialisation
LME the London Metal Exchange
MinMetals China Minmetals Corporation
Mt Metric Tonne
MNCs Multinational Corporations
NSA North-South trade Agreement
OECD Organisation for Economic Cooperation and Development
OSEC Office Suisse d'Expansion Commerciale
SAIT Supplementary Agreement on Investment and Trade
SATS Supplementary Agreement on Trade and Service
SBA Swedish Board of Agriculture
SHFE Shanghai Futures Exchange
SICE Systeme d'Information sur le Commerce Exterieur
SONAMI Sociedad Nacional de Minería
SSA South-South trade Agreement
SUBDERE Subsecretaría de Desarrollo Regional y Administrativo.
UCR University of California-Riverside
USC University of Southern California
USD United States Dollars
WB World Bank
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UN United Nations
UNCTAD United Nations Commission on Trade and Development
UNGS United States Geological Survey
US United States of America
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1. INTRODUCTION
1.1. Introduction
1.1.1. Introduction to the Topic
Latin America has been familiar with exploitation and pillage since the first European
conquistadores set foot on the soil of the continent (Galeano 1997; Van Engelen 2010:8).
Times have changed and the continent is not under the colonial powers any longer. Yet, as Latin America still holds the world’s leading source of metals and continues to economically depend on exporting this mineral wealth, the global search for the rich natural resources of Latin America are by no means vanished (Hogenboom 2012:135).
The main export destinations of Latin Americas natural resources were Europe and the United States (US) (Gachúz 2012). However, as China’s economy grew significantly over the past two decades, it simultaneously drove its ‘hunger’ for raw materials. China outpaced the European Union (EU) as second export and import destination and narrowed the gap with the United States (US) as the first trade destination of Latin America (Jenkins 2012:24; Gachúz 2012:136; Klinger 2013).
With China ‘tightens its grip’ on Latin America, it became subject of concerns whether this pivotal change is or will be detrimental for Latin America’s economic development (Ebert and Menza 2014; Elson 2014; Ferchen 2011; Gachúz 2012; Gallagher and Amos 2013; Gallagher and Porzecanski 2011; Harris 2015; Hogenboom 2012; Jenkins 2012; Klinger 2013; Veltmeyer 2013; Wise 2016). Some argue optimistically that China’s rise provides new possibilities for Latin American countries. Where others argue that China is the new hegemon and drags the continent in a new era of dependency as a monstrous dragon.
In this ‘search for natural resources’, the political economy context of liberal markets and free trade is highly important. Signing (bilateral) free trade agreements (FTAs) is often a characteristic feature of global trade, making markets (i.e. mining activities) more accessible. China proclaims to play by these global rules of economic trade and thus signs official and internationally accepted FTAs. Taken the concerns into account, whether China’s influence is a deleterious or beneficial, the question rises if these ‘newly’ signed FTAs foster a ‘new’ form of dependency, where China extracts the continent under the accepted global rules of free trade, while Latin America’s development stalls.
This research is focused on this intersection of whether the international relation between China and Latin America, concerning the politics of free trade agreements, can be
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indicated as new dependency relationship and is incorporated in the following research question:
How far do bilateral trade agreements involving natural resources, create dependencies between the parties?
This research question incorporated the term bilateral trade agreements (BTA) instead of Free Trade Agreements (FTAs), as the focus of this research is on bilateral relations. However, in the following chapters it is sometimes referred as FTA since it comprehend the general meaning of trade agreements in the context of liberal markets.
1.1.2. Motivation
The motivation to carry out this research is based on the interesting nature of the power politics of extraction in Latin America, and its accompanied global reach as well as the several actors it concerns who are all pursuing their own interests. For the purposes of this thesis, the dependency theory is indicated as most applicable. Although the ‘original’ theory is concerned with North-South relations, in this research the dependency theory is used to shed a different light (i.e. South-South trade relations) on global inequalities and resource extraction. This ‘new’ angle of the dependency theory is due to the crucial role of China’s economic rise, which is relatively new to the contemporary world.
Although many addressed the rise of China, with its enormous demand for raw materials and the affects for Latin American countries, this research is differs. It will put these extractive activities in a perspective of political economy and taking the global structure of free trade (agreements) into account. The politics of free trade agreements provide therewith a new context in which a new power angle is revealed. The findings in this thesis contribute therefore to the scientific and social understanding of resource extraction in Latin America, in the light of bilateral free trade agreements.
9 | P a g e 1.1.3. Aim of the Research
On the whole, this research has two aims. On the one hand, the thesis aims to provide an understanding of the power politics of natural resources in the context of free trade agreements. On the other hand, it aims to put the rise of China in relation to Latin America in a broader context of political economy, focussed on the dependency theory.
The theoretical objective of this research is primary to provide a strategic-political insight in the power politics behind free trade agreements which include natural resources. This insight improves the theoretical views on the dependency theory from an different angle.
The practical objective of this research is to broaden the understanding of the global sector of natural recourses and how these relate to FTAs. The various actors such as states and MNCs, their interests, interaction and power play will be explicated in order to get a comprehension of these global politics.
1.2. Methodology
1.2.1. General Methodology
A combination of inductive and deductive analysis is used in this thesis. Conclusions will be drawn from the general theoretical framework of the dependency theory and from theories regarding free trade agreements, applied to a case study, which will be addressed in the following subparagraph 1.2.2. From inductive reasoning, general conclusions are draw from findings, data analysis and observations derived from the case study and aim to provide new insights on the existing dependency theory and trade theory.
Furthermore, this research is conducted from qualitative and quantitative research. Qualitative sources include indebt inquiry of primary resources to build a case study, deduced from dependent and independent reports of among others ECLAC, CSIRO, IADB, OSEC, SICE, UNCTAD, WTO and the World Bank. In addition to these sources websites of concerned corporations, governments, annual reports and news resources will be used as primary sources as well. The quantitative part of this research will be derived from data sets obtained from, among others the World Bank, investing.com and Harvard’s Atlas of Economic Complexity. As the secondary sources concern, these comprise of academic literature of experts in the field of political economy, natural resources and free trade agreements. The focus of these sources will be predominantly regarding Latin America and China.
These sources will be analysed in order to get a general understanding of the subject area as well as to construct the theoretical framework of the thesis.
10 | P a g e 1.2.2. Case Study Selection: the Chilean Copper Industry
For the case study of this research the Chilean copper industry in relation with China is selected. Hereby, the central aspect of this relations is the free trade agreement between the two countries, which was concluded in 2005. Although many Latin American countries are abundant in natural resources, the reason to select Chile is based on the two following rationales:
First, Chile holds the largest copper reserves in the world, they mine the most copper ores and is for more than half of its exports dependent on copper and copper derivatives. Being world’s leading copper mining country and highly dependent on this primer natural resource, makes the Chilean copper industry an interesting and exemplary case study. Chile reflects the overall trend of Latin American economies (i.e. commodity-based export economies) and it could be possible to speculate on similar impacts on other countries where primary commodities ‘…make up the lion’s share of the total exports…’ (World Economy & Finance 2009:4). Second, Chile has the most FTAs signed among Latin American countries and has an extensive history with trade liberalisation. Chile was also the first country which signed a bilateral FTA with China, making it an exemplary case as frontrunner.
China is the largest copper consumer in the world (nearly 50% of the world copper exports go to China), and fostered the primary commodity boom in 2003-2011 as it has a large focus on Latin American countries for its abundance of raw materials. Chile, as stated above, is holding the largest copper reserves and is the first country they signed a bilateral FTA with, making it the most compelling combination to draw conclusion from in the light of a possible renewed dependency relation.
For the purposes of this thesis, the case study is focused on the effects of how the bilateral trade agreements (BTAs) could create a dependency for Chile. Although China is also an important actor, the primary focus of this research is from a Latin American and Chilean perspective. Thereby acknowledging that to disregard China’s endogenic aspects contains an aperture, but will not affect the conclusions drawn for the purposes of this thesis.
11 | P a g e 1.2.3. Structure of the Research
The theoretical framework will be based on the dependency theory, arguing that the (poor) developing periphery primarily exports raw materials to the more developed core, causing unequal power relations. Due to structural inequalities, resources flow from the periphery to the core, enriching industrialised countries at the expense of the poor, denying developing countries the capital and technology needed to industrialise, and perpetuating existing inequalities and disparities. (WTO 2010b:69).
This theoretical framework of the dependency theory will be enriched with the theory of free trade, elaborating on the economic doctrine of liberal markets with its accompanied and flourishing FTAs. These theories are combined and explicated in chapter 2 and will form the broader theoretical context of the analysis made in the chapters 3 and 4 .
In chapter 3, first a profile of Chile will be outlined concerning relevant issues such as a brief historic perspective and economic climate. Second, a brief introduction on the global copper industry will be given, to impart the reader a context of the Chilean copper industry. This specific Chilean copper industry will be further analysed in depth, focussing on key elements of which conclusions will be derived. From these conclusions, the possible dependency for Chile on the copper industry will be addressed.
In chapter 4, the Chilean copper industry will be outlined in the light of China’s prevalence. The bilateral FTA between the two countries is analysed, whereby both their expectations as well as the outcomes are elaborated. Additionally, the varying arguments concerning China’s rising influence in the region, are put in a broader context of a possible
Sinophobia, meaning that China is rather depicted as a threat than an opportunity. This Sinohobia is relevant for this thesis or at least complementary, as the possibility of a ‘new’
dependency could also be propelled by solely ideas or sense that it is a detrimental and threatening relationship.
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2. THEORATICAL FRAMEWORK
2.1. Introduction
As stated in the previous introductory chapter, this thesis regards a research of the politics of free trade agreements involving natural resources, while addressing the broader question whether or not these agreements will create dependencies between states. When international issues of global dependency are addressed, researched and questioned, it can hardly be complete without adducing the dependency theory. This theory is originally and in general concerned with the unequal extractive global power relations between industrialized countries and the poorer, non-industrialized countries. Whereas nowadays the former is mostly addressed as ‘developed countries’ or the ‘global North’, and the latter as ‘developing countries’ or the ‘global South’.
This thesis is based on a case-study where the trade relationship between China and Chile is inquired. In 2006, the two countries conducted a FTA in order to enhance this trade relationship. Interestingly, according to the United Nations both Chile as well as China are classified as developing countries (UN 2014; SBA 2004). And although the dependency theory is originally concerned with North-South trade relations, it is in this thesis used to shed a ‘new’ light on upcoming South-South trade relations (Bilaterals 2012; Baldwin and Jaimovich 2012:2). As the World Trade Organization1 (WTO) classifies FTAs in North-South and North-South-North-South agreements, with both different beneficiary features, this thesis will provide a framework of these differences in order to unravel the nature of the FTA between China and Chile in a later stadium (WTO 2006).
First, this chapter will start to explicate the broader context of the dependency theory. Second, an overview is provided regarding free trade in historical context of economic liberalism and neoliberalism, the politics of international trade agreements and the accompanied institutions (e.g. WTO) and also differences in trade agreements will be set forth (i.e. North-South vs. South-South). In an effective and concise manner, this theoretical framework will reveal the prevailing notions regarding free trade as preeminent, amplified with -what this thesis will call- ‘the ideology of free trade’, meaning the (underlying) assumptions that the economic comparative advantage in free trade are widely accepted as an objective truth. Finally, the implications of this theoretical framework will also be taken into account.
1
WTO – an international organisation responsible for enforcing existing global free trade pacts and promoting an open world system (Hellinger 2011:563).
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2.2. Dependency Theory
2.2.1. Introduction to the Dependency Theory
The core issue which occupies the dependency theory is perhaps best captured in the question of: ‘Why are so many parts of Africa, the Middle East, Asia and Latin America –the “Global South”– so much poorer overall than the countries that make up the “developed” world”2…?’ (Hellinger 2011:120). In other words, the dependency theory of development is a broad theory that questions the nature of the relationship between poor, underdeveloped countries and wealthy, industrialized countries, whereby it is often indicated as an unequal, dependent relationship.
In the aftermath of the colonial period, capitalism thrived and the newly independent countries ‘…were eager to overcome their history of poverty and colonialism and rapidly modernize their countries.’ (Collins 2014). Despite the efforts, economic performance remained disappointing in the developing world, and the inequality between developed and developing countries rather increased than declined (Van Engelen 2010:26).
In that period of time (i.e. 20th century), ideas of modernisation theories of economic development were dominating, based on the concept of Rostow’s ‘stages of growth’ which argued that development was a linear process3 whereby each country had ‘...the same chances of achieving sustained economic and industrial development in the international environment.’ (Ibid.:26). As Rostow’s ‘take-off’ towards a linear growth path did not evolve in other countries than in the Western sphere, the classical economic view became hardly convincing for Dependistas (proponents of the dependency theory) (Chase-Dunn 2015:196). The dependency theory emerged therefore predominantly as a reaction to the dominant ideas of modernisation theories of ‘universal’ economic development (Ibid.:196).
Although the theory is more a collective name for various explanations for this international inequality, the theoretical framework is originated from the work of Raúl Prebisch, an Argentine economist4 (Muedini 2015; WTO 2010b:69; Barton et al. 2008:25). Studies of Prebisch and his colleagues revealed quite the contrary than prevailing economists argued, namely that this interaction between developed and developing countries often led to severe economic problems in the poorer countries rather than prosperity (Muedini 2015). With these results, Prebisch challenged the ‘…conventional wisdom that trade was the
2
Including North America, Western Europe, Japan, Australia, and New Zeeland (Hellinger 2011:120). 3
This model for linear economic growth was issued by the American economist Walt Whitman Rostow, who argued that economic growth will be ‘more or less automatic’ when the economy (and society) transformed themselves in a certain way, which he addressed/coined as ‘the take-off’ (1959:25).
4
Who would later become the first chairman of UNCTAD (United Nations Commission on Trade and Development (Van Engelen 2010:27)
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universal engine of growth’, and rather concluded that free trade appeared far more advantageous to industrialized countries (Van Engelen 2010:27).
In the 1950s, Raúl Prebisch and Hans Singer proposed these ideas of ‘underdevelopment’, which became known as the Prebisch-Singer-Thesis (WTO 2010b:69). As periphery countries often were reliant on a commodity-based export, Prebisch and Singer observed and concluded that the driving force behind the condition of underdevelopment, concerned the declining price of primary commodities over time relative to the price of manufactured goods (Ibid.:69). Here, a main source of the problem was that production improvements in the commodity industries of developing countries, often resulted in decreasing prices rather than increasing incomes, caused by the highly competitive nature of primary commodity markets (Ibid.:69). Eventually, this would cause difficulties in capital accumulation, which was needed for investments for further development (Ibid.:69). This forced developing countries frequently to attract loans from the core, allowing them to pay for the imported manufactured goods (WTO 2010b:69; Van Engelen 2010:27). According to the Prebisch-Singer Thesis, this dynamism caused differences of power that trapped the poor into a cycle of trade deterioration, composed of ‘…declining export earnings, weak investment and eventually underdevelopment…’ (WTO 2010b:69).
As the Prebisch-Singer-Thesis challenged the unconventional conviction of free trade as the universal engine of economic growth, they also challenged the idea that failings of individual countries were their own fault (Ibid.:69). They advocated that these economic ‘failings’ were rather due to the intrinsic structure of the global market, which caused the growing inequality (Ibid.:69). This is in contrast to the prevailing neoclassical idea that ‘…open trade and economic expansion benefits all countries [Pareto optimal] and that growth in industrialized countries would eventually lead to growth in poorer countries….’ (WTO 2010b:69; Ferraro 1996 cited by Muedini 2015).
In the aftermath of the ideas of Prebisch and Singer, various interpretations emerged concerning the questions of ‘how and why’ structural inequalities persist in the world economy (WTO 2010b:69). These questions, occupations and even new theories became famously known under the umbrella of the term ‘dependency theory’ (Ibid.:69). Although the identifications and understandings have been divergent, there are two essential elements where scholars and academics seem to agree upon: integration and subordination (Collins 2014). As political science lecturer Collins5 argues, ‘…dependency theorists tend to agree
5
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that poor nations have a dependent relation to rich nations in-so-far as their interaction is both close and asymmetrical, with the result that poor countries are, in some significant way, subordinated to rich ones.’ (2014). Although this relationship is alternately described as core/periphery, dominant/dependent, metropolitan/satellite, the meaning remains more or less the same, whereas the core is generally designated as industrial advanced countries, the periphery refers generally to Latin America, Asia and/or Africa (Ibid.).
Under this umbrella of the dependency theory, other writers, e.g. André Gunder Frank and Immanuel Wallerstein, continued to build upon and developing this analysis further. Gunder Frank coined the term ‘development of the underdevelopment’, which meant the extraction of ‘…surpluses produced in the satellites to meet the requirements of the metropolis, [whereby] capitalism distorted and thwarted the development of the satellites to its own benefit.’ (Wolf 2011:22). A different approach was taken by Wallerstein with his theory of the World-system. World-System theorists perceive the division of the core and the periphery countries as the global reflection of the class divisions proposed by Karl Marx, i.e. owners versus non-owners of the modes of production (WTO 2010b:69). The unequal division of international political and economic power, was according to the world-system theorists therefore a direct outflow of a capitalist world (Van Engelen 2010:31).
According to the Dependistas, free trade is the propagated ideology for the wealthy industrialised countries in which they can pursue their own interests, since free trade only undermines the development of the developing world (Van Engelen 2010:27). Some
Dependistas go even further by stating that the core highly benefits from maintaining the
existing order (of exploitation), whereby free trade rather functions as a ‘vehicle for exploitation’ (Ghatak 1995:65, cited in Van Engelen 2010:30). Even external forces, such as multinational corporations (MNCs), international commodity markets and/or foreign assistance, are seen as ‘singular importance’ in the dependent areas by which ‘…the advanced industrialized countries can represent their economic interests abroad.’ (Muedini 2015).
Dependistas argue that the generated economic surplus in the ‘periphery’ is mainly
subtracted by actors such as MNCs originated from the core (Van Engelen 2010:29). And since most industries are dominated by foreign corporations, the lion’s share of the profit still flows towards the core (Ibid.:30). Gunder Frank has coined this the dual economy, whereby the global relation of dependence of the core and periphery, is reproduced at a local level due to the internal power of elites who collaborate with states and corporations from the core
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(Ibid.:30). As the elite also benefits from the ‘extraction profit’, they typically do not invest them in diversification or improvements of the labour wages, ‘…but instead employs them to buy capital intensive manufactures from the core.’ (Ibid.:30).
In order to interrupt this tailspin of trade deterioration and unequal relation between the core and periphery, developing countries had to diversify their economies and lessen their dependence on primary commodities by moving towards a more industrialised industry and exporting manufactured goods (WTO 2010b:69). According to Prebisch, Latin America should not withdraw from the international economy, but rather renegotiate ‘…the terms of participation in the international economy.’ (Van Engelen 2010:28). In following these ideas of Prebisch, Latin American countries implemented the policy Import Substitution
Industrialization (ISI) (Hellinger 2011:145,261). This ISI strategy concerned a policy that
levied taxes on imports and subsidized domestic production, in order to stimulate the national industrialisation (Ibid.:145, 261, 558). This policy emphasized domestic production and tried to exclude foreign investors, based on the idea, ‘Why export cacao…only to import chocolate? (Ibid.:145). The approach of ISI stands therewith in contrast with liberal economic theories based on comparative advantage (Ibid.:130).
Above, the dependency theory is explicated in a brief historical overview, amplified with the main characteristics, concepts and lines of thoughts. As the theory has been highly valuated in the past, the following subparagraph will put the theory in today’s perspective.
2.2.2. The Dependency Theory in Today’s context
The history of Latin America is frequent enough disclosed as it was colonised by the Spanish and Portuguese Conquistadores who extracted the natural resources of the continent for their own interests. Ever since, Latin America was incorporated into the global system, functioning as the periphery and serving the economic interests of their new core (Ibid.:33). Unfortunately, this exploitative relationship has continued to dominate the development of Latin America, even after independence, ‘…first under British and ultimately under the U.S. hegemony6, to this date.’ (Van Engelen 2010:33).
These thoughts however are not shared with every scholar nowadays, arguing that the dependency days has certainly fade. For example, as an unknown commentator reacted on a
6
Hegemony is here defined by the Oxford Dictionary as ‘leadership or dominance, especially by one state or social group over others’ – (Oxford Dictionaries 2016).
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Wikipedia forum concerning the dependency theory, advocating ‘…I hope it was some PhD candidate in sociology or political science [who wrote the Wikipedia website about Dependency Theory] because dependency theory has been long dead among most self-respecting academics...especially within economics…’ (Wikipedia 2008). Although very convincing formulated, many will not agree with this argument, for example sociology professor Christopher Chase-Dunn7, who argues that ‘Dependency theory is alive and well…[and] understanding the changing nature of global power is not a task whose time has ended.’ (2015:197).
Additionally, Chase-Dunn stresses that it is a mistake to ignore the hierarchy of the core and periphery, ‘…not only for reasons of completeness, but also because the ability of core capitalists states [and MNCs] to exploit noncore resources and labor, has been a major factor in deciding the winners of global completion.’ (Ibid.:197). The dependency theory has always been congruent with inquiries of the global class structure, and although industrial production has largely moved from the core to the noncore, ‘…rather than flattening the world this trend has been accompanied by the extension …of exploitation based on financial transactions and foreign investment.’ (Ibid.:197).
Despite the fact that we have the tendency to discard history and the ideas, concepts and theories associated with the dependency school, these ‘…continue to heavily influence analysis in Latin American politics today (Hellinger 2011:122). And according to professor Chase-Dunn, only by using past insights of the dependency theory and extending it to the present and the future, only then patterns of globalisation and the accompanied problems of inequality and power structures can be well understood (2015:197).
7
Christopher Chase-Dunn is Distinguished Professor of Sociology and Director of the Institute for Research on World-Systems at the University of California-Riverside (UCR N.D.).
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2.3. Politics of Free Trade (Agreements)
As stated in the previous paragraphs, the dependency theory sought to challenge the prevailing ideas of the neoclassical economy of modernisation, which advocates that open markets were the way to go, that every country had the same opportunities and should follow the plotted stages of growth. This theory of free trade is nowadays a thriving doctrine, wherein free trade agreements are a common phenomenon. To understand the politics of free trade agreements, it is important to understand its context of open trade. This context will be set forth in the following subparagraphs.
2.3.1. Introduction to Classical Liberal Economy and Neoliberalism
Neoliberalism can be seen as the foundation for free trade, a term which emerged around the 1950s but became more common in the 1970s and 1980s under the British administration of Thatcher and under the American administration of Reagan (Jones 2014). In general, neoliberalism emerged from the ideas of the laissez-faire economic liberalism and strongly advocates for (economic) liberalisation policies with an emphasizes on deregulation, privatisation and opening markets to foreign investment and trade (Jones 2014:11; Chase-Dunn 2015:197).
When speaking of neoliberalism, classical liberal economists that must be addressed are Adam Smith and David Ricardo (Jones 2014:11). Smith is often illustrated as the father of modern free trade (Smith 2013). He advocated that the pursuance of individual interests would eventually lead to social interest, and in order to give individuals the freedom to pursue their interest, less government interference in economic spheres was paramount (Smith 2013). Building upon Smith’s notion of economic liberalisation, classical economist David Ricardo proposed his famous comparative advantage theory. This theory advocates that every country should specialize and invest in ‘what it does best’, which will automatically provide the most benefit. Since it is a comparative advantage, a country does not need to be the best at anything in order to gain from trade. Thus, free trade was merely a ‘win-win’ situation. Nowadays, the comparative advantage theory still enjoys great importance as stated on the official website of the WTO, that this theory brought ‘…the single most powerful insights into economic…[and] it is one of the most widely accepted among economists.’ (WTO 2016a).
19 | P a g e 2.3.2. The Ideology of Free Trade
The influence of Smith’s thoughts on the liberalisation of the economy are nowadays still visible in international organisations as the World Bank (WB), the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT, the antecedent of the WTO), which were established after the World War II under the guidance of the US in order to regulate the international financial markets and to manoeuvre towards trade liberalisation (Hellinger 2011:129). In 1948, when the GATT was formed, 23 countries signed an agreement which would reduce customs tariffs, and as trade was seen as the engine of economic growth, the main goal of the GATT was to promote free trade by ‘…persuading countries to abolish import tariffs and other barriers to open markets.’ (BBC 2003). Although, another organisation was proposed (International Trade Organisation) to regulate and stabilize global commodity prices, which was initially more ambitious than the GATT, it was ultimately blocked by the US as they had more faith in prices that were set freely on the global market (Hellinger 2011:129).
In the 1950s when the GATT began to function, it was largely financially dependent on the US, causing the organisation to be more Western orientated (Watson 2014:422-423). That the influence of the US is still present today, is perhaps best illustrated by Matthew Watson, who states that ‘When they act in concert, the US and the EU are almost always able to get their interests imprinted into WTO law, even if majority opinion amongst WTO members is against them.’ (Ibid.:424). That the WTO is still an important organisation in promoting and fostering international free trade nowadays, can be found for example in statements on their website, such as: ‘The economic case for an open trading system based on multilaterally agreed rules is simple enough and rests largely on commercial common sense.’ (WTO 2016a).
Some academics have also argued that bilateral trade agreements (BTAs) can have other objectives than increasing trade alone. Namely, that BTAs also function as a way for major powers to ‘….realise their strategic goals beyond the scope of the WTO…’, but more importantly, it can provide smaller countries ‘…a “defensive” response…to the leading FTA projects of the US and the EU, as it aims to reduce asymmetric dependence on global powers (Wesley 2008:215, cited in Wehner 2011:211). Thus, a governmental position regarding FTAs can be seen as shaped by the capacity of states themselves, making the ‘impasse’ of the WTO a ‘…synergic force for big, intermediate and small countries to enhance economic bilateralism.’ (Ibid.:211).
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The liberal concept has become more and more hegemonic in world affairs, meaning that most countries take the liberal concept for granted, or even as ‘common-sense’ (Hellinger 2011:22). On the contrary, theories and ideas concerning free trade also have been for a long time a crucial element of academic studies whereby its logical validity and relevance have been largely queried (Sen 2005). The prevailing idea that free trade functions as a ‘engine of growth and development’ was disputed in many academic literature, reminding us of the dependency theory (Ibid.:1012). By those, free trade was rather seen as an attempt on the part of ‘….advanced nations to push their national interest…[whether by] multilateral negotiations in the World Trade Organization…[or through] unilateral imposed strategic trade…’, leaving developing countries unable to oppose the external pressure for opening up their economies (Ibid.:1012). Herewith, the free trade doctrine as comparative advantage, is still used as a justification for trade liberalisation, especially in developing areas (Ibid.:1026). As research associate and visiting professor Sunanda Sen8 argues, the prosperities of a conflict-free world of free trade have not really remained and that trade theories and policies did not take the issues into account which mainly concerned the development areas (2005:1023). Furthermore, Sen advocates that the mainstream neo-classical economists have focused too exclusively on the Pareto-optimality conditions achievable under free trade, when prescribing trade policies for the developing world (Ibid.:1023). She concludes therefore that it is ‘…not surprising that policy conclusions emerging from such formulations [theoretical Pareto-optima] have failed to address the problems of the real world. (Ibid.: 1023).
2.3.3. Bilateral Free Trade Agreements: North-South and South-South
The ‘breeding ground’ for FTAs can partly be dedicated to the relatively ‘slow’ movement of multilateral negotiations conducted under the WTO (Wehner 2011:211). As market-oriented countries urged for more international economic integration, the movement of multilateral negotiations was perceived as rather slow, this caused a fast proliferation of bilateral agreements (Stallings and Katada 2009:239, cited in Wehner 2011:211). As trade liberalisation is and was seen as an important factor for developing countries regarding integrating into the global market, FTAs appeared the most popular form in order to achieve this integration (World Bank 2011:2). Evidence also showed that the bilateral trade flows were and are significantly increased due to these agreements (Baier and Bergstrand 2007, cited in World Bank 2011:2).
8
At the Institute for Studies in Industrial Development, Delhi; Jamia Millia Islamia University, Delhi; and the Institute of Development Studies Kolkata, among other institutions in India and overseas (Levy Institute 2016)
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As this thesis examines the bilateral trade relation between Chile and China (in the case study), which are according to the United Nations ‘developing countries’, it is important to address the differences in trade agreements (UN 2014; IMF 2004:53). This is due to the fact that there are significant difference of trade agreements between North and South countries (NSA) and agreements among South countries (SSA). Herewith, NSA is between a developed and a developing country, and SSA are solely between two developing countries (UNCTAD 2008:2). Although the WTO does not use the division between developed and developing countries, they do recognise differences between NSAs and SSAs (WTO 2016b). It is however possible for ‘…members [to] announce for themselves whether they are “developed” or “developing” countries…’, although fellow members can challenge this decision (Ibid.).
Some have advocated strongly in favour of NSAs agreements, making the assumption that ‘…Southern countries are likely to be better served by North-South agreements than agreements among themselves.’ (Ethier 1998; Kreuger 1999; both cited in World Bank 2011:4). For example, due to the fact that NSAs are more likely to produce efficiency gains as they offer developing countries, among other things, larger market access (World Bank 2011:4). In a working paper of the World Bank the impact of NSAs and SSAs was compared whereby they used the comparative advantage to explain why SSAs are less desirable than NSAs (2011). In this paper it was argued that the relative similar factors suppliers, smaller economies and higher transport costs of low-income counties (i.e. developing countries), ‘…have less scope for realizing the gains from trade based on comparative advantage…within South-South blocks (Ibid.:4). Additionally, they argued that SSAs can also be very inadequate in e.g. reducing tariff schedules and have often a weak implementation, making SSAs ‘…more likely to exist only on paper without achieving significant trade cost reductions in practice (World Bank 2005, cited in World Bank 2011:4).
In contrast, advocating in favour of South-South trade agreements is not completely rare. For example, a SSAs could also have more impact than NSAs, due to trade barriers that are higher between Southern countries, if such an agreement was at first absent (Ibid.:4). Also, the agenda between NSAs are most likely to be set by rich countries, whereby the ‘…developing countries have to adjust their standards, regardless of whether these are appropriate to their conditions…[whereby] …the benefits in North-South agreements are circumscribed by developing countries…’ (World Bank 2011:6). Thus, weaker bargaining power of the developing states will result in that the rules are mostly set by richer countries,
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which will tend to reflect ‘…the status quo of high-income countries…’ (Whalley 2003, cited in World Bank 2011:6).
Interestingly, in the same working paper it is argued that SSAs are more likely to ‘…ensure the same level playing field for its members’, as the countries have similar ‘stages of development’ and thus fair competition (World Bank 2011:6). Thus, it could ease the concerns regarding hard competiveness with high-quality manufactured goods (Ibid.:6). Not surprisingly so, the World Bank paper concludes with the idea, based on a UNCTAD report of 2007, that ‘…a large part of the success derives from countries’ willingness to liberalize…’, which according to them is easy to achieve in SSAs, as all the developing countries ‘...have similar reasons to engage into trade agreements.’ (Ibid.:6).
Despite the fact that bilateral trade agreements have proven to increase trade flows, it does not necessarily mean that the net trade9 will rise, because ‘…trade creation can occur at the expense of trade diversion.’ (Viner 1950, cited in World Bank 2011:5). However, in the global economic doctrine of free trade, ‘trade creation, [and] not trade diversion is the norm (Lee and Shin 2004, Clausing 2001, Cernat 2003; cited in World Bank 2011:5).
2.4. Issues of the Theoretical Framework
Several studies have been conducted in order to prove or reject the dependency theory and several results have been found which rejected or underwrote the theory. For example, Beer and Boswell (2002) who argued that researchers used data of many national societies ‘…to test hypotheses about the effects of international dependence on national development and within-country inequality…’, whereby they often found results which confirmed the dependency theory (cited in Chase-Dunn 2015:196).
On the contrary, Velasco argued precisely the opposite, alluding towards Dependistas who continued to blame the hegemonic centre (mainly the US) for all the problems of the developing countries (2002:44). He advocated that as ‘Armies of graduate students tried to find a positive correlation between expansion in the North and recession in the South, but failed.’ (Ibid.:44). Further, Velasco stressed that often a boom in the West also resulted in growth for developing countries, which is nowadays not different (Ibid.:44). He also stated that there was no correlation between the wealth of Northern countries and the poverty in Southern countries confirmed or found by academics (Ibid.:44). Nevertheless, Velasco did admit that the ‘milder version’ of the dependency theory, was more useful, since this
9
Net Trade’ refers to the ‘change in total trade’ and is calculated as the difference between ‘trade creation’ and ‘trade diversion’ (World Bank 2011:5).
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‘version’, pioneered by Cardoso and Faletto, proclaimed that although both the rich and poor countries grew under capitalism, it was not equally beneficial (Ibid.:45).
It seems that this debate, whether the dependency theory is usefulness or not in the complexity of the nowadays global industry, tend not to lose its significance in the near future (IAD 2014:17). To some, the field is even stuck within an ‘impasse’, with on the one hand the ‘pessimists’ who argue that the extraction of resources will inevitable result in crisis (since it is a ‘pathological disorder’), and on the other hand the ‘optimists’ who believe that resource extraction and production is rather a comparative advantage with is a key aspect for development (Bridge 2008, cited in IAD 2014:17).
However, despite the fact that (neoliberal) free trade policies are, according to development theories, fostering unequal power relations, it cannot be denied that Latin American countries ‘line up’ to sign free trade agreements and entering institutions such as the WTO (Velasco 2002:45). For example, representatives of Latin American countries at WTO conferences call rather for ‘…more globalization, not less.’, and are heavily involved with cutting tariffs and signing trade agreements (Ibid.:45). Although this could be based on the dominant conviction that open economies far better than closed ones, an additional reason for Latin American countries to open up is also due to popular demand, as ‘…[n]o Latin American politicians would want to deny their constituents the imported consumer goods they have become accustomed to…’ (Ibid.:45).
It is perhaps hard to explain for hard-core Dependistas why these countries themselves go along with these ‘harmful’ policies, but as Velasco interestingly observes, governments of Latin American countries seem to have a pragmatic position regarding free trade and as they do, they ‘…duck the stones thrown by U.S. and European college students who claim to be acting on behalf of the world’s poor…[which, as a]…evangelical fervor, this time against globalization, once again comes from the North.’ (Ibid.:45).
The dependency theory has certainly its implications, even the mere fact that it could be objectionable to study non-Western international relations from a Western-biased perspective, whereby this thesis could be seen by some (e.g. Velasco) as an ‘evangelical favour’. Overall, when applied to the relationship between Chile and China, it is the Chinese government itself who asserts that the economic relationship between them ‘…reflects fundamental complementarities…’, and thus has solely positive effects for both sides (Ferchen 2011:57). But antipodes (not necessarily Western-biased) see this relationship rather as a ‘…renewed form of Latin American dependency…[as the] rapidly expanding trade and
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investment ties may have short-term benefits for both sides, the commodity-based nature of the relationship ultimately reinforces dysfunctional patters of Latin American development…’ (Ferchen 2011:57).
2.5. Conclusion
This chapter discussed the concepts, ideas and key aspects of the dependency theory and how it is still relevant today in addressing issues of global inequality in the context of global trade. In short, the dependency school of thought emerged in reaction to prevailing ideas of modern economists who argued that modernisation was a linear process which all countries needed to follow through the adoption of free trade, in order to obtain prosperity. Dependistas advocated that the driving force behind the underdevelopment of development was mostly due to the extractive global structure, where the prices of primary commodities (produced and exported by the periphery) decreased relatively to the prices of manufactured goods (produced and exported by the core), causing eventually unequal (trade) relationships of power.
This chapter discussed the emergence of the common idea that economic liberalisation is the ‘the way to go’ in order to gain prosperity and growth, and additionally, its accompanied feature of free trade agreements. Here, a distinction was made between bilateral NSAs and SSAs, whereby opinions are diversified about which agreement gains more benefits for developing countries.
The following chapter will analyse the Chilean copper industry and places its findings into the theoretical framework as explicated above.
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3. CHILE’S PRIDE: CHILE AND THE COPPER INDUSTRY
3.1. Introduction
The purpose of the following chapter is to evaluate the copper industry in Chile and use the findings to examine a possible dependency of Chile’s economy on this industry. This chapter starts with elaborating on a general country profile, followed by a comprehensive analysis of the Chilean copper industry. Here, the reader will be introduced to the main characteristics, influences and key actors in the case study. Altogether, this chapter aims to provide an extensive analysis of the main factors in the Chilean copper industry and addresses the question if a possible dependency on the copper industry is in existence and which complications this might comprehend.
3.2. Profile of Chile
3.2.1. Brief Introduction to Chile
Chile is situated in South America and was colonized under the Spanish crown in the 16th century, but they declared themselves independent in 1810 (CIA 2016a). In 1973, Chile was, under the military regime led by General Augusto Pinochet for over a decade, followed by a freely elected president in 1990 (Ibid.). Since the 1980s, Chile maintained ‘sound economic policies’, which contributed to steady growth rates and reduced poverty by more than 50% (Ibid.). Regarding the international reputation of Chile, the CIA describes that the country has ‘…increasingly assumed regional and international leadership roles befitting its status as a stable, democratic nation.’ (Ibid.).
Chile comprises 756,102 square kilometres and is the longest North-South country in the world, with an enormous diversity of landscapes, climates and natural resources such as copper, timber, iron ore, molybdenum (Ibid.). With ‘only’ 17,508,260 people10
, Chile has also a very diverse population with several indigenous groups and several languages besides the official language of Spanish (Ibid.). This long ‘indigenous’ history is present in the country’s name: Chile. The most accepted etymological explanation is that the word derives from the indigenous language of the Aymara “Chilli”, with two meanings: confín del mundo (the end of the world) and lugar más alejado o más hondo de la tierra (farthest place or the depths of the earth) (González 201211).
10
July 2015 (CIA 2016a) 11
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The economy of Chile is classified as market-oriented with a large focus on foreign trade and approximately 30% of the Gross Domestic Product (GDP)12 is accounted by exports of goods and services (Ibid.). Almost 60% of the GDP is provided by commodities, whereas the most important one is copper, providing already 20% of the governmental revenue (Ibid.). Additionally, Chile has a longstanding ‘commitment’ to trade liberalisation and signed up to date 22 trade agreements covering 60 countries (CIA 2016a; SICE 2016). And enthrallingly, in early 2010 the country signed the ‘OECD Convention’ and became the very first Latin American country which joined the Organisation for Economic Co-operation and Development (OECD) (CIA 2016a; OECD 2010).
3.2.2. Neoliberal Profile of Chile
As stated above, Chile has a relative long history with an open economy, dating back to the ‘Pinochet-period’ when free trade was implemented in the early 1970s (Ebert and Menza 2014:103). Pinochet implemented the ‘Organic Law’, which meant that private investors had access to the exploration and exploitation of natural resources without having to pay taxes directly (Ibid.:103). Nevertheless, it was only in the 1990s, that multinational corporations (MNCs) saw Chile as a ‘viable investment destination’ (Ruiz-Dana 2007, Fuentes 2011, cited in Ebert and Menza 2011:103).
In the last 40 years, Chile has made the transition to outward-oriented economy with neoliberal policies through ‘deep free market reforms’, reducing tariffs and restrictions on capital movements, and signing multilateral and bilateral free trade agreements (Barton et al. 2008:25; World Economy & Finance 2009:3; Gobierno de Chile 2004:cxxix). Additionally, the Chilean governments throughout the 90s moved themselves in active participation on the multilateral level and therewith opening up ‘…on an equal basis with Chile’s most important partners in the world economy through FTAs.’ (Gobierno de Chile 2004:cxxix).
These changes made Chile one of the most opened economies in the world and to some even the ‘frontrunner’ in economic terms of globalisation or pictured as ‘…close to textbook recommendations as they can get.’ (Barton et al. 2008:25; World Economy & Finance 2009:3; IADB 2006:1). Massive results were experienced as Chile drove towards the system of free trade (IADB 2006:1). Trade as a percentage of GDP saw an increase from 29% to 69% from 1973 to 2004, and goods exported grew at the annual average of 6% which
12
This thesis follows the definition of the GDP (Gross Domestic Product) defined by the World Banks, as ‘…the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in constant local currency.’ (World Data Bank 2016).
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were the main driver of the annual average growth of 4.4% in the GDP (WDI, cited in IADB 2006:1). With a contrasting note, as Chile embarked on all these free market reforms, ‘…manufacturing value added as a percentage of GDP fell by 45%, while total natural resource rents rose by 71%...’ (Ebert and Menza 2014:105).
Nevertheless, Chile is, just as the most Latin American countries, familiar with the history of ISI policies (as stated in paragraph 2.2.), but with these transitions towards a free trade market, the country turned its back on this export-orientated development strategy of ‘ISI era’ and entered the free global market (World Economy & Finance 2009:3).
3.2.3. Chile’s FTAs
As stated in the previous subparagraph 3.2.1., Chile has signed the most BTAs and FTAs in comparison with other Latin American counties (SICE 2016, see appendix 27). This underwrites the longstanding commitment of Chile to the liberalisation of trade and the conviction that this will strengthen its national economy (Wehner 2011: 208; CIA 2016a; SICE 2016; see appendix 15). What makes Chile so different from other Latin American countries, is that it gives priority to bilateral agreements over regional economic integration (Wehner 2011:208). In order to understand why Chile pursued and signed relatively so many FTAs, it is important to look at domestic as well as international factors, which will be elaborate below.
It is often stated that the US pushes for FTAs, but when the emphasizes is solely put on the role the US, it is not acknowledged that Chile itself pursues for FTAs (and Latin American counties in general) (Ibid.:209). In the case of Chile, the ‘search for’ FTAs is based on two pillars. On the one hand the economic interests of domestic groups as a significant role, and on the other hand the interests the government itself (Ibid.:209). Domestic proponents of FTAs are predominantly export orientated groups who use a ‘…utility-maximising logic to push for FTAs…[which] is mainly a strategy of market diversification in exports…’ (Ibid.:209,213).
The government on the other hand, has more political-economic strategic goals of its own, consisting of, among other things, ‘…reducing the asymmetric economic dependence, …influencing power poles (e.g. as a balance-strategy), and improving the country’s bilateral relations and international status.’ (Wehner 2011:209). These goals of the Chilean government of strengthen their own national economy, are more or less compatible with the interests of the export-oriented domestic groups. This is because diversification of the
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markets, pursued through trade liberalization and FTAs, has simultaneously positive effects on the GDP (Ibid.:214).
Furthermore, as Chile is more a ‘multilateral rule-follower’, signing bilateral agreements could also give the country the opportunity to emphasize, create or cut out certain rules which covers their own economic situation more sufficient (Ibid.:209). Although this sounds as if Chile is really capable of bringing any influence to bear, Wehner showed in her research from private conversations with the Chilean trade diplomates Andrés Rebolledo and Carlos Furche in 2008, that ‘…Chile’s FTA policy has been unfolded with a great deal of flexibility in order to account for the potential (un)willingness of the possible counterpart to achieve an accord (cited in Wehner 214). In different words, Chile’s strategy is not to drive a hard bargain, but rather aims at concluding any accord.
This ‘soft’ strategy is perhaps amplified with the competitive element of signing a FTA, according to the principle of ‘first come, first served’, meaning that if Chile is the first country to achieve an accord with another country, ‘…it will have an advantage and the opportunity to realize high economic gains until such time as others negotiate with the same country.’ (Hugo Baierlein 2008, cited in Wehner 2011:214). This strategy is an crucial factor for Chile to purchase FTAs, which relies on the interplay of emulation and competition (Solis and Katada 2009, cited in Wehner 2011:213).
The incentive for Chile to augment the number of their bilateral agreements, can also be partly explained by a more historical development. As the WTO was rather slow in its progress regarding multilateral liberalization negotiations, it restrained Chile to enter markets (especially the Asian economies, which were highly protective) (Wehner 2011:220)13. Although, this pursuing of bilateral agreements is particular pertinent for agriculture products, it was also applicable for the mining industry. The incentive for Chile to go negotiate with Asian economies, in particular China, in order to create a liberalised context for industrial products in exchange for commodities, was according to trade diplomat Mario Matus14, rather a strategic decision (from personal communication, cited in Wehner 2011220). In that line of though, one of the main objectives of the Chilean government to signed the FTA with China, was therefore the ‘hope’ of diversify as well as to incorporate new products which could be exported to China (Gachúz 2012:137). These aspirations will be more elaborated in paragraph 4.3.
13
Chile is a member of the WTO from its foundation on January 1st, 1995. Previously it was a founding member of the GATT of 1947 (DIRECON 2016a)
14
Matus, Mario. Trade Diplomat. Roles in the Negotiations: Negotiator/ Chief Negotiator. Date of Interview:28/02/2008. Place: Geneva-Switzerland.
29 | P a g e 3.2.4. Corruption and Elite
Chile is often called the ‘Switzerland of the global South, which refers towards the good economic and financial situation – although when observed from the outside (Benedikter et al. 2015:5). From within, the country is sometimes ‘steering through rough waters’, which is barely visible for outsiders (Ibid.:15). These ‘rough waters’ indicate predominantly the pressing issue of unequal distribution of developmental benefits (Ibid.:15). Benedikter et al. have branded this unequal situation as the ‘two Chiles’, whereby on the one hand a part of the population has access to all the resources, ‘…means and features incomes that are found in the richest countries on earth’, and on the other hand, ‘…60% of the population has an average income comparable to the African State Angola (Globedia 2011, cited in Benedikter et al. 2015:16).
The two main issues concerning these ‘two Chiles’ can be found on the one hand in the basic needs of Chilean citizens, such as education, healthcare and pensions, and on the other hand in key resources, such as copper, water, agriculture and forest (Ibid.:86). Both of the areas are dominated by large economic interest groups, which are in general the richest families of Chile (i.e. elites) (Barton 2008:31; Benedikter et al. 2015:86). Fundamental needs of Chileans are in many cases understood as private services instead of individual rights (Ibid.:86). Thus, when the profitability of these basic necessities needed to be secured, in order to safeguard the returns to the elites, ‘….a neoliberal mindset was pursued…[whereby] …[e]ducation in particular has become a cash cow for Chile’s elite.’ (Benedikter et al. 2015:86). As the key resources concerns, these are still dominated by a few existing elite groups who do not tend to foster innovation (Ibid.:86). That these few powerful elite groups rule over the resource sector, is certainly a social problem since this forms the basis of the Chilean economy (Ibid.:86).
These issues are also underwritten by Nem Singh on a more national level, who imputed the inequality in Chile to the ‘governance model’ (2010:1428). Here, the role of the state is mainly to promote private interests, meanwhile it has been lacking to monitor and regulate poor practices and consequences of resource exploitation of the mining sector (Barton 1997, cited in Nem Singh 2010:1428). This high tolerance of the state ‘…for mining in the name of profits and economic growth has been paid with very high costs.’ (Nem Singh 2010:1428).
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3.3. Chile’s Copper Industry
The mining sector is extremely important to Chile, and besides that it gave the country relative prosperity, it also gave the Chileans a shared vision (CSIRO 2014:vii). As Chile holds the largest copper industry in the world (in terms of production), it is perhaps no surprise that the country even has its own Ministerio de Minería (Ministry of Mining15). Furthermore, Chile has unprecedented large reserves,
MNCs flourish, but above all they have their national pride: the state-owned copper mining company
Corporación Nacional del Cobre de Chile (Codelco). This
pride is for example reflected in the slogan of Codelco, which states Orgullo de Todo, meaning ‘pride of all’ (Codelco 2011; figure 1).
In order to understand the underlying objectives for
Chile and China to sign the FTA in 2006, it is important to get a comprehension of Chilean copper industry. This paragraph 3.3. will provide an overview regarding this large copper industry, globally and for Chile specific, addressing herewith broader issues of what copper is, its uses and production process. Furthermore, this paragraph provides an in-depth analysis about active MNCs and the presence of China in Codelco. This paragraph inquires also developments of the copper price and the relations between the national GDP. And to a further extend, from the findings in this paragraph, preliminary conclusions will be drawn in relation to a possible existence of a copper-export dependency.
3.3.1. Introduction to the (Global) Copper Industry
Archaeological investigations showed that approximately 10,000 years ago, several societies used copper to make coins serving as currency and ornaments in western Asia (ICSG 2015:6,49, OECD 2015:119). It was one of the first metals which humans used and ever since, copper continued to be important within human societies (ISCG 2015:5). Copper is an element that occurs naturally in the crust of the Earth, composed of a variety of forms (BGS 2007:2). Although over 150 copper minerals have been identified, only a few of these are of economic importance, of which Chalcopyrite can be addressed as the most (economic) important copper minerals of all, and comprises about half of the total copper production (OECD 2015:120, BGS 2007:2; geology.com).
15
http://www.minmineria.gob.cl/574/w3-channel.html
Figure 1 Logo Codelco (Codelco 2011)
