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DIRECTORATE-GENERAL FOR EXTERNAL POLICIES OF THE UNIONDIRECTORATE B

– POLICY DEPARTMENT –

NOTE

ON RELATIONS BETWEEN CHILE

AND THE EUROPEAN UNION

Summary:

After 16 years of dictatorship between 1973 and 1989, Chile began a process of democratisation under the authority of the military. That process culminated in August 2005, when the Congress adopted a reform of the Constitution that had been imposed in 1980 by General Pinochet’s government. This political success has been mirrored by good economic progress, which is largely the result of structural reforms. These have helped open up the economy, which has been strengthened via the implementation of several free-trade agreements and by focusing on national production.In January 2006 Michelle Bachelet won the Presidential elections. It is an unprecedented event for a woman to achieve such a high position in the Southern Cone. Her priority areas will be health, education and the reduction of poverty.Relations between the EU and Chile in terms of politics, the economy and cooperation are excellent. The association agreement concluded in 2002 has done much to strengthen relations between the two partners, and the fields of activity to which the agreement applies have increased as a result.

DGExPo/B/PolDep/Note/2006_138 September 2006

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This note was requested by the Delegation to the EU-Chile Joint Parliamentary Committee.

It is available in the following languages: English

Author: Pedro NEVES

Manuscript completed in September 2006.

To obtain copies, please email pedro.neves@europarl.europa.eu

European Parliament, Brussels, September 2006.

The opinions expressed herein are those of the author and do not necessarily reflect the position of the European Parliament.

Sources:Economist Intelligence Unit (EIU)European CommissionEurostatReutersGlobal Insight

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CONTENTS

Page

I. POLITICAL SITUATION...................................................................................................4

II. ECONOMIC SITUATION. ...............................................................................................15

III. RELATIONS BETWEEN THE EU AND CHILE............................................................21

ANNEXES

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I. POLITICAL SITUATION

1. Introduction

1.1 Geographical location

In the Aymara language the word Chile means ‘the place where the earth ends’, and the country has a curious geography: from Peru to its southernmost tip it is 4.330 km long and never more than 362 km wide1.

The country is located in the south-west of South America, bordered to the north by Peru, to the east by Bolivia and Argentina, and to the south and west by the Pacific Ocean. Several archipelagos (the Chonos archipelago, Wellington Island and the western part of the Tierra del Fuego) extend along Chile’s southern coast from Chiloé Island to Cape Horn. The total surface area of the country is around 756.950 km2. Chile’s population is relatively homogenous compared to other South American countries, and the country has 16.1 million inhabitants, over a third of whom live in Santiago, the capital.

The landscape is dominated by the Andes, a long mountain range which runs the length of the country from the Bolivian plateau in the north to the Tierra del Fuego in the south. Chile can be divided longitudinally into three types of landscape: the Andean Cordillera in the east, the plateau area of the Central Valley, and coastal mountain ranges in the west. In the central region, the plateau gives way to the Central Valley, which is around 965 km long and 40-80 km wide, and which is the most heavily populated region of the country. The fertile depression between the Aconcagua and Bío-Bío rivers forms the agricultural heartland of Chile. The country may be divided into three climatic regions: the arid north, the Mediterranean-like central region and the temperate oceanic south. The northern region is almost entirely desert, and the Atacama desert is one of the driest in the world. Temperatures, however, are moderated by the altitude and by the offshore presence of the cold Humboldt Current from Peru.

1.2 Historical background

The first inhabitants of Chile came from Asia via the Bering Strait. Various Indian tribes spread throughout the land, and as Chile’s unique geography made it unappealing to conquerors, the various Indian tribes lived in harmony for many years.

In 1520, Fernand de Magellan was the first to catch sight of Chile shortly after he sailed through the strait which today bears his name, but he did not go ashore, instead carrying on towards the Philippines. In 1540, Pedro de Valdivia founded Santiago, and although several months later the town fell under the attacks of the mapuches (Indians), they could be brought under control relatively quickly. The Indians submitted, mainly thanks to the implementation of the

1 See annex I.

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encomienda2, which laid the foundations for a colonial society: the soldiers were encouraged to take over large estates and enjoy the profits from them.

On this basis, colonial society developed over the next three centuries according to a strict hierarchy. The majority of power was in the hands of a small white landowning elite; next came the craftsmen and the smaller landowners, and finally the working class, which included the mestizos and Indians, who worked for a minimal wage in mines and on farms. Following various catastrophes and wars in Europe, a large number of families emigrated to Chile, increasing the diversity of the population. From an economic point of view, Chile remained isolated throughout the 17th and 18th centuries, as the only trade authorised was that with the Iberian capital via Peru.

Despite the ban on importing printed books other than those from Spain, the echoes of the European Enlightenment and the North American and French uprisings were heard in Chile and led to an initially covert rise of national consciousness, which soon became increasingly open. Napoleon’s incursion into the Iberian peninsula brought events to a head, and a group of Criollos refused to swear allegiance to Napoleon and declared independence on 18 September 1810. The elected junta abolished slavery and declared the complete freedom of international trade. In 1814, Peru’s viceroy sent troops to Chile to overcome the rebellion. Chile finally won its fight for independence after victories at Chacabuco (12 February 1817) and Maipú (5 April 1818).

Over a century of political conflict between conservative and liberal political forces then followed. In 1938, an authoritarian regime came to power which promised economic stability, and Chile experienced nearly 30 years of prosperity, based on increasing integration into world trade. It was during this time that Valparaíso became one of the world’s most important ports. In 1951, strikes occurred in almost every sector of the economy. A popular reaction against the traditional parties resulted in the election of General Ibáñez the following year, supported by the Agricultural Working Party. In 1958, Jorge Alessandri Rodríguez, a former senator heading a conservative-liberal coalition, was elected to the presidency on a platform favouring free enterprise and foreign investment. The presidential election of 1964 was won by the former Senate member Eduardo Frei Montalva, candidate of the Christian Democrat Party. Frei carried out major reforms, such as partial government ownership of the copper industry and an agrarian reform which allowed for the expropriation of farms which covered over 80 ha, as well as farms which were badly run or which had been abandoned. His reforms aroused dissatisfaction in both leftist and conservative elements that resulted in violent political opposition. The conservative right considered his reformatory policies to be a travesty, whereas the left considered him too timid.

As the presidential election of 1970 approached, leftist opposition united to form a Popular Unity coalition; it nominated Salvador Allende Gossens, who waged his campaign on a platform that promised full nationalisation of all basic industries, banks, and communications. He received nearly 37% of the votes against his rightist opponent, former President Alessandri. Allende became the first Marxist President democratically elected on a socialist programme. Thanks to his political instinct and historical pragmatism, he succeeded in presenting a ‘new way’ of embracing socialism at a time when the signs of crisis in the ‘real socialisms’ were already

2 The encomienda is the main basis of the Spanish colonial system. Each soldier received a section of land and the right to use the Indians who lived there to cultivate the land or mine gold. Dispossessed of their land and reduced to forced labour, the Indians were exploited and often died due to ill treatment. The encomenderos often neglected their duty of caring for the Indians and converting them to Christianity. The encomienda system is one of the reasons why Chile’s landowning structures remained remarkably stable over several centuries. The landowning oligarchy which ran the latifundia until the agricultural reforms of 1960 can be seen as a direct descendant of the encomenderos of the 16th century.

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beginning to show. Once installed as president, Allende quickly began to implement his campaign promises, turning the country toward socialism and democracy. A large part of the economy was placed under state control, mineral resources, foreign banks, and large companies were nationalised, agrarian reform was accelerated and peasant councils were set up. In addition, Allende initiated a redistribution of income, raised wages, and put price controls in place. Opposition to his programme, however, was strong, and by 1972 the result was seen in protest movements. The situation grew still more critical in 1973, when runaway inflation, food shortages (caused by the reduction of foreign credits and the stockpiling of goods by retailers and small manufacturers), strikes, and political violence brought Chile to the brink of chaos. The crisis was aggravated by the United States, which, mistrustful of the new Chilean authorities, imposed a financial blockade on the country. Despite the fact that Chile was the most politically and economically sound country in South America and that it had an exemplary history of democracy (its Parliament had been sitting for 130 years without a break), the military forces seized power on 11 September 1973 and President Allende died during an assault on La Moneda Palace by the army. General Augusto Pinochet Ugarte became the leader of the military junta and in July 1974 took the title of ‘Supreme Head of the Nation’. He immediately suspended the Constitution, dissolved the Parliament, imposed strict censorship, and banned all political parties. In addition, he embarked on a campaign of terror and bloody repression against the left. Thousands were arrested; many were executed, tortured, or exiled, while still others spent many years in prison or ‘disappeared’. On 5 October 1988, Pinochet held a plebiscite on whether his term should continue after March 1989 and be extended to 1997. When nearly 55% of the electorate voted no, the General announced that his term would be extended to March 1990.

In December 1989, in Chile’s first presidential election in 19 years, voters chose the Christian Democrat candidate, Patricio Aylwin. While Pinochet remained commander-in-chief of the armed forces, in April 1990 Aylwin appointed a commission ‘for truth and reconciliation’ to investigate human rights violations by the Pinochet regime. His economic reforms were aimed at maintaining a high growth rate and establishing social integration. The country opened up to the rest of the world by increasing exports, particularly to the United States, thanks to a bilateral trade and investment agreement. The local elections of June 1992 increased the lead of the Christian Democrats. In the presidential election of 1993, the Christian Democrat candidate of the Concertación coalition, Eduardo Frei Ruiz-Tagle, the son of the former President Eduardo Frei Montalva, beat Arturo Alessandri, the centre-right candidate.

2. Internal Policies

2.1 Institutional framework

Chile is a presidential republic which since 1990 has been in the process of democratisation. This lengthy process, which is still incomplete, is the epilogue to a military dictatorship which lasted over 16 years, from 1973 to 1990, under the leadership of General Pinochet. Before leaving power, the dictator put in place legislation (an Amnesty Law and the Constitution) intended to tie the hands of the following regime. The Amnesty Law, which relates to crimes committed under the dictatorship, has recently been called into question. Adopted on 11 March 1981, it has been amended four times (in July 1989, November 1991, October 2004 and August 2005). Amendments to the Constitution required a two-thirds majority in the National Congress, a difficult task given the way in which deputies are elected.

Under the 1980 Constitution, executive power was vested in the President, elected by popular vote for four years, and in the cabinet which he appointed. The military retained control of the

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Government until 1989, when the first presidential election by universal suffrage was held since 1970. Under the new Constitution, there is a four-year, non-renewable presidential term. The President is both Head of State and Head of the Government. For the first time since 1973, the President also controls the armed forces. In his capacity as head of the executive branch he is assisted by the Minister of the Interior, who has more political influence than the other cabinet members.

Legislative power is exercised by the National Congress, which sits in Valparaíso and consists of two chambers: the Chamber of Deputies and the Senate.

The Chamber of Deputies, which has a fixed number of 120 members, is elected for four years according to a bi-nominal system3 established by the military junta. The current Chamber of Deputies, elected in December 2005, is made up of 63 MPs of the governing Concertacióncoalition and 52 MPs of the opposition, Alliance for Chile (APC).

The seats in the Chamber of Deputies are divided in the following way:

Concertación (63):- 20 Partido Demócrata Cristiano (PDC)- 21 Partido por la Democracia (PPD)- 15 Partido Socialista (PS)- 7 Partido Radical Social Demócrata (PRSD)

Alianza para Chile (52):- 33 Partido Unión Demócrata Independiente (UDI)- 19 Partido Renovación Nacional (RN)

Other Parties (5):- 4 Parlamentarios Independientes (I)- 1 Partido Acción Regionalista (PAR)

The Senate consists of 38 senators. One half of the Senate is re-elected every four years. There are 19 senatorial districts, each of which returns two senators. Nine seats for appointed senators were recently abolished as a result of constitutional reform.

The seats in the Senate are divided in the following way:

Concertación (20):- 6 Partido Demócrata Cristiano (PDC)- 3 Partido por la Democracia (PPD)- 8 Partido Socialista (PS)- 3 Partido Radical Social Demócrata (PRSD)

Alianza para Chile (17):- 9 Partido Unión Demócrata Independiente (UDI)- 8 Partido Renovación Nacional (RN)

3 The 120 Members of the Chamber of Deputies are elected according to the bi-nominal system, which means that two members are elected for each of the country’s 60 constituencies from a ‘closed list’. If the winning party receives more than twice as many votes as the following party, it wins two seats; otherwise, each of the two parties wins a seat. The method excludes any representation of small parties and encourages a moderate two-party system in the American style.

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- 1 Parlamentarios Independientes (I)

Chile’s legal system has its roots in Spanish law and the Napoleonic Code. The highest authority of the judicial branch is the Supreme Court, which is based in Santiago. The 21 judges are appointed by the President and confirmed in office by a two-thirds majority in the Senate. The members of the 16 regional Courts of Appeal are appointed by the Supreme Court.

At an administrative level Chile is divided into 13 regions (including the Santiago metropolitan area), which in turn are divided into 40 provinces. The regions are headed by governors (Intendentes) who were appointed by the President, as were the heads of the provinces, under the regime of General Pinochet. Since 1992, they have been elected, as they were previously.

2.2 Recent political developments

After a military dictatorship which lasted over 16 years (1973-1989), Chile’s began its return to democracy under President Patricio Aylwin of the Concertación Democrática coalition. Aylwin was elected in December 1989 following a referendum held in October 1988, which forced Pinochet’s military regime to hold elections. In December 1993 Mr Frei, a Christian Democrat, was elected President, but although he continued to move the country towards democracy, persistent opposition from the Senate meant that he was unable to rid the country of the dictatorship’s authoritarian legacy (examples of which include the irremovability of the heads of the armed forces, the bi-nominal electoral system and appointed senators).

On 16 January 2000, the socialist Ricardo Lagos was elected President after a close fought election in which the right-wing candidate, Mr Joaquín Lavin, the major of Santiago and head of the Independent Democratic Union, won 48.7% of votes in the second round. Mr Lavin’s party is seen by observers as the chief successor to General Pinochet’s regime, and he himself is seen as the leading political force in the country. Ricardo Lagos Escobar, who was inaugurated as President on 11 March 2000, was a charismatic figure of the moderate left. He was the leader of the Partido por la Democracia (PPD) and was he was one of the architects of the alliance formed by the Socialists and Christian Democrats to oppose the Pinochet dictatorship in 1989. Mr Lagos announced reforms within the social sector, principally in health and education, and promised to rid the democratic regime of the institutional legacy of the dictatorship.

In the local elections of 29 October 2000 the right gained ground, with a victory for Mr Joaquín Lavin in Santiago, and this trend continued in the parliamentary elections of December 2001, but the October 2004 municipal elections saw ground being lost again. The democratic Concertación(government majority) reached an agreement with the opposition in the Senate on 6 October 2004 to reform the Constitution. This reform was adopted by Congress in August 2005, and came into effect in September 2005.

From then on, the Head of State will have powers to dismiss the commanders of the armed forces and the armed police, after consultation with the Senate. The nine seats reserved for unelected Senators, four of which are reserved for former military commanders - and those of lifetime Senators, have been abolished. However, the bi-nominal system will remain. This prevents the representation of minority parties, and has given the opposition, with only a third of the vote, half the seats in Parliament.

On 12 October 2004, the Senate also adopted the reform of the National Security Council, reducing its role to that of a consultative body to be convened exclusively by the President.

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Finally, on 4 November 2004, the Senate adopted the reduction of the Presidential mandate from 6 to 4 years, with no re-election. Until that point, the right-wing opposition had rejected this proposal in the belief that it could win the December 2005 presidential elections..

2.3 2005 Elections

a) Introduction

The Presidential Elections took place in December last year. The Concertación assured a fourth consecutive victory, this time lead by the centre left PS candidate Michelle Bachelet. She is the first female President in the Southern Cone and one of the very few in the whole continent4. The main difference is that she has not risen to power thanks to family connections. Furthermore her background is somewhat unconventional as she raised three children as a single mother. On top of this she is an agnostic and has a scientific education. She is a good example of someone who has suffered from the Pinochet military regime: her father was tortured and killed at the beginning of the coup. Chile has a reputation of social conservatism and the church is still one of the most influential institutions. Actually, divorce was only legalised in 2004, under the Lagos administration.

In 2002 she was the first woman to become Defence Minister after having spent two years in the Health Ministry (she was a paediatrician). Prior to her political career she worked as an advisor to the World Health Organisation and the Pan American Organization.

She will focus on maintaining the social programmes initiated by Mr. Lagos and keeping the emphasis on poverty reduction as a priority. The VAT rate which had been raised temporarily by former President Lagos to 19% will remain in order to finance social programmes and improve the pension system.

b) Candidates

The Concertación (a 17 party coalition) started off presenting two candidates for the Presidential elections: Michelle Bachelet from the Socialist Party (PS) and Soledad Alvear from the Cristian Democrats (PDC), but the latter abandoned her campaign in May 2005 as her cabinet colleague was leading the polls. Ms Alvear will probably run for president in the 2009 elections as will Mr. Piñera from the APC.

The opposition presented two candidates: Joaquín Lavín and Sebastián Piñera.

Joaquín Lavín is a member of the Independent Democratic Union (UDI). Since the year 2000 he has been the mayor of Santiago.

The other opposition candidate is the very wealthy businessman Sebastián Piñera for the Renovación Nacional Party (RN). He is well known for promoting corporate social responsibility in Chile and represents the softer side of the rightist opposition. He is one of the major shareholders in the country's airline LAN Chile and owns the media network Chilevision. He pledged that if elected he would create 100.000 new jobs.

4 Violeta Chamorro in Nicaragua, Mireya Moscoso in Panama and Janet Jagan in Guyana, Lidia Gueiler in Bolivia and Isabel Perón in Argentina.

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Tomás Hirsch, from the Communist party performed surprisingly well in the first round but then called on his electorate to abstain from voting in the second round. Despite this, sources from the EIU claim that 375.00 people (approximately 5% of the electorate) switched to Ms Bachelet after voting for Mr. Hirsch in the first round.

In the first round of the elections, on December 11th 2005, Ms Bachelet obtained 45.95% of the votes, thus taking her into a second round. Prior to the December vote there was a public television debate between the candidates which lead to a small fall in Bachelet's popularity.

Following the December election Mr. Joaquín Lavín decided to back out and to support the more popular Piñera, although not all his electorate will follow his footsteps. Some of the lower income supporters of Mr Lavín preferred voting for Bachelet as opposed to the wealthy businessman with whom they cannot identify.

On January 15th Michelle Bachelet defeated Sebastián Piñera with 53.5% of the votes. Finally, she took office on March 11th 2006 for a four year term. The Concertación also holds the majority of the seats in the Congress and in the Senate.

Mr Piñera has already stated that he intends to stand for the 2009 elections. He hopes to build a wider centre right coalition than the Alianza without losing the more right wing UDI. To avoid getting caught up political clashes, Mr. Piñera will stay away from the front line in the political debate during 2006-2007.

2.4 Bachelet Administration

The Concertación won for the forth time in a row, but for the first time the President enjoys both the majority in the Chamber of Deputies and in the Senate. On top of this the constitutional reform finally brought an end to the presence of the unelected senators. Experts predict that there will not be a major change in the policies; the Bachelet Adminstration aims to pursue continuity with new, experienced faces.

Bachelet announced the names of her cabinet members before the deadline; as previously promised half of the ministers are female. Against most expectations, Bachelet chose Andrés Velasco as Minister of Finance, a Harvard University academic and an independent. The other option would have been to appoint Mario Marcel for this post. Previously he was Mr. Lagos' budget director5. Mr. Velasco believes that further structural reforms are necessary in order to raise Chile's rate of economic growth.

In her first speech she promised to implement new reforms during her 100 first days in office. These would cost US$6bn without implying an increase in taxes. The main pillars are to accelerate the country's modernisation and to increase its economic growth potential6.

President Michelle Bachelet has proposed a plebiscite on the reform of the nation's controversial binominal electoral system, which dates back to the authoritarian Augusto Pinochet regime (1973-90). General Pinochet replaced a proportional electorial system with the binominal model, undermining election prospects for smaller parties in favour of larger political entities. Chile's

5 Vice-President and Interior Minister: Andrés Zaldivar, External Relations Minister: Alejandro Foxley, Economy Minister: Ingrid Antonijevic, Finance Minister: Andrés Velasco, Mining and Energy Minister: Karen Poniachik, Defence Minister: Vivianne Blanlot, Labour Minister: Osvaldo Andrade, Agriculture Minister: Alvaro Rojas, Transport and Communication Minister: Sergio Espejo, Chief of Staff: Paulina Veloso6 For more details see Annex II

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right-leaning National Renewal (RN) opposition has abandoned awaited cross-party talks with the government on the issue, in protest at the president's suggestion to bypass congress on the issue. Chile's Communist party has given its backing to Ms Bachelet for suggesting a referendum to tackle the last remaining major authoritarian legislation from the Pinochet years. Ms Bachelet's predecessor Ricardo Lagos attempted to overhaul Chilean voting laws, but he fell short of the two-third majority required to do so, although he previously won congressional backing to restrict the power of the military and make the upper house more democratic.

In May 2006 education protests tested the Cabinet. Nationwide demonstrations by students gained widespread support and provoked calls for a cabinet reshuffle in June 2006. The ministerial team remained intact after President Bachelet announced a reform package addressing key demands. Measures to quell unrest in the education sector centred on the establishment of a presidential council to come up with long-term educational reforms. Some surveys have indicated a significant drop of 11 percentage points in the president's popular approval ratings, dipping to 56%.

2.5 Human rights

The ferocious repression that was unleashed in Chile after 11 September 1973 led to a genuine state of ‘internal war’. Very soon the number of arrests, disappearances and summary executions rose sharply, the concentration camps filled up and torture centres were set up. In the space of 12 months there were nearly 3200 victims, including 1200 people who ‘disappeared’.

The army, aware that there could later be a backlash against a policy of repression on such a scale, passed a law on 19 April 1978 granting amnesty to all those who had committed crimes and offences between 11 September 1973 and 10 March 1978. This amnesty, covering the blackest period of the dictatorship, applied to a large number of police, military and security agents. After his setbacks in London, General Pinochet also tried to protect himself by persuading the Chilean Congress to adopt, on 25 March 2000, a constitutional amendment granting immunity from prosecution to former Presidents of the Republic, including himself. The then President of the European Parliament, Mrs Nicole Fontaine, replied to the Chilean Congress’ adoption of what she called a contingency amendment by saying that its sole purpose was to protect General Pinochet from prosecution for the crimes of which he was accused and that it was an illusion to believe there was any real intention of giving Pinochet a fair trial in Chile and a provocation towards countries that had initiated proceedings on the grounds of his violation of fundamental rights.

These attempts to evade justice did not intimidate Chile’s Supreme Court, which in a historic judgment delivered on 8 August 2000 confirmed the decision a Santiago Court of Appeal had taken in early June to strip Pinochet of his parliamentary immunity. In its resolution of 14 December 2000, the European Parliament, while underlining that EU-Chile relations must be based on respect for human rights, democratic values and a shared vision of justice and accountability for crimes against humanity, expressed its respect for the Chilean judiciary and the independence of which it had shown proof in the proceedings against General Pinochet and affirmed the right of the Chilean people to identify the authors of the flagrant violations of fundamental rights committed under the Pinochet dictatorship7. On 1 July 2002, however, the Supreme Court ruled that the former 87-year-old dictator was suffering from senile dementia which prevented him from defending himself. He may still be tried in absentia in France for the disappearance of five French citizens.

7 OJ C 232, 14.8.2001, p. 352.

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The commemoration of the thirtieth anniversary of the coup d’état which overthrew the government of Salvador Allende on 11 September 1973 led to an unprecedented collective examination of the circumstances which led to the coup and the tragic years which ensued, on the part of all political and social sectors. The army8, political parties and churches now recognise the gravity of the human rights violations which took place under the dictatorship.

The first stage was the Retting Report, which sought to provide the most complete record possible of the human rights violations which resulted in murders and ‘disappearances’ committed by agents of the state or private individuals with political purposes in view. Over 3200 names of victims were thus assembled. Next there came measures in favour of those who had been living in exile, and those who had lost their jobs for political reasons. In November 2003, the ‘National Commission on illegal arrests and torture’ was set up on the initiative of President Lagos, so as to resolve the tragedy of former political prisoners who had survived torture and other ill-treatment.

However, the World Organisation against Torture (WOAT) regrets the fact that despite official figures recording that some 104.000 individuals were subjected to torture or ill treatment between 1973 and 1990, less than 25.000 have appeared before the Commission, whose purpose is to draw up recommendations which will guarantee that the victims are indemnified. According to the WOAT, the initiative’s success has been undermined by lack of information, stigma and the trauma suffered by the victims, as well as the brief period during which the Commission was active9.

The judicial difficulties of former dictator Augusto Pinochet reveal Chilean society’s desire finally to vent its grief over the past. On 28 May 2004, the Santiago Appeal Court waived the General’s immunity, by 14 votes to 9, in view of his responsibility for the crimes committed during ‘Operation Condor’, a plan devised by the South American dictators to eliminate their opponents in the 1970s and 1980s. The Supreme Court took a similar decision on 26 August 2004. The judicial noose has therefore definitively closed around the neck of the man who ruled Chile with an iron hand for 17 years. The impunity of the man who was the head of the Chilean army for 25 years is at an end. Augusto Pinochet is now being prosecuted not only for crimes committed during the military dictatorship10 but also for corruption, illegal self-enrichment and tax fraud11.

On 13 December 2004, the Chilean judge Juan Guzmán ordered Augusto Pinochet to be placed under house arrest, charged with one murder and nine kidnappings as part of Operation Condor. The judge said that he believed that the caudillo, aged 89, was mentally fit to stand trial. On 20 December 2004, the Court of Appeal unanimously ratified the arrest warrant issued against the former dictator. On 4 January 2005, the Supreme Court confirmed the charges against the General and his house arrest for the Operation Condor crimes. By three votes to two it rejected the appeal lodged by Pinochet’s lawyers demanding the annulment of the decision of 13 December 2004. Judge Guzmán is therefore free to continue his investigations, in the spirit enunciated by President Lagos when he said ‘silence is over, there will be no more forgetting,

8 On 5 November 2004 General Juan Emilio Cheyre, the Head of the Chilean Army, acknowledged, for the first time, the responsibilities of the military in the human rights violations under the Pinochet dictatorship (1973-1990).9 Press release of 13 May 2004.10 Over 300 appeals against him for kidnappings, tortures, disappearance and executions have been lodged in Chile.11 A US Senate report has revealed that the Riggs National Bank in Washington helped t he former dictator to transfer money illegally to the USA. Four to eight million dollars or more are supposed to have been deposited between 1994 and 2002. Furthermore, when he took power, the General owed only a middle-class house but he apparently now owns a dozen properties.

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the dignity of each and every individual has been reestablished [...] Because we have been capable of looking the whole truth in the face, we can start putting the pain behind us and letting the wounds scar over’.

In February 2005 trials began against Augusto Pinochet in relation to alleged human rights abuses during the "Operación Colombo"12. The Santiago Court of appeals is currently dealing with the trial.

For a long time it went largely unnoticed that the ‘honest’ dictator had in fact, over a 25-year period, been spinning a complex financial web enabling him to hide at least USD 13 million in secret bank accounts. So it was that on 7 June 2005, the Court of Appeal in Santiago waived the immunity that Augusto Pinochet had enjoyed as a former President, thus paving the way for him to be tried for tax fraud and corruption. On the same day, however, the court decided that a case brought against Pinochet for crimes committed under the ‘Condor Plan’ (an operation carried out by several South American dictatorships between 1970 and 1980 to eliminate members of the opposition) should not proceed to judgment. The decision dismayed human rights activists and the families of the victims of the military dictatorship, whose legal representative, Mr Contreras, pointed out ‘it seems that the stolen money is worth more than the blood of thousands of victims’.

3. External Policies

3.1 Relations with neighbouring countries

Since democracy was restored, the main priority for Chile in terms of foreign policy has been the normalisation of relations with its neighbours. The historical controversy over Peru’s access to the port of Arica (annexed during the War of the Pacific, 1879-1881) was finally settled on 13 November 1999, when an agreement was signed completing the implementation of the 1929 peace treaty. In 1978, poor relations between Santiago and Lapaz led to a breakdown in diplomatic relations. In August 2006, Chile and Bolivia drew up a "broad" agenda for dialogue between both their countries "without exclusions", according to a joint statement released following a meeting between their respective vice-chancellors Alberto van Klaveren and Mauricio Dorfler. The Agenda includes the controversial issue of access to the sea, demanded by La Paz. Bolivia has made any discussions about the possibility of gas being exported to Chile conditional on a favourable resolution of the territorial dispute. In August 1991, Mr Aylwin and Mr Menem, the Presidents of Chile and Argentina at the time, signed a Treaty of Peace and Friendship, followed by a border agreement on disputed southern regions. Close relations are also maintained with the United States (the leading investor in the country) and the Asian Pacific region (Chile’s principal trading customer).

In November 2005 Chile signed a Free Trade Agreement with China which will become operational later on this year. Chile has also started negotiations with Japan which are likely to lead to the signing of an FTA in November 2006.

12 This military operation took place in 1975. 119 people, mainly members of the Movimiento de Izquierda Revolucionario(MIR), disappeared without leaving any trace. The National Secret Police (DINA) is directly responsible although part of the responsibility is inevitably attributed to Pinochet.

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3.2 Relations with international organisations

Chile is a member of several regional and international organisations. It belongs to the UN and its various bodies, to the World Trade Organization (WTO), to the Organization of American States (OAS)13, to the Latin American Integration Association (LAIA) and to the Latin American Economic System (LAES). However, it withdrew from the Andean Pact in 197614.

It is also a member of the Rio Group (since 1990) and the Asia Pacific Economic Cooperation (APEC, since 1994). Chile has traditionally preferred bilateral free trade agreements (open regionalism) to regional integration, but the signing of an Association Agreement with Mercosur in June 1996 indicated a change of direction.

On the basis of the Framework Cooperation Agreement signed in June 1996, on 18 November 2002 the European Union and Chile signed an ambitious Association Agreement. It consolidated the European Union’s presence in Chile, strengthened both political and trade relations and promoted economic growth and sustainable development15. It is based on the three pillars of political dialogue, cooperation and free trade, to be established gradually between now and 2007.

As far as Asia Pacific Economic Cooperation (APEC) is concerned, Chile has actively sought trading partners and found markets in the Pacific basin, in particular in Australia and New Zealand. Its status as a country in the Pacific region was established in 1994 when it became a member of Asia Pacific Economic Cooperation, a quasi-OECD for the Pacific with vague goals, and Chile takes great pride in having been APEC’s first South American member. In November 2002, Chile signed a Free Trade Agreement with South Korea which came into force in April 2004. Chile hopes to sign such an agreement with China in 2005, and has signed less ambitious trade agreements with India and Russia.

Chile is proud of having remained true to its ‘multipolar diplomacy policy which means that it is not dependent on any one bloc, a sharp contrast to Mexico, which carries out 90% of its trade with the United States and catches a cold when America sneezes.’ Although it belongs to the regional group Asia Pacific Economic Cooperation (APEC) and is an associated member of Mercosur (the regional market of the Southern Cone), Chile also signed a Free Trade Agreement with the United States in December 2002, which came into force in 2004 after ratification by the Chilean and US congresses in 2003. This follows identical free trade agreements with Canada and Mexico.

After suffering the resounding exit of oil-rich Venezuela, the Andean Community (CAN) has turned its attention to Chile, where the new president is keen to foster regional integration. At the investiture of Colombian president Alvaro Uribe in August 2006 a formal invitation was made for Chile to rejoin the group that it helped to found in 1969. Some weeks later, Chile's President Michelle Bachelet confirmed by a letter the country's aspiration to return to the CAN as an associate member. According to Foreign Affairs Minister Alejandro Foxley, the formal letter asks under which regime and modalities the country could rejoin the group, which is composed of Colombia, Ecuador, Peru and Bolivia.

13 The former Interior Minister, José Miguel Insulza, has been Secretary-General of the OAS since 2 May 2005.14 Chile nevertheless rejoined the Andean Community of Nations (CAN) as an observer in 2004.15 See pages 21 and 22.

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II. ECONOMIC SITUATION16

1. Introduction

Chile’s ‘great transformation’ was consolidated with the return to democracy. Not only was the economic inheritance of the dictatorship years not destroyed: despite the political turn-around and change of regime, relative continuity prevailed. At the end of the 1980s, when the ‘Chicago boys’ left government with the fall of the military regime, the new Chilean leader, far from rejecting this economic inheritance, continued with the mix of privatisation and regulation, the opening-up of markets to trade flows and the retention of a mining sector under state control, financial liberalisation and control of capital. These were the means used to implement what has been called equitable growth (crecimiento con equidad).

Chile’s annual GDP growth rate has averaged 5.3% over the past 23 years, and the period between 1990 and 1997 was particularly dynamic, reaching an average annual growth rate of 8.3%. Between 1990 and 2005 GDP per head rose from US$ 2.340 to US$ 7.004.

These achievements are largely due to liberal structural reforms carried out since the 1970s, which include privatisation, deregulation, the modernisation of capital markets, a strict fiscal policy, independence of the Central Bank and reform of labour legislation. However the fact that Chile has shown more resilience than many other Latin American countries, and has also made better progress and undergone more modernisation, is mainly due to its extremely open economy (exports account for between 25 and 30% of GDP, varying annually)17, and the specialisation of national production in sectors where the country has either a comparative or an absolute advantage (copper, wood/paper, salmon and seafood, fruits and vegetables, wines) to the detriment of traditional industries (textiles, leather and ceramics). In addition, export markets are divided between Europe, the United States, eastern Asia and the rest of America.

However, this policy has not prevented economic crises. In 1982-1983, a collapse of the banking system led to a severe recession (-13.4% in 1982). More recently, the effects of the Asian crisis led to a drop in GDP of 1.1% in 1999. The economy began to recover in 2000 with 4.4% growth, faltered again in 2001 due to a slowdown in the world economy, and started to pick up again in 2004.

The opening of Chile’s economy to the outside world therefore involves an element of risk: the slowdown in growth (to a growth rate of only 2.1% in 2002) is mainly due to low levels of activity by Chile’s main trading partners in 2002, and to a lesser extent to the effects of the Argentinian crisis. Nonetheless, in a region convulsed by financial upheavals, Chile looks like an enclave of stability, whether financial or macro-economic. Relatively strict monetary fiscal policies are solid institutional anchors. The country today also stand on a significant platform of macro-economic reforms, which has helped consolidate confidence of international investors in the Chilean economy.

16 See Annex III.17 In the commercial sphere, Chile’s ratio for opening-up is over 50%, customs tariffs are very low, and Chile has concluded numerous free trade agreements.

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2. Economic sectors

2.1 Agriculture

In 1995 almost 12% of the workforce was employed in agriculture. Except for sheep farming, conducted in the south of the country, the bulk of Chile’s agricultural activity is concentrated in the Central Valley. The leading crops are wheat, potatoes, sugar beet, maize, rice, tomatoes and oats.

The agricultural and food sector employed around a million people in 2001 and accounted for 14% of GDP (8% for primary products and 6% for processed goods), as well as large currency reserves. Chile is the southern hemisphere’s leading exporter of fresh fruit. Thanks to its free trade agreements Chile agrees to treble its agricultural exports by 2010. Nearly 20% of Chile is covered by forests, and output consists of both hardwoods (such as laurel) and softwoods (such as pine). They are mainly used for lumber and to manufacture wood pulp.

2.2 Fishing

Although only 5300 km in length, thanks to the fjords in its southern part Chile’s coastline measures nearly 10 000 km, and fishing has become one of the most dynamic and profitable sectors of the economy. Between 1974 and 1999 fish catches increased by 500%, more than anywhere else in the world. Chile is the fourth-largest producer of fish in the world, the largest producer of farmed trout, and the second-largest producer (after Norway) of farmed salmon and fishmeal. However, this increase in production has had adverse effects on the environment, such as a loss of diversity of marine flora, water pollution, salinisation and the spread of diseases from farmed fish to wild fish.

2.3 Mining

Chile has some of the world’s largest known copper deposits and is one of the world’s leading producers. Copper accounts for nearly half of all annual exports by value and generates one-third of government income, but it is subject to fluctuations in price on the world market. Between November 2001 and March 2004 the price of copper doubled which enabled the government to generate considerable income which is in use today.18 Oil and natural gas (first discovered in 1945) are extracted in the Tierra del Fuego and in the Strait of Magellan. Chile also has large deposits of nitrates, iodine, sulphur, and coal, as well as silver (of which it is the sixth-largest producer in the world), gold, iron, zinc, manganese, and molybdenum.

2.4 Industry

Cheap Asian imports have had an adverse impact on the traditional Chilean industries (textiles, leather and ceramics), which have undergone a sharp decline. In contrast, other industries such as the cellulose19 and methane industries have expanded. The Government encourages these new

18 Despite the Pinochet dictatorship, and the implementation of liberal economic policies after democracy returned in 1990, there has been no privatisation of the sector.19 The success of the EU-Chile Association Agreement is particularly clear in the trade in cellulose. 36% of the cellulose produced in Chile is exported to the EU. That trade, however, has adverse effects on the environment. In

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industries and promotes technological development: an ambitious science and technology plan has been published.

2.5 Tourism

Chile’s diverse scenery, ranging from desert in the north to lakes, fjords and glaciers in the south, attracts large numbers of tourists every year. In 1998, revenue from tourism was over USD 1 billion. The Argentinian crisis in 2002 hit Chilean tourism hard as Argentinian visitors accounted for around 60% of all foreign tourists. Chile’s Government is seeking to attract a greater influx of tourists from Europe, North America and Asia.

3. Trade and Free Trade Agreements

Trade is a growth sector of the economy. Chile’s main exports are:- mining products (43%, of which copper accounts for 39.1%);- agricultural products, including forestry and fishing products (22%);

The main imports are:- consumer goods (17.9%);- raw materials, energy and intermediate products (61%);- capital goods (21%).

In 2003, Chile’s main markets for exports were the EU, the United States, Japan, China, South Korea, Mexico and Brazil. Its main suppliers were Argentina, the United States, the EU, Brazil, China, Japan, Mexico and South Korea.

Chile shows a trade surplus. Observers claim20 that exports totalled USD 44 billion in 2005 and imports only USD 36.6 billion – a surplus of over USD 7 billion! The price of copper (the country’s main export) rose again in late 2002, with Korea and China, which together account for 20% of global consumption, recording a 10% increase in demand. Between 2001 and 2002 there was little change in the amount of oil imported as a percentage of total imports (around 10%), as people tend to use less petrol when prices rise. However, an ever greater energy shortage threatens to brake industrial production, while neighbouring Argentina’s own needs led it to slash its gas exports to Chile by 40% in the first three months of 2004.

Chile’s multilateral trade policy is one of the main reasons for its economic success, and ensures that the country is not dependent on any one economic bloc. Although Chile belongs to the regional group Asia Pacific Economic Cooperation, and is an associated member of Mercosur, it continues to favour bilateral free trade agreements. Chile has signed free trade agreements with Mexico (1991), Venezuela (1993), Colombia (1993), Ecuador (1994), Canada (1997) and Peru (1998) and in 2002 it signed free trade agreements with the European Union, South Korea and the United States21. In the meantime, the Minister for Finance has forecast a USD 400 million fall in revenue from customs duties, and intends to increase VAT to compensate. However, these problems have not prevented the return of a certain optimism to the business community, as the

less than a year, the number of black-necked swans at the Carlos Anwandter nature reserve has fallen from 6 000 to 160. The Chilean Government has already brought pressure to bear on Celco, the company producing cellulose in the Valdivia factory near the reserve.20 World Markets Analysis.21 Chile is the only South American country to have signed a Free Trade Agreement with the United States.

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agreements provide for the opening of new markets and an increase in the flow of foreign capital towards Chile.

Chile and China inaugurated a new phase of intercontinental free-trade agreements by sealing the first Chinese -Latin American deal in August 2006. Both threats and opportunities are taking shape for the two countries. Chile is particularly keen to secure a share of Chinese growth and bolster trade by gaining access to the commodity - hungry market. China, meanwhile, wants to secure a tighter grip on vital raw materials abundant in Latin America and Chile (particularly, copper) and create a platform to increase its trade and investment within the region.

4. Main economic indicators

4.1 Fiscal policy

Fiscal policy will remain one of the most prudent in the world in macroeconomic terms, by adhering to a fiscal rule that commits the government to achieving a structural surplus equivalent to 1% of GDP annually. The structural fiscal accounts measure fiscal revenue at the level it would reach if GDP growth and copper prices were at their medium-term trend levels, which are estimated at 5% and 99 US cents/lb respectively by two independent committees. This policy will continue to yield large surpluses in 2006-07, as a result of strong economic growth and high tax and non-tax revenue from the mining industry, derived from high international prices for copper and molybdenum. This helped the central government surplus to increase in the first quarter of 2006 to 2.2% of GDP, from 1.4% a year earlier. The central government surplus will rise from a record 4.7% of GDP in 2005 to just under 5.5% of GDP in 2006 as the average copper price rises to US$2.96/lb from US$1.67/lb in 2005, and will fall to 3.2 of GDP in 2007 as social spending increases.

Chile’s financial system remains strong thanks to a strict legal framework for banks, insurance companies and pension funds, and Chile’s banking sector is one of the most developed in Latin America, with a credit to GDP ratio of 70%. This figure is topped only by Panama and Uruguay, and as these are offshore centres it is difficult to make comparisons. In addition, Chile is also known for its very high level (92.2%) of private sector funding by banks. The market for consumer credit and mortgages is dynamic, due to low interest rates. The sector is well supervised and at the end of the first quarter of 2003 had good levels of capitalisation and profitability.

Chile’s currency, the peso, was revalued by 30% between 1993 and 1997. In 1998 the peso dropped 3.6% against the dollar, then 10.9% in 1999, 5.1% in 2000, 13.4% in 2001 and 5.6% in 2002. According to the Central Bank, these depreciations will have a positive impact on growth. In late 1999 the dollar was worth 508 pesos, while six years later it was worth over 600 pesos. However, the falling dollar is causing revaluation.

4.2 Economic policy

- The Banco Central de Chile (BCC, the Central Bank) will continue to tighten monetary policy gradually in the rest of 2006 and in 2007, sticking to interest rate rises of no more than a quarter of a percentage point each to avoid shocks. It raised its policy rate three times in the first seven months of 2006, raising its target interbank rate to 5.25% on July 13th, from 4.5% at end-2005. This completed 14 rises of a quarter of a percentage point each since September 2004, when the BCC started tightening monetary conditions. The BCC will probably bring the

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nominal interbank rate to around 5.75% by the end of 2006, a level that is likely to remain unchanged in 2007. The monetary authority should succeed in bringing inflation back towards the centre of its target range in the forecast period.

a) Growth

Between 1998 and 2002, growth averaged 2.4%, compared to a growth rate of 7.3% between 1993 and 1997, mainly as a result of the adverse international economic situation. Whereas in 2001 growth was mainly boosted by exports, the growth rate of 2.1% in 2002 was mainly driven by domestic demand, and in 2003 and 2004 by increased copper exports, underpinned by Chinese demand. In 2005 growth reached 5.95% (the government had forecasted 6%). Growth is forecast to reach 5.2 in 2006 before moderating to a still strong 4.8% in 2007 (EIU).

b) Inflation

Between 1998 and 2002, inflation fluctuated between 3 and 4%, without moving out of the 2-4% target range set by the Central Bank. Wages only rose by 1.8% per year during the same period. Inflation reached a reasonable rate of 2.8% in 2003 and 1.05% in 2004. Nevertheless, the headline annual inflation rate reached 3.7% in 2005, the highest year-end level since 2000. It rose in the first half of 2006, to 3.9% in June, but appears likely now to start to trend downwards. The rise in 2005 and early 206 was due to the sharp rise in international oil prices over the year and strengthening domestic demand. The Central Bank will continue to tighten monetary conditions and is expected to bring inflation down to within its target range, at 3.6% and end-2006 and 2.7% at end-2007.

c) Foreign direct investment (FDI)

After taking power in 1973, the military encouraged foreign investment by means of a liberal regime laid down in Decree Law 600 of 1974, which is still in force: ‘the same rules as for nationals, with guaranteed stability of tax regulations for 10 years….’According to the Economist Intelligence Unit (EIU), inflows of foreign direct investment into Chile reached USD 12.7 billion in 1974-1994. This figure nearly tripled between 1997 and 2004, with total investments reaching USD 35.1 billion. From 1974 to 2001, mining attracted USD 16 billion in FDI, or in other words a third of total FDI.

d) Foreign debt

Despite the performance of Chile’s economy, foreign debt has not dropped. Whereas in late 1993 it was around USD 19 billion, 10 years later (late 2003) it had reached nearly USD 39.6 billion, with a continuing upward trend (USD 40.5 billion for 2004 according to the EIU).

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5. Social issues

5.1 Unemployment

The unemployment rate was 7.44% in 2005 and is unlikely to decrease very much in 2006. The number of jobs in the private sector increased, in addition to the new jobs created by programmes indirectly funded by the state.

During the first half of his term of office, former President Lagos set himself the task of improving employee protection by introducing unemployment benefits (employers and employees contribute a total of 3% of wages into a newly set-up fund) and a reform of the labour code (increased rights for trade union representatives, restrictions placed on redundancies and a reduction of the working week from 48 to 45 hours by 2005). In addition, the minimum wage has increased to 200 USD a month.

5.2 Poverty

According to the World Bank, poverty has decreased. Between 1997 and 1998 cases of extreme poverty (less than €1.60 a day) dropped from 13% to 4%, and cases of poverty (under EUR 3 a day) fell from 40% to 17%. However social inequalities persist: the top 20% of households earn 14.3 times more than the bottom 20%.

In 2004, the lack of an income redistribution policy and comprehensive anti-poverty measures prompted the Concertación Government to set up both a health programme intended to help the most disadvantaged sectors of society22 and the ‘Chile solidario’ programme, which aims to combat the poverty affecting 18.8% of Chileans. Its budget of USD 11 million budget will be used to help the country’s poorest 225.000 families and cut the poverty rate to 15% of the population in 2006.

6. Economic forecasts

The prospects for 2006 are looking good, with an acceleration of growth forecast despite an uncertain international environment. Experts agree on a growth rate of 5.2%.

According to the EIU, inflation will be around 3.9% in 2006.

Chile’s policy of actively welcoming foreign direct investment and the coming into force of recent free trade agreements should attract more foreign investment in 2006. The EIU forecasts a fiscal surplus of 0.6% of GDP.

Chile has a high level of foreign debt, which according to the EIU could reach USD 45.42 billion in 2006. However Chile should continue to show a trade surplus.

Experts consider it likely that the number of jobs in the private sector will increase, in addition to the new jobs which will be created by programmes indirectly funded by the state. Unemployment should therefore reach 7.2% in 2006.

22 Acceso Universal de Garantías Explícitas (AUGE).

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III. RELATIONS BETWEEN THE EU AND CHILE

1. EU-Chile agreements

1.1 The 1996 Agreement

Chile’s return to democracy encouraged the development of economic and trade relations between Chile and the European Union. A first framework agreement on cooperation between the European Community and Chile was signed in 1990. In this connection, the European Parliament adopted a resolution on the strengthening of relations between the European Union and Chile23, in which it called for the signature of a Framework Agreement on EU-Chile cooperation. The Agreement, which was signed in 1996 and came into force on 1 February 199924, goes even further than the framework agreement of the same type signed with Mercosur at the end of 1995. It includes an important section on trade cooperation in the fields of services, investment and intellectual property and aims to strengthen relations between the EU and Chile and to establish a full political and economic association. To this end, negotiations were launched during the EU-Latin America-Caribbean Summit in 1999.

The success of this Agreement helped bring about the signing of an Agreement on drug precursors and psychotropic substances, which came into force on 1 June 1999.

The 1996 Agreement also covers cooperation, and projects in many different areas have been implemented. A new cooperation strategy for 2000-2006 has been drawn up with the Chilean authorities25, and its aims were outlined during the tenth Ministerial Meeting held in Santiago on 28 March 2001. Thus, for the period 2002-2006, EUR 34.4 million will be allocated, of which EUR 12.2 million will be used for technical and commercial cooperation and EUR 22.2 million for economic cooperation. The key cooperation priorities for the period 2000-2006 are technological innovation, the environment and modernisation of the state.

The 1996 Agreement also includes a political chapter, according to which the EU and Chile will hold regular political dialogue at the level of heads of state, foreign ministers and senior officials, as the EU and Chile have many common values in the field of human rights, fundamental rights and democracy. An institutionalised dialogue between the Chilean National Congress and the European Parliament has begun, as have meetings between EU and Chilean civil society.

The new strategy shows that the main challenges for Chile at the present time are an over-concentration of production and exports on a limited number of products and an unequal distribution of income. In terms of spending, the new strategy recommends that the available budget be shared out in the following way: 59% on economic cooperation and technological innovation, 32.5% on capacity building to promote, inter alia, social equality, and 8.5% on protection of the environment and natural resources. From 1991 until 1998, the EU disbursed around EUR 37.5 million to co-finance regional financial and technical aid projects. The two main projects currently running are the ‘Programme for the Fight against Urban Poverty’ (EU contribution EUR 9.6 million) and the ‘Coquimbo Region Programme’ (EUR 10.7 million). Two other projects in the field of economic cooperation are in progress: ‘Statistical Cooperation between Chile, Mercosur and the European Community’ (EU contribution EUR 548 300) and

23 OJ C 32, 5.2.1996, p. 142.24 OJ L 42, 16.2.1999, p. 46.25 Details of the Agreement are given in the ‘Memorandum of Understanding’ and confirmed in the ‘Chile Country Strategy Paper’

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‘Ecocertificación de madera y productos forestales en Chile’ (EUR 850 000), which promotes environmentally friendly wood and timber production.

The Agreement also provides for cooperation in economic and socio-cultural fields, as well as in the fields of technology, education and science.The EU is Chile’s main trading partner and the principal foreign investor in Chile. Increasing trade is therefore a matter of mutual interest.

1.2 The EU-Chile Association Agreement

At the first meeting of the EU-Chile Joint Council of 24 November 1999, the two parties decided to begin negotiations on political and economic cooperation between Chile and the European Union.

The recession that hit Chile in 1999 following the Asian crisis highlighted the economic vulnerability of the country, which had until then been accustomed to sustained growth of some 7%. Very serious social inequalities remain, and in 2000 inflation rose again to 4.6%. However, the free trade agreements Chile has signed with Mexico and Canada, the Chile-Mercosur Association Agreement and agreements with the European Union and the USA have helped improve Chile’s economic situation.

In its resolution of 14 December 2000 on the legal proceedings against General Pinochet and the consolidation of democracy in Chile, the European Parliament stated ‘that the best means by which the European Union can support the consolidation of democracy in Chile is the conclusion of a far-reaching agreement for political cooperation and economic association and cooperation, with the human rights clause to the fore’26. This opinion was underlined on 1 March 2001 by the European Parliament’s recommendation to the Council on the negotiating mandate for an Association Agreement with Chile. In it, the European Parliament expresses concern at the fact that it is not yet formally involved in defining negotiating mandates with third countries and makes recommendations to the Council, for example:

- ‘Concerning human rights, the new negotiating guidelines should be based on the international agreements in the field, including those concerning the protection of ethnic minorities...;

- Similarly, the new negotiating guidelines should explicitly provide for the inclusion in the agenda for political dialogue of the new Association Agreement of matters relating to the common European security and defence policy ... [and] include specific references to suitable arrangements for the participation of civil society in the new political dialogue;

- Above all, the new negotiating mandate should eliminate the existing provision under which the conclusion of the new Association Agreement with Chile is made conditional on the completion of the round of WTO negotiations;

- The Commission should guarantee full compatibility of the free trade area to be established between both sides with the existing WTO rules...’27.

26 OJ C 232, 14.8.2001, p. 352.27 OJ C 277, 1.10.2001, p. 142.

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On 26 April 2002, after nearly three years of negotiations, European and Chilean officials concluded their discussions on the Association and Free Trade Agreement.

Respect for democratic principles, human rights and the rule of law are essential elements of the Agreement. The promotion of sustainable economic and social development and the equitable distribution of the benefits of the Association Agreement are guiding principles for its implementation.

The political chapter of the Association Agreement aims to strengthen political dialogue between the EU and Chile, in particular by way of increased cooperation in the fight against terrorism. The European and Chilean parliaments and representatives of civil society will be consulted and involved in this dialogue in order to guarantee a high level of accountability and transparency. Civil society will be encouraged to participate more fully and to exchange views on cooperation strategies and their implementation.

The European Union and Chile will intensify their cooperation in a variety of other areas, with the aim of fostering a sustainable economic, social and environmental model.

The part of the Association Agreement on trade relations covers all areas of EU-Chile trade relations and goes well beyond their WTO commitments:

1. A free trade agreement on trade in goods provides for a very high degree of liberalisation and is underpinned by a set of strong and transparent rules, namely:

(a) in the industrial sector, the EU will abolish customs duties on around 90% of imports from Chile immediately (in particular those on textile products) and on the remaining 10% of imports after three years. Chile will abolish customs duties on industrial products from the EU after three, five or seven years on a case-by-case basis;

(b) in the agricultural sector, 97-98% of trade will be liberalised over a ten-year period for both parties. A wine and spirits agreement has also been concluded, which will grant mutual respect of protected names and oenological practices, as well as increased market access on both sides. In addition, a sanitary and phytosanitary agreement will facilitate trade in animals, animal products and plants, while safeguarding public, animal and plant health;

(c) in the fisheries sector, the Agreement focuses on mutual access to markets for fish exports. Liberalisation will be carried out over a ten-year period for 93% of current trade.

2. A fully-fledged free trade agreement in services has been included in the Association Agreement that will apply to public procurement markets as well as to liberalisation of investment.

3. The Agreement also includes rules on competition, intellectual property and an effective dispute settlement mechanism.

The trade provisions of the Agreement should generate significant economic and commercial benefits by deepening the economic ties between the EU and Chile.

The provisions on the institutional framework, trade in goods, public procurement, competition and the dispute settlement mechanism will come into force once the EU-Chile Agreement has

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been adopted by the Chilean Congress and the EU Council28. This also applies to the trade-related elements of the cooperation chapter. The provisions relating to political dialogue, services, establishment, current payments and capital movements, intellectual property and cooperation require ratification by both the European Parliament and the national parliaments of the EU Member States before they can come into force29.

The Agreement is the most ambitious, innovative and wide-ranging agreement negotiated to date with a non-applicant country, and it represents a genuine strategic and bi-regional association between the EU and Latin America. Following the recent enlargement of the European Union, a Protocol adapting the European Association Agreement was adopted by the Commission and Chilean Government representatives on 30 April 2004.

The EU/Chile Association Council met for the first time on 27 March 2003 in Athens. Both sides adopted the Association Council’s rules of procedure and the joint and special committees established by the Agreement. The ratification of the agreement by the EP was welcomed, and the national parliaments were invited to expedite the process. EU/Chile consultations were to be launched as soon as possible, so as to adopt the cooperation priorities for 2003-2006, in order to implement the new agreement.

On the political front, the two sides agreed that dialogue should focus (without excluding any issue a priori), on: strengthening democracy, promoting and respecting human rights, promoting peace and stability, confidence-building measures and conflict-prevention, the fight against terrorism, organised crime and arms trafficking, international monitoring of illegal drugs, measures against illegal immigration and trafficking in human beings, and finally, sustainable development.

Following the second EU-Chile Association Council held in Luxembourg on 24 May 2005, representatives of the Luxembourg Presidency of the Council (representing the EU) and of the Chilean Government welcomed the entry into force, on 1 March 2005, of the EU-Chile Association Agreement, which had been extended to include aspects other than trade. It also dealt with political dialogue and cooperation.

On international issues, the Union welcomed Chile’s participation in Operation Althea in the western Balkans, and in UN peacekeeping operations in Haiti. Both partners expressed satisfaction with the progress made as regards the trade-related aspects of the Association Agreement. Indeed, Chile’s exports to the EU increased by 44% in 200430.

Representatives on both sides also expressed their satisfaction at the very positive outcome of bilateral cooperation and that drafting of the country strategy paper (2007-2013) had begun. That paper is due to be approved during the first half of 2006.

In addition, European and Chilean Ministers acknowledged how important it was to engage in political dialogue on sector-specific issues under Article 52 of the Association Agreement. They suggested that this be extended to other areas such as employment, social policies, youth issues, culture, the information society and the environment.

28 Following the approval of the Association Agreement by the EU Council and Chile on 18 November 2002, and after ratification by the Chilean Congress, the trade chapter of the Association and Free Trade Agreement came into force on 1 February 2003.29 On 12 February 2003 the European Parliament gave its assent to conclusion of the Agreement, published in OJ C 643 of 19.02.2004, p. 68.30 Chile’s exports to Europe account for 21% of the country’s total exports.

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1.3 Agreement on Scientific and Technological Cooperation and the Aviation Agreement

This scientific Agreement, that was signed on 23 September 2002, and the Aviation Agreement make it possible for Chile to take part in the Sixth Framework Programme for Research and Development (2002-2006). The joint research programmes will focus on biotechnology and information technology, as well as on food safety, the environment etc. The Agreement will allow scientists from the EU and Chile to take part in each other’s research programmes, and provides for the exchange of experts and the sharing of facilities, etc.

The Commission initialled an aviation agreement with Chile at the beginning of September 2004. Once signed and in force, this will give all European airlines access to the Chilean market from any Member State.

1.4 II EU-Chile Summit

Under the institutionalised political dialogue between the European Union and Chile, a Summit was held on 13 May 2006 between the European Union represented by the Austrian Federal Chancellor, Mr. Wolfgang Schlüssel, President of the European Council, the President of the European Commission, Mr. José Barroso, the HR/SG Javier Solana and the President of Chile, Ms. Michelle Bachelet.

President Michelle Bachelet and the European Union troika expressed their satisfaction at the results achieved in implementing the Association Agreement. It is an instrument which has already imparted considerable impetus to relations between Chile and the European Union, not just in trade but also in highly significant areas such as political dialogue and co-operation. In this context, both Parties agreed to instruct their respective authorities in order to study and implement ways to strengthen the process of association in all areas of the bilateral relation.

Both administrations tackled bilateral trade obstacles with a constructive spirit of cooperation, agreeing to continue such a dialogue with a view to facilitating trade and improving their understanding of each other's policies and legislation.

Regarding development co-operation, the Parties acknowledged that overall bilateral co-operation is very positive. The budget allocated to Chile in the framework of the Country Strategy Paper 2002-2006 (€ 34.4 millions) has been fully committed to programmes in areas such as state modernisation, support for the creation and development of the innovative enterprises and support for the implementation of the Association Agreement. The Parties took note of the state of progress in the preparation of the Country Strategy Paper 2007-2013, inwhich Chilean authorities and other stakeholders have been and will continue to be fully involved, that should lead to a new pluriannual co-operation programme as fruitful and successful as the last one.

The Parties welcomed the present levels of bilateral co-operation and the stepping up of such co-operation through policy dialogues in areas of mutual interest including higher education, employment and social policies. These policy dialogues should continue and could be extended to other areas such as intellectual property, information society and environment, among others.

EPADES\DELE\D-CL\NT\628801EN PE 378.960EN26

2. Interparliamentary dialogue

From June 1998, interparliamentary relations between Chile and the EU have been based on the ‘Declaration on the Institutionalisation of the Interparliamentary Dialogue and the Interparliamentary Dialogue and the Chilean Congress’ signed in Santiago, which provided for organised annual meetings to be held alternately in Chile and Europe. The Fourth Interparliamentary Meeting was held in Strasbourg on 25 and 26 September 2002, and ended with a declaration aimed at creating a Parliamentary Association Committee, in accordance with the provisions of Article 9 of the Association Agreement, formed of MEPs and members of the Chilean National Congress, which would be able to request information and make recommendations to the Association Council, which would in turn have to inform the Parliamentary Committee of its decisions.

On this basis, rules of procedure governing the working of the Parliamentary Association Committee was debated and adopted at the meeting of 27 and 28 October 2003 in Valparaíso, between MEPs and members of the Chilean National Congress. Two other issues of significance were also tackled:

- The political, economic and social situation in the EU, Chile and Latin America in general;- Scientific and technical cooperation between the EU and Chile.

A European Parliament delegation for relations with Chile was set up following the 2004 elections.

The fourth meeting of the Parliamentary Association Committee was held in Strasbourg on 13 June 2006. The MEPs and Chilean MPs at the meeting agree to continue to assess the results of the EU-Chile Association Agreement. Both delegations considered the progress of the WTO rounds and agreed that this assessment would figure on the agenda for future meetings. They also suggested that it be included as a topic on the agenda for the first meeting of the Euro-Latin American Assembly.

Both Parties encouraged governments to continue developing political dialogue in new areas such as employment and social policies.

The delegations reiterated their recommendation to the Association Council and the European Commission to support the creation of a programme of grants for Chilean students in Europe and European students in Chile within the framework of the new bilateral cooperation programme and with the aim of improving knowledge of the situation on both sides.

Both delegations expressed their interest in fostering cooperation through common projects, and for this purpose they undertook to promote information mechanisms on possible areas or projects for cooperation. In this regard, they proposed to their respective authorities that they draw up a concrete programme defining specific areas and programmes to be developed.

EPADES\DELE\D-CL\NT\628801EN PE 378.960EN27

Annex I

EPADES\DELE\D-CL\NT\628801EN PE 378.960EN28

Annex IIBachelet Administration Programme

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Annex III

CHILEMACRO ECONOMIC DATA AND FORECASTS

1999 2000 2001 2002 2003 2004 2005 2006GDP Growth % -0.76 4.49 3.38 2.18 3.73 6.06 5.95 5.43GDP US$bn 73.00 75.21 68.57 67.27 73.37 94.10 113.04 126.10GDP Per Capita US$ 4860 4944 4451 4314 4651 5897 7004 7727Inflation (CPI) % 3.34 3.85 3.56 2.49 2.81 1.05 3.07 3.29Population m 15.02 15.21 15.40 15.59 15.77 15.96 16.14 16.32Population Growth % 1.32 1.29 1.25 1.22 1.18 1.15 1.14 1.12Unemployment Rate % 5.75 5.69 5.62 7.72 8.05 8.20 7.44 7.17Current Account Balance US$bn

0.10 -0.90 -1.10 -0.58 -1.10 1.39 0.21 0.01

Current Account Balance % GDP

0.14 -1.19 -1.60 -0.86 -1.50 1.48 0.19 0.01

Trade Balance US$bn 1.66 1.40 1.05 1.63 2.93 8.47 7.44 6.69Imports (G+S) US$bn 19.95 22.36 21.79 21.27 23.91 30.06 36.62 40.16Imports (G+S) US$bn % Change

-15.00 12.11 -2.57 -2.37 12.39 25.76 21.83 9.64

Exports (G+S) US$bn 21.61 23.76 22.84 22.90 26.83 38.53 44.06 46.85Exports (G+S) US$bn % Change

3.50 9.99 -3.89 0.25 17.20 43.60 14.35 6.31

Local Currency to Euro 528 483 554 649 781 757 695 676Foreign Direct Investment $m

8,988 3,639 4,476 1,713 3,000 3,500 - -

Foreign Direct Investment % GDP

12.30 4.86 6.74 2.65 4.31 4.25 - -

Total External Debt $m 34.26 36.99 38.36 41.94 39.60 40.50 - -Total Debt % GDP 46.91 49.36 57.73 64.87 56.86 49.14 - -Debt Service Ratio % Total Exports

22.12 24.48 27.47 32.75 26.85 21.05 - -

Source: World Markets Research Centre

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Annex IV

By products 1000 EUR

1000 EUR % of total 1000 EUR % of

total01-99 Total 7.858.669 100,0 3.884.080 100,0

of which:01-24 Agricultural prod. (incl. fish, prepared foodstuffs etc.) 1.770.613 22,5 113.285 2,9

of which:01-05 Live animals; animal products 439.576 5,6 15.393 0,4

of which:02 Meat and edible meat offal 66.712 0,8 890 0,003 Fish and crustaceans, molluscs and other aquatic invertebrates 354.693 4,5 721 0,0

06-14 Vegetable products 745.717 9,5 24.896 0,6of which:

08 Edible fruit and nuts; peel of citrus fruits or melons 631.622 8,0 833 0,016-24 Prepared foodstuffs; beverages 578.253 7,4 64.717 1,7

of which:22 Beverages, spirits and vinegar 430.737 5,5 24.369 0,623 Residues and waste from the food industries; prepared animal fodder 54.035 0,7 7.371 0,2

25-27 Mineral products 1.564.771 19,9 24.006 0,6of which:

26 Ores, slag and ash 1.556.413 19,8 95 0,028-38 Products of the chemical or allied industries 466.797 5,9 421.716 10,9

of which:28 Inorganic chemicals; organic of inorganic compounds of preciousmetals/rare-earth metals/radioactive el.284.551 3,6 13.839 0,429 Organic chemicals 165.194 2,1 46.318 1,2

39-40 Plastics and rubber and articles thereof 6.887 0,1 182.235 4,7of which:

39 Plastics and articles thereof 6.370 0,1 129.678 3,3

44-49 Wood/art. of woods etc; pulp of wood or other fibrous cellulosic 485.985 6,2 206.009 5,3of which:

44 Wood and articles of wood; wood charcoal47 Pulp of wood or of other fibrous cellulosic material etc. 340.021 4,3 1.602 0,048 Paper and paperboard; art. of paper pulp, of paper or of paperboard 39.671 0,5 116.804 3,0

50-63 Textiles and textile articles 8.463 0,1 76.592 2,068-70 Articles of stone, plaster, cement, asbestos etc. 2.101 0,0 41.431 1,172-83 Base metals/articles of thereof 3.379.495 43,0 297.942 7,7

of which:72+73 Iron and steel and articles of iron or steel 295.374 3,8 224.178 5,8

74 Copper and articles thereof 3.071.306 39,1 8.790 0,2

84-85 Machinery and mechanical appliances; elec. eq., sound recorders etc. 78.839 1,0 1.667.862 42,9of which:

84 Nuclear reactors, boilers, machinery and mechanical appliances 68.623 0,9 1.256.085 32,385 Electrical machinery/equip. and parts thereof; sound recorders etc. 10.216 0,1 411.776 10,6

86-89 Vehicles, aircrafts, vessels and associated transport equipment 10.195 0,1 551.850 14,2of which:

86 Railway/tramway locomotives, rolling-stock/parts thereof; etc. 2.023 0,0 109.363 2,887 Vehicles other than railway/tramway rolling-stock etc. 1.587 0,0 351.473 9,088 Aircraft, spacecraft, and parts thereof 6.505 0,1 85.746 2,2

90-92 Optical, photographic, cinematographic etc. instruments 8.582 0,1 142.735 3,7of which:

90 Optical/photographic/cinematographic/measuring/medical or surgical inst. Etc. 8.469 0,1 141.327 3,6Various ch Other products 63.453 0,8 104.281 2,7Source: COMEXT database, EUROSTATProduction: JDa/DG4/European Parliament

Imports (cif) Exports (fob)

Trade relations EU(25)-Chile, 2005

Harmonised System (HS): Sections and chaptersHS Chapters

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Annex V

1000 € - % - 1000 € - % -Total (EU25) * 7.858.669 100 3.884.080 100,0

of which:France 1.100.468 14,0 449.751 11,6Netherlands 1.727.463 22,0 227.348 5,9Fr Germany 865.448 11,0 980.703 25,2Italy 1.435.383 18,3 408.132 10,5Utd. Kingdom 695.342 8,8 222.115 5,7Ireland 38.947 0,5 48.897 1,3Denmark 129.996 1,7 80.933 2,1Greece 91.934 1,2 21.288 0,5Portugal 37.693 0,5 51.875 1,3Spain 882.326 11,2 474.278 12,2Belgium 233.000 3,0 190.024 4,9Luxembourg 321 0,0 10.506 0,3Sweden 274.639 3,5 263.156 6,8Finland 144.059 1,8 311.985 8,0Austria 139.135 1,8 82.620 2,1Malta 3.633 0,0 1.119 0,0Estonia 4.340 0,1 3.199 0,1Latvia 1.826 0,0 5.131 0,1Lithuania 5.356 0,1 518 0,0Poland 30.961 0,4 26.731 0,7Czech Republic 5.989 0,1 12.616 0,3Slovakia 305 0,0 2.166 0,1Hungary 2.498 0,0 6.120 0,2Slovenia 6.906 0,1 2.760 0,1Cyprus 701 0,0 107 0,0

Source: COMEXT database, EUROSTATProduction: JDa/DG4/European Parliament

Trade of the EU with Chile by Member States, 2005EU-imports (cif) EU-exports (fob)

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Annex VI

MIO ECU/€EU-imports (cif) EU-exports (fob) Balance

1999 3.630 2.619 -1.0102000 5.139 3.489 -1.6502001 5.149 3.719 -1.4302002 4.886 3.162 -1.7242003 4.946 2.959 -1.9872004 7.206 3.118 -4.0882005 7.859 3.884 -3.975

Source: COMEXT database, EUROSTATProduction: JDa/DG INFO/European Parliament

Trade of the EU25 with Chile: 1999-2005

-6.000

-4.000

-2.000

0

2.000

4.000

6.000

8.000

MIO

EC

U/€

1999 2000 2001 2002 2003 2004 2005

Trade of the EU25 with Chile: 1999-2005

EU-imports (cif) EU-exports (fob) BalanceProduction: JDa/DG INFO/EP