Chile replaced a highly complex and restrictive foreign trade regime by a flat 10% nominal tariff rate in a span of 5 years. In the Chilean case, the credibility of the trade reform is related more to the overall macroeconomic and policy reform itself. A trade reform generates a reallocation of resources according to comparative advantage: In the chilean case, at the intersectorial level, there was a substitution within tradables where exports of natural resources (mining, forestry, fish, fruit) displaced industry. At the intrasectorial level, there was a restructuring within industry where there was an expansion of manufacturing related to processing of (Chilean) natural resources while there was a contraction of manufacturing competing with imports. It is important to be aware of some problems that could happen during the implementation of a trade reform. From the Chilean experience the following may be mentioned (1): Tariff reductions could generate a drop in fiscal revenues close to 1% of GDP. (2) An unilateral trade liberalization could generate an important commercial disequilibrium. Consumer (non-food) imports are highly elastic in the Chilean case income and price elasticies close to 2 and-2 have been observed. External resources required to finance Chilean import liberalization reform required 5% of GDP per year during 5 consecutive years. (3) Keeping the “right” level of the real exchange rate is the key variable to ensure the “success” of a trade reform. To achieve this objective is not easy in an inflationary environment. (4) Chilean trade reform generated a reduction of industrial employment close to 10%. (5) Export expansion is a very slow process. Some specific measures taken by the State during the 1969s in those sectors where Chile had a comparative advantage e.g. natural resources were crucial to the increase of exports in the 1970s (under a neutral incentive system).
Patrício Meller (Tue,) studied this question.