Challenges Facing the Chilean Copper Industry in the Light of Increased Trade and FDI with China. A possible Future Sino-Chilean Dependency

Abstract

This thesis elaborates on the possible economic challenges that confronting the Chilean copper mining industry as a result of increased bilateral trade and FDI flow with China. It is conducted as a literature review, based on a qualitative and quantitative analysis and a descriptive approach. Chile is a case in point as the country holds the largest copper reserves and production in the world and is today encouraging Sino-Chilean FDI flows to a great extent. China on the other hand, is the worlds’ largest consumer of copper holding domestic industrial capacity of refining the copper ore, an industry which Chile is yet to develop. The study analyses the indirect challenges to the Chilean economy through volatile world market copper prices, increased competition in export markets for manufactured goods, labor issues, and the lack of value added activities in the copper industry in Chile. Although Chinese FDI flows into Chile have increased in importance in recent years, trade is still by far the key driver in the Sino-Chilean bilateral economic relation. Nevertheless, as bilateral trade rapidly grows it raises concerns because Chilean exports to China are mainly concentrated in primary products such as copper, while imports from China mostly consists of manufactured goods. This asymmetrical relation is complex because even though the Chilean economy has benefited from the high commodity prices on the short term, more severe consequences may surface in future regarding the loss of competitiveness in the Chilean manufacturing industries including limited high value added activities in the copper industry. The analysis concludes that the bilateral Sino-Chilean economic relation is most likely to continue to increase over time. There are signs suggesting that actual Chinese FDI flows to Chile may be higher than indicated by official statistics due to the channeling of investment funds through so called tax havens. The main direct and indirect economic impacts are loss of competitiveness in export markets hampering further development of the manufacturing industries, obstruction of the development of value added activities in the copper industry and industry as a whole, and loss of employment to foreign workers due to lack of a domestic skilled labor force.