200 (26.07.18)

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How Chile Trounces China at Trade

Australia and the US may have let relations with Beijing turn sour, but politicians in Santiago have been quietly teaching the world’s largest manufacturer how to shift products

Something bizarre is happening in Beijing's supermarkets. For the first time, they are being stocked all year round with dark, heart-shaped cherries. They are not grown under China's vast covered greenhouses, and do not come from growers in Thailand or Vietnam, but are being flown all the way from Chile on dedicated charter flights, known as “fruit freighters”.
    The two countries are on opposite sides of the world and it takes more than 24 hours to fly Shanghai-to-Santiago, but flush Chinese shoppers can't get enough of Chilean cherries, buying 95,000 tonnes last year, equal to nearly half a billion punnets.
    Cherries may not be the world's largest export commodity, but are just the latest example of how Chile has been outfoxing China on trade, using free trade deals and the quality of its own produce to squeeze juicy terms out of Beijing, whilst pulling-in a trade surplus.
    After five rounds of talks in Beijing, Chile became the first country to sign a free trade agreement with China in 2005. Chile's negotiators emerged with tariff relief over 92 per cent of its products, from salmon to canned peaches. They also blocked some of China's dominant industries, including cement and chemicals, from entering the Chilean market.
    Since then, Chile's exports to China have risen from $5bn to $19bn, equal to annual growth of 12 per cent. Copper accounts for $13bn of that: Chile is the biggest producer and China is the biggest buyer. But Chile has also cultivated many softer exports, including pulp, fish and granola bars, using its trade deal to get the most out of China's need for metal. Rivalling Australia, Spain and France, its wine valleys are dumping 181 million bottles on China every year.
    Weirdly, the relationship appears to be built on a degree of mutual respect. Chile reciprocates by spending around $15bn on Chinese goods, shipping-in toys and electronics. It has let Beijing build a base station on its territory in the Antarctic and a space observatory in the Atacama desert. To be even better connected, the countries plan to sink a fibre optic cable across the Pacific, making Chile less dependent on US satellites. “Both countries share the benefit,” one trade negotiator says.
    China's critics say it is buying low-value goods and selling them back at a premium. One-tenth of all cars in Santiago are now made in Chinese factories. Other countries would “bristle at the idea” of opening-up so freely to China, one American economist says, but bigger economies could learn

from how Chile is playing China.
    In 2006, before their free trade deal was officially ratified, Chile turned to Beijing to finance a new copper mine, using state-of-the-art technology and driverless trucks. Minmetals, one of China's state-owned metal giants, gave $550m to Chile's national producer Codelco in exchange for the right to buy over 800,000 tonnes of copper over the next 15 years, plus an option to acquire half the mine for an additional $900m. In total, the deal was expected to hit $2bn.
    To celebrate the new partnership, Minmetals' president and one of China's largest banks held a ceremony in the Great Hall overlooking Tiananmen Square, where the Communist party holds its national congress every five years. Alongside the head of Codelco, they gave speeches to an audience of 200, including ministers, ambassadors and staff.
    When the mine was being built, a delegation of Chinese officials turned up on site; they were casually dressed and talking in Chinese, acting like “big men on campus”, according to one account. They came in “with an ownership attitude.”
    But when construction finished, Codelco called a press conference to say that “in the spirit of long-term cooperation”, it had decided to call off the deal. Copper prices had risen so quickly, it was no longer tenable. Rather than escalate the matter to the World Trade Organisation, Minmetals rolled over, sinking $1.9bn into an Chilean iron ore mine instead.
    Chile, which turned into a nation of shopkeepers when its industries were privatised in the 1980s, has always treated China as a customer, holding it at arms-length: if Beijing wants Chile's copper so badly, it can always “buy it on the market,” a Codelco insider quipped. “If we start selling the ownership, we will be mortgaging our future.”
    Chile has been just as tough in fending off investment in its lithium mines. Earlier this year, China's Tianqi Lithium launched a $4.1bn bid for a stake in Chile's lithium giant SQM, but the deal has been referred to antitrust regulators.
    One of Chile's former diplomats to China has politely pointed Beijing in a different direction. Rather than buying-up mines, it could build battery factories in Chile, or invest in other South American economies. “My own wager is that we are going to see more of that. Haiti may be next in line.”
    China's other trading partners have played a less sharp hand. Australia, which

sold $49bn of coal and iron ore to China last year, has welcomed investment by Chinese groups, letting them snap-up everything from hotels in Sydney to Melbourne's port. The spending-spree has come to $90bn in ten years, according to accountancy KPMG. But Australia is now rueing its loss of control, triggering a mood of 'China panic', diplomats say, when it emerged that China-linked groups are now large political donors.
    The US is also coming off badly in its trade with Beijing, nursing a painfully large deficit of $365bn in 2017, pushing the White House to threaten tariffs on up to a third of all US imports. Chile, conversely, has turned a surplus with China every year since their free trade agreement, adding-up to $47bn in Santiago's favour. Even in 2008, when copper prices dropped off a cliff, it sold more to China than it bought.
    That looks set to continue. Chile first flew cherries to China in 2015 and is now adding other fruits to the mix. Nectarines started taking-off for Asia three months ago and Chile's trade negotiators just landed a duty-free deal on avocados. Using Israeli technology, its agricultural sector is largely robotic, using soil moisture sensors, drips and tree-pickers that shake the fruit from trees. Pears, then citrus fruit, will be added to its freighters over the next four years.
    Chile's relationship with China is “excellent”, Chile's ambassadors and trade negotiators say. “The main product gained over these past 10 years has been trust.”



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