By Alicia Gutiérrez | 2024-08-23

SANTIAGO -- The peril of having overly close ties to China is becoming evident in Chile.

In 2005, Chile became the first country to sign a free trade agreement (FTA) with China, a move that deepened the South American nation's economic and political dependence on Beijing.

A report by international analyst Sascha Hannig, published on August 5, highlights the unfolding inequalities of the trade relationship between Santiago and Beijing that leave Chile economically and politically vulnerable to China.

In her study "Chile's FTA with China: Copper Monoculture, Limited Diversification, and Hidden Dependence," Hannig emphasizes that while China has diversified its economy and became a technological powerhouse, Chile remains reliant on copper exports, hindering its broader economic development.

"With the data in hand, it's clear that this treaty has greatly benefited China by enabling it to diversify and expand its exports to Chile, further solidifying its role as a technological power. But has the FTA with China truly benefited Chile?" asked Hannig, an affiliate of the Center for the Opening and Development of Latin America (CADAL).

This dependence has enfeebled the Chilean economy and exposes Santiago to political pressure from Beijing, she added.

The report underscores a troubling trend in Chilean foreign trade from 2000 to 2022, with 41.6% of the country's exports now headed to China.

Exports to China comprise 35% of Chile's GDP, according to the World Bank and the Organization for Economic Cooperation and Development (OECD).

Such a large customer, even a benevolent one, has an unavoidably outsized impact on a country of 20 million.

China however is not always benevolent.

At China's mercy

It has a history of retaliating against other countries and has issued veiled threats to Chile when the South American nation fails to serve Beijing's interests, said Hannig.

She cited an example from 2018, when the then-Chinese ambassador to Chile, Xu Bu, warned of potential commercial repercussions following Chile's effort to block the purchase of shares in the national company SQM by the Chinese firm Tianqi.

The pressure worked, leading to Tianqi's acquisition of a 24% stake in SQM that December.

Today, Chile's steel industry stands as a clear victim of Beijing's ability to wipe out key Chilean economic sectors.

Chinese steel "dumped" at a price below cost precipitated the collapse of the iconic Huachipato steel company.

After 70 years of operation in the Biobío region, Huachipato could compete no more.

In August, it announced its permanent closure, which will take about a month to complete.

Labor unions raised concerns in March about potential pressure from Beijing on a Chilean trade oversight body, the Anti-Distortion Commission.

They cited the commission's "excessive delay" in addressing "unfair competition."

"We suspect the Chinese government is exerting undue pressure on the Chilean authorities," the unions stated, accusing China of trying to "protect its interests in the heavily subsidized steel it exports to Chile."

Betting on copper and nothing else

Hannig's report also scrutinizes the Chinese role in Chile's industrialization, particularly in the mining sector, raising concerns about the potential harm to Chile of recent lithium contracts.

Those deals mean more damage to the Atacama desert and yet another Chilean bet on exporting raw materials.

China's penchant for importing copper ore rather than value-added products raises questions about whether that trade strategy advances Chile's development.

Nonetheless, the debate in Chile over the risks of dependence on China remains muted.

Supporters of close ties to Beijing, including Jorge Heine, Chile's former ambassador to China, dismiss such concerns as "fantasies."

However, this perspective fails to recognize that China is significantly expanding its mining and refining capacity, which could potentially reduce its demand for Chilean copper.

The situation is worsening because Chile has no strategy if China decides someday to prioritize domestic copper mining, said Hannig.

Chile's failure to court more copper buyers could lead to grave repercussions, Hannig said.

It has left itself open to political coercion and to downturns in trade with China, whatever the cause.

That unaddressed weakness is evident in various sectors, such as steel and mining, where China's trade practices have inflamed tensions and raised concerns about its ability to sway the Chilean government, according to the investigation.