r a b a j o X e T C H I M -...
41
Universidad Nacional Autónoma de México Facultad de Economía Centro de Estudios China-México Número 6. Diciembre, 2010 A Study of the Impact of China’s Global Expansion on Chile: The Copper and Textile Value Chains Jonathan R. Barton D E L C E C H I M E X C UADERNOS DE T RABAJO Cuadernos de Trabajo del Cechimex en su versión electrónica puede ser consultada en: http://www.economia.unam.mx/cechimex/cuadernostrabajo.html
Transcript of r a b a j o X e T C H I M -...
Universidad Nacional Autónoma de México
Facultad de Economía
Centro de Estudios China-México
Número 6. Diciembre, 2010
A Study of the Impact of China’s Global Expansion on Chile: The Copper and
Textile Value Chains
Jonathan R. Barton
d e
l C
e C
H I
M e
XC
ua
der
no
s de T
ra
ba
jo
Cuadernos de Trabajo del Cechimex en su versión electrónica puede ser consultada en: http://www.economia.unam.mx/cechimex/cuadernostrabajo.html
Universidad Nacional Autónoma de México
Dr. José Narro Robles Rector Dr. Sergio M. Alcocer Martínez Secretario GeneralLic. Enrique del Val Blanco Secretario Administrativo Mtro. Javier de la Fuente Hernández Secretario de Desarrollo Institucional M.C. Ramiro Jesús Sandoval Secretaria de Servicios a la Comunidad Lic. Luis Raúl González Pérez Abogado General
Facultad de Economía
Dr. Leonardo Lomelí Vanegas DirectorMtro. Eduardo Vega López Secretario GeneralLic. Javier Urbieta Zavala Secretario AdministrativoDr. Ignacio Perrotini Hernández Jefe de la División de Estudios de PosgradoMtro. Alfredo Cordoba Kuthy Jefe de la División de Estudios ProfesionalesIng. Alejandro Pérez Pascual Jefe de la División del Sistema Universidad Abierta
Centro de Estudios China-México
Dr. Enrique Dussel Peters CoordinadorDra. Yolanda Trápaga Delfín Responsable
Cuadernos de Trabajo del Cechimex
Revista bimestral del Centro de Estudios China-Méxicode la Facultad de Economía de la UNAMLa responsabilidad de los trabajos firmados es exclusivamente de sus autores y no necesariamente reflejan una posición oficial del Centro, de la Facultad o de la UNAM.
Editor responsable: Dr. Sergio E. Martínez Rivera
Comité Editorial
Alejandro Álvarez Bejar, Eugenio Anguiano Roch, Romer Cornejo Bustamante, Leonel Corona Treviño, Enrique Dussel Peters, Octavio Fernández, Víctor Kerber Palma, José Ling Juan, Liu Xue Dong, Ignacio Martínez Cortés, Jorge Eduardo Navarrete López, María Teresa Rodríguez y Rodríguez, Song Xiaoping, Mauricio Trápaga Delfín, Yolanda Trápaga Delfín, Wu Hongying, Wu Yongheng, Zhong Xiwei.
Diseño de portada: Arq. Mauricio Trápaga Delfín
Número de certificado de reserva otorgado por el Instituto Nacional del Derecho de Autor para versión impresa: 04-2010-071617584500-102 Número de certificado de reserva otorgado por el Instituto Nacional del Derecho de Autor para versión electrónica: 04-2010-022210232000-203Número de certificado de licitud de titulo (en trámite). Número de certificado de licitud de contenido (en trámite).
Correspondencia: Centro de Estudios China México. Edificio anexo de la Facultad de Economía de la UNAM. Segundo piso. Circuito inte-rior, Ciudad Universitaria. CP. 04510, teléfono 5622 2195. Correo electrónico de la revista: [email protected].
Imprenta: Editores Buena Onda, S.A. de C.V. Suiza 14, Col. Portales Oriente, delegación Benito Juárez, México D.F., CP. 03570.
Precio por ejemplar: $75.00 M.N.Tiraje 100 ejemplares
Cuadernos de Trabajo del Cechimex en su versión electrónica puede ser consultada en: http://www.economia.unam.mx/cechimex/cuadernostrabajo.html
门MÉN – Puerta, umbral. El carácter simboliza una puerta de una sola hoja. En el caso de los Cuadernos de Trabajo del Cechimex se escogió el acto de editar y publicar, abrir puertas al conocimiento y a la discusión. Nos pone en contacto con el pensamiento sobre los temas que nos interesan y permiten un dialogo bilateral, base del trabajo del Centro de Estudios China-México de la Facultad de Economía de la Universidad Nacional Autónoma de México. Es así que estamos ofreciendo una “puerta” en donde todos podemos acceder a otro lugar en cuanto al conocimiento se refiere.
1
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
A Study of the Impact of China’s Global Expansion on Chile: The Copper and Tex-tile Value Chains1
Jonathan R. Barton2
Resumen
En 2006, China y Chile firmaron un acuerdo bilateral que consolido una tendencia en las rela-ciones comerciales que habían iniciado rápidamente desde finales del siglo pasado. La relación comercial se fundamenta en las exportaciones de cobre, las cuales han apoyado la expansión industrial de China; sin embargo, los efectos de las importaciones de mercancías chinas también han sido significativos dentro de la economía chilena. Es evidente que hay un cambio en términos proporcionales más allá de las relaciones comerciales tradicionales con Norteamérica y Europa occidental debido a las crecientes oportunidades surgidas con China. El auge en los precios del cobre durante el período 2005-2008 fue influenciado considerablemente por su demanda para las inversiones chinas en infraestructura (electrificación rural), la construcción ( infraestructura para las Olimpiadas) y la industria. Aunque China tenga sus propios depósitos y una considerable capacidad para la fundición de este metal, Chile - como la fuente internacional principal- se be-nefició del aumento en la demanda y de sus efectos globales en el precio.
A mediados del 2008, la crisis económica internacional propicio que China disminuyera sus reservas lo que trajo consigo una caída en los precios del cobre similares a inicios del 2005. Las ventajas para Chile son ilusorias en la exportación de cátodos para su transformación posterior en China a pesar de que se les agrega valor en el país; la capacidad de la fundición en países desarrollados ha restringido históricamente el desarrollo de esta etapa de la cadena de valor en Chile. Una iniciativa que intenta garantizar una colaboración de más largo plazo con China es la creación de una empresa conjunta, bajo un sistema offshore, ligando a MinMetals de China y CODELCO de Chile - ambas grandes empresas publicas- para asegurar volúmenes y precios de exportación en el mediano plazo. Mientras que las oportunidades para las exportaciones de cobre a China han proporcionado el principal motor para relaciones comerciales más fuertes y la preparación del acuerdo, también ha habido indicios del creciente el impacto potencial en Chile resultado de grandes sectores de la exportación chinos. En el caso de los textiles, China ahora domina el mercado de importación chileno, al mismo tiempo que ha acelerado la quiebra de un sector doméstico ya debilitado. Otras áreas en las cuales las exportaciones chinas a Chile han sido fuertes son en los bienes electrónicos y vehículos; debido a la limitada capacidad doméstica en estos sectores ha tenido como efectos principales, el desplazamiento de otros exportadores nacionales. Aunque la relación del post-acuerdo de comercio entre China y Chile se encuentra en su fase inicial, hay indicios claros de una creciente concentración hacia la exportación de recursos naturales, principalmente cobre y una conformación de puntos débiles en el sector industrial a nivel nacional. El grado exacto de este impacto en términos del “Efecto China” es difícil de deter-minar dado los papeles que juega como tercer país en las composiciones comerciales y las ventas del mercado interior, tales como desplazamiento o reorientación de exportaciones nacionales. Sin embargo, la dependencia histórica de Chile en las exportaciones de cobre en su perfil comercial ha crecido estos últimos años después de un período de disminución relativa debido al repunte de exportaciones no tradicionales tales como: celulosa, fruta, salmones y vinos a inicios de los 80; este fenómeno reciente da una vuelta al predominio de cobre que se relaciona con los altos precios de cobre propiciados principalmente por el aumento de la demanda china.
1 This paper was prepared as part of a research project on “The Impacts of China’s Global Expansion on Latin America” coordinated by Professor Rhys Jenkins of the University of East Anglia which was funded by the World Economy and Finance research programme of the UK Economic and Social Research Council (Grant No. RES-165-25-005).
2 Jonathan Barton is a Senior Lecturer in the Institute of Urban and Regional Studies, Pontífica Universidad Católica de Chile. His research interests lie in the field of urban and regional sustainability, such as strategic planning, evaluation methodologies and governance regimes, as well as the local impact of international trade.
2
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
3
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Abstract
In 2006, China and Chile signed a bilateral agreement that cemented a trend in commercial rela-tions that had strengthened rapidly since the turn of the century. The trading relationship pivots on copper exports which fuel the industrial expansion in China; however, the effects of imports of Chinese goods have also been significant within the Chilean economy. It is evident that there is a shift in proportional terms away from the traditional trading relations with North America and Western Europe due to the rising opportunities presented by China.
The boom in copper prices during the 2005-2008 period was influenced considerably by the copper demand for Chinese investments in infrastructure (e.g. rural electrification), construction (e.g. Olympics-related building) and manufacturing. Although China has its own deposits and considerable smelting capacity, Chile –as the leading international source- benefited from this rise in demand and its global price effects. From mid-2008, the international economic crisis led China to fall back on reserves and this has brought copper prices back down to early 2005 levels. The advantages for Chile lie in exporting cathodes for further processing in China rather than adding value in-country; smelting capacity in more developed countries has historically restricted the development of this stage of the value chain in Chile. An initiative that seeks to guarantee a longer-term collaboration with China is the creation of a joint venture, based offshore, that links China’s MinMetals and Chile’s CODELCO –both large public entities- in assuring export vol-umes and prices over the medium-term.
While opportunities for copper exports to China have provided the main motor for stronger trade relations and the preparation of the agreement, there have also been rising indications of the potential impact in Chile resulting from strong Chinese export sectors. In the case of textiles, China now dominates the Chilean import market and has accelerated the demise of an already-weakened domestic sector. Other areas in which Chinese exports to Chile have been strong are those of electronic goods and vehicles; there is little domestic capacity in these sectors therefore the effects are mainly those of displacement of other national exporters to the country.
Although the post-agreement China-Chile trading relationship is in its early phase, there are al-ready clear indications of a rising concentration on natural resource exports, principally copper, and a compounding of weaknesses in domestic manufacturing sectors. The precise extent of this impact in terms of the ‘China effect’ is difficult to determine given the third country roles in trade compositions and domestic market sales, such as displacement or reorientation of national ex-ports. Nevertheless, Chile’s historical dependency on copper exports in its trade profile has been enhanced in recent years following a period of relative decline due to the rise of non-traditional exports such as cellulose, fruit, salmon and wines from the early 1980s; this recent phenomenon of a return to rising copper predominance is related to higher copper prices, driven chiefly by the rise in Chinese demand.
Key words: Copper and Textile Value Chains in Chile; China-Chile trading relationship.
5
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Contents
Introduction ...................................................................................................................................... 7
1. The Copper Export Value Chain .............................................................................................. 9 1.1 China in the Global Copper Market ............................................................................... 10 1.2 The Role of Chile in China’s Copper Imports ............................................................... 16 1.3 Effects within the Chilean Copper Sector ...................................................................... 21
2 The Textiles Import Value Chain ............................................................................................ 25 2.1 Chinese Textile and Garment Exports to Chile ............................................................. 26 2.2. Effects on the Chilean Textile and Garment Sector ...................................................... 29
3 ReflectionsontheSectorialImpactofChina-ChileTrade ................................................... 36
Bibliography ................................................................................................................................... 38
7
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Introduction
As noted in Barton (2009), the growth in the Chilean economy since the downturn at the beginning of the decade has largely been driven by the Chinese market. As a source of demand for Chile’s principal mineral exports, and a source of manufactured products entering the Chilean market, the trading relationship has strengthened rapidly. The effects of this relationship are not felt evenly throughout the Chilean economy; as a consequence the selection of specific trading relations in certain sectors facilitates a more nuanced appreciation of the changes that have taken place.
The data presented in Barton (2009) reveals that the copper demand in Chile has generated the boom in the Chilean economy, and that this sector has been vital to the emerging China-Chile trading relationship which has led to a bilateral agreement.3 Given the fact that copper export revenues provide over 40% of all export revenues, the rise in Chinese demand and the price impact re-sulting from this demand have had dramatic effects on the economy as a whole. As with all economies that experience situations relating to the resource curse thesis (Auty 1993), the impact on the Chilean peso has been considerable, leading to other export sectors, particularly fruit, wine and other non-traditional export sectors, struggling to achieve previous export targets.
While those sectors are affected indirectly by the strength of the copper export price resulting from Chinese demand, other sectors have been affected more directly by the trading relationship. These sectors have struggled to compete in the face of Chinese imports into Chile. The data in Barton (2009) clearly reveals that one of the hardest hit sectors is textiles; footwear is another. These products which have relatively low technological requirements and are still comparatively labor-intensive in low income countries, are highly price-sensitive in the global market. Given China’s labor cost advantages, the greatest threats to Chilean producers have been created in these products. There are other manufactures sectors that are well developed in the Chinese case (particularly in terms of high volume production), such as electronic goods; however, there has been little do-mestic capacity in this area given previous low-cost imports from other Asian countries from the 1970s and from neighboring Brazil. Since only electronics goods show greater dynamism than the textiles sector in terms of the import profile from China, the latter has been selected as the import value chain case.
In terms of the broader effects of the shift towards China over the last decade, and particularly away from the US (in terms of market share), there is clearly a cost dimension that can be revealed through foreign exchange values. The weakening dollar has made the US market increasingly difficult for Chilean exports, whereas the Chinese market has strengthened and the Chilean peso has weakened against the yuan, encouraging demand for Chilean exports (see Figures 1–3). However, the strengthening of the yuan against the peso has not occurred to the extent that Chinese exports to Chile are hampered; espe-cially since production costs remain low in China and the products sold in Chile (electronics, footwear, textiles, toys, etc.) remain attractive compared with other import sources.
Source: Based on Banchile (2007) data
3 Prior to the bilateral agreement, Chile benefited from a Most Favoured Nation clause with a tariff of only 2% on its copper cathode exports to China, whereas the general tariff was 11% (COCHILCO 2003).
Figure 1: Yuan against the US dollar January 1994–December 2006
8
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Figure 2: Chilean peso against the US dollar January 1975–December 2006
Source: Based on Banchile (2007) data
Figure 3: Chilean peso against the yuan January 2002–December 2006
Source: Based on Banchile (2007) data
The exercise in terms of assessment of the two selected value chains is as follows. The intention has been to identify experiences in the two sectors in terms of recent transformations that can be largely explained by the influence of the China-Chile trading relationship. The attempt to identify changing cost structures is of particular interest in order to understand what the micro ef-fects have been, underpinning changing costs, prices, and the health of each of the sectors in Chile. Based on this understanding, we present the strategies of the two sectors created in order to profit from the opportunity, or to resist the challenge .
It is clear in the two cases presented that the impact of recent China-Chile trade has provided the strongest impulse to the Chilean economy in the democratic period, particularly since the slowdown associated with the Asian contagion from 1997 onwards (and related downturns in neighboring economies). While the post-1990 period has been characterized by a diversi-fication of the export profile with increasing proportions of non-traditional product exports associated with minerals, the more recent effects of the China-Chile relationship have taken the country back to its key non-renewable export platform. Parallel to this, many of the basic manufacturing sectors that were stimulated during the structuralist period since the mid-twentieth century through import substitution industrialization are unable to compete with lower labor costs and low regulatory cost pro-duction sources, of which China is clearly the most important. Consequently, the Chilean economy is undergoing a transfor-mation with regard to this recent impact, increasing foreign exchange earnings from its mineral base which in turn are creating demand for Chinese basic producer goods and electronic goods. To survive the wave of high volume, low cost production imports, it appears that survival in certain areas of domestic basic goods production will depend on the development of niche products in a different price range and oriented to the Latin American market rather than the Chilean market alone.
9
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
1. The Copper Export Value Chain
The copper value chain is based on a process of mineral extraction and its transformation into products used mainly in indus-try and construction. As with all value chains the price differential rises with increased value-added through the chain. The main benefits of copper as a material lie in its electrical conductivity, hence its use in lightly and heavily engineered products, also for electrical distribution systems (at multiple scales, from within an electronics product, within a computer or a car for instance, to a network of cabled regional electrical distribution). Its use in construction is also very important, not only for electrical wiring but also for pipes and tubes, given its resistance to corrosion.
In Figure 4 on the following page, the phases of the copper chain can be clearly seen. In the case of Chile-China trade there is a strong focus on Chilean production in the copper production phase, with little activity in the product manufacture fields where China has increased its capacity extensively over the past decade to satisfy its own manufacturing and construction demands. Mineral ore is crushed and ground in the preliminary links of the copper chain to create concentrate slurry that can be processed in two ways. The first relates to a process of leaching and electrowinning; the second is smelting and electrolytic refining. Both processes lead to the production of copper cathodes. The first process leaching and electrowinning, involves the production of a weak copper sulfate solution from concentrate slurry. The solution is then charged within an electrolytic process tank where copper ions are attracted to copper foil sheets which act as starter cathodes. The second process is the most common, whereby stages of melting and purifying create firstly copper matte (50–70% copper), followed by blister (98.5–99.5% copper); recycled copper can also be incorporated in this melting process. Anodes are cast from this copper and then placed in an electrolytic bath where copper ions are attracted to copper foil sheets and a cathode (99.9% copper) is pro-duced (Copper Development Association 2007; International Copper Study Group (ICSG) 2007). Cathodes can be traded in this form or semi-processed into slabs and ingots (cakes), bars, rods, profiles and powder for further finishing in value-added processes for the production of copper with nickel and zinc alloys (a range of brass products), wire, cables, pipes and sheets. This transformation process of converting cathodes into such products requires an industrial base which Chile has not devel-oped. Consequently, it is the more developed economies that trade mostly in these value-added products and in which China has sought to develop its potential.
Taking the process a step back to the copper production stage, China has also been developing considerable smelting capac-ity to convert concentrates into cathodes. This is not only for domestic mine production, which has also been increasing, but also for imported ores and concentrates which can be purchased in their most basic form, having been crushed and milled. By buying more concentrates for processing it will be possible to reduce the need to purchase Chilean cathodes and other
Mill
Smelter
MOULD CASTING
-building wire-copper tube
-motor vehicle wire-magnet wire-telecom wire-power cable
-sheet and strip-other copper
-finished products
-alloy sheet+strip-cas�ng alloy
-alloy rod-other alloy
-finished products
Refinery-hydrometallurgy-pyrometallurgy
Brass mill and alloys
Copper fabrica�on
Buildings
Machinery
ORE
Vehicles
Infrastructure
STOCK
PRODUCTION FABRICATION and MANUFACTURING
SEMI-FABRICATED PRODUCTS USES
Cath
odes
and
Refi
ned
copp
er
new scrap
concentrate
blister Cu
-castings
old scrap
cas�
ng, e
xtru
sion,
dra
win
g, ro
lling
-incineration-landfill
tailings slag
The Copper Value Chain
finished productnetworks
raw materialnetworks
export networks
semi-processednetworks
Copper Producers Copper product manufacturers Copper trading
Figure 4
Source: Appelbaum and Gereffi (1994), Adapted from Vexler et al. (2004), Kupferinstitut (2007)
10
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
refined products in the future; export data for 2007 reveals, however, that China is still buying cathodes. Nevertheless, given the global distribution of copper mine reserves, Chile will remain an important supplier of concentrates and cathodes for at least the next fifty years.
1.1. China in the Global Copper Market
Although copper has always been a strategic industry within the Chilean economy since the moment it replaced nitrates as the dominant export during the first quarter of the twentieth century, even by its own terms, the entry of China into the WTO and its ‘opening up’ process as well as the increasing role of the APEC economies in global production and consumption have created dramatic transformations. The relative immunity to the Asian contagion –compared with its neighbors- in spite of the slowdown observed five years ago owes much to the rise of China and its copper demand for machinery and electron-ics manufactures, which are in turn exported. Approximately 50% of all copper is used in the electrical sector such as in the manufacture of cables, connections and terminals and in components of articles driven by electric power. The remaining uses are mainly found in construction and architecture. These remain the traditional uses of the material –including components in kettles and other kitchen equipment, locks, photographic equipment and calculators, and vehicles (averaging 20kg of cop-per use in each)- but they are clearly essential to the Chinese model of electronics manufactures exports. Further uses are also being sought, such as in the development of copper chips in electronics components for web-based data transmission (CODELCO Educa, 2007).
Figure 5: Share of global copper imports (%)
Source: Based on data from La Comisión Chilena del Cobre (COCHILCO) (2007b)
Figure 6: Global copper import values (US$ ’000; SITC Rev 3: 682)
Source: UN Comtrade
-
5.0
10.0
15.0
20.0
25.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
China
Japan
USA
Germany
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
China
USA
Germany
Italy
11
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
It is clear that China has been focused on the value-added stages of the copper chain, based on heavy imports of concentrates and cathodes for smelting and refining. The trade data on the products derived from the different phases of the value chain indicate how Chile acts mainly as the provider of raw materials which are processed in China and then exported as manufac-tured content.
The Chinese economy has been growing strongly in the last decade –with a 10% annual average growth in GDP 2000–2006 (WTO 2007a)- and there is little doubt that this has been the principal reason for the spiking of copper prices in recent years.
This growth is driven by manufacturing, whose contribution to national GDP has risen from 36.7 in 1990 to 40.4 in 2000 and 43.1% in 2006 (Asian Development Bank 2007). There are, however, other reasons that have contributed to this price trend. It is difficult to be precise about the specific contribution of Chinese demand to these prices, but it is at the centre of the price pattern dynamics since it has triggered other factors that have also played a role. Chinese industrial production over the past decade has been several points stronger than other major economies; therefore it is driving not only copper demand but also demand for other commodities, which have experienced strong price upturns such as in the case of copper. This demand is related to manufactured products for domestic consumption but particularly for export, as well as to infrastructure. In the case of copper there is strong demand from sectors such as air conditioning unit manufactures, the national electrical power generation and distribution network, and from the automobile and construction sectors (e.g. related to the Olympic Games infrastructure) (Various Cochilco data).
Figure7:Internationalrefinedcopperprices,1981–2006(US$cents/lb,LondonMetalsExchange)
Source: Based on COCHILCO (2007b) data
TABLE1:Chineseproductionandtrade,1990–2006.
GDP (2000 constant prices) 1990 1995 2000 2002 2003 2004 2005 2006
Mining, manufacturing, electricity, gas, water 685.8 2495.1 4003.4 4743.1 5494.6 6521.0 7723.1 9035.1
Construction 85.9 372.9 552.2 646.5 749.1 869.4 1013.4 1165.3
Trade 142.0 546.8 963.0 1195.1 1348.0 1525.0 1353.5 1491.6
Industrial growth (%) - - (2001)8.4 9.8 12.7 11.1 11.7 12.5
Source: Asian Development BANK (2007)
Although demand in Europe and the USA has not been strong over the last five years, Chinese, Japanese and Korean demand (with a significant demand also for semi-conductors in the two latter economies) has more than made up for this weakness. The level of demand, particularly in China, has been such that international inventories –on the three principal exchanges
12
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
(London Metals Exchange, Shanghai Metal Exchange, and the US Commodities Exchange COMEX)- started to decline dur-ing 2003–2004. Given supply restrictions relating to installed capacity in global copper mining, these inventories could not be easily restocked and this led to concerns over copper availability. There were two important outcomes: there was a significant increase in spot price purchases rather than futures purchases as industries sought to access copper as swiftly as possible in the face of future uncertainty; and rising prices started to lead to labor unrest as workers around the world sought to gain a share of the increase. During 2004–2007, significant labor unrest leading to planned output declines were registered in Chile, Peru, USA, Mexico, India, Zambia and Poland (Cochilco, various data). These disputes also contributed to the supply shortfall to compensate for international stocks collapses; these disputes may have had an influence on the rise of China’s share of imports from Australia and Mongolia in relation to Chile. The following table reveals that copper supply sources, for China as well as for other countries, remain relatively concentrated (see Table 2).
Other factors that contributed to price increases relate to broader international economic trends and specific incidents. Two significant global trends that played a role in this were the weakness of the US dollar which led to greater interest in basic met-als trading as an alternative investment, and rising oil prices, which had a knock-on effect on copper mining and trading input and transport prices. More specific events that have fuelled the copper price have been the reconstruction of New Orleans, and other natural disasters in the world where major rebuilding has taken place, as well as the trading activities of the Chinese State Reserve Bureau trader Liu Qibing who was individually –and illegally- responsible for pushing up prices during the last months of 2005 (Cochilco various).
Although it is difficult to “factor out” Chinese demand in terms of determining the impact of several variables on international copper prices, China’s specific buying pattern between 2005 and 2007 reveals how it can influence the price. As prices sky-rocketed from 2003 and onwards into 2005, the State Reserve Bureau decided to fall back on existing stocks and considerably reduce imports during 2006 (50.6% less refined copper and 11.1% less concentrates compared with 2005) (Cochilco 2006d); the extent of this reduction led to several smelting firms reducing production considerably. As an outcome, international cop-per prices, which had risen so strongly from 2003, effectively tripling by mid-2006 (compared with early 2004), started to fall slightly for the first time in this period during the last quarter of 2006. At this time China fell back on strategic reserves and the existing sectoral stocks throughout the production chain; however, these reserves were rapidly run down given the high domestic demand and China returned to the market in the first quarter of 2007 to replenish them; imports in this period were 269.5% higher than in the corresponding quarter of 2006 (Cochilco 2007c). The impact on the copper price led the June 2006 peak of 400 c/lb to fall to under 240 c/lb in February 2007 before jumping back to 360 c/lb in May 2007. This rise in Chinese demand continued into 2008 due to industrial demand, and while the EU, North America and Japan all reduced their demand for copper; Chinese demand in 2007 increased 35% compared with 2006. Other countries that increased their demand signifi-cantly were Egypt, United Arab Emirates and Saudi Arabia (COCHILCO 2008).
The year 2008 presented a marked change in the global copper market’s fortune, resulting from the international financial crisis and its repercussions in the industrial sectors of the major consuming nations. In July, copper prices fell 70% from a historic high of 407.5 cents/lb. Although China maintained its demand, other markets reduced their demand significantly and international reserves have increased as a consequence, in turn losing their critically low levels that contributed to high copper prices. Production was also affected both in mines (strikes in Chile, Peru and Indonesia) and in industrial demand centers (e.g. heavy snow in China affecting production and logistics) (COCHILCO 2009).
A value chain approach to copper trading between Chile and China reveals that there have been significant changes over the past decade in the ways this chain operates (leading to this 2006 snapshot). By looking at the three principal disaggre-gations of the chain it is possible to see this transformation in more detail (see Table 3). Firstly, Chile continues to be the global leader in mine production, and this has increased significantly in parallel with global demand for this product; China has also invested heavily in mining and has increased mine production by 53% compared with Chile’s 58%. However, the more significant changes in terms of value-added have taken place in China rather than Chile. China’s smelter production has increased dramatically over this period (174%), compared with only a slight increase in the case of Chile (13%). The main outcome is that Chinese smelting increased rapidly and outstripped Chilean smelting production as of 2005. The expansion of Chinese smelting capacity has been such that there is overcapacity, given the high prices of raw materials imported from Chile particularly. A similar picture can be seen for the value-added stages in the refining process. Although Chile has increased its refining production (by 32%), China has invested more heavily and has more than doubled its refining production during the period (by 154%).
13
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE2:Chinesecopperimportsbyproducttype(US$’000)andprincipalsources(%)
HS2002 2002 Principal sources 2003 Principal
sources 2004 Principal sources 2005 Principal
sources 2006 Principal sources
2603Ores and concentrates
809,448
Chile 23.5Mongolia
20.7 Peru 15.2Australia
13.4
1.291.283
Chile 32.8Mongolia
15.5Peru 15.2Australia
11.5
2,228,043
Chile 35.6Peru 18.0Mongolia
14.1Australia
7.0
3,720,781
Chile 42.5Peru 14.7Australia
11.2Mongolia
9.4
6,113,901
Chile 37.4Australia
14.3Peru 14.2Mongolia
13.8
7402Unrefined copper
159,740
S. Africa 26.7
Ukraine 21.5
Peru 11.8Chile 9.7
234,940
S. Africa 16.0
Chile 12.6Peru 11.9Namibia
9.3
325,274
Chile 18.7Belgium
13.1Pakistan
10.9Namibia
9.3
463,214
Chile 32.5Pakistan
18.2Namibia
8.6Other Asia
8.5
552,795
Pakistan 23.2
Chile 18.7Zambia
12.0Other
Asia11.8
7403Refined copper + copper alloys
1,992,008
Chile 43.0Kazakh.
17.0Japan 11.6Russ. Fed.
6.9
2,580,495
Chile 46.5Kazakh.
15.5Philippines
7.2Japan 5.2
3,482,038
Chile 55.4Kazakh. 8.8 Philippines
7.5 Japan 6.0
4,482,913
Chile 44.9 Kazakh.
13.1 Japan 8.0
Rep. Korea 4.7
5,494,952
Chile 39.0Japan 16.5
Rep. Korea 10.7
India 5.6
Source: Based on UN Comtrade database (2007)
In terms of the copper value chain it is interesting to view the locations of installed capacity in different links of the chain: mining, smelting, refining and manufactures fabrication. The objective is not necessarily to show how geography has evolved over time but rather to provide a snapshot of existing capacity. As much as trade flows in and by themselves, the following tables show the main sites of activity, and this in turn explains the trade flows. The conclusions that can be drawn from this 2006 snapshot can be summarized as follows:
Chile retains its position as the principal source of copper ores and concentrates, and this is unlikely to change over 1) time given current knowledge of available deposits (see Table 4). It is relevant that, despite increasing its mining ca-pacity in recent years, China is not a dominant copper mineral producer due to its comparative lack of deposits. Given its high demand for copper products in the current industrial transformation this is a positive opportunity for Chile.
China has invested most heavily, given the lack of natural deposits, in the endeavor of adding value to ores and con-2) centrates in the smelting process. Investment in smelting has been considerable, leading to overcapacity in the face of high ore and concentrate prices in 2006. Table 5 shows that China has several facilities that rank at the global level and that feed off the mining production, as made evident in said table. Although Chile has a high level of smelting capacity, this is falling in relative terms against the specific growth at this stage of the chain in China.
The panorama for refining is similar to that for smelting with both China and Chile globally important in this field. 3) However, the Chinese commitment to smelting and refining due to its lack of deposits has led to high levels of invest-ment in capacity increases compared with the composition of the Chilean production chain.
It is notable that neither country has a leading manufacturing plant at the highest value end of the chain. This remains 4) concentrated in the USA and Western Europe for the most part, although there are also leading firms in Mexico, Brazil, and Korea.
14
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Table3:ChileanandChinesecoppermining,smeltingandrefiningproduction,1997-2006(kMTcoppercontent)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Chile
Mine production 3,392.0 3,686.9 4,391.2 4,602.0 4,739.0 4,580.6 4,580.6 5,412.5 5,320.5 5,360.8
Smelter production 1,389.6 1,403.1 1,473.9 1,460.4 1,503.2 1,438.7 1,542.4 1,517.6 1,558.1 1,565.4
Refinery production 2,116.6 2,331.9 2,666.1 2,668.3 2,882.2 2,850.1 2,901.9 2,836.7 2,821.0 2,811.3
China
Mine production 495.5 486.8 520.0 592.6 587.4 568.1 604.4 742.2 761.6 755.4
Smelter production 657.4 667.2 837.0 1,013.9 1,145.1 1,179.9 1,379.2 1,502.9 1,751.5 1,802.0
Refinery production 1,179.4 1,211.3 1,174.0 1,371.1 1,523.3 1,632.5 1,836.3 2,198.7 2,600.4 2,998.9
Source: Based on Cochilco (2007b) data
TABLE4:Leadinginternationalcoppermines
Rank Mine name Capacity(’000mt) Country Owner(s)
1 Escondida 1.311 Chile BHP Billiton, Rio Tinto, Japan Escondida
2 Codelco Norte 957 Chile Codelco
3 Grasberg 750 Indonesia PT Freeport Indonesia, Rio Tinto
4 Collahuasi 450 Chile Anglo American, Xstrata plc, Mitsui, Nippon
5 Morenci 430 USA Freeport Memoran Copper and Gold, Sumitomo
6 Taimar Peninsula 430 Russian Federation Norilsk Nickel
7 El Teniente 418 Chile Codelco
8 Antamina 400 Peru BHP Billiton, Teca, Xstrata plc, Mitsubishi
9 Los Pelambres 335 Chile Antofagasta Holdings, Nipón Mining, Mitsubishi Materials
10 Batu Hijau 300 Indonesia PT Pukuafu Indah, Newmont, Sumitomo Corp., Sumitomo Metal Mining
11 Bingham Canyon 280 USA Kennecott
12 Olympic Dam 255 Australia BHP Billiton
13 Andina 236 Chile Codelco
14 Zhezkazgan Complex 230 Kazakhstan Kazakhmys
15 Los Bronces 226 Chile Anglo American
16 Rudna 220 Poland KGHM Polska Miedz SA
17 El Abra 219 Chile Codelco, Freeport McMoran Copper and Gold
18 Mount Isa 212 Australia Xstrata plc
19 Toquepala 210 Peru Southern Copper Corp.
20 Cananea 210 Mexico Grupo Mexico
Source: International Copper Study Group (2007)
15
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE5:Leadinginternationalsmeltingfirms
Rank Smelter name Capacity (’000mt) Country Owner(s)
1 Birla Copper (Dahej) 500 India Birla Group2 Norddeutsche Affinerie 450 Germany Norddeutsche Affinerie AG2 Saganoseki/Ooita 450 Japan Pan Pacific Copper Co. Ltd.4 Codelco Norte 400 Chile Codelco4 Guixi 400 China Jiangxi Copper Corp.4 Norilsk (Nikelevy, Medny) 400 Russia Norilsk G-M7 El Teniente (Caletones) 391 Chile Codelco Chile8 Besshi/Ehime (Toyo) 365 Japan Sumitomo Metal Minino Co. Ltd.9 Jinchuan 350 China Jinchuan Non-Ferrous Metal Co.9 Yunnan 350 China Yunnan Copper Industry Group
11 Onahama/Fukushima 324 Japan Mitsubishi Materials Corp., Dowa Metals and Mining Co. Ltd., Furukawa Metals and Resources Co. Ltd.
12 Huelva 320 Spain Atlantic Copper SA (Freeport McMoran)12 Garfield 320 USA Kennecott (Rio Tinto)14 Ilo Smelter 315 Peru Southern Copper Corp. (Grupo Mexico)15 Naoshima/Kagawa 312 Japan Mitsubishi Materials Corp.16 Sterlite Smelter (Tuticorin) 300 India Vedanta17 Onsan II 300 Korea Rep. LS-Nikko Co. (LS, Nippon Mining)17 La Caridad 300 Mexico Mexicana de Cobres SA (Grupo Mexico)19 Altonorte (La Negra) 290 Chile Xstrata plc20 Gresik 260 Indonesia Mitsubishi, Freeport McMoranSource: International Copper Study Group (2007)
TABLE6:Leadingcopperrefiningfirms
Rank Smelter name Capacity (’000mt) Country Owner(s)
1 Birla 500 India Birla Group2 Codelco Norte 457 Chile Codelco3 Amarillo 450 USA Grupo Mexico4 Chuquicamata Refinery 443 Chile Codelco5 Morenci 420 USA Freeport-McMoran Copper and Gold Inc., Sumitomo6 El Paso 415 USA Freeport-McMoran Copper and Gold Inc.7 Guixi 400 China8 Norddeutsche Affinerie 385 Germany Norddeutsche Affinerie AG9 CCR Refinery (Montreal) 380 Canada Xstrata plc9 Pyshma Refinery 380 Russia Uralelectromed (Urals Mining & Metallurgical Co.)11 Las Ventanas 376 Chile Codelco12 Toyo/Niihama (Besshi) 365 Japan Sumitomo Metal Mining Co- Ltd.13 Ilo Copper Refinery 350 Peru Southern Copper Corp. (Grupo Mexico)13 Jinchuan 350 China Jinchuan Non Ferrous Co.13 Yunnan 350 China Yunnan Copper Industry Group16 Olen 345 Belgium Cumerio17 Norilsk 330 Russia Norilsk17 Huelva 320 Spain Atlantic Copper SA (Freeport Memoran)19 Garfield 300 USA Kennecott (Rio Tinto)20 La Caridad 300 Mexico Mexicana de Cobre SA (Grupo Mexico)Source: ICSG (2007)
16
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE7:Leadinginternationalcopperfabricationplants
Rank Owner(s) Plant Type Capacity (’000mt) Country
1 Wieland Werke (Wieland Metals) Brass mill 360 Germany2 Freeport McMoran Copper & Gold Inc. Wire rod plant 355 USA3 Freeport McMoran Copper & Gold Inc. Wire rod plant 355 USA4 Southwire Wire rod plant 320 USA5 Conticon (Grupo Condumex – Grupo Carso) Wire rod plant 318 Mexico6 SCCC (Nexans) Wire rod plant 300 France7 Trafilierie Carlo Gnutti Brass mill 300 Italy8 Umicore – Sumerio Wire rod plant 280 Belgium9 Hitachi Wire Rod (Hitachi Cable) Wire rod plant 280 Japan9 Norddeutsche Affinerie Wire rod plant 275 Germany11 LS Cable Wire rod plant 270 Korea12 Asarco (Grupo Mexico) Wire rod plant 270 USA13 Katur-Invest (Uralelektromed) Wire rod plant 265 Russia13 Nexans Canada Inc. (Nexans) Wire rod plant 260 Canada13 Deutsche Giessdraht (Norddeutsche Affinerie, Codelco) Wire rod plant 250 Germany16 MKM Mansfelder Kupfer & Messing (Kazakhmys) Brass mill 250 Germany17 Taihan Electric Wire rod plant 250 Korea17 Huta Miedzi Cedynia (KGHM Polska Miedz) Wire rod plant 240 Poland19 Poongsan Brass mill 235 Korea20 Caraiba Metais (Paranapanema) Wire rod plant 230 BrazilSource: ICSG (2007)
1.2. The Role of Chile in China’s Copper Imports
The importance of the Chinese market in terms of Chilean copper demand is apparent in Figure 22. The dramatic growth in volume sales at the turn of the decade and the more dramatic rise in the value of those sales from 2003 bear witness to the critical nature of the trading relationship that has been established and has given rise to large private (various firms) and public sector earnings (Corporación Nacional del Cobre de Chile (CODELCO) and the mining royalty) in the mining industry.
Figure 8: Chilean copper exports to China (volume and value)
Source: Based on COCHILCO (2007b) data
-
200,0
400,0
600,0
800,0
1.000,0
1.200,0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
(kM
T C
oppe
r Con
tent
)
-
1,0
2,0
3,0
4,0
5,0
6,0
7,0
(US$
Mn
FOB)
Copper Exports by Destination (China) Value (MT Copper)
17
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Table 9 shows the contribution that Chilean production makes to satisfying the global copper demand. Given that copper reserves of the scale of those present in Chile are not be found elsewhere, there is clearly a tremendous advantage in terms of rising prices associated with rising demand, due to physical supply limitations. In the case of Chile, the proportion of total copper exports to China is presented (Table 9). This trend, from 4.0% of Chilean copper demand in 1997 to 12.4% a decade later, together with the total volumes involved, reveals not only the critical importance of the Chinese market but also the production boom now felt at a global level. The prices generated by this rising demand can be observed in Figure 8, showing the same spiking effect from 2002-2003 to date.
TABLE8:ChileancopperexportstoChina
Year VolumekMT copper content
Total valueUS$ millions FOB
Value per kMTUS$ millions FOB
1987 27.1 42.6 1.61988 24.0 64.1 2.71989 35.8 75.5 2.11990 4.0 7.1 1.81991 23.9 36.8 1.51992 171.1 358.9 2.11993 113.4 202.3 1.81994 37.6 75.0 1.51995 88.3 216.9 2.11996 137.3 242.6 1.81997 142.7 275.0 2.01998 168.4 235.9 2.51999 323.8 475.8 1.82000 545.6 918.7 1.92001 572.0 793.8 1.42002 597.2 877.3 1.52003 843.2 1.393.5 1.72004 999.7 2.716.5 2.72005 1.101.2 3.475.2 3.22006 685.8 4.140.2 6.0
Source: Based on COCHILCO (2007b) data
TABLE9:Globalcopperexports(totalvolumeandshare)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Chile
kMT copper content 3,297.2 3,575.0 4,268.7 4,473.0 4,649.5 4,502.2 4,687.5 5,485.6 5,337.0 5,234.0
Share of global copper exports 346 35.1 39.3 38.8 37.8 38.2 39.6 44.3 40.1 39.9
kMT Chilean copper content to China 142.7 168.4 328.8 545.6 572.0 597.2 843.2 999.7 1.101.2 685.8
Share of Chilean copper exports to China 4.0 4.4 7.7 12.6 12.2 14.0 18.4 18.7 19.6 12.4
Peru
kMT copper content 492.2 454.9 494.7 480.3 556.8 810.6 760.7 819.4 1.036.6 869.8
Share of global copper exports 5.2 4.5 4.6 4.2 4.5 6.9 6.4 6.6 7.8 6.6
Australia
kMT copper content 361.0 435.4 513.2 578.7 709.1 653.5 661.9 618.9 717.3 680.6
Share of global copper exports 3.8 4.3 4.7 5.0 5.8 5.5 5.6 5.0 5.4 5.2
Source: Based on COCHILCO (2007b) data
18
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
The decline in figures in 2006 is due to China’s use of copper stocks and domestic production due to the rising copper prices generated by demand from China itself and other major buyers such as Japan and the USA. The China Strategic Reserve Bureau is the government agency that manages stocks of key raw materials in China, and its intervention can lead to consid-erable changes in trade flows (CODELCO 2005). In the case of the 2006 import reduction, this was compensated by rising national copper production –to 760.000Mt- which has received intensive investment in recent years. Recent copper deposit exploration in the provinces of Qulong and Yunnan has enhanced the options for reducing the heavy import dependency in the sector in the medium term by increasing planned domestic production by one third (China Economic Net 2007a, 2007b).
In spite of the fall in 2006, the impact of Chinese demand on the Chilean copper sector has had significant influence on the na-tional economy. This can be seen, for example, in the contribution of copper revenue to GDP. This contribution rose dramati-cally between 2003 and 2004, precisely the period in which Chinese copper demand increased considerably and international copper prices started to boom as a consequence (see Table 10). It can also be seen that this impact of gross copper income has been key to the health of the national economy and the government’s economic stability, as seen in the gap between income and spending. The contribution of copper revenues to public revenues was generated principally by Codelco up to 2005, and then increased by the additional contribution of the royalty on copper, legislated in 2005, which applies to all the larger firms and also reflects the rise observed in 2006.
TABLE10:ChileangovernmentincomeandspendingaspercentageofGDP,1990–2006
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total income 21.8 21.6 21.1 20.4 21.6 21.7 21.1 20.7 22.0 23.7 26.0
of which:
Net tax income 16.7 16.3 16.4 15.7 16.5 16.5 16.6 15.9 15.6 16.8 17.1
Gross copper 1.3 1.3 0.4 0.4 0.9 0.5 0.5 0.8 3.0 3.7 5.7
Total spending 19.6 19.6 20.7 22.5 22.3 22.2 22.3 21.2 19.9 19.1 18.2
Source: Dirección de Presupuestos, Government of Chile (2007)
The 2005 trade agreement can be expected to have a significant impact on Chile-China copper trade for two main reasons. Firstly, the prior 2% Chinese tariff on copper cathodes has now been eliminated, as it has on unrefined copper and unwrought products such as wire bars and billets. This is an advantage for Chilean exporters over other countries exporting copper to China based on overall metals and minerals tariff ranges that are on average 7.7% ad valorem (WTO 2007b). However, given that Chilean exports of refined copper far exceed those of any other supplier (Kazakhstan, Japan and Korea), it will merely reinforce its advantages relative to others, particularly in cathodes.
The second reason relates to a vital aspect of the value-added dimensions of this trading relationship. China has been keen to protect the industrial development that has been booming over the last decade. To achieve this, the China schedule list relat-ing to the Free Trade Agreement (FTA) ensures that a range of value-added copper products remains protected (see Table 11); this is similar to the Chilean listing of its textile industry products with the same intentions. The outcome of this protection is that Chile will remain a lower value commodity exporter while China will add value in profiles, bars, rods, wire, plates, and diverse alloys; despite the rise in cathode exports in 2007, both concentrates (raw material) and cathodes (semi-finished) are not final products. These are also regarded as semi-manufactures that are used directly in industrial and construction sectors. To date, Chile has not been a significant exporter of these types of products to China or to any other destination, as it is not considered an important part of the copper chain within Chile. It is mainly the more industrialized economies that trade in these higher value goods.
19
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE11:ScheduleofChina(2005Chile-ChinaFTA):selectedcopperproducts
Tradeclassification Product Basic tariff Years maintained
74050000 Master alloys of Cu 4 10
74071000 Bars, rods and profiles of refined Cu 4 10
74081100 Wire of refined Cu 6mm 4 10
74081900 Wire of refined Cu 6mm 4 10
74091100 Plate, sheet and strip of refined Cu, in coil 4 10
74091900 Plate, sheet and strip of refined Cu, not in coil 4 10
74101100 Foil of refined Cu, not backed 4 10
74111000 Pipes and tubes, refined Cu 4 10
Source: Dirección General de Relaciones Económicas Internacionales (DIRECON) (2007b)
In terms of the structure of Chilean trade with China in contrast with other destinations, there appears to be little marked difference in products apart from the proportionally large growth in the lowest value basic products, copper ores and concen-trates. The trend of increasing copper waste and scrap imports in the overall composition is related to copper prices for refined goods, and is similar for the Rest of the World as it is for China. Rather than China seeking to restrict Chile to the lower value links in the chain, there is also the fact that Chile is not seeking to move into these sectors through increased manufacturing capacity for semi-processed and finished goods. This may be due to limited domestic demand but is more likely to be related to the comparative advantages of the copper reserves through which Chile is able to heavily influence the supply-side aspects of the global copper chain. Since the country has little industrial capacity, focusing heavily on the export of renewable and non-renewable natural resource-based products, it is not part of a sectoral or national strategy to move vertically up the copper chain into new products.
Figure9:PrincipalChileancopperexportstoChinaandrestoftheworld,2002–07VALUES(US$M)
Source: UNComtrade
0
5000
10000
15000
20000
25000
2002 2003 2004 2005 2006 2007
China: Refined copper and copper alloys, unwrought
RoW: Refined copper and copper alloys, unwrought
20
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Figure10:PrincipalChileancopperexportstoChinaandrestoftheworld,2002–07VALUES(US$M)
Source: UNComtrade
Figure11:PrincipalChileancopperexportstoChinaandrestoftheworld,2002–07VOLUMES(metrictons)
Source: UNComtrade
0
2000
4000
6000
8000
10000
12000
14000
16000
2002 2003 2004 2005 2006 2007
China: Copper ores and concentrates
RoW: Copper ores and concentrates
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
2004 2005 2006 2007
China: Refined copper and copper alloys, unwrought
RoW: Refined copper and copper alloys, unwrought
21
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Figure12:PrincipalChileancopperexportstoChinaandrestoftheworld,2002–07VOLUMES(metrictons)
Source: UNComtrade
1.3. Effects within the Chilean Copper Sector
As with most mining sectors, access to the raw material and its conversion into metal is the principal feature of the cost structure. The national Minerals Law defines a copper concentration level that is viable for commercial exploitation, while the costs of access, extraction, processing, energy and labor determine the critical aspects of that viability (see CODELCO 2007; Minera Escondida 2005b). In its Annual Report of the Minera Escondida operations (2004 and 2006), the company BP Billiton documents its cost structure, which differs from information derived from the other main company, CODELCO. These variations are due to different forms of evaluation, such as for energy. These variations make it difficult for the asso-ciation (COCHILCO) to assess what parameters are required for the cost structure. Nevertheless, they present the following information:
FIGURE13:Chileancopperexportsandunitproductioncosts,1997–2006
Source: Based on COCHILCO (2007b) data
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
2004 2005 2006 2007
China: Copper ores and concentrates
RoW: Copper ores and concentrates
The calculation of unit production costs relates to net costs for an A grade cathode, also including sales of sub-products pertaining to the copper. The variations can be seen in the information presented by CODELCO, which presents its costs as follows. The variations are due principally to changes in prices, e.g. falling molybdenum prices in 2006, also changes in de-preciation, exchange rates, and input costs:
TABLE12:Overallcoststructure,CODELCO,2004–06
US$ cents/lb 2004 2005 2006
Net cathode cost 55.7 38.0 64.4
Direct costs 31.7 11.6 37.4
Total costs 81.3 97.8 115.6
Based on CODELCO (2006)
The breakdown provided by Minera Escondida provides a more detailed picture of the composition of the costs involved in production and how these have changed over the last decade (Table 13). Since the interest here is in assessing changes in the direct cost structure, proportional costs are provided as percentages of the direct cost total (minus depreciation), with the remaining details provided as values in italics (US$ millions).
TABLE13:Costitemprofile(%,US$millions),MineraEscondida,1997–2006
Cost Items 1997 2000 2003 2006
Labor 11.1 13.5 11.7 14.0
Contractors 9.3 12.7 15.3 11.1
Energy 8.0 10.8 12.8 8.8
Replacement parts 6.2 6.5 8.9 6.1
Fuels and lubricants 2.7 3.7 3.8 4.7
Ball mills 2.5 2.9 3.7 2.6
Reactants 1.6 2.8 3.2 3.4
Explosives 2.1 2.2 2.5 1.5
Consultancies 1.2 2.0 0.9 0.4
Other items 12.0 12.5 12.3 7.9
Total direct operational costs 505.8 526.3 644.9 1,081.9
Treatment and refining 46.0 35.2 30.7 43.7
Credit for sub-products -6.1 -5.0 -8.9 -8.6
Transport costs 6.8 7.9 7.3 8.4
Inventory transfers 0.3 1.4 -1.6 -4.2
Post-production development expenditure -3.8 -6.2 -2.7 0.1
Total direct costs 890.2 756.4 857.5 1,787.6
Depreciation 109.5 177.5 245.7 259.5
Amortization of post-production development 0.0 0.0 10.2 32.5
Total direct costs + depreciation 999.7 933.8 1,113.5 2,079.6
Net interest 31.7 106.5 72.8 75.4
Net expenditure 33.6 10.7 30.2 209.8
Total costs and interest 1,065.0 1,051.0 1,216.5 2,364.7
Source: Based on Minera Escondida 2005a, 2007.
23
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
The table reveals that labor costs account for approximately a quarter of total direct costs, rising from 20% in 1996, despite the fact that costs have been reduced by subcontracting many activities and reducing the numbers of salaried workers in the mining companies. Energy expenditure has risen over time and taken a larger share of total costs, although it fell year on year from 2003 to 2006. Given that such a large share of total costs is subsumed within the category ‘treatment and refining’, the remaining costs do not appear to have changed dramatically since the transformations caused by the Chinese demand, apart from labor costs. The boom in this sector has generated increased labor demands for a larger share of the profit, thus inflating labor costs in the overall structure. Over time this has led to rising costs per unit of production (lbs copper sold) (Table 14).
TABLE14:Unitcostsagainstsalesvalue
Unit Cost 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
a 0.408 0.448 0.451 0.386 0.392 0.383 0.418 0.404 0.433 0.537 0.652
b 0.469 0.535 0.525 0.594 0.545 0.541 0.596 0.573 0.548 0.690 0.863
Source: Based on Minera Escondida 2005a, 2007a: US$ total lbs copper sold/total direct costsb: US$ total lbs copper sold/total direct costs+depreciation+interest
During the 1990s, the industry’s cost structure became more influenced by public sector regulation. The democratic transi-tion that saw the end of the Pinochet dictatorship was important in changing labor relations, wages and conditions, and was also followed by other legislation, such as in the field of environmental protection (through the Environmental Law 19.300 of 1994). In the case of the latter, this led to detailing and monitoring of the quality of air, soil, solid wastes, and water discharges; currently there is new legislation tabled in Congress that also emphasizes indigenous rights (often in areas of mining activities) and the protection of glaciers (applied in the case of the gold mining company Barrick in its activities in the Huasco Valley). This all leads to new responsibilities and costs for mining companies (see COCHILCO 2007a). Energy use and reduction in view of the difficulties of security in national supply from neighboring countries is also high on the agenda, despite consid-erable reductions in energy per output unit during the 1990s (COCHILCO 2001b; COCHILCO 2006a). Another challenge is that of water availability in the regions to the north of the country, which has led to Minera Escondida building its own desalination plant in 2006 (Minera Escondida 2007). The range of these new challenges, which has increased since the early 1990s, has led to firms and the sector as a whole being more proactive than other sectors in terms of taking on board aspects of sustainability in their operations, and using indicators and sustainability reporting to this end (COCHILCO 2001c; Minera Escondida 2005b).
One of the key elements of copper sector legislation was not reversed, however. Given the importance of CODELCO in terms of production share, the fact that it is still subject to Law 13.196 (1958) whereby 10% of the value of its export sales is passed to the armed forces budget, remains significant in terms of the way this firm remains tightly wedded to other state institutions and how its management has to bear these factors in mind.
In addition to this legislation, known as the Copper Laws, an equally important piece of legislation was passed as recently as 2005. Following two years of discussion, the Congress passed the so-called Royalty Law (Law 20.026, Article 64), which introduced a specific tax on the operational profits of mining activities. Article 64 (which modifies the 1974 law on taxation of profits) defines a 5% tax of on annual sales associated to 50,000 tons of refined copper, with a variable tax rate for sales of between 12,000–50,000 tons. The ten leading mining firms increased their taxation payments by 145% in 2006 compared with 2005 (DIPRES 2008); in the case of Minera Escondida (2007), for example, this led to a payment of US$266 M in 2006. In view of the rising profit generated by the sector, pressure mounted on the government of President Lagos to use part of it for the country’s public policy challenges. In view of the non-renewable nature of the resource, the concept of using profits generated to invest in economic diversification in light of the finite nature of the resource is one that is applied in several other countries and was promoted by various actors within the country.
One of the specific pressures that were brought to bear was to promote regional development in the Region of Antofagasta (Región II) which had been the driving force of the national economy, due to its concentration of mineral resources (see Figure 14). The argument was that much of the national wealth was generated from this region, but few benefits were accrued locally apart from mine workers’ incomes, which were increasingly insecure due to the subcontracting of many mining activities and the overall decline in salaried mine worker numbers. Figure 15 puts the decreasing employment within this sector into perspective. Despite the boom in production, overall worker numbers have declined, considerably, increasing productivity per worker. Nevertheless, these figures relating to workers employed directly by the companies do not reflect the nature of the flexibilization of labor in the sector and the precarious nature of subcontracting in terms of job security. Much of this in-security fed labor disputes during 2006 and 2007, affecting the operations of the Minera Escondida and various CODELCO production sites.
24
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
FIGURE 14: Regional distribution of copper production
Source: Based on COCHILCO (2007b) data
As with all production sectors, there is also increased attention to the application of new technologies that are likely to fur-ther reduce labor demand in the future. These technologies are oriented towards shifting to less contaminating energy, to the identification of mineral deposits via sensors and similar monitors (for real time three-dimensional evaluation), machines for exploiting deposits in higher risk locations, for better separation of ore from rock, and for reducing waste in the production process, thus minimizing both input demands and unwanted byproducts. For example, Minera Escondida (2007) began oper-ating a plant for biolixiviating sulfurous materials in 2006. The conclusions of one COCHILCO study (2001a, p.10) of R&D in CODELCO, Escondida, Noranda and Outokumpu established the following:
Projecting mining into future decades requires highlighting its role as a supplier of products that contribute to the improved welfare of society, performing efficiently in economic terms and responsibly in terms of the environment, the health of the work force, and in terms of energy saving. This implies that mining must transform itself into a highly sophisticated industry that makes intensive use of advanced technologies created in the sector and/or adapted from other industrial and military sectors.
FIGURE 15: Copper production and employment in the sector
Source: Based on COCHILCO (2007b) data
4,2
9,77,85,3
9,3
54,3
9,4
-
5.000.000
10.000.000
15.000.000
20.000.000
25.000.000
30.000.000
35.000.000
40.000.000
I Region II Region III Region IV Region V Region VI Region R. M.
-
1.000
2.000
3.000
4.000
5.000
6.000
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
kM
T F
ine
Co
nte
nt
-
10.000
20.000
30.000
40.000
50.000
60.000
Yea
rly A
ver
age
Mining Production Copper Employment in the Mining Sector (Copper)
25
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
2. The Textiles Import Value Chain
The global textiles and garment chain has perhaps been studied more intensively than any other due to the labor aspects of the chain, particularly the low labor costs and the implications of gendered employment, piece rates and other issues. This sector has characterized the internationalization of industrial production during the last quarter of the twentieth century, with increasing production levels in countries with lower labor costs and access to raw materials: natural (particularly cotton) and synthetic fibers. South East and South Asian countries have been particularly important in this process, while China has been a more recent and powerful competitor following its “opening up” process and its entry into the WTO. With a wage system inherited from a command and control economy rather than a market-based economy the advantages generated in textile production and garment manufacture are considerable. This is accompanied by access to both types of raw material, since cotton production in the country is extensive; while synthetic fibers are also being produced by the large chemicals sector in the context of an industrial manufacturing boom over the last decade. The growth in total textile production against traditional cotton yarn and fabric production can be seen in Table 15.
TABLE15:Chinesetextilesandgarmentexports(US$M)
1995 2000 2002 2003 2004 2005 2006
Textiles and textile articles 35,878 49,379 57,849 73,346 88,767 107,661 138,102
Of which: Cotton yarn and cloth 3,990 3,716 5,264 6,842 7,379 8,398 9,740
Source: ADB (2007)
Much of the pressure generated on Chilean textiles is part of a globalized tendency whereby global sourcing has facilitated ac-cess to globalized production for retailers and marketers, while they themselves focus on design and other higher value func-tions (Gereffi /Melemedovich 2003). The phasing out of apparel quotas by the WTO in 2005 has also increased opportunities for garment exports. Unlike the copper value chain where there is more trade in different stages of the processed product, tex-tile and garment manufactures are increasingly produced within a framework of “full-package production” whereby the gar-ment exporter produces an agreed design within a subcontracting arrangement for a retailer. Under this arrangement, Chinese yarns and fibers are processed more and more within the country rather than being exported for processing elsewhere.
The textiles sector has been particularly affected by the strengthened trading relationship between China and Chile established by the FTA. In general terms, the Chilean textiles sector is not very strong nationally, although it experienced considerable development during the post-war period and was regarded as significant within the manufacturing sector by the early 1970s. However, during the democratic period the sector’s exposure specifically to Asian imports has had a marked effect and Chinese imports have been particularly influential. An INTECH report (2001, p.2) from 2001 documenting the changes during the 1990s, prior to the more significant impact generated by Chinese imports in the current decade, noted the following:
Over time, the manufacturing sector has had to deal with several crises, produced by endogenous and exogenous factors. For this reason, its influence on the economy has diminished with the reduction in its contribution to GDP. The textiles and garments industry is included in this group. The different internal policies, from an extremely protected market to one of free trade, the low investment in technology, the international competition especially from Asia, the oversupply and consequent price drops, have led to changes in the Chilean textiles and garments industry.
The following tables relating to the manufacturing sector (sectoral shares of manufacturing exports and imports) reveal this declining trend during the current decade. In general terms, the sector contributes very little to the export profile yet it is significant in terms of imports, its share declining only due to the significant share increase in chemicals and basic metals imports; this net balance in the value of trade is shown in Table 1. In the context of trade with China specifically, this national share differentiation varies greatly (see Barton 2009).
26
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE16:Manufacturingexportsectorsandtheirparticipation(%)2001 2002 2003 2004 2005 2006
310 Food and beverages 40.3 41.3 41.6 40.1 39.7 38.0350 Chemicals 19.9 18.7 21.3 20.6 23.5 24.0330 Forestry 12.2 13.8 13.1 14.2 12.6 11.6340 Paper 13.6 13.3 12.6 13.4 11.5 11.0370 Basic metals 3.1 3.2 3.4 4.2 4.6 7.4380 Metallurgical goods 7.9 7.1 5.5 5.3 6.1 6.2320 Textiles 2.1 1.7 1.5 1.5 1.3 1.2360 Mineral products 0.6 0.6 0.7 0.6 0.5 0.5390 Others 0.3 0.3 0.2 0.1 0.1 0.1
Source: Based on SOFOFA data
TABLE17:Manufacturingimportsectorsandtheirparticipation(%)2001 2002 2003 2004 2005 2006
380 Metallurgical goods 48.7 49.2 48.0 47.2 50.3 48.0350 Chemicals 24.9 24.4 25.5 26.2 26.3 27.8370 Basic metals 3.8 3.7 3.9 4.7 4.3 4.6320 Textiles 7.8 7.7 7.2 7.2 6.2 6.6310 Food and beverages 6.8 7.3 8.0 7.5 6.4 6.6340 Paper 3.5 3.2 3.1 3.2 2.7 2.5360 Mineral products 1.6 1.7 1.7 1.5 1.4 1.4330 Forestry 1.2 1.3 1.2 1.3 1.1 1.3390 Others 1.5 1.4 1.4 1.3 1.2 1.3
Source: Based on SOFOFA data
TABLE18:Tradevaluesinthetextileandgarmentindustry,2001-2006US$ ’000 2001 2002 2003 2004 2005 2006Export value 175,121 142,493 149,931 186,398 192,686 200,638Import value 1,061,070 1,006,908 1,029,030 1,290,086 1,490,731 1,811,677Source: Based on SOFOFA data
2.1. Chinese Textile and Garment Exports to Chile
The breakdown of the figures presented in Table 19 points to the overall trends within this sector. Over time there has been a slow increase in the share of clothing items with respect to textiles as value is added to the materials. However, in the case of China-Chile trade, the increase relating to these clothing items in the import profile is of greatest significance, since the contribution of Chinese imports to this total is most noteworthy. The trend reveals not only the considerable growth in total textile and footwear imports, which have almost doubled in a five year period, but also the fact that most of the growth is seen in value added products rather than relatively unprocessed materials.
27
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE19:ChileanimportsofChinesetextilesandgarments(fiveleadingproductcategoriesbyvalue,2005.TotalChineseimport value (US$) and share of total import)
HS2002 2002 2003 2004 2005 2006
6110 Jerseys, pullovers, cardigans, waistcoats and similar articles, knitted or crocheted
44,751,18473.8%
45,133,86876.2%
70,557,48185.6%
98,610,39688.3%
115,142,80988.9%
6204 Women’s or girls’ suits, ensembles, jackets, blazers, dresses, skirts
30,313,16463.8%
42,855,23271.6%
63,343,18476.3%
82,311,60079.5%
112,893,94081.3%
6109 T-shirts, singlets and other vests, knitted or crocheted
28,748,34855.4%
34,390,48864.7%
58,586,90672.7%
68,301,08177.5%
93,886,15878.0%
6203 Men’s or boys’ suits, ensembles, jackets, blazers, trousers
37,486,04872.1%
44,552,32480.7%
60,678,25284.7%
67,620,00783.5%
88,161,30983.6%
6201 Men’s or boys’ overcoats, car-coats, capes, cloaks, anoraks
14,540,70579.4%
16,877,12880.1%
24,782,17182.3%
31,722,79484.8%
39,542,99385.0%
Source: Based on UNComtrade
Chinese dominance in these product lines, complementing its strength in computing equipment, other electrical machinery and equipment and footwear, has risen steadily over time until it has nearly dominated the composition of imports. The coun-tries that compete with China, albeit with considerably smaller market shares, are clustered in two groups: one from Asia (Thailand, Bangladesh and Vietnam) and one from Latin America (Peru, Argentina, Brazil), with Spain and the USA also contributing among this second tier of suppliers. Although these are selected product categories which exhibit strong Chinese participation, it is clear that in the other 4-digit groups within HS 2002 61 (Articles of apparel and clothing accessories, knit-ted or crocheted) and 62 (Articles of apparel and clothing accessories, not knitted or crocheted) also reveal a strong Chinese presence, as made evident in the following table showing shares within the 2-digit groups.
TABLE20:Chineseshare(%)oftotalChileanimports(US$)oftextilesandgarments
HS1996 1998 2000 2002 2004 2006
61 Articles of apparel and clothing accessories, knitted or crocheted
173,401,50437.8%
212,054,56048.6%
208,532,94459.1%
278,597,67372.6%
428,359,46279.5%
62 Articles of apparel and clothing accessories, not knitted or crocheted
240,842,27254.4%
235,503,34462.4%
230,760,73666.0%
338,111,37176.0%
503,766,00879.5%
63 Other made up textile articles; sets; worn clothing, worn textile articles; rags
75,468,15214.9%
67,859,12018.2%
65,739,17225.9%
77,914,84832.3%
127,192,79637.1%
Source: Based on UN Comtrade
There was a high displacement level in other competitor countries in the 2000–2006 period, following China’s entry into the WTO and the rapid insertion of its products in the global market. In the case of textiles and garments, this has been particularly dramatic, with China and Hong Kong between them currently supplying large shares of all the main textile and garment export categories: 36.2% (60), 46.4% (61), 41.6% (62) and 35.3% (63) (percentage of total global exports in these categories, 2006). In the most significant classifications in the Chilean import profile, articles of apparel and clothing accessories (61 and 62), the countries that have lost ground to China are Italy, Spain and the USA. During the 2001–2006 period, not only did their shares diminish but also their total values (61), which sank from one fifth to a quarter as not only Chinese, but also regional (Peru, Brazil, Argentina and Colombia) imports, became more competitive. The trend is similar in the case of classification 62, with Italy, Spain and the USA losing ground in absolute and relative terms while India falls slightly. The principal beneficiary, apart from China, is Argentina.
While the main areas of Chinese import competition are those of manufactured garments, it is the case that Chinese and more broadly, Asian production of synthetic and natural fibers has also reduced the cost per garment. However, there is no evidence to suggest that Chilean manufacturers have benefited from this low cost input given that the wage differential is so significant that changes in physical input prices are unable to counter this situation. Furthermore, cheaper fibers are also available to pro-ducers in China without the additional commercial and transportation overheads; therefore it is unlikely that any benefits can
28
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
be accrued from this. Table 21 reveals that manmade filaments are the only products in which Chinese imports have gained ground; however this is at the cost of other competitors rather than in terms of increasing imports in this field. In yarns, there is a significant increase in the import total, though China is not a strong importer in this classification.
Given the strength of the Chinese entry into the Chilean textile and garment market, it was regarded as one of the most sensi-tive sectors during negotiations for the free trade agreement that came into force in 2006. While most goods are intended to be free from duty within a year from parliamentary approval, the following list of products within the leading 50 Chilean imports from China (2004) received protection for a ten year period: cotton T-shirts and vests; synthetic or artificial fiber jerseys; cotton trousers for men and boys; long cotton trousers for women and girls; jerseys, pullovers, cardigans, jackets and similar articles; other jerseys, pullovers, cardigans, jackets; denim trousers; cotton baby wear; polyester shirts; synthetic T-shirts and vests; long women’s synthetic trousers; synthetic baby wear; cotton shirts and blouses for women and girls. Other non-textile products in the same category are tires, cement, certain chemicals, glass, doors, windows, washing machines and wooden furniture. One of the few products to be totally excluded from the agreement was cotton men’s shirts, along with flour, wheat, sugar and 148 other specific products. As part of this process which provides certain products with a decade of further protec-tion, an agreement was drawn up between the National Customs Service and the Chilean Textile Institute S.A., the industry’s association, to ensure an efficient inspection system to ensure correct classification, point of origin, correct labeling and simi-lar intellectual property considerations (DIRECON 2006).
TABLE21:Chileanimportsharesoftextilesandgarments(inUS$)2001 2002 2003 2004 2005 2006
61 Articles of apparel and clothing accessories, knitted or crochetedPeru 5.7 5.6 4.8 3.8 3.4 3.6Argentina 1.0 2.1 3.4 2.8 2.6 2.5Brazil 3.3 4.0 4.8 4.8 3.8 2.4Colombia 3.2 2.9 1.6 1.1 1.1 0.9India 2.5 2.4 1.7 1.4 1.0 0.9USA 1.4 1.3 1.4 1.2 1.0 0.9Italy 5.0 3.5 1.8 1.4 1.0 0.7Spain 5.7 5.9 3.0 1.4 0.9 0.562 Articles of apparel and clothing accessories, not knitted or crochetedArgentina 0.8 1.4 1.6 1.7 2.0 1.8India 4.3 3.9 3.0 2.4 2.0 1.8Brazil 1.4 1.8 1.8 2.7 2.2 1.6Colombia 1.9 2.1 1.4 1.6 1.1 1.2USA 2.2 2.1 1.5 1.2 1.0 1.1Italy 2.5 2.4 1.9 1.3 1.3 1.0Spain 2.5 1.9 2.0 2.0 1.3 1.0Peru 0.7 0.5 0.5 0.5 0.5 0.4Source: Based on UN Comtrade
TABLE22:Chineseshare(%)oftotalChileanimports(US$)oftextilerawmaterials
HS1996 1998 2000 2002 2004 2006
54 Manmade filaments 73,639,9762.5%
63,667,9047.4%
48,921,34417.3%
68,273,28527.2%
85,708,24129.6%
55 Manmade staple fibers 119,631,44811.4%
111,487,52818.8%
86,808,04815.4%
96,391,27416.0%
96,285,63818.8%
56 Wadding, felt, nonwovens, yarns, twine, cordage, etc.
45,790,1921.6%
59,082,7641.2%
41,760,8641.2%
66,105,7384.3%
90,086,1807.6%
Source: Based on UN Comtrade
29
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
The decision to maintain a ten year protection on specific textile and garment imports results in China benefiting from Most Favoured Nation status, as is the case with all of Chile’s commercial partners. A flat 6% tariff on imports was established in 2003. However, preferential tariff agreements exist with several countries including Canada, Costa Rica, El Salvador, Mexico, EU, USA and Korea. There is also a tariff preference associated to Chile’s relationship with the Andean Community and Mercosur (Gobierno de Chile 2004). Prior to the Chile-China agreement it would have been expected that these other coun-tries with preferential treatment would benefit from a lower tariff than that for Chinese products, or no tariff at all; however this was negligible, given the existing low tariff across the board that was gradually introduced from 1998 in 98% of tariff lines until it evened out at between 0 and 6% by 2003. Since the trend indicates that the main beneficiaries of trade in recent years, apart from China, are Argentina and Brazil –gaining at the expense of Italy, Spain and the USA principally- there is no tariff-based effect, since the same would apply to all.
The decision to further protect the Chilean textile and garment sector means that it is impossible to evaluate the expected trade gains estimated in a 2004 feasibility study of trade impact resulting from the agreement. The study concluded that tariff reduction on these import goods would generate a 10% Chinese import trade expansion of US$51 M (textiles – US$18 M; confection and garments – US$11 M) (Gobierno de Chile 2004); Table 20 reveals these figures to have underestimated the effects (2006).
2.2. Effects on the Chilean Textile and Garment Sector
The impact of Chinese imports on the sector is well communicated through the trials and tribulations of the textile associa-tion INTECH (Instituto Textil de Chile A.G.). This association represents producers of yarn, fabric, clothing and furnishings and was established in 1961 at the time of the import substitution program. Its main role is to communicate the sectors’ need for diverse government entities such as the ministries and public services, particularly the national development agency (CORFO), the export development agency (ProChile), the economic development division of the Foreign Office (DIRECON), and the National Customs Service. The current situation of INTECH reveals the problems faced in recent years and the need to intensively restructure the association and its strategy in the face of heavy competition. These problems were summarized in a presentation by INTECH’s president Juan Garcia to the Senate trade committee (INTECH, 2007a) and during an interview with him.4
During the ten year period of 1995–2005, Chinese textile imports rose from US$125 M to US$ 675 M, a 539% increase (representing 52.5% of the total in 2004, and 57% in 2006), sparking what Garcia terms: ‘the strong and long sectoral crisis, at unsustainable levels for a large number of subsisting firms’. A fact of particular concern is that 90.4% of Chinese textile imports correspond to clothing, which affects on the whole production chain as demand for clothing manufactures and cloth are reduced. The main argument in the face of this large increase in such a small time-span is the production cost of these imports. In his Senate submission, Garcia points to the fact that half of all clothes imports are made available at US$5 or less per kg. He argues that this is impossible to achieve given the associated costs of the cloth, garment confection, transport and insurance, and profit, in view of the average international costs of yarn between US$2.5-2.7/kg.
In the face of these prices the Chilean textiles sector has experienced a considerable decline. For example, membership of INTECH has decreased from 130 members during the 1995–1998 period to 75 members currently. However, the greatest ef-fects have been felt in plant closures and layoffs. Garcia mentions the closure of dozens of yarn and fabric producing textile plants and hundreds of clothing workshops, which has led to a reduction of 50,000 workers during the period (from 167,500 in 1995 to 117,000 in 2005, according to the ILO). This trend continued, with a further estimated loss of 7,000–7,500 work-ers, between 2005 and 2006. Falling production is reflected in the following table, revealing the declining performance of the sector relative to all manufacturing.
TABLE23:IndexoftextileproductioninChile,2002-2007Industrial production 2002 2003 2004 2005 2006 2007p
171 Spinning, weaving and finishing of textile products 100 99.7 92.8 83.0 70.1 69.5173 Manufacture of cloth and knitted articles 100 101.1 98.3 83.1 88.3 84.4181 Manufacture of clothing, excl. furs 100 100.1 102.5 89.5 81.7 68.9All manufacturing 100 105.2 114.4 120.7 124.6 129.4Source: INE (2008)
4 Juan Garcia, president of INTECH, pers. comm., 16 August 2007.
30
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
The changing composition of firms operating in the sector can be seen in the importer and exporter rankings in textile and garment imports and exports (see Tables 24 and 25). In terms of exports, 49.6% of total exports by value are generated by five firms. The principal firm is the largest textile firm in the region. Santista Textiles is a Brazilian company with production facili-ties in Brazil (five plants), Argentina (two) and Chile (one). It is the first national exporter in all three countries. As a denim producer for leisurewear and uniforms mainly, and the leading consumer of cotton in southern Latin America, it is an example of a firm that has expanded along with the Mercosur agreement. The company was created in 1994 as a merger between two older Sao Paulo textile firms (Santista Textil 2007). Its presence in the Chilean economy is a consequence of an earlier phase of erosion of nationally-owned capacity in this sector. The fact that it appears in the top ten importers of textiles and garments indicates that in Chile textiles or semi-finished goods are imported for semi-finishing or finishing. Textiles Pollak SA, in con-trast, is an old Chilean firm dating back to the mid-twentieth century which graduated from yarns and materials to clothing in the 1980s. Currently it produces a cross range of products and exports to a wide range of markets, particularly in the Americas and Europe (Textiles Pollak 2007).
Bellavista Oveja Tomé SA dates back to 1865 and specializes in woolen yarns and garments. Since it is in the field of synthet-ics that Chinese products are strongest, China’s impact is considerably lower on this firm than on the previous two; however, in December 2007 it announced its closure due to continual losses since 2002, when it was taken over by a new management. The primary explanations for the ongoing losses are the exchange rate and state subsidies for woolens exporters in Uruguay, India and China, as well as competition in high quality products with Italian producers (Bellavista Oveja Tomé SA 2007; Ministerio de Economía 2007). This is a case of competition in third markets rather than in the domestic market, but clearly Chinese production and trade have also played a role in this localized crisis. The case of Standard Wool Chile SA in Punta Arenas is similar to the former in that the firm only works with woolen products; however, it is British-owned rather than Chilean, and is linked to the Standard Wool UK firm with headquarters in Bradford. Since it is the main supply source for the Bradford operation it may have greater security compared to firms that export their own products from Chile, though much depends on the costs of Chilean production vis-à-vis other areas of woolen production.
Coresa SA is quite a different kind of company because it is a packaging firm which uses synthetic fibers for the production of polypropylene and polyethylene packaging bags and nets for use in a wide range of sectors. Established in 1966, it has expand-ed into Argentina and Peru where is has production plants which complement the two plants in Chile (Coresa SA 2007).
The principal textile and garment importers are the main department store and largest supermarket chains. These are followed by firms that specialize in garment retail. The main retail chains in the country are dominated by large firms organized as department stores; these are Ripley, Falabella, Almacenes Paris, Johnsons and La Polar (Comercial Siglo XXI). This concen-tration of major retailers is similar to that of a 2003 study which revealed that in the USA the 29 largest retailers dominated 98% of all apparel sales, with Kmart and Wal-Mart holding a quarter of volume sales between the two of them (Gereffi /Memedovich 2003). The only firm in the top five Chilean importers not to exhibit the same characteristics is D&S SA, which operates the brand Lider, the leading supermarket in the country alongside Jumbo, and is operated by the firm Cencosud Supermercados SA. Cencosud is a holding that also operates Almacenes Paris Comercial SA. As such there is a close associa-tion between the largest retail operations in the country and the import of textiles and garments. Nevertheless, their share in total imports (27.6%) is only half that of the top five exporting firms. With imports less concentrated than exports, it is evident that many more organizations are involved in importing textiles and garments generally, and that this is also likely to be the case for Chinese imports due to their preponderance in the overall import structure.
Faced with this rapidly changing, negative scenario for domestic producers, the chief criticism of the producers’ association is the failure of the Chilean government to act against this competitive advantage based on such low costs. In view of the govern-ment’s strong free trade orientation, witnessed in its multiple multilateral and bilateral trade agreements established during the past decade, it is reluctant to impose restrictions, especially in light of the earnings generated through copper exports. Garcia argues that the low prices for Chilean consumers generated by these imports are counterproductive in many ways since these same consumers (at least textile workers) are losing their purchasing power over time through unemployment. Although the National Committee on Import Distortions has intervened, for example in the case of socks –where a 16% tariff was imposed on Chinese imports for a year and then 8% for the following six months- the problem has remained; therefore, benefits to national industry were a respite rather than a resolution.
31
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE24:Rankingoftextileandgarmentexporters,2006(value)Rank Firm US$ FOB % total
1 Santista Textil Chile SA 28,798,522 16.12 Textiles Pollak SA 23,849,105 13.33 Bellavista Oveja Tome SA 14,273,991 8.04 Coresa SA 13,686,312 7.65 Standard Wool Chile SA 8,221,451 4.66 Cia. De Tejidos Primatex SA 6,459,694 3.67 Tejidos Caffarena SA 4,691,956 2.68 Grupo Garib 4,452,153 2.59 Crossville Fabric Chile SA 4,123,533 2.310 Polytex SA 3,467,801 1.911 Lanera Chilena SA 3,310,520 1.812 Hilanderia Maisa SA 3,062,222 1.713 Corp. Manufacturera San Juan SA 3,056,619 1.714 Mavesa Ltda. 3,022,871 1.715 CAIMI SAC 2,442,207 1.416 Zalaquett SA 2,314,960 1.317 Soc. Ganadera José Marín Vicuña 1,882,641 1.118 Fabrica de Confecciones Trial SA 1,666,576 0.919 Hirsch y Gassmann Ltda. 1,460,446 0.820 Comercial Regina Ltda. 1,452,170 0.8Others 43,361,190 24.2TOTAL 179,056,943 100Source: INTECH (2007c)
The point made against this government’s unwillingness to defend national industries is that elsewhere in the region the pres-sures from Chinese textile imports have been counteracted with stronger instruments. For example, in the case of Mexico compensatory impositions of up to 530% have been applied, whereas Peru has applied Safeguard Clauses on clothing costed at under $30/kg and Argentina uses quantitative restrictions and other tariff instruments that affect approximately 40% of these imports. In the case of the USA and Europe, simple quantitative controls are applied on the scale of imports. This range of defensive instruments has become increasingly important following the end of the Textiles and Clothing Agreement (replac-ing the Uruguay Round Multifibre Arrangement) in January 2005. The termination of this agreement could lead to 50% of US imports in this sector being generated from China by 2010, for example (Kuwayama and Cordero 2005).
32
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
TABLE25:Rankingoftextileandgarmentimporters,2006(value)
Rank Firm US$ FOB % total
1 Ripley y Johnson’s SA 146,564,269 9.5
2 SACI Falabella 116,683,302 7.6
3 Almacenes Paris Comercial SA 84,634,188 5.5
4 Distribución y Servicio D&S SA 39,353,426 2.6
5 Comercial Siglo XXI SA 37,208,205 2.4
6 Multitiendas Corona SA 31,928,522 2.1
7 Comercial Fashions Park SA 30,287,081 2.0
8 Fernández y Cia. Ltda. 20,611,370 1.3
9 Comercializadora SA 20,299,974 1.3
10 Santista Textil Chile SA 19,439,095 1.3
11 Tricot SA 16,801,028 1.1
12 Zara Chile SA 15,726,651 1.0
13 Colchones Rosen SAIC 15,344,562 1.0
14 Cencosud Supermercados SA 12,636,171 0.8
15 Badinotti Chile SA 12,478,059 0.8
16 Cia. Chilena de Tabacos SA 10,686,899 0.7
17 Goodyear de Chile SA 10,302,061 0.7
18 DH Empresas SA 10,160,348 0.7
19 Arabesca Ltda. 9,202,857 0.6
20 Proctor & Gamble SA 9,182,238 0.6
Others 871,200,333 56.5
TOTAL 1,540,730,639 100
Source: Instituto Textile de Chile (INTECH) (2007c)
FIGURE16:Compositionoftextileexports,2001-2006(byvalue)
Source: Based on SOFOFA data
-
50.000
100.000
150.000
200.000
250.000
2001 2002 2003 2004 2005 2006
324. Calzados
323. Curtiembres y
Talabarterias
322. Confección prendas de
vestir
321. Textiles
33
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
FIGURE17:Compositionoftextileimports,2001–2006(byvalue)
Source: Based on SOFOFA) data
One element of particular concern for INTECH was the signing of the trade agreement between China and Chile that came into force in October 2006. The position of this association was that the advantages of a trade agreement would be that trade would be better regulated than it had been to date, with access to the Administrative Commission of the Agreement to deal for example with ongoing problems, especially Chinese subsidies for its industry:
...with the objective of selling at any price in order to employ people. The undervaluation of prices in China, that in the best of cases is 50% less than those in Chile, especially in underwear, sweaters and socks, clearly reveals that there are subsidies to the industry, while in Chile we are the kings of economic ‘opening’ with very low tariffs. (Juan Garcia in Diario El Sur, 23 August 2006)
During the negotiations from 2004, INTECH was successful in convincing DIRECON of the negative effects that would be-come more emphasized by the agreement if considerable safeguards were not put into place. Consequently, 80 clothing import firms were penalized on the grounds that their prices did not correspond to international average prices and that in many cases the prices did not even cover raw material costs. Despite this recognition, however, Garcia notes that little was achieved, since the fines were insufficient to change the behavior of the firms, and that only harsher sanctions for repeat offences would lead to some change along these lines: ‘To this we may add –using a minimum of legal logic- that those firms which have been sanc-tioned three or more times should be eliminated from import activities.’ A further criticism is that the growth in the number of importers in this sector to approximately 300 leads to under-declaring of import volumes due to the lack of customs officials to compare real and declared imports. Much of this undeclared trade in goods is directed to the informal market where tax is not paid, therefore the sector and the state both lose out through the impact on the sector; less tariffs, less sales tax. Smuggling of goods is particularly complex in the case of free trade areas such as the Zona Franca in Iquique to the north of the country, where a Central Bank study calculates that 20% of trade may be clandestine since the goods leave the zone and are sold in the city or transferred to other cities. Garcia cites the calculation of the National Chamber of Trade that estimates a loss associated with informal clothing sales of US$ 350 M annually. This figure can be doubled if lost public revenues due to failure to pay trade tariffs and sales taxes are included. Many illegal garments also fail to comply with labeling regulations, although the problem is so widespread that inspectors from the national consumer agency, SERNAC, is unable to monitor and pursue cases effectively in order to lead to a reduction of incidence.
Using the argument that this sector remains relatively labor-intensive compared to others, with the possibility of generating five jobs for every US$10,000 of investment (or losing the same in the face of low cost imports), Garcia presented the current case of the textiles sector in terms of its disappearance or continued reduction along recent lines to a comparative skeleton of the sector in relation to the mid-1990s. The sector’s changes that shape the export and import breakdowns noted above can be seen in the following figures released by the National Statistics Institute (Table 25). They reveal the pressures exerted on the national industry in face of the very low cost structure derived from Chinese imports, principally due to low regulatory and labor costs. The data bears witness to the overall trend in the number of plants and workshops operating in the sector, which were particularly affected by the slowdown in 2000-2001 and have only recovered slightly compared with the mid-1990s figures. A 1997 firm survey detailed the existence of 6,687 textile and garment firms, of which 4,800 were micro firms, 1,452 small firms, 315 medium-sized firms, and 120 large firms. Most of the firms in this sector (85%) are concentrated in the Metropolitan Region, therefore the effects on employment have been geographically concentrated, and have hit SMEs, which are likely to be mostly family-run businesses with small capital bases (INTECH 2001). There is no evidence of Chinese FDI
0
200.000
400.000
600.000
800.000
1.000.000
1.200.000
1.400.000
1.600.000
1.800.000
2.000.000
2001 2002 2003 2004 2005 2006
324. Calzados
323. Curtiembres y
Talabarterias
322. Confección prendas de
vestir
321. Textiles
34
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
in the sector, in terms of textile and garment manufactures, however there is FDI in trading companies involved in wholesale and retail activities which facilitate import flows (see Foreign Investment Committee 2007).
The number of workers employed in the sector reveals the decrease outlined by Garcia; however, the total number varies con-siderably in the INE calculation compared with that of the Association and the ILO. This is due to the fact that INE recording firms and their employees follow a method that does not capture the large number of smaller firms involved in the making of clothing, focusing principally on yarn and fabric producers.
The table reveals the cost structure and how it changed over the 1996–2004 period. Taking the total production costs as includ-ing labor costs, it can be seen that wages (21.5% in 1996, 18.3% in 2004) remain the principal cost involved beyond basic raw material costs (56.9% 1996, 51.7% 2004).5 However, the largest observed increase is the one relating to indirect costs (10.0% 1996, 18.3% 2004). Since the public sector can have a more influential role in the area of indirect costs, taxation and energy pricing (which is less significant in this sector than in others, reaching on average less than 3% of total production costs), this rise suggests that total administration, depreciation, subcontracting, and other costs have risen, or are at least substantially higher than in China. The price of raw material itself presents the greatest differences and effects; however, as outlined by Garcia, this is in regard to pricing below US$5/kg. Although the contribution of raw material to overall costs has dropped to a little over 50%, the ability to access cheap raw materials is clearly more difficult compared with the Chinese experience. This is due to the whole Chinese production chain, with low cost natural and synthetic fiber production from yarn and fabric processes to the garments themselves. Low wages and overall production costs due to state support and controls on input costs lead to low final product costs that are in marked contrast to average international costs. Since labor is the second largest contributor to the cost profile –and generates approximately 70% of total costs alongside the raw materials- it is not therefore surprising that China generates a notable contrast in total production costs with respect to Chile.
TABLE26:StructureandcostsintheChileantextileandgarmentindustry,1996–2004
1996 2001 2002 2003 2004
No. of establishments 737 471 553 531 535Earnings (’000 pesos) 49,118 28,965 28,479 28,682 29,076Raw materials and other inputs (’000 pesos) 351,991,876 102,594,557 105,293,991 112,234,456 323,845,691Total energy costs (’000 pesos) 5,980,216 6,371,948 7,073,598 7,698,536 7,399,525Electric energy consumption (’000 pesos) 10,913,187 8,740,950 9,735,607 10,362,429 10,689,949Indirect costs (’000 pesos) 61,619,721 51,542,381 79,544,924 101,719,359 114,560,548Taxation (’000 pesos) 47,100,042 31,248,259 38,886,878 37,682,878 52,584,771Total costs of good received and contracted work 484,847,500 414,271,207 453,249,242 521,463,190 511,415,112Total income from sales and work carried out 846,175,906 671,511,733 474,971,098 803,956,533 827,146,520Gross production value 874,266,046 679,343,710 755,069,543 811,754,563 843,137,024Net value 393,096,804 265,590,108 309,087,702 290,157,742 336,270,522Source: Based on INE data
Specific information on wage levels in China is difficult to define given the state’s role in the economy and a range of hidden subsidies and support mechanisms, as well as the range of different production unit types. There is a related issue of transpar-ency also given the difficulties of comparison with wages in fully market-based economies. It is for these reasons that the ILO database, LABORSTA, has limited data on Chinese wages. Nevertheless, the available information reveals that when converted into US dollars (December 2007) the wage gap is more of a chasm, as demonstrated in the following labor costs which are primarily wage-based (see Table 26).Although it is difficult to compare, the trend indicates that the difference between Chilean and Chinese wages has a factor of four. This is precisely the difference noted by Banister (2005) in comparing China to Mexico and Brazil, while the average manufacturing hourly wage in China is 3% of that earned by similar workers in the USA and Western Europe.
Whether this cost differential constitutes dumping is unlikely to become an issue of debate or unfair trade restrictions (beyond the limited measures already considered and applied, as mentioned by Garcia), due to the macroeconomic advantages generated
5 This labor factor in production can be noted in the list of countries that have a high proportion of textile and clothing exports in their export profile. The top ten listed countries for 2003 are: Cambodia, Macao (China), El Salvador, Bangladesh, Dominican Republic, Sri Lanka, Mauritius, Tunisia, Honduras and Morocco. In the Central American cases, much of this production is based in maquila production zones (Kuwayama and Cordero 2005).
35
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
by Chinese copper demand and the desire to maintain a strong trading relationship, as witnessed in the CODELCO-MinMetals joint venture for example (see Barton 2009). In this sense, there is little interest in protecting a domestic manufacturing sector, despite its labor-intensive characteristics and the risks that are generated by its ongoing restructuring and closures. As such, the rationalization of the sector and further job losses are likely. Although the distribution of textile employment is more even than, copper mining activities, for example, it is most likely to affect small and medium-sized firms which operate workshops for garment confection, which accounts for a larger share of textile employment than the larger firms represented by INTECH for example. An indicator of these reductions is the planned closure of the textile engineering degree program at the University of Santiago de Chile (USACH). Kassai (2000) documents a similar experience in the national leather goods sector during the 1990s, with difficulties in responding to changes in the international commercial environment, the higher degree of vertical integration of larger (often international) firms, the increased buying power of a reduced number of principal retail chains, and the degree of informality in the high number of smaller production units in the sector.
TABLE27:Earningsintextileandgarmentmanufacturing(US$,December2007)
1998 2001 2002 2004 2005 2006
ChinaManufacturing in urban units - - 1.533 - - -Manufacturing in manufacturing units (TVEs*) (large units) - - 952
(1.223) - - -
321 Manufacturing textiles 1.058 796 - - - -322 Manufacturing garments - 2.388 - - - -Thread and yarn spinner - - - 1.145 1.130 1.370Cloth weaver (machinist) - - - 1.274 1.562 1.621Garment cutter - - - 1.493 1.558 1.844Sewing machine operator - - - 1.291 1.495 1.646Chemical fibers manufacturing - - 1.568 - - -Garments and other fiber products - - 1.246 - - -ChileManufacturing employment earnings 4.344 4.920 5.268 5.436 5.676 -Source: Based on ILO LABORSTA data and Banister (2005)*town and village enterprises
The future of the Chilean textiles sector looks likely to be wedded to highly specific products and the Latin American market in particular, or to sourcing production from China directly. The Mexican, Argentinean and USA markets account for approxi-mately 50% of all Chilean textile exports, therefore these will increasingly be the focus for new product development, such as for traditional woolen goods (e.g. alpaca) where China does not have advantages (being particularly strong in synthetic fibers).This need to pursue a quality-based rather than quantity-based strategy through niche products has been apparent for some time in view of the competitive nature of international textile and garment markets and low labor costs in so many countries, not only China (see INTECH 2001). throughout the Mexican and Argentinean financial crises during this same period of transformation (1996–2006), Chilean exports lost ground due to exchange rates favoring local producers, therefore the aim is also to recover ground as well as diversify the available products. In this scenario, while the Chile-China trade agreement has accentuated the demise of the sector, the Chile-US trade agreement –which came into force in 2004- resulted in a doubling of exports to that country by the following year, although the sector remains very small in terms of total exports (Kuwayama and Cordero 2005; Ministerio de Relaciones Exteriores 2007).
The situation in the sector remains similar to the one identified by INTECH in 2001 (p.9), however the speed of change has been greater than experienced up to that point. Nevertheless, the recommendations of their evaluation of the sector –repeated by Juan Garcia in 2007- relate principally to a controlled demise of the sector that is almost an exit strategy, with a rearguard action against unfair trading practices in the short-term:
...in future it is inevitable that the sector will experience a continuous period of industrial adjustment. Distortions should be cor-rected in the short term: nevertheless, the adjustment trend allows us to forecast that this tends towards a progressive decline in the number of firms and in employment, retaining those segments of the chain that have real possibilities of competing in the globalized economy. Short-term problems have to be resolved to successfully confront this sectoral readjustment process, such as those refer-ring to market distortions and unfair competition practices, to develop medium-term and long-term practices for improvements in competitiveness.
36
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
3.ReflectionsontheSectoralImpactofChina-ChileTrade
The strength of the Chinese market for Chilean copper exports has led to the strongest period of economic growth in Chile during its democracy. The signing of the bilateral agreement in 2006 bears witness to this closer trading relationship and its importance in Chilean exports (for example the rise in non-traditional exports in 2005–2006, despite their relatively low share regarding copper exports), and in components for Chinese production, mainly for exports as manufactures of machinery, electronics and vehicles. Two principal views can be presented with regard to the current situation. One is exemplified by the experience of the copper sector, while the other is exemplified by the textiles sector. They provide contrasting realities with regard to the process of contemporary economic globalization through liberalization.
The positive appreciation of liberalization is presented in terms of the foreign exchange earnings generated by copper exports and how the royalty has been used as a neostructuralist measure to capture some of the benefits that have been created by the bilateral agreement, which is ultimately an inter-governmental agreement. Both public firms, CODELCO in particular (accounting for 37.2% of total exports 2006), and private firms (North American and Australian-based predominantly, spe-cifically Escondida with 25.3% of total exports, 2006) have benefited from this situation of increased demand and increased prices (COCHILCO 2007b). The higher prices are due to the restricted sources of supply; Chile exports 39.9% of all copper, with the second exporter, Peru, contributing only 6.6% of total exports in 2006 (COCHILCO 2007b). The current trend is likely to last due to Chinese demand, generating large scale investments in the sector planned over the next five years in the order of US$13.090 M, of which CODELCO will invest US$660 M (COCHILCO 2006b).
The CODELCO-MinMetals agreement is a further sign that this situation is not temporary, especially given the production potential within China initially for exports and then to satisfy its own domestic demand. Given that copper reserves are finite and unlikely to be exploited beyond this century (based on known reserves), the role of Chinese demand may well shape the remaining decades of Chilean copper production and the Chilean economy. This situation will certainly be supported by the increasing demand for and price of molybdenum, which is used in steel alloys for durability and resistance to heat and cor-rosion. As a product derived from the copper production process when sulfide ores are separated from the copper metal, the potential to generate greater profits from the process is enhanced; Chile accounts for approximately 25% of total molybdenum production (on a par with China, with only the USA producing more: 32%; COCHILCO 2007b). In 1995, ores and concen-trates of titanium, molybdenum, vanadium, etc. accounted for only 2.3% of all exports, whereas this figure rose to 7.3% in 2005 (second only to copper exports: ore, concentrates and refined, which accounted for 37.9% in 1995 and 42% in 2005, CEPAL 2007).
In many ways the current shift towards China and away from the US –given the weak dollar and the difficulties that this gener-ates for export sectors- is similar to previous trends in Chilean economic history, for example the dependency on Britain in the case of nitrate trade, followed by the dependency on the US regarding the copper trade. This new dependency is different in that Chinese firms do not produce in Chile; rather it is a strong market for Chilean exports and a source of imports that are in demand in Chile given the lack of domestic production, or in which they are especially competitive on price against Chilean products. The latter is the case regarding textiles.
Given the ways in which China remains highly organized by the state, with a range of subsidies and other support mechanisms that do not allow for clarity in establishing real cost structures, it would be erroneous to speak of China-Chile trade in terms of liberal free trade as constructed in neoliberal discourse; this is despite China’s entry into the WTO and its signing of bilateral agreements. Among the numerous examples of this lack of transparency is the lack of information on the size of China’s cop-per reserves and how these are managed.
The experience of Chile’s textile sector has been dramatic in terms of the explosion of Chinese imports in the wake of the negative impact generated by the Asian contagion on neighboring economies which were important markets. The closure of many plants and workshops has led to a rapid decline in employment which has not been absorbed by the firms that have replaced the national production and now distribute the imports. One of the few aspects for comparison between the experi-ences of the copper sector and the textile sector in this decade is the gradual decline of fixed labor requirements, either for increased technological intensity for productivity reasons and subcontracting (in copper), or for declining output principally in the case of textiles.
While production costs can be assessed in the case of Chile, uncovering the real direct and indirect costs of production in an economy that is still in the early transition stages towards capitalism is unlikely to reveal comparative data that stands up to analysis. Nevertheless, it is the case that Chinese textile production hovers at dumping levels, given the state support for various stages of the production process. As noted above, however, Chile is unlikely to pursue such accusations at the WTO or within its bilateral arbitration arrangement, given the overwhelming benefits generated for the copper sector. In this sense, the efforts to create manufacturing capacity during the post-war decades, weakened by neoliberalization as of the mid-1970s, have now reached a critical stage. The contribution of copper exports and other mineral derivatives looks likely to increase
37
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
in the national export profile, followed by non-traditional export sectors that may also benefit from Chinese demand in the longer term as the middle class becomes more affluent (e.g. demand for wines and salmon). These non-traditional sectors have maintained their strong growth during the 1990s and doubled in value between 2001 and 2006 up to US$15.242 M. The top ten export products currently account for 75% of all export value (ProChile 2007).6
Textiles and footwear are unlikely to figure as important manufacturing sectors, being largely restricted to niche markets for woolen products from the Magallanes region in the south where sheep production remains significant and from the north where alpaca fibers also enable Chilean production to differentiate itself from the mainly synthetic fibers used in Chinese sweaters and sporting garments specifically. The wages provided in each sector (mining versus manufacturing industry) also point to this favored position of the mining industry. INE (2006) reports that the average nominal monthly wage in the mining sector is 569,193 pesos/US$1,114 (December 2005), compared to a machine operator receiving 532,140 pesos/US$1,041. In the industrial manufacturing sector wages fall to 238,397 pesos/US$466 and 169,807 pesos/US$332 respectively. This bias is historical, based on the strength of mining trades unions; however, these unions also understand their bargaining power in terms of lost revenue for any production days lost due to strike activity. Minera Escondida (2007) calculated that the strike in August 2006 was responsible for a 1.25% reduction in output compared with 2005, which was particularly significant in consideration of the fact that copper prices were running 82.7% higher than their 2005 average.
The neoliberal model driven by liberalization is likely to lead many countries back into their comparative advantages based on renewable and non-renewable resource bases or on labor supply. In the case of Chile, increased dependence on copper brings back the dilemma of terms of trade (international commodity prices against manufactured import prices) raised by Raúl Prebisch in the 1940s, which led to the structuralist development programs of the three following decades in Latin America.7 The difference in the case of trade with China at the turn of the twenty-first century as opposed to Europe and North America during the twentieth century is that many more products are based on high volumes at low prices, and specifically oriented towards consumer products. While the import substituting industrialization model exhausted itself trying to shift into higher technology production sectors, it is clear that the democratic Concertación administrations believe that the shift towards a knowledge-based economy will come through the royalty on copper, and its use in the initiatives favored by the National Council of Innovation for Competitiveness formed in 2006, rather than through protecting sectors and building R&D in this way. It is considered that most initiatives will be generated from projects linked to mining and non-traditional sectors which have flourished since the 1980s such as biotechnology and mining technologies. However, these sectors are unlikely to be labor-intensive, therefore the point made by Juan Garcia relating to employment and domestic demand remains relevant: in the face of increased technological intensity in production and increased human capital-intensity in new branches, traditional manufacturing capacity and employment in basic industries is likely to decrease, suggesting challenges of structural unem-ployment and the need for highly effective redistribution policies to overcome the poor distribution of income, services and opportunities currently experienced in Chile.
6 The products are as follows: copper, molybdenum concentrates, salmon, cellulose, wines, processed wood products, grapes, methanol, plastics, and ferromolybdenum.7 The export boom in copper led to an 82% increase in export value from 2005 to 2006, participating in 58.1% of all export value (ProChile 2007).
38
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Bibliography
Appelbaum, R. /Gereffi, G. (1994): Power and Profits in the Apparel Commodity Chain, in: E. Bonacich et al. (eds.) Global Production: The Apparel Industry in the Pacific Rim. Philadelphia, PA, 42-62.
Asian Development Bank (2007): Key Development Indicators. Manila.
Auty, R. (1993): Sustaining Development in Mineral Economies: The Resource Curse Thesis. London.
Banister, J. (2005): Manufacturing Earnings and Compensation in China, in: Monthly Labor Review, August, 22-40.
Barton, J. R. (2009): The Impact of China’s Global Expansion on Chile, in: Jenkins and Dussel (eds.)
Bellavista Oveja Tome SA (2007): Sobre Nosotros; online: http://www.bellavista.cl/pages/sobrenos_histo.htm (accessed: 15 December 2007).
CEPAL (2007): Statistical Yearbook of Latin America and the Caribbean, 2006. Santiago.
China Economic Net (2007a): China Copper Import Down 60% in May; online: http://en.ce.cn/Industries/Energy&Mining/200606/28/t20060628_7540573.shtml (accessed 22 December 2007).
China Economic Net (2007b): Large Copper, Iron Ore Deposits Located; online: http://en.ce.cn/Industries/Energy&Mining/200701/25/t20070125_10205811.shtml (accessed 22 December 2007).
COCHILCO (various): Informes Trimestrales del Mercado del Cobre, I Trimestre 2004–3 Trimestre 2007. Santiago.
COCHILCO (2001a): La Investigación e Innovación Tecnológica en la Minería del Cobre. Santiago.
COCHILCO (2001b): Consumos de energía en la minería del cobre 1990–1998. Santiago.
COCHILCO (2001c): Hacia Indicadores de Desarrollo Sustentable para el Sector Minero (1º Etapa). Santiago.
COCHILCO, Unidad de Asuntos Internacionales y Medio Ambiente (UAIMA) (2003): Impacto de los Acuerdos Comerciales en el Acceso a Mercados para los Productos Mineros Chilenos. Santiago.
COCHILCO (2006a): Boletín Minería Sustentable Boletín Nº 13 cuarto trimestre. Santiago.
COCHILCO (2006b): Inversión en la Minería Chilena del Cobre y del Oro Proyección del período 2006–2010. Santiago.
COCHILCO (2006c): Informe Trimestral del Mercado del Cobre I Trimestre 2006. Perspectivas 2006–2007. Santiago.
COCHILCO (2006d): Informe Trimestral del Mercado del Cobre, 4 Trimestre 2006. Santiago.
COCHILCO División Jurídica (2007a): Boletín de información legislativa 25. Santiago.
COCHILCO (2007b): Anuario de Estadísticas del Cobre y Otros minerales – Yearbook: Copper and Other Mineral Statistics 1987–2006. Santiago.
COCHILCO (2007c): Informe Trimestral del Mercado del Cobre, 1 Trimestre 2007. Santiago.
CODELCO (2005): Memoria Anual. Santiago.
CODELCO (2006): Memoria Anual. Santiago.
CODELCO (2007): Convenio Codelco–MinMetals; online: http://www.codelco.com/prensa/presentaciones/pdf/Mimmetals-Codelco.pdf (accessed 3 June 2007).
CODELCO (2008): Informe Semestral del Mercado del Cobre: Primer Semestre 2008. Santiago.
39
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
CODELCO (2009): Informe Semestral del Mercado del Cobre: Segundo Semestre 2008. Santiago.
CODELCO /Deloitte (2007): Balances Generales Consolidados. Santiago.
CODELCO Educa (2007): online: https://www.codelcoeduca.cl/
Copper Development Association (2007): Copper Production from Ore to Finished Product; online: http://www.copper.org/education/production.html (accessed 28 December 2007).
CORESA SA (2007): Historia; online: http://www.coresa.cl/historia.asp (accessed 15 December 2007).
Danish Environmental Protection Agency (2007): EDIPTEX–Environmental Assessment of Textiles, Working Report 24. Copenhagen.
DIPRES, Gobierno de Chile (2008): Informe de Finanzas Públicas. Santiago.
Dirección de Presupuestos, Government of Chile (2007): Estadísticas Finanzas Públicas: Series Anuales; online: http://www.dipres.cl/estadisticas/Series_Anuales/9006GnoCentralTOTAL3.html (accessed 22 December 2007).
DIRECON (2006): Tratado de Libre Comercio Chile-China. Santiago.
DIRECON (2007a): Inversiones en el Exterior–exportación de capitales desde Chile; online: http://www.direcon.cl/index.php?accion=inversiones_exterior_02b (accessed 1 June 2007).
DIRECON (2007b): Schedule of China; online: http://www.direcon.cl/documentos/China2/lista_china_junio_2006.pdf (ac-cessed 28 December 2007).
Foreign Investment Committee, Chile (2007): FDI Statistics; online: http://www.foreigninvestment.cl/index/fdi_statistics.asp?id_seccion=2 (accessed 21 May 2007).
Gereffi, G. (2001): Shifting Governance Structures in Global Commodity Chains, with Special Reference to the Internet, American Behavioural Scientist 44:10, 1616-1637.
Gereffi, G. /Memedovich (2003): The Global Apparel Value Chain: What Prospects for Upgrading by Developing Countries? Vienna: UNIDO.
INE (various): Encuesta Nacional Industrial Anual (1996, 2001, 2002, 2003, 2004). Santiago.
INE (2006): Anuario de Remuneraciones Medias y Costos Medios 2005. Santiago.
INE (2008): Indices de Estadísticas de Producción Sectorial; online: http://www.ine.cl/canales/chile_estadistico/estadisticas_economicas/industria/series_estadisticas/series_anteriores.php (accessed 8 January 2008).
INTECH (2001): Estudio del Sector Textil Chileno Elaborado por el Instituto Textil de Chile. Santiago.
INTECH (2007a): El Gran Problema del Sector Textil: Masiva Importación de Productos Sustitutivos desde China Popular a Precios Subvaluados, Presentation to the Senate Trade Comittee, mimeo.
INTECH (2007b): Estudio del Sector Textil Chileno. Santiago.
INTECH (2007c): Informe Estadístico Diciembre 2006. Santiago.
International Copper Study Group (ICSG) (2007): The World Copper Factbook 2007. Lisbon.
Kassai, L. (2000): Cuero, Calzado y Afines en Chile ¿Una Industria en Desaparición o en Búsqueda de un Nuevo Destino? Santiago.
40
Cu
ad
er
no
s d
e T
ra
ba
jo d
el
Ce
Ch
ime
x n
o. 6
Kupferinstitut (2007): Copper Production Chain; online: http://www.kupfer-institut.de/front_frame/pdf/LCI-3.pdf (accessed 7 December 2007).
Kuwayama, M. /Cordero, M. (2005): Implicancias del Término del Acuerdo sobre los Textiles y el Vestuario (ATV) para América Latina y el Caribe. Santiago: CEPAL.
Minera Escondida (2005a): Memoria Anual 2004. Santiago.
Minera Escondida (2005b): Reporte de Sustentabilidad 2004. Santiago.
Minera Escondida (2007): Memoria Anual 2006 Estados Financieros. Santiago.
Ministerio de Economia (2007): Gobierno compromete colaboración con los trabadores de Bellavista Oveja Tomé; online: http://www.economia.cl/aws00/servlet/aawsconver?1,,503569 (accessed 23 December 2007).
Ministerio de Relaciones Exteriores-Chile (2007): Comercio Exterior de Chile–Cuarto Trimestre 2006. Santiago.
Pérez, S. /Vera, F. (2007): El Campo High Tech, in: Revista Capital. 4 May.
PROCHILE, Departamento Desarrollo Estratégico (2007): Análisis de las Exportaciones Chilenas 2006. Santiago.
Santista Textil (2007): Quienes Somos; online: http://www.santistatextil.cl/ (accessed 15 December 2007).
SOFOFA (various): Comercio Exterior Informe Mensual Diciembre 2002, 2004, 2006, Santiago.
Textile Pollak (2007): Mercado Pollak; online: http://www.pollak.cl/espanol.htm (accessed 15 December 2007).
US Geological Service (2007): Minerals Yearbook; online: http://minerals.usgs.gov/minerals/pubs/myb.html (accessed 20 December 2007).
Vexler, D. et al. (2004): The Contemporary Latin American and Caribbean Copper Cycle: 1 Year Stocks and Flows, in: Resources, Conservation and Recycling 41:1, 23-46.
WTO (2007a): Trade Profiles 2007. Geneva.
WTO (2007b): World Tariff Profiles 2006. Geneva.
“Cuadernos de Trabajo del Cechimex”
Número1,2010. Mexico’s Economic Relationship with China: A Case Study of the PC Industry in Jalisco, Mexico.
Número2,2010. A Study of the Impact of China’s Global Expansion on Argentina: Soybean Value Chain Analysis.
Número 3, 2010. Economic Relations between Brazil and China in the Mining/Steel Sectors.
Número4,2010. A study of the impact of China’s global expansion on Argentina: Leather value chain analysis
Número5,2010.Economic relations between Brazil and China in the consumer electronics sector
Número6,2010. A Study of the Impact of China’s Global Expansion on Chile: The Copper and Textile Value Chains
