CHILE VALUE CHAINS 2280509 wp7 by rlb27893



                    WORKING PAPER No. 7

A Study of the Impact of China’s Global Expansion on Chile
             The Copper and Textile Value Chains

                         Jonathan R. Barton
               Centro de Estudios Urbanos y Regionales
           Pontífica Universidad Católica de Chile, Santiago

                            February 2009

COCHILCO   La Comisión Chilena del Cobre
CODELCO    Corporación Nacional del Cobre de Chile
DIRECON    Dirección General de Relaciones Económicas Internacionales
FDI        foreign direct investment
ILO        International Labour Organization
INE        Instituto Nacional de Estadísticas
INTECH     Instituto Textil de Chile A.G.
SME        small and medium enterprises

Introduction to the value chain studies
As noted in Working Paper 6 in this series (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 swiftly. The impacts of this relationship are not felt evenly through 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 been taking place.
The data presented in Working Paper 6 reveals that the copper demand in Chile has
provided the boom in the Chilean economy, and that it is this sector that has been vital to
the China-Chile trading relationship that has emerged which has led to a bilateral
agreement.1 Given that fact that copper export revenues provide over 40% of all export
revenues, the rise in Chinese demand and the price impacts generated by this demand have
had dramatic impacts on the economy as a whole. As with all economies that experience
situations relating to the resource curse thesis (Auty, 1993), the impacts on the Chilean peso
have been considerable, leading to other export sectors, in particular the fruit, wine and
other non-traditional export sectors, struggling to realise previous export targets.
Whereas these other sectors are affected indirectly by the strength of the copper export
price due to Chinese demand, other sectors have been affected more directly by the trading
relationship. These sectors are those that have struggled to compete in the face of Chinese
imports into Chile. The data in Working Paper 6 are quite clear in revealing that one of the
hardest hit sectors is that of textiles; footwear is another. These products, which have
relatively low technological requirements and are still relatively labour-intensive in low
income countries, are highly price sensitive in the global market. Given China’s labour
cost advantages, it is in these products that the greatest threats to Chilean producers have
been generated. 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 domestic capacity in this area given previous low-cost imports
from other Asian countries from the 1970s and from neighbouring Brazil. Since it is only
these electronics goods that show greater dynamism than the textiles sector in terms of the
import profile from China, it is the latter that has been selected as the import value chain
In terms of the broader effects of the shift towards China over the last decade, away from
the US in particular (in terms of market share), there is clearly a cost dimension that can be
revealed through the 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). This strengthening of the yuan against the peso has not
been to the extent that Chinese exports to Chile are hampered however, especially 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.

 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).

    Source: Based on Banchile (2007) data







                                                                                                                                                                           Source: Based on Banchile (2007) data








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                                                                                                           Chilean peso against the US dollar January 1975–December 2006
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                                                                                                                                                                                                                                                                                  Yuan against the US dollar January 1994–December 2006
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                                                             Figure 3
                                   Chilean peso against the yuan January 2002–December 2006



















Source: Based on Banchile (2007) data

The exercise in terms of the assessment of the two value chains selected 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. Of particular interest is the attempt to identify changing cost structures in
order to understand what the micro effects have been, underpinning changing costs, prices,
and the health of each of the sectors in Chile. Based on this understanding, the strategies of
the two sectors to profit from the opportunity, or to resist the challenge, are presented.

It is clear in the two cases presented that the impacts of recent China-Chile trade have
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 neighbouring economies). Whereas the post-1990 period has
been characterised by a diversification of the export profile with increasing proportions of
non-traditional product exports relative to minerals, the more recent effects of the China-
Chile relationship have taken the country back to its key non-renewable export platform. In
parallel, many of the basic manufacturing sectors that were stimulated during the
structuralist period since the mid-twentieth century through import substitution
industrialisation are unable to compete with lower labour cost and low regulatory cost
production sources, of which China is clearly the most important. Consequently, the
Chilean economy is undergoing a transformation in relation 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 would appear 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.

1. The copper export value chain
The copper value chain is based on a process of mineral extraction and its transformation
into products used principally in industry and construction. As with all value chains, the
price differential rises with increased value-added through the chain. The principal 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 seen clearly. 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. In the preliminary links of the copper chain the mineral ore is
crushed and ground to create a concentrate slurry that can be processed in two ways. The
first relates to a process of leaching and electrowinning; the other is that of smelting and
electrolytic refining. Both processes lead to the production of copper cathodes. The first

process, that of leaching and electrowinning, involves the production of a weak copper
sulphate solution from the 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 produced (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 alloys of copper
with nickel and zinc (a range of brass products), wire, cables, tubes and sheets. This
transformation process of converting cathodes into these products requires an industrial
base which Chile has not developed. 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 phase, China has also been
developing considerable smelting capacity 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 refined products into the future;
export data for 2007 reveal that China is still buying cathodes, however. 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.

                                                                                                Figure 4

                                                                                   The Copper Value Chain
                      Copper Producers                                            Copper product manufacturers                                                        Copper trading

                                                                                                                                                                                          old scrap

                                                                              FABRICATION and                                              SEMI-FABRICATED
                         PRODUCTION                                           MANUFACTURING                                                                                   USES

                                                                                                                                                -building wire
                                                                                                                                                 -copper tube
                                                                                                                                            -motor vehicle wire

                                                                                                                                                -magnet wire

                                                                                                    casting, extrusion, drawing, rolling
                                                                                   Copper                                                       -telecom wire

                                                Cathodes and Refined copper
                                                                                 fabrication                                                     -power cable
                                                                                                                                               -sheet and strip
                                                                                                                                                -other copper            Machinery
                                                                                                                                             -finished products

                             Smelter                                                                                                          -alloy sheet+strip
                                                                                                                                                -casting alloy                               -incineration
                                                                                                                                                   -alloy rod
                       blister Cu                                                 Brass mill                                                      -other alloy
                                                                                  and alloys                                                 -finished products

                                                                                                                                           MOULD CASTING

                                                                                  new scrap
      tailings slag

        raw material                     semi-processed                                    finished product                                                         export
          networks                          networks                                           networks                                                            networks

                  Source: Appelbaum and Gereffi (1994), Adapted from Vexler et al. (2004), Kupferinstitut (2007)

1.1. China in the global copper market
Although copper has always been a strategic industry within the Chilean economy since the
point when 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 and the rising role of the APEC economies in global production and
consumption have generated dramatic transformations. The relative immunity to the Asian
contagion – compared with its neighbours – despite the slowdown five years ago owes
much to the rise of China and its copper demand for its machinery and electronics
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 electricity. The remaining uses are principally to be 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 in vehicles (with on average 20kg of copper 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 (%)




          -                                       2002   2003 2004 2005 2006
                 1997 1998   1999     2000 2001

       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

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
principally as the provider of the raw materials which are processed in China and then
exported as manufactured content.
The Chinese economy has been growing strongly during the current decade – with an
annual average of 10% growth in GDP 2000–2006 (WTO, 2007a) – and there is little doubt
that this has been the principal reason for the spiking of the copper prices in recent years.
This growth is driven by manufacturing, whose contribution to national GDP has risen from
to 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 the Chinese demand to the price, but it is at the
centre of the dynamic of the price pattern 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 as with
copper. This demand is related to manufactured products for domestic consumption but
particularly for export, and to infrastructure. In the case of copper there is strong demand
from sectors such as air conditioning unit manufactures, the national electrical energy
generation and distribution network, and from the automobiles and construction sectors
(e.g. related to the Olympic Games infrastructure) (Cochilco, various).

                                                                     Figure 7
                                                 International refined copper prices, 1981–2006
                                                    (US$ cents/lb, London Metals Exchange)







   Source: Based on COCHILCO (2007b) data

                                                                          Table 1
                                                          Chinese production and trade, 1990–2006
 GDP (2000 constant prices)                              1990             1995                 2000                 2002                 2003                 2004                  2005             2006
 Mining, manufacturing,                                  685.8          2495.1                  4003.4              4743.1              5494.6                6521.0            7723.1              9035.1
 electricity, gas, water
 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 semi-conductors also important in the latter
two economies) has more than made up for this weakness. The level of demand in China in
particular has been such that international inventories – on the three principal exchanges
(London Metals Exchange, Shanghai Metal Exchange, and the US Commodities Exchange
COMEX) – started to decline during 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. Two important outcomes were generated:
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 labour unrest as workers around the world sought to gain
a share of the increase. During 2004–2007, significant labour unrest leading to planned
output declines were registered in Chile, Peru, USA, Mexico, India, Zambia and Poland
(Cochilco, various). 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 coming from Australia and Mongolia relative to Chile. The
following table reveals that the sources of copper supply, for China as well as for other
countries, remain relatively concentrated (see Table 2).
Other factors that contributed to the price increases relate to broader international economic
trends and specific incidents. Two important global trends that played a role were the
weakness in the US dollar which led to greater interest in basic metals 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 reconstruction 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 final months of 2005 (Cochilco, various).
Although it is difficult to ‘factor out’ Chinese demand in terms of determining impacts of
diverse variables on international copper prices, the particular buying pattern of China
between 2005 and 2007 reveals how it can influence the price. As prices skyrocketed from
2003 and onwards into 2005, the State Reserve Bureau decided to fall back on existing
stocks and to 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. The outcome
was that international copper 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 through 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 falling 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 increasing their demand significantly were Egypt, United Arab Emirates
and Saudi Arabia (COCHILCO, 2008).
The year 2008 revealed a marked change in the fortunes of the global copper market due to
the international financial crisis and its repercussions in the industrial sectors of the major
consuming nations. Copper prices fell 70% from a historic high in July 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 centres (eg. 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 in the ways in which this chain operates over the past decade
(leading to this 2006 snapshot). By looking at the three principal disaggregations 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 Chilean increase (13%). The principal outcome is that Chinese smelting
increased rapidly and outstripped Chilean smelting production from 2005. The expansion of
Chinese smelting capacity has been such that there is overcapacity, given the high prices of
the raw materials imported from Chile in particular. A similar picture for the value-added
phases can be seen 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%).

                                                                             Table 2
                                          Chinese imports of copper by product type (US$ ’000) and principal sources (%)
                                Principal                     Principal                   Principal                    Principal                    Principal
   HS2002          2002                         2003                         2004                         2005                          2006
                                 sources                       sources                     sources                      sources                      sources
                                  Chile 23.5                    Chile 32.8                  Chile 35.6                   Chile 42.5                   Chile 37.4
                              Mongolia 20.7                Mongolia 15.5                     Peru 18.0                    Peru 14.7                Australia 14.3
Ores and           809,448                    1.291.283                    2,228,043                    3,720,781                      6,113,901
                                   Peru 15.2                     Peru 15.2             Mongolia 14.1                  Australia 11.2                   Peru 14.2
                              Australia 13.4               Australia 11.5               Australia 7.0                 Mongolia 9.4                 Mongolia 13.8
                                                                                            Chile 18.7
                               S.Africa 26.7                S.Africa 16.0                                                Chile 32.5                 Pakistan 23.2
7402                                                                                    Belgium 13.1
                               Ukraine 21.5                     Chile 12.6                                            Pakistan 18.2                    Chile 18.7
Unrefined          159,740                      234,940                      325,274        Pakististan   463,214                       552,795
                                   Peru 11.8                     Peru 11.9                                             Namibia 8.6                   Zambia 12.0
copper                                                                                            10.9
                                   Chile 9.7                  Namibia 9.3                                            Other Asia 8.5                Other Asia11.8
                                                                                          Namibia 9.3
7403                                                                                                                                                   Chile 39.0
                                 Chile 43.0                     Chile 46.5                    Chile 55.4                  Chile 44.9
Refined                                                                                                                                                Japan 16.5
                               Kazakh. 17.0                 Kazakh. 15.5                    Kazakh. 8.8                 Kazakh. 13.1
copper +         1,992,008                     2,580,495                     3,482,038                     4,482,913                   5,494,952       Rep.Korea
                                 Japan 11.6                Philippines 7.2               Philippines 7.5                   Japan 8.0
copper                                                                                                                                                       10.7
                               Russ. Fed.6.9                     Japan 5.2                     Japan 6.0               Rep.Korea 4.7
alloys                                                                                                                                                   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 fabrication of manufactures.
The objective is not necessarily to show how the geography has evolved over time but
rather to provide a snapshot of existing capacity. As much as trade flows in and of
themselves, the following tables show where the principal sites of activity are and this in
turn explains the trade flows. The conclusions that can be drawn from this 2006 snapshot
can be summarised as follows:
       1) Chile retains its position as the principal source of copper ores and concentrates,
       and this is unlikely to change over time given the current knowledge of available
       deposits (see Table 4). It is relevant that, despite increasing its mining capacity in
       recent years, China is not a dominant copper mineral producer due to its relative
       lack of deposits. Given its high demand for copper products in the current industrial
       transformation this is a positive opportunity for Chile.
       2) Where China has invested most heavily, given this lack of natural deposits, is in
       the arena of adding value to ores and concentrates in the smelting process.
       Investment in smelting has been considerable, leading to overcapacity in the face of
       high ore and concentrates prices in 2006. Table 5 shows that China has several
       installations that rank at the global level and that feed off the mining production
       evident in the previous table. Although Chile has a high level of smelting capacity,
       this is falling in relative terms against the specific growth in this phase of the chain
       in China.
       3) The panorama for refining is similar to that for smelting with both China and
       Chile of global importance in this field. However, the Chinese commitment to
       smelting and refining due to its lack of deposits has led to high levels of investment
       in capacity increases compared with the composition of the Chilean production
       4) It is notable that neither country has a leading manufacturing plant at the highest
       value end of the chain. This remains concentrated in the USA and Western Europe
       for the most part, although there are also leading firms in Mexico, Brazil, and

                                                        Table 3
          Chilean and Chinese copper mining, smelting and refining production, 1997-2006 (kMT copper content)
                1997      1998       1999      2000        2001       2002       2003      2004     2005             2006
                  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
                  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
                  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
                    495.5        486.8     520.0          592.6     587.4     568.1     604.4     742.2     761.6     755.4
                    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
                  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

                                                             Table 4
                                               Leading international copper mines
           Rank             Mine name                           Country                    Owner(s)
                                                                            BHP Billiton, Rio Tinto, Japan
             1      Escondida                      1.311      Chile
             2      Codelco Norte                   957       Chile         Codelco
             3      Grasberg                        750       Indonesia     PT Freeport Indonesia, Rio Tinto
                                                                            Anglo American, Xstrata plc, Mitsui,
             4      Collahuasi                      450       Chile
                                                                            Freeport Memoran Copper and Gold,
             5      Morenci                         430       USA
             6      Taimar Peninsula                430                     Norilsk Nickel
             7      El Teniente                     418       Chile         Codelco
                                                                            BHP Billiton, Teca, Xstrata plc,
             8      Antamina                        400       Peru
                                                                            Antofagasta Holdings, Nipón Mining,
             9      Los Pelambres                   335       Chile
                                                                            Mitsubishi Materials
                                                                            PT Pukuafu Indah, Newmont, Sumitomo
             10     Batu Hijau                      300       Indonesia
                                                                            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
                                                                            Codelco, Freeport McMoran Copper and
             17     El Abra                         219       Chile
             18     Mount Isa                       212       Australia     Xstrata plc
             19     Toquepala                       210       Peru          Southern Copper Corp.
             20     Cananea                         210       Mexico        Group Mexico
         Source: International Copper Study Group (2007

                                                     Table 5
                                       Leading international smelting firms
 Rank             Smelter name                          Country                        Owner(s)
   1      Birla Copper (Dahej)              500          India      Birla Group
   2      Norddeutsche Affinerie            450        Germany      Norddeutsche Affinerie AG
   2      Saganoseki/Ooita                  450          Japan      Pan Pacific Copper Co. Ltd.
   4      Codelco Norte                     400          Chile      Codelco
   4      Guixi                             400          China      Jiangxi Copper Corp.
   4      Norilsk (Nikelevy, Medny)         400          Russia     Norilsk G-M
   7      El Teniente (Caletones)           391          Chile      Codelco Chile
   8      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
                                                                    Mitsubishi Materials Corp., Dowa Metals and
  11      Onahama/Fukushima                 324          Japan      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      Vedanta
  17      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 plc
  20      Gresik                            260        Indonesia    Mitsubishi, Freeport McMoran
 Source: International Copper Study Group (2007)

                                                    Table 6
                                          Leading copper refining firms
 Rank             Smelter name                         Country                        Owner(s)
  1      Birla                              500      India          Birla Group
  2      Codelco Norte                     457        Chile         Codelco
  3      Amarillo                          450        USA           Grupo Mexico
  4      Chuquicamata Refinery             443        Chile         Codelco
                                                                    Freeport-McMoran Copper and Gold Inc.,
  5      Morenci                           420        USA
  6      El Paso                           415        USA           Freeport-McMoran Copper and Gold Inc.
  7      Guixi                             400        China
  8      Norddeutsche Affinerie            385        Germany       Norddeutsche Affinerie AG
  9      CCR Refinery (Montreal)           380        Canada        Xstrata plc
                                                                    Uralelectromed (Urals Mining & Metallurgical
  9      Pyshma Refinery                   380        Russia
  11     Las Ventanas                      376        Chile         Codelco
  12     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 Group
  16     Olen                              345        Belgium       Cumerio
  17     Norilsk                           330        Russia        Norilsk
  17     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)

                                                Table 7
                            Leading international copper fabricating plants
Rank                      Owner(s)                       Plant Type                  Country
  1           Wieland Werke (Wieland Metals)              Brass mill         360     Germany
  2        Freeport McMoran Copper & Gold Inc.          Wire rod plant       355       USA
  3        Freeport McMoran Copper & Gold Inc.          Wire rod plant       355       USA
  4                       Southwire                     Wire rod plant       320       USA
  5      Conticon (Grupo Condumex – Grupo Carso)        Wire rod plant       318     Mexico
  6                    SCCC (Nexans)                    Wire rod plant       300      France
  7                Trafilierie Carlo Gnutti               Brass mill         300       Italy
  8                  Umicore – Sumerio                  Wire rod plant       280     Belgium
  9           Hitachi Wire Rod (Hitachi Cable)          Wire rod plant       280      Japan
  9                Norddeutsche Affinerie               Wire rod plant       275     Germany
 11                        LS Cable                     Wire rod plant       270      Korea
 12                Asarco (Grupo Mexico)                Wire rod plant       270       USA
 13             Katur-Invest (Uralelektromed)           Wire rod plant       265      Russia
 13             Nexans Canada Inc. (Nexans)             Wire rod plant       260     Canada
         Deutsche Giessdraht (Norddeutsche Affinerie,
 13                                                     Wire rod plant       250     Germany
            MKM Mansfelder Kupfer & Messing
 16                                                       Brass mill         250     Germany
 17                    Taihan Electric                  Wire rod plant       250     Korea
 17      Huta Miedzi Cedynia (KGHM Polska Miedz)        Wire rod plant       240     Poland
 19                       Poongsan                        Brass mill         235     Korea
 20            Caraiba Metais (Paranapanema)            Wire rod plant       230     Brazil
Source: 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)

                          1.200,0                                                                                                                                                 7,0


   (kMT Copper Content)


                                                                                                                                                                                        (US$ Mn FOB)



                             -                                                                                                                                                    -
                                                                 Copper Exports by Destination (China)                           Value (MT Copper)

  Source: Based on COCHILCO (2007b) data

Table 9 shows the contribution that Chilean production makes to the satisfaction of global
copper demand. Since copper reserves of the scale 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 are 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
that is being experienced on a global level. The prices that this rising demand has
generated can be observed in Figure 8, showing the same spike effect from 2002-2003 to

                                                             Table 8
                                                 Chilean copper exports to China
                                                    Volume             Total value           Value per kMT
                                               kMT copper content US$ millions FOB          US$ millions FOB
                               1987                          27.1                42.6                     1.6
                               1988                          24.0                64.1                     2.7
                               1989                          35.8                75.5                     2.1
                               1990                           4.0                  7.1                    1.8
                               1991                          23.9                36.8                     1.5
                               1992                         171.1               358.9                     2.1
                               1993                         113.4               202.3                     1.8
                               1994                          37.6                75.0                     1.5
                               1995                          88.3               216.9                     2.1
                               1996                         137.3               242.6                     1.8
                               1997                         142.7               275.0                     2.0
                               1998                         168.4               235.9                     2.5
                               1999                         323.8               475.8                     1.8
                               2000                         545.6               918.7                     1.9
                               2001                         572.0               793.8                     1.4
                               2002                         597.2               877.3                     1.5
                               2003                         843.2             1.393.5                     1.7
                               2004                         999.7             2.716.5                     2.7
                               2005                       1.101.2             3.475.2                     3.2
                               2006                         685.8             4.140.2                     6.0
                    Source: Based on COCHILCO (2007b) data

                                                          Table 9
                                       Global copper exports (total volume and share)
                        1997      1998    1999      2000       2001      2002      2003             2004        2005      2006
kMT copper
                       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
                          346          35.1     39.3      38.8           37.8     38.2      39.6      44.3        40.1      39.9
copper exports
kMT Chilean
copper content to       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          4.0          4.4       7.7     12.6           12.2     14.0      18.4      18.7        19.6      12.4
kMT copper
                        492.2         454.9    494.7     480.3         556.8     810.6     760.7     819.4      1.036.6    869.8
Share of global
                           5.2          4.5       4.6       4.2           4.5       6.9       6.4       6.6         7.8       6.6
copper exports
kMT copper
                        361.0         435.4    513.2     578.7         709.1     653.5     661.9     618.9       717.3     680.6
Share of global
                           3.8          4.3       4.7       5.0           5.8       5.5       5.6       5.0         5.4       5.2
copper exports
Source: Based on COCHILCO (2007b) data

 The decline in figures for 2006 is due to China’s use of copper stocks and domestic
 production due to the rising copper prices generated by demand, by 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 considerable changes in trade flows (CODELCO, 2005). In the case of the 2006
 reduction in imports, this was compensated by rising national copper production – to
 760.000Mt - which has been subjected to 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 a 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 an important influence on the national economy. This can be seen, for example, in the
 contribution of copper revenue to GDP. This contribution rises dramatically between 2003
 and 2004, which is precisely the period in which Chinese copper demand rises considerably
 and international copper prices start 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 is generated by Codelco
 principally to 2005, and is 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 in

                                             Table 10
              Chilean government income and spending as percentage of GDP, 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 principal reasons. Firstly, the previous 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, in cathodes in particular.
 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 relating 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, since it is not considered an important part of the copper chain within Chile. It
is mainly the more industrialised economies that trade in these higher value goods.

                                               Table 11
                  Schedule of China (2005 Chile-China FTA): selected copper products
     Trade                                                                                   Years
                                         Product                            Basic tariff
 classification                                                                            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 to China relative to other destinations, there
appears to be little marked difference in products apart from the large proportional growth
in the lowest value basic products, copper ores and concentrates. The trend of increasing
imports of copper waste and scrap 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 influence heavily 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.

                                   Figures 9, 10, 11 & 12
          Principal Chilean copper exports to China and rest of the world, 2002–07


VOLUMES (metric tonnes)

Source: UNComtrade

1.3. Impacts 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 level of

concentration of copper that is viable for commercial exploitation, while the costs of
access, extraction, processing, energy and labour define 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 principal company,
CODELCO. These variations are due to different forms of evaluation, such as for energy.
These variations make it difficult for the association – COCHILCO – to assess what the
parameters are for the cost structure. Nevertheless, they present the following information:

                                                         Figure 13
                                Chilean copper exports and unit production costs, 1997–2006
                      3.000                                                                                      90,0


                      2.000                                                                                      60,0
         kMT Copper

                                                                                                                        US$ c/lb.

                      1.000                                                                                      30,0


                         0                                                                                       -
                              1997   1998     1999   2000     2001        2002   2003    2004     2005   2006

                                            Copper Exports (by Cathodes)         Unit Production Cost

       Source: Based on COCHILCO (2007b) data

The calculation of unit production costs relates to net costs for an A grade cathode,
including also the sales of subproducts relating 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, eg. falling molybdenum prices in 2006,
also changes in depreciation, exchange rates, and input costs:

                                                         Table 12
                                       Overall cost structure, 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 the changes in the direct cost
structure, proportional costs are provided as percentages of the direct cost total (less
depreciation), with the remaining details provided as values in italics (US$ millions).

                                                 Table 13
                     Cost item profile (%, US$ millions), Minera Escondida, 1997–2006
       Cost Items                                            1997      2000      2003              2006
       Labour                                                  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 subproducts                                  -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
       Amortisation 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.

The table reveals that labour 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 this
fell year on year from 2003 to 2006. Since such a large share of total costs is subsumed
within the category ‘treatment and refining’, the remaining costs appear not to have
changed dramatically since the transformations produced by the Chinese demand, apart
from labour. The boom in the sector has generated increased labour demands for a larger
share of the profits, thus inflating labour costs in the overall structure. Over time this has
led to rising costs per unit of production (lbs copper sold) (Table 14).

                                                      Table 14
                                           Unit costs against sales value
          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, 2007
 a: US$ total lbs copper sold/total direct costs
 b: US$ total lbs copper sold/total direct costs+depreciation+interest

During the 1990s, the cost structure of the industry became more influenced by public
sector regulation. The democratic transition that saw the end of the Pinochet dictatorship
was important in changing labour 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 the detailing and
monitoring of the quality of air, soil, solid wastes, and water discharges; currently there is
new legislation tabled in Congress that also highlights 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), which all lead 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 neighbouring
countries is also high on the agenda, despite considerable reductions in energy per unit of
output 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 constructing 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 pieces 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 important in terms of the way in which this firm remains tightly
wedded to other state institutions and how its management has to bear these factors in
Besides this legislation, known as the Copper Laws, an equally important piece of
legislation was passed only in 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 tax of 5% of annual sales relating to 50,000 tonnes of refined
copper, with a variable tax rate for sales of between 12,000–50,000 tonnes. The ten leading
mining firms increased their taxation payments by 145% in 2006 relative to 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 profits generated by the sector, pressure mounted
on the government of President Lagos to use part of this for the public policy challenges in
the country. 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 diverse actors
within the country.
One of the specific pressures that was 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 the region, but that few benefits
accrued locally apart from the mine workers’ incomes, which were increasingly insecure

due to the subcontracting of many of the mine activities and the overall decline in salaried
mine workers’ numbers. Figure 15 puts into perspective the decreasing employment within
the sector. Despite the boom in production, overall numbers of workers have declined,
considerably increasing the productivity per worker. Nevertheless, these figures relating to
workers employed directly by the companies do not reflect the nature of the flexibilisation
of labour in the sector and the precarious nature of subcontracting in terms of job security.
Much of this insecurity fed into labour disputes during 2006 and 2007, affecting the
operations of the Minera Escondida and various CODELCO production sites.

                                             Figure 14
                            Regional distribution of copper production





                      9,4                  9,3                 7,8       9,7
                     I Region   II Region III Region IV Region V Region VI Region   R. M.

      Source: Based on COCHILCO (2007b) data

As with all productive sectors, there is also increased attention to the application of new
technologies that are likely to further reduce labour demand into 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 wastes in the production process, thus minimising both
input demands and unwanted biproducts; for example, in 2006 Minera Escondida (2007)
began operating a plant for biolixiviating sulphurous materials. The conclusions of a
COCHILCO study (2001a, p.10) of R&D in CODELCO, Escondida, Noranda and
Outokumpu established the following:
   Projecting mining into future decades requires the highlighting of 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

                     6.000                                                                                                                                                     60.000

                     5.000                                                                                                                                                     50.000
  kMT Fine Content

                                                                                                                                                                                         Yearly Average
                     4.000                                                                                                                                                     40.000

                     3.000                                                                                                                                                     30.000

                     2.000                                                                                                                                                     20.000

                     1.000                                                                                                                                                     10.000

                       -                                                                                                                                                       -
                                           Mining Production Copper                            Employment in the Mining Sector (Copper)

 Source: Based on COCHILCO (2007b) data

2. The textiles import value chain
The global textiles and garment chain has perhaps been studied more intensively than any
other due to the labour aspects of the chain, particularly the low labour costs and the
implications of gendered employment, piece rates and other issues. This sector has
characterised the internationalisation of industrial production during the last quarter of the
twentieth century, with increasing levels of production in countries with lower labour costs
and access to raw materials: natural (particularly cotton) and synthetic fibres. 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 wages system inherited from a command and control economy
rather than a market-based economy, the advantages generated in the production of textiles
and also the manufacture of garments are considerable. This is accompanied by access to
both types of raw material, since cotton production in the country is extensive, while
synthetic fibres are also being produced by the large chemicals sector in the context of an
industrial manufacturing boom over the last decade. This growth in total textile production
against traditional cotton yarn and fabric production can be seen in Table 15.

                                                                        Table 15
                                                     Chinese textiles and garment exports (US$ M)
                                                   1995      2000         2002      2003       2004                                                               2005             2006
Textiles and textile
                                                    35,878                49,379                57,849                73,346                88,767              107,661            138,102
Of which: Cotton
                                                         3,990                 3,716                 5,264                 6,842                 7,379                 8,398            9,740
yarn and cloth
Source: ADB (2007)

Much of the pressure generated on Chilean textiles is part of a globalised tendency whereby
global sourcing has facilitated access to globalised production for retailers and marketers,
while they themselves focus on design and other higher value functions (Gereffi and
Melemedovich, 2003). The phasing out of apparel quotas by the WTO in 2005 has also
increased the opportunities for garment exports. Unlike the copper value chain where there
is more trade in different phases of the processed product, increasingly textile and garment
manufactures are being produced within a framework of ‘full-package production’ whereby
the garment exporter produces an agreed design within a subcontracting arrangement for a
retailer. Under this arrangement, Chinese yarns and fibres are processed increasingly
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 particularly strong nationally, although it experienced considerable
development during the postwar period and was regarded as significant by the early 1970s
within the manufacturing sector. However, during the democratic period the exposure of
the sector to Asian imports in particular has had a marked effect and the 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 impacts generated by Chinese
imports in the current decade, noted the following:
   Over time, the manufacturing sector has had to deal with diverse crises, produced by
   endogenous and exogenous factors. For this reason, its influence in the economy has
   diminished with a 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 falls in prices, 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 considerably (see
Working Paper 6).

                                                 Table 16
                          Manufacturing export sectors and their participation (%)
                                   2001        2002         2003         2004         2005          2006
                Food and
    310                                40.3         41.3        41.6        40.1         39.7          38.0
    350         Chemicals              19.9         18.7        21.3        20.6         23.5          24.0
    330         Forestry               12.2         13.8        13.1        14.2         12.6          11.6
    340         Paper                  13.6         13.3        12.6        13.4         11.5          11.0
    370         Basic metals            3.1          3.2         3.4         4.2          4.6           7.4
    380                                 7.9          7.1         5.5          5.3            6.1         6.2
    320         Textiles                2.1          1.7         1.5          1.5            1.3         1.2
    360                                 0.6          0.6         0.7          0.6            0.5         0.5
    390         Others                  0.3          0.3         0.2          0.1            0.1         0.1
Source: Based on SOFOFA data

                                               Table 17
                        Manufacturing import sectors and their participation (%)
                                 2001        2002         2003         2004           2005           2006
   380                              48.7        49.2         48.0          47.2          50.3           48.0
   350       Chemicals              24.9        24.4         25.5          26.2          26.3           27.8
   370       Basic metals            3.8          3.7          3.9          4.7           4.3            4.6
   320       Textiles                7.8          7.7          7.2          7.2           6.2            6.6
             Food and
   310                               6.8          7.3          8.0          7.5              6.4         6.6
   340       Paper                   3.5          3.2          3.1          3.2              2.7         2.5
   360       Mineral products        1.6          1.7          1.7          1.5              1.4         1.4
   330       Forestry                1.2          1.3          1.2          1.3              1.1         1.3
   390       Others                  1.5          1.4          1.4          1.3              1.2         1.3
Source: Based on SOFOFA data

                                                    Table 18
                        Trade values in the textiles and garments industry, 2001-2006
  US$ ’000            2001          2002             2003           2004          2005             2006
 Export value          175,121       142,493          149,931        186,398       192,686           200,638
 Import value        1,061,070     1,006,908        1,029,030      1,290,086     1,490,731         1,811,677
Source: 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 the
 sector. Over time there has been a slow increase in the share of clothing items relative to
 textiles as value is added to the materials. However, of greatest significance in the case of
 China-Chile trade is the increase relating to these clothing items in the import profile, since
 the contribution of Chinese imports to this total is most significant. 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 in value added
products rather than relatively unprocessed materials.

                                                  Table 19
    Chilean imports of Chinese textiles and garments (leading five product categories by value, 2005
                         Total Chinese import value (US$) and share of import total)
HS2002                               2002           2003          2004           2005          2006
6110 Jerseys, pullovers,           44,751,184    45,133,868     70,557,481     98,610,396   115,142,809
cardigans, waistcoats and               73.8%         76.2%         85.6%          88.3%          88.9%
similar articles, knitted or
6204 Women's or girls' suits,      30,313,164    42,855,232     63,343,184     82,311,600   112,893,940
ensembles, jackets, blazers,            63.8%         71.6%         76.3%          79.5%          81.3%
dresses, skirts
6109 T-shirts, singlets and        28,748,348    34,390,488     58,586,906     68,301,081    93,886,158
other vests, knitted or                 55.4%         64.7%         72.7%          77.5%          78.0%
6203 Men's or boys' suits,         37,486,048    44,552,324     60,678,252     67,620,007    88,161,309
ensembles, jackets, blazers,            72.1%         80.7%         84.7%          83.5%          83.6%
6201 Men's or boys'                14,540,705    16,877,128     24,782,171     31,722,794    39,542,993
overcoats, car-coats, capes,            79.4%         80.1%         82.3%          84.8%          85.0%
cloaks, anoraks
Source: Based on UNComtrade

The Chinese dominance in these product lines, complementing its strength in computing
equipment, other electrical machinery and equipment and footwear, has risen steadily over
time to almost dominate the import composition. The countries that compete with China,
albeit with considerably smaller market shares, are clustered in two groups, from Asia –
Thailand, Bangladesh and Vietnam – and 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, knitted or crocheted) and 62 (Articles of apparel and clothing accessories, not
knitted or crocheted) also reveal a strong Chinese presence, as apparent in the following
table showing shares within the 2-digit groups

                                                 Table 20
                 Chinese share (%) of Chilean import totals (US$) of textiles and garments
          HS1996                1998           2000            2002              2004          2006
61 Articles of apparel
                             173,401,504     212,054,560     208,532,944       278,597,673   428,359,462
and clothing accessories,
                                   37.8%          48.6%            59.1%            72.6%         79.5%
knitted or crocheted
62 Articles of apparel
                             240,842,272     235,503,344     230,760,736       338,111,371   503,766,008
and clothing accessories,
                                   54.4%          62.4%            66.0%            76.0%         79.5%
not knitted or crocheted
63 Other made up textile
articles; sets; worn          75,468,152      67,859,120      65,739,172        77,914,848   127,192,796
clothing, worn textile             14.9%          18.2%            25.9%            32.3%         37.1%
articles; rags
Source: Based on UN Comtrade

The level of displacement of other competitor countries has been high 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
principal 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, of articles of apparel and clothing accessories (61 and 62), in the
Chilean import profile the countries that have lost ground to China are Italy, Spain and the
USA. Over the period 2001–2006, not only their shares diminished but also their total
values (61) which sank to a quarter of a fifth as not only China, but also regional (Peru,
Brazil, Argentina and Colombia) imports became more competitive. In the case of
classification 62, the trend is similar, 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 principal fields of Chinese import competition are those of manufactured
garments, it is the case that Chinese and more broadly, Asian production of synthetic and
natural fibres has reduced the cost per garment also. However, there is no evidence to
suggest that Chilean manufacturers have benefited from this low cost input given that the
wages differential is so significant that changes in physical input prices are unable to
counter this situation. It is also the case that the cheaper fibres are also available to
producers in China without the additional transport and commercial overheads, therefore it
is unlikely that any benefits can accrue from this. Table 21 reveals that the only products in
which Chinese imports have gained ground are manmade filaments; 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 textiles and garments market, it
was regarded as one of the most sensitive sectors during the negotiations of 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 fibre 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 this same category are tyres, cement, certain chemicals, glass, doors, windows,
washing machines and wooden furniture. One of the few products to be excluded totally
from the agreement was cotton men’s shirts, alongside flour, wheat, sugar and 148 other
specific products. As part of this process of providing certain products with a decade of
further protection, an agreement was drawn up between the National Customs Service and
the Chilean Textile Institute S.A., the industrial association, to ensure an efficient
inspection system to ensure correct classification, point of origin, correct labelling and
similar intellectual property considerations (DIRECON, 2006).

                                                   Table 21
                         Chilean import shares of textiles and garments (in US$)
                        2001           2002            2003            2004      2005         2006
61 Articles of apparel and clothing accessories, knitted or crocheted
Peru                          5.7            5.6              4.8           3.8       3.4            3.6
Argentina                     1.0            2.1              3.4           2.8       2.6            2.5
Brazil                        3.3            4.0              4.8           4.8       3.8            2.4
Colombia                      3.2            2.9              1.6           1.1       1.1            0.9
India                         2.5            2.4              1.7           1.4       1.0            0.9
USA                           1.4            1.3              1.4           1.2       1.0            0.9
Italy                         5.0            3.5              1.8           1.4       1.0            0.7
Spain                         5.7            5.9              3.0           1.4       0.9            0.5
62 Articles of apparel and clothing accessories, not knitted or crocheted
Argentina                     0.8            1.4              1.6           1.7       2.0            1.8
India                         4.3            3.9              3.0           2.4       2.0            1.8
Brazil                        1.4            1.8              1.8           2.7       2.2            1.6
Colombia                      1.9            2.1              1.4           1.6       1.1            1.2
USA                           2.2            2.1              1.5           1.2       1.0            1.1
Italy                         2.5            2.4              1.9           1.3       1.3            1.0
Spain                         2.5            1.9              2.0           2.0       1.3            1.0
Peru                          0.7            0.5              0.5           0.5       0.5            0.4
       Source: Based on UN Comtrade

                                             Table 22
              Chinese share (%) of Chilean import totals (US$) of textile raw materials
         HS1996               1998            2000            2002            2004            2006
54 Manmade filaments         73,639,976      63,667,904     48,921,344      68,273,285      85,708,241
                                  2.5%            7.4%           17.3%          27.2%           29.6%
55 Manmade staple fibres    119,631,448     111,487,528     86,808,048      96,391,274      96,285,638
                                 11.4%           18.8%           15.4%          16.0%           18.8%
56 Wadding, felt,            45,790,192      59,082,764     41,760,864      66,105,738      90,086,180
nonwovens, yarns, twine,          1.6%            1.2%            1.2%           4.3%            7.6%
cordage, etc.
Source: Based on UN Comtrade

The outcome of the decision to maintain a ten year protection on specific textile and
garment imports means that China benefits from most favoured nation status, as do all
Chile’s commercial partners. A flat tariff of 6% on imports was established in 2003.
However, preferential tariff agreements exist with several countries, including Canada,
Costa Rica, El Salvador, Mexico, EU, the USA and Korea. There is also a tariff preference
associated with Chile’s relationship with the Andean Community and Mercosur (Gobierno
de Chile, 2004). Prior to the Chile-China agreement, these other countries with preferential
treatment would have been expected to 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 for 98% of tariff lines until it flattened
out at between 0 and 6% by 2003. Since the trend indicates that the principal beneficiaries
of trade in recent years, apart from China, have been 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 textiles and garments sector means that it is
impossible to evaluate the expected trade gains that were estimated in a 2004 feasibility
study of trade impacts 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 impacts (2006).

2.2 Impacts 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 association INTECH (Instituto Textil de Chile A.G.). This
association represents producers of yarns, fabrics, clothing and furnishings and was
established in 1961 at the time of the import substitution programme. Its principal role is to
communicate the sectors’ needs to diverse government entities such as the ministries and
public services, in particular 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 intense competition. These problems were summarised in a
presentation by INTECH’s president Juan Garcia to the Senate trade committee (INTECH,
2007a) and during an interview with him.2
During the ten year period 1995–2005, Chinese textile imports rose from US$125 M to
US$ 675 M, an increase of 539% (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’. Of particular concern is the fact that 90.4%
of Chinese textile imports is clothing, which impacts on the whole production chain since
demand for clothing manufactures and for cloth are reduced. The principal argument in the
face of this large increase in a small timespan 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 yarns of 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 1995–98 period to 75 members currently. However, the greatest impacts have been felt
in plant closures and layoffs. Garcia mentions the closure of dozens of textile plants
producing yarns and fabrics and hundreds of clothing workshops, which have 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 has continued, with a further estimated loss of 7,000–
7,500 workers between 2005–06. Falling production is reflected in the following table,
revealing the declining performance of the sector relative to all manufacturing.

    Juan Garcia, president of INTECH, pers. comm., 16 August 2007.

                                                   Table 23
                               Index of textile production in Chile, 2002-2007
           Industrial production              2002       2003      2004       2005   2006    2007p
 171 Spinning, weaving and finishing           100       99.7       92.8      83.0   70.1     69.5
 of textile products
 173 Manufacture of cloth and knitted          100      101.1       98.3      83.1   88.3    84.4
 181 Manufacture of clothing, excl.            100      100.1      102.5      89.5   81.7    68.9
 All manufacturing                             100      105.2      114.4     120.7   124.6   129.4
   Source: INE (2008)

The changing composition of firms operating in the sector can be seen in the rankings of
importers and exporters 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 facilities in Brazil (five plants), Argentina (two) and Chile (one).
It is the principal national exporter in all three countries. As a producer of denim for
leisurewear and uniforms principally and the leading consumer of cotton in southern Latin
America, it is an example of a firm that has expanded alongside the Mercosur agreement;
the company was created in 1994 as a merger between two older Sao Paulo textiles 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 textiles or semi-finished goods are
imported for semi-finishing or finishing in the Chile. Textiles Pollak SA, in contrast, 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 across the range of products and
exports to a wide range of markets, in particular in the Americas and Europe (Textiles
Pollak, 2007).
Bellavista Oveja Tomé SA dates back to 1865 and specialises in woollen yarns and
garments. Since it is in the field of synthetics that Chinese products are strongest, China’s
impact is considerably less on this firm than on the previous two; however in December
2007 it announced its closure due to consistent losses since 2002, when it was taken over
by a new management. The principal explanations for the ongoing losses are the exchange
rate and state subsidies for woollens exporters in Uruguay, India and China, as well as
competition in high quality products with Italian producers (Bellavista Oveja Tomé SA,
2007; Ministerio de Economia, 2007). This is a case of competition in third markets rather
than in the domestic market, but clearly Chinese production and trade has also played a role
in this localised crisis. Standard Wool Chile SA in Punta Arenas is a similar case to the
former in that it is a firm that only works with woollen products; however, it is British-
owned rather than Chilean, and is linked to the Standard Wool UK firm which is
headquartered in Bradford. Since it is the principal supply source for the Bradford
operation it may have greater security compared with firms that export their own products

from Chile, though much depends on the costs of Chilean production vis-a-vis other areas
of woollen production.
Coresa SA is a quite different company since it is a packaging firm which uses synthetic
fibres for the production of polypropylene and polyethylene packaging bags and nets for
use in a wide range of sectors. Established in 1966, it has expanded into Argentina and
Peru where is has production plants, complementing the two plants in Chile (Coresa SA,
The principal importers of textiles and garments are the main department store and largest
supermarket chains. These are then followed by firms that specialise in garment retail. The
principal retail chains in the country are dominated by large firms organised as department
stores; these are Ripley, Falabella, Almacenes Paris, Johnsons and La Polar (Comercial
Siglo XXI). This concentration of major retailers is similar to that of a 2003 study which
revealed that in the USA the largest 29 retailers dominated 98% of all apparel sales, with
Kmart and Wal-Mart holding a quarter of volume sales between the two of them (Gereffi
and 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 association between the largest retail operations in the country and the import of
textiles and garments. Nevertheless, their share – 27.6% – in total imports is only half that
of the top five exporting firms. With imports less concentrated than exports, it is evident
that many more organisations 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 principal
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 government’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 that are generated by these imports are counterproductive
in many ways since these same consumers – at least the 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 tariff of 16%
was imposed on Chinese imports for a year and then 8% for the following six months, the
problem has remained, therefore the benefits to national industry were a respite rather than
a resolution.

                                               Table 24
                        Ranking of textile and garment exporters, 2006 (value)
       Rank                       Firm                      US$ FOB              % total
         1      Santista Textil Chile SA                        28,798,522        16.1
         2      Textiles Pollak SA                              23,849,105        13.3
         3      Bellavista Oveja Tome SA                        14,273,991         8.0
         4      Coresa SA                                       13,686,312         7.6
         5      Standard Wool Chile SA                            8,221,451        4.6
         6      Cia. De Tejidos Primatex SA                       6,459,694        3.6
         7      Tejidos Caffarena SA                              4,691,956        2.6
         8      Grupo Garib                                       4,452,153        2.5
         9      Crossville Fabric Chile SA                        4,123,533        2.3
        10      Polytex SA                                        3,467,801        1.9
        11      Lanera Chilena SA                                 3,310,520        1.8
        12      Hilanderia Maisa SA                               3,062,222        1.7
        13      Corp. Manufacturera San Juan SA                   3,056,619        1.7
        14      Mavesa Ltda..                                     3,022,871        1.7
        15      CAIMI SAC                                         2,442,207        1.4
        16      Zalaquett SA                                      2,314,960        1.3
        17      Soc. Ganadera José Marín Vicuña                   1,882,641        1.1
        18      Fabrica de Confecciones Trial SA                  1,666,576        0.9
        19      Hirsch y Gassmann Ltda.                           1,460,446        0.8
        20      Comercial Regina Ltda.                            1,452,170        0.8
     Others                                                     43,361,190        24.2
     TOTAL                                                     179,056,943        100
    Source: INTECH (2007c)

The point made against this government unwillingness to defend national industries is that
elsewhere in the region the pressures 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 cases of the USA and
Europe, simple quantitative controls on the scale of imports are applied. This range of
defensive instruments has become increasingly important following the ending of the
Textiles and Clothing Agreement (replacing 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).

                                                  Table 25
                          Ranking of textile and garment importers, 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)

                                                  Figure 16
                             Composition of textile exports, 2001-2006 (by value)


              200.000                                                  324. Calzados

                                                                       323. Curtiembres y
                                                                       322. Confección prendas de
                                                                       321. Textiles

                         2001 2002 2003 2004 2005 2006

            Source: Based on SOFOFA data

                                             Figure 17
                       Composition of textile imports, 2001–2006 (by value)

                                                                 324. Calzados
                                                                 323. Curtiembres y
                                                                 322. Confección prendas de
            400.000                                              321. Textiles
                      2001 2002 2003 2004 2005 2006

         Source: Based on SOFOFA) data

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 the association was that
the advantages of a trade agreement would be that trade would be more regulated than it
had been to date, with access to the Administrative Commission of the Agreement for
example to deal 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 impacts that would be enhanced by the agreement if considerable safeguards
were not put into place. Consequently, 80 clothing imports firms were penalised 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
behaviour of the firms, and that only harsher sanctions for repeat offences would lead to
some change along these lines: ‘To this can be added – using a minimum of legal logic –
that those firms which have been sanctioned 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 the underdeclaring 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 impacts on the sector, less tariffs, less sales tax. The smuggling
of goods is particularly complex in the case of free trade areas, for example 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 the lost public revenues due to the failure to pay trade tariffs and
sales taxes are included. Many illegal garments also fail to comply with labelling
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 in incidences.
Using the argument that the sector remains relatively labour-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 skeleton
of the sector compared with the mid-1990s. The changes in the sector that shape the export
and import breakdowns noted above can be seen in the following figures released by the
National Statistics Institute (Table 25). What they reveal are the pressures exerted on the
national industry in the face of the very low cost structure derived in the Chinese imports,
principally due to low regulatory and labour costs. The data bear 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
against the mid-1990s figures. A 1997 firm survey detailed the existence of 6.687 textile
and garments 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 impacts on employment have been geographically
concentrated, and have hit SMEs, which are likely to be family-run businesses with small
capital bases, in particular (INTECH, 2001). There is no evidence of Chinese FDI 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 numbers of workers employed in the sector reveals the decrease outlined by Garcia;
however the total number varies considerably in the INE calculation compared with that of
the Association and the ILO. This is due to INE recording firms and their employees
according to a methodology that does not capture the large number of smaller firms
involved in the making of clothing, focusing principally on the yarns and fabrics producers.
The table reveals the cost structure and how it has changed over the period 1996–2004.
Taking the total production costs as including labour costs, it can be seen that wages
(21.5% 1996, 18.3% 2004) remain the principal cost involved beyond the basic raw
materials costs (56.9% 1996, 51.7% 2004).3 However, the largest increase is that relating
to indirect costs (10.0% 1996, 18.3% 2004). Since it is in the area of indirect costs,
taxation and the pricing of energy (which is less significant in this sector than in others,
reaching on average less than 3% of total production costs) that the public sector can have a
more influential role, this rise suggests that total administration, depreciation,
subcontracting, etc. costs have risen, or at least are substantially higher than in China. It is

 This labour factor in production can be noted in the list of countries that have a large proportion of textile
and clothing exports in their export profile. The top ten listed countries in this regard 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).

 in the price of the raw material itself that the greatest differences and impacts are generated
 however, as outlined by Garcia in the pricing below US$5/kg. Although the contribution of
 the raw material to overall costs has dropped to a little over 50%, the ability to access cheap
 raw materials compared with the Chinese experience is clearly more difficult. This is due
 to the whole production chain in China, with low cost natural and synthetic fibres
 production through the yarn and fabric processes into 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 labour
 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
 marked contrast in total production costs relative to Chile.

                                                   Table 26
                 Structure and costs in the Chilean textile and garment industry, 1996–2004
                                 1996             2001            2002            2003          2004
 No. of establishments                 737             471              553            531           535
 Earnings (’000 pesos)             49,118           28,965           28,479         28,682        29,076
 Raw materials and other
                              351,991,876      102,594,557      105,293,991    112,234,456    323,845,691
 inputs (’000 pesos)
 Total energy costs (’000
                                5,980,216        6,371,948        7,073,598      7,698,536      7,399,525
 Electric energy
 consumption (’000             10,913,187        8,740,950        9,735,607     10,362,429     10,689,949
 Indirect costs (’000
                               61,619,721       51,542,381       79,544,924    101,719,359    114,560,548
 Taxation (’000 pesos)         47,100,042       31,248,259       38,886,878     37,682,878     52,584,771
 Total costs of good
 received and contracted      484,847,500      414,271,207      453,249,242    521,463,190    511,415,112
 Total income from sales
                              846,175,906      671,511,733      474,971,098    803,956,533    827,146,520
 and work carried out
 Gross production value       874,266,046      679,343,710      755,069,543    811,754,563    843,137,024
 Net value                    393,096,804      265,590,108      309,087,702    290,157,742    336,270,522
Source: Based on INE data

 Specific data of wage levels in China are difficult to establish given the role of the state in
 the economy and a range of hidden subsidies and support mechanisms, as well as the range
 of different types of production units. There is a related question of transparency 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 data reveal that when converted into US dollars (December
 2007) the wages gap is more of a chasm, as demonstrated in the following labour costs
 which are principally wages-based (see Table 26).
 Although difficult to compare, the trend indicates that the difference between Chilean and
 Chinese wages is of a factor of four. This is precisely the difference noted by Banister
 (2005) in comparing China with Mexico and Brazil, while the average manufacturing
 hourly wage in China is 3% of that earned by similar workers in the USA and Western

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,
mentioned by Garcia), due to the macroeconomic advantages generated by Chinese copper
demand and the desire to maintain a strong trading relationship, as witnessed in the
CODELCO-MinMetals joint venture for example (see Working Paper 6). In this sense,
there is little interest in protecting a domestic manufacturing sector, despite its labour-
intensive characteristics and the risks that are generated by its ongoing restructuring and
closures. As such, the rationalisation of the sector and further job losses are likely.
Although the distribution of textiles employment is more even than, for example, copper
mining activities, it is most likely to affect small and medium-sized firms which operate
workshops for the confection of garments, which account for a larger share of textiles
employment than the larger firms represented by INTECH, for example. An indicator of
these reductions is the planned closure of the textile engineering degree programme 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.

                                              Table 27
                Earnings in textile and garment manufacturing (US$, December 2007)
                                    1998      2001      2002        2004      2005     2006
  Manufacturing in urban units            -         -     1.533          -         -          -
  Manufacturing in
  manufacturing units (TVEs*)             -         -                    -         -          -
  (large units)
  321 Manufacturing textiles        1.058         796          -         -         -        -
  322 Manufacturing garments              -     2.388          -         -         -        -
  Thread and yarn spinner                 -         -          -     1.145     1.130    1.370
  Cloth weaver
                                          -         -          -     1.274     1.562    1.621
  Garment cutter                          -         -          -     1.493     1.558    1.844
  Sewing machine operator                 -         -          -     1.291     1.495    1.646
  Chemical fibres
                                          -         -     1.568          -         -          -
  Garments and other fibre
                                          -         -     1.246          -         -          -
  Manufacturing employment
                                      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 the USA markets account for approximately 50%

of all Chilean textile exports, therefore these will increasingly be the focus for new product
development, such as for traditional woollen goods (e.g. alpaca) where China does not have
advantages (being particularly strong in synthetic fibres). 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 textiles and garments markets
and low labour costs in so many countries, not only China (see INTECH, 2001). During
the Mexican and Argentinean financial crises during this same period of transformation
(1996–2006), Chilean exports lost ground due to exchange rates favouring 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 that identified by INTECH in 2001 (p.9),
however the velocity of change has been greater than that experienced to that point.
Nevertheless, the recommendations of their evaluation of the sector – and 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: future it is inevitable that the sector will experience a continuous period of industrial
   adjustment. In the short term distortions should be corrected: nevertheless, the adjustment
   trend allows us to forecast that this will be 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 globalised economy. To successfully confront this sectoral readjustment
   process, short-term problems have to be resolved, such as those referring to market
   distortions and unfair competition practices, to develop medium-term and long-term practices
   for improvements in competitiveness.

3. Reflections on the sectoral impacts of China-Chile trade
The strength of the Chinese market for Chilean copper exports has led to the strongest
period of economic growth in Chile during democracy. The signing of the bilateral
agreement in 2006 bears witness to this closer trading relationship and its importance for
Chilean exports (for example the rise in non-traditional exports in 2005–2006, despite the
relatively low share of these relative to copper exports), and for components in Chinese
production, principally 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 globalisation through liberalisation.
The positive appreciation of liberalisation 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, specifically 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, provoking large scale investments in the sector planned over the
next five years of 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, for exports initially, 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
corrosion. As a product derived from the copper production process as sulphide 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 concentrates 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,
In many ways the current shift towards China and away from the US, given the weak dollar
and the difficulties that this generates for export sectors, is similar to previous trends in
Chilean economic history, for example the dependency on Britain with the nitrate trade,
followed by the dependency on the US in relation to the copper trade. This new
dependency is different in that Chinese firms are not producing 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 organised 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 copper reserves and how
these are managed.
The experience of Chile’s textiles sector, in terms of the explosion of Chinese imports
following in the wake of the negative impacts generated by the Asian contagion on
neighbouring economies that were important markets, has been dramatic. The closure of
many plants and workshops has led to a rapid decline in employment that has not been
absorbed by the firms now distributing the imports that have replaced national production.
One of the few aspects for comparison in terms of the experiences of the copper sector and
of the textiles sector this decade is the gradual decline of fixed labour requirements, either

for increased technological intensity for productivity reasons and subcontracting (in
copper), or for declining output principally in the case of textiles.
Whereas the production costs can be assessed in the Chilean case, uncovering the real
direct and indirect costs of production in an economy that is still in the early phases of
transition towards capitalism is unlikely to reveal comparative data that stand up to
analysis. Nevertheless, it is the case that Chinese textile production hovers at dumping
levels, given the state support for diverse 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 postwar decades,
which were weakened by neoliberalisation from the mid-1970s, have now reached a critical
stage. The contribution of copper exports and other mineral derivatives looks likely to
increase 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 to
US$15.242 M. The top ten export products currently account for 75% of all export value
(ProChile, 2007).4
Textiles and footwear are unlikely to figure as manufacturing sectors of any importance,
being largely restricted to niche markets for woollen products from the the Magallanes
region in the south where sheep production remains significant and from the north where
alpaca fibres also enable Chilean production to differentiate itself from the mainly synthetic
fibres used in Chinese sweaters and sporting garments in particular. The wages that are
provided in each sector (mining versus manufacturing industry) also point to this favoured
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) with a machine operator
receiving 532,140 pesos/US$1,041; in the industrial manufacturing sector the wages fall to
238,397 pesos/US$466 and 169,807 pesos/US$332 respectively. This bias is a historical
one 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 to strike action.
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
The neoliberal model driven by liberalisation is likely to lead many countries back into
their comparative advantages based on renewable and non-renewable resource bases or on
labour supply. In the case of Chile, increased dependence on copper brings back the
dilemma of terms of trade (international commodity prices against manufactured imports
prices), raised by Raúl Prebisch in the 1940s that led to the structuralist development
programmes of the following three decades in Latin America.5 The difference with trade
with China at the turn of the twenty-first century as opposed to with Europe and North

  The products are as follows: copper, molybdenum concentrates, salmon, cellulose, wines, processed wood
products, grapes, methanol, plastics, ferromolybdenum.
  The export boom in copper led to an increase of 82% in export value 2005 to 2006, participating in 58.1% of
all export value (ProChile, 2007).

America during the twentieth century is that many more products are based on high
volumes at low prices, particularly oriented towards consumer products. Whereas the
import substituting industrialisation model exhausted itself in trying to shift into higher
technology production sectors, it is clear that the democratic Concertacion administrations
believe that the shift towards the knowledge-based economy will come through the royalty
on copper, and its use through the initiatives favoured 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 the non-traditional sectors that have flourished since the
1980s such as biotechnology and mining technologies. However, these sectors are unlikely
to be labour-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 unemployment and the need for highly effective redistribution
policies to overcome the poor income, services and opportunities distribution currently
experienced in Chile.

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