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Mar 17, 2017 | 14:41 GMT

Is Chile's Economic Heyday Behind It?

Stratfor's graphic of the day features a standout geopolitical map, chart, image or data visualization reflecting global and regional trends and events.
(Stratfor)
Chilean copper production and prices

Chile, like neighboring Argentina, is isolated from the world's major markets because of its geography. The country is lodged between the Andes Mountains to its east and the vast South Pacific Ocean to its west. And for much of its political and economic development, its regional trading partners were few and far between. The Argentine and Brazilian economies, for instance, did not industrialize until the last several decades of the 20th century. Thanks to its wealth of mineral deposits, however, Chile became an important source of raw materials — particularly copper — for construction and manufacturing sectors in the United States, Europe and, more recently, Asia. These trade partnerships form the backbone of Chile's economy to this day; demand from China, Europe and the United States combined currently accounts for around 58 percent of the country's exports. Nearly 45 percent of Chile's total exports relate to copper mining, the government's main source of export revenues.

This dependence on overseas commodity markets has put Chile at the mercy of global economic trends. The country's economy grew rapidly in the mid-2000s as China's demand for copper surged, taking prices for the commodity with it. Between 2003 and 2013, in fact, Chile's year-on-year economic growth dipped below 3.5 percent only during the global financial crisis of 2008-09. But now that China's own economic growth is slowing — and its voracious appetite for Chilean copper is decreasing — Chile's economy has stalled. The country's economic growth fell to 1.5 percent in 2016. Although demand in the United States and the European Union will stay steady, it is unlikely to rise dramatically. Consequently, Chile's economic heyday is probably now behind it.

Barring a turnaround in copper prices, the country's options for reviving its economy are decidedly limited. The region lacks markets where Chile can sell its copper to offset falling demand for the commodity elsewhere. The country could try to boost its exports of goods such as fruits or fish to nearby markets, but these lower-value items won't even begin to compensate for the lost copper-related export revenues. Many of Chile's neighboring markets, moreover, are too small — or their tariff barriers too high — to fuel economic growth in the country. And though Chile has significant deposits of lithium that could provide an alternative source of income, the metal is unlikely to rival copper's prominence in the economy any time soon.

Chile will eventually weather the slump in copper prices, but until then, its economy will languish. In the meantime, the country's voters will cast their ballots in hopes that the next administration will find a way to usher in a new period of rapid growth. Still, it is clear that the obstacles facing Chile's economy will remain in place far beyond the next four-year presidential term.

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