Chile and Canada updated their 16-year-old free-trade accord last month, agreeing to changes that will provide financial services companies in the two countries with improved access to each other's markets.
Q: How important is this change for Canadian and Chilean financial services companies? Where trade in financial services has been liberalized previously in Latin America and the Caribbean, what have been the effects on the domestic financial system and foreign companies? How well do current free-trade accords in the region address the needs of financial services companies?
A: "The Canada-Chile Free Trade Agreement (CCFTA) entered into force on July 5, 1997. Sixteen years later, the CCFTA, in general terms, has delivered on its promises by allowing both countries to expand their bilateral trade significantly. Nevertheless, the erosion of Canadian preferences in Chile occurred because Chile implemented new free-trade agreements with third parties. Especially the FTAs with the European Union in 2003, with the United States and Korea in 2004, and with China in 2006 caused Canada's preferential advantages to wane. For this reason, the CCFTA had to evolve and include a chapter on financial services in order to open new markets for exporters in both countries. A liberalization of financial services within the CCFTA was a critical step to further enhance Canada's trade and direct investment in Chile.
Also, historically, the inclusion of financial services in FTAs has been more common in North-South than South-South agreements. This is not surprising. The inclusion of financial services in most North-South agreements likely reflects the fact that the majority of foreign financial institutions in less-developed countries are headquartered in developed countries, as well as the relative bargaining powers between the negotiating counterparts. Only two Latin American countries have tended to include financial services chapters in South-South agreements—Mexico and Panama.
The financial liberalization within the CCFTA will likely improve resource allocations by offering greater opportunities for sharing and diversifying risks. It is a relatively swift and painless way of boosting investments through increased capital inflows to both countries. However, financial liberalization may also be seen as expanding these opportunities by allowing funds to be taken more freely across borders where they can be concealed more easily if necessary. With fewer controls on financial transactions, it is much easier to launder money. For this reason, countries must compliment financial liberalization with appropriate policies designed to improve the quality of governance in order to avoid more corruption and lower growth."