Free Trade on the Line if Marxists Capture Chile

Commentary, Government, Paz Gómez

When Hong Kong pro-democracy protests stalled a US-China deal last year, they showed how sensitive trade is to domestic political unrest. Few observers noticed, however, that Chilean demonstrations forced the cancelation of the Asia-Pacific Economic Cooperation summit—where President Donald Trump and Chinese Communist Party Secretary Xi Jinping were to sign a long-awaited trade agreement.

Chile has trade deals covering 65 markets and 88 percent of world GDP, including with Canada, and her winds of change compel attention as a prospective thorn in the side of global commerce.

The only South American nation part of the OECD is going through her worst crisis in recent history. Street protests over inequality and the cost of living exploded in early October, and they have provoked an even steeper economic decline than the devastating 2010 earthquake. Political uncertainty has triggered capital flight, and the Chilean Finance Ministry cut its 2020 GDP growth estimate by a full percentage point.

Chile’s reputation as a beacon of stability has crumbled. Her downfall as Latin America’s freest economy will be next if Marxist activists have their way. They seek a new constitution that expands state control over pensions, natural resources, medical care, and education.

The consequences would ripple across the globe. Half of the Chilean economy relies on international trade. Let us not forget Chile is the world’s number one producer of copper and a major supplier of lithium, molybdenum, gold, and silver.

For the Great White North, Chile’s fall from grace would be an economic and symbolic loss. Canada was the first country to sign a free-trade agreement with Chile, the CCFTA, 20 years ago. Since then, exports to Chile have quadrupled to a peak of $2.9 billion in 2017. Canada has invested $17.1 billion in Chile, her top destination in all South America.

Canada and Chile revamped the CCFTA in February 2019, but anticipated benefits will likely fall short with an economy in decline and future of political institutions up in the air. As in neighbouring Bolivia, Ecuador, and Venezuela, constitutions driven by social justice were the beginning of their ruin.

New Constitution Bound to Happen

Riots in Chile left more than 1,200 stores looted and $2 billion in losses. Around 300,000 residents lost their jobs, and 25 people died. Astoundingly, the painful economic consequences and extreme violence were not enough to delegitimize the riots. Chilean socialists have convinced the public the country’s relatively market-based economy, made possible by the 1980 constitution, is the root of all evil.

Dissatisfaction was so severe, President Sebastián Piñera had to reach an agreement with opposition parties to hold a plebiscite in April 2020 on whether to rewrite the constitution. A non-binding consultation—in which 2.4 million Chileans aged 14 and above voted in late 2019—revealed 92 percent support for the reckless experiment.

The consultation also found Chileans’ top demands are for broader spending on and an end to private-sector involvement in pensions, medical care, and education. Even though the current constitution provides for regular legislation to improve these services, it does not satisfy the radical activists’ desire to turn Chile into an all-encompassing nanny state, à la Venezuela.

Expanding the number of constitutional rights sounds good, but proponents never mention where the funding will come from. Inevitably, Chilean taxpayers will pick up the tab. A burdensome economic model for investors and businesses means even less wealth to redistribute.

In the same vein, protesters want the state to play a larger role in managing natural resources such as minerals and water. Ironically, green-energy regulations were behind the increase in public-transportation tickets that ignited the unrest in the first place.

Foreign-direct investment would be a major victim of this shift. As it happens, Canadian companies in Chile are heavily concentrated in mining, water, and gas.

Chileans Can Find Lessons Close to Home

Venezuela and Ecuador, chief exemplars of 21st-century socialism, offer cautionary tales regarding what happens when social-justice warriors succeed in rewriting the law of the land. Rather than improve the quality of life, central planning and utopian mandates there have crippled entrepreneurship, employment, and trade.

Chilean voters would also do well to reflect on the policies that have caused their own discontent. From 2014 to 2018, socialist President Michelle Bachelet increased corporate taxes by 30 percent and banned the replacement of workers on strike. Public spending grew at three times the rate of GDP growth, and the private sector came under more regulatory red tape.

Axel Kaiser, a Chilean classical liberal and visiting scholar at Stanford’s Hoover Institution, wrote in the Wall Street Journal these reforms dramatically increased hiring costs, reduced capital investment, and undermined economic growth: “Piñera promised to bring back better times. So far he has failed to deliver.”

Trade in the Cross Hairs

In July, Chileans showed their disagreement with free trade during a non-binding plebiscite on whether to ratify the Trans-Pacific Partnership (TPP), of which Canada is a chief backer. Only 6 percent of respondents favoured the agreement, and 92.7 percent opposed it.

This was the first time Chilean civil society showed strong resistance to a trade agreement, and opposition to it resonated among protesters in the following months. As a result, the Chilean Senate decided to suspend a November hearing on the TPP.

If Chile foregoes this agreement, the nation’s trade with key countries such as Australia, Japan, Peru, New Zealand, and Canada, will likely plummet.

The rule of law, property rights, and economic freedom combined in recent decades to be Chile’s key drivers of growth and prosperity. Today she has socioeconomic indicators that are the envy of her neighbors. The desire for a new constitution is settled, but voters can be smart and choose a mixed convention as the method to draft it.

A mixed convention—in which members of Congress and elected citizens each share half of the seats—brings together Chileans from two different political moments: before and after the protests. This would give radicals less room to impose their agenda.

Properly applying checks and balances, legislators could uphold international law and trade agreements as starting points for the new constitution. Investors, entrepreneurs, and liberal democracies, including Canada, would continue to trust Chile as a business-friendly nation in Latin America. Chile’s openness to the world is worth defending and is a testament to the power of trade to overcome underdevelopment.

Paz Gómez is a research associate with the Frontier Centre for Public Policy.