EVENT: Argentina accepted a lower-than-expected increase in a tax on natural gas exports to Chile at the Mercosur summit on July 20-21.
SIGNIFICANCE: Although the decision has helped allay tensions between the two countries, the dispute nevertheless has strengthened the view in Chile that Argentina is an unreliable trading partner, provoking increased scepticism about the prospects for regional integration and the usefulness of Chile's associate membership of the Mercosur customs union.
ANALYSIS: Tension started to mount between Argentina and Chile in late June when Argentina, after agreeing to pay a higher price for the natural gas it imports from Bolivia, announced that it would introduce a compensating increase in an export tax on its gas sales to Chile. The Argentine government justified the proposed increase on the grounds that, without imports from Bolivia, Argentina's own production would be insufficient to supply the domestic market, preventing it from fulfilling its supply contracts with Chile. In a bid to alleviate an energy shortage, Argentina, in fact, has restricted gas sales to Chile since mid-2004 and placed a freeze on new export licences.
The tension increased further in mid-July when Argentina also announced that service stations close to its borders would be obliged to charge higher petrol prices to vehicles with a foreign number plate. Although this measure, designed to stem traffic in cheap Argentine petrol, did not specifically target Chile (with which traffic is small due to the barrier of the Andes Mountains), it was seen as another sign of ill-will on the part of the Argentine authorities, particularly since Santiago was not informed of the measure before it appeared in the press.
Bachelet blow. This put the government of President Michelle Bachelet in a difficult situation, with little room for manoeuvre while being criticised by the political opposition and public opinion for not taking a harder line with Argentina:
* Until 2008, when a liquid natural gas (LNG) plant is due to come on stream, allowing Chile to import gas from producer countries around the world, it will remain exclusively dependent on supply from Argentina. Although power generators and industries can switch to substitute -- if more expensive -- oil-based fuels, residential consumers have no alternative (except the propane that distributors can supply in an emergency). As a result, Santiago's paramount concern, rather than taking a hard line on price, is to see that Argentina maintains the supply needed for these consumers (which represent around a tenth of total supply contracts).
* Reflecting widespread irritation with Argentina, the political opposition pressed the government to file a complaint to international organisations, such as the WTO or the International Centre for Settlement of Investment Disputes (ICSID). However, as the opposition is aware, this would serve little purpose because, even if a favourable ruling were obtained, the process would be lengthy. Moreover, the government fears that the filing of a complaint would be used by Argentina as an excuse to cut off all gas supply. Suggestions of trade sanctions were also dismissed for this reason.
* Argentine offer. However, during the Thirtieth Mercosur Summit, held in Cordoba, Argentina on July 20 and 21, President Nestor Kirchner met Bachelet and, reportedly acting against the advice of his Planning Minister Julio De Vido, made an offer that, in Chile, was considered conciliatory:
The price of Argentine gas exports to Chile (measured at the border between the two countries) will rise from 2.4-2.8 dollars per million BTU to just under 4.0 dollars per million BTU (pending the publication of the official decree by the Argentine government). Although a substantial increase, this compares favourably with the 5 dollars anticipated in Chile. Moreover, Kirchner is reported to have provided verbal assurances that residential supply will be maintained. However, there is concern in Chile that the tax may be raised again at the end of the year when the price paid by Argentina for Bolivian gas will probably increase further.
Buenos Aires has also undertaken to review its plans to charge higher petrol prices to foreign vehicles. The measure will apparently be applied selectively depending on the level of sales to foreign vehicles in different areas. In any case, a number of Argentine provinces, including Mendoza where tourism from Chile is an important source of income, had indicated they would either not implement the measure or compensate visitors for the additional expense.
Bilateral relations. Although Chilean companies are important investors in Argentina, particularly in the retail sector, Argentina is not a very significant export market for Chile. In 2005, sales reached 626 million dollars, out of total exports of 40 billion dollars, and were, for example, a tenth of exports to the United States and a third of those Brazil. However, Argentina is Chile's second most important import supplier, just behind the United States, with purchases of 4.4 billion dollars in 2005 (representing some 10% of Argentina's total exports). Of this amount, close to 2.4 billion dollars corresponded to oil, petroleum gas and natural gas (which reached 520 million dollars).
Although trade disputes occasionally flare up between the two countries and Argentina, for example, claims that Chile is in violation of a WTO ruling against its price band on wheat imports, bilateral relations are generally sound. Border disputes have largely been resolved and, in recent years, military co-operation has increased. However, the prevailing view in Chile is that its interests are currently being sacrificed to Kirchner's bid to keep domestic energy prices low and maintain his popularity in the run-up to next year's presidential election. This is resented and there is expectation that, once the LNG plant comes on stream, the government will take a stronger stand in any disputes with Argentina.
Regional trade policy. Although the gas-price dispute has been smoothed over, at least temporarily, it is one of several factors that point towards a possible shift in Chile's regional trade alliances:
* Dissatisfaction with Mercosur. In Chile, there is a widespread view that associate membership of Mercosur has brought few benefits and this disenchantment is likely to increase now that Venezuela has joined the customs union, reflecting wariness of the populism and regional influence of President Hugo Chavez.
* Scepticism about regional integration. Although the Bachelet government maintains that its aim is regional integration, starting with transport infrastructure and energy, the recent dispute with Argentina has only confirmed a growing view that this is a remote prospect, at least on any terms that would be attractive to Chile.
In this context, there are incipient signs of the possible development of a new Pacific Coast axis, bringing together Chile, Colombia, Peru, Mexico and Central America -- all of which have, or have negotiated, free trade agreements with the United States -- as opposed to the efforts of Chavez to build an anti-US alliance, including Bolivia and Cuba. This possibility also reflects the fact that the regional influence of Brazil, Chile's main ally in South America, has been weakened by its dependence on Bolivian gas.
CONCLUSION: Energy politics, as illustrated by the recent tensions between Argentina and Chile and by Brazil's vulnerability to its dependence on Bolivian gas, appear to be driving relations within South America and, as well as putting a new chill on Chile's relations with Argentina, could presage a broader realignment within the region.