TED Case Studies

Chile Wood Exports and Subsidy

IDENTIFICATION
LEGAL CLUSTERS
GEOGRAPHIC CLUSTERS
TRADE CLUSTERS
ENVIRONMENT CLUSTERS
OTHER FACTORS

I. Identification

1. The Issue

Forestry is one of Chile's most rapidly growing economic sectors, surpassing Brazil in its share of exports to the world market. Accordingly, Chile has increased its dependance on forestry exports and in the past five years they have tripled to $1.1 billion. In an effort to increase its exportable forestry products, the government provides subsidies for reforestation, forest management and plantings of native forest species. In the process of making room for plantations, much of the natural forest is cleared, causing the destruction of various native flora and fauna. Although reforestation has added 293,000 hectares of forest area, much of that total has been to establish tree plantations whose product is intended for export.

2. Description

The passage of Decree law 701 in 1973 by General Pinochet, resigned to massively increase the sector's exports, encouraged woodland management and replanting to such an extent that the government underwrote 75 percent of the costs involved in reforestation of cut-over areas. It led to the incorporation of 2.8 million hectares into the woodlands system. This law also provided a forestry subsidy, thereby making it possible to reach a critical mass of timber stands to attract financial capital to exploit the resources. The decree exerted an enormous influence on the forestry sector, increasing the rate of reforestation yearly 15-fold between 1973 and 1985. Forest products also grew from 4 percent of exports to 10 percent by 1979.

In 1976, the government declared the araucana and the alerce national monuments, but enforcement against felling was weak and in 1987, the government gave in to pressure from the timber industry and revoked the trees' protected status. In 1990, democratically elected President Aylwin reinstated it, however. Internationally, the trees are classified as "rare" on the Red Data List of threatened plant and animal species; and they are in Appendix 1 of the Convention on International Trade in Endangered Species. Although Chilean law proscribes the export of these native trees, domestic use is unrestricted. In addition, there is evidence that countries such as Argentina, Australia, New Zealand, and Spain regularly import the native wood. Remaining alerce trees are in very hard to reach, requiring travel by foot for a full day in many cases. This protects them from loggers for the time being until they can get at them with helicopters and expensive equipment. Very few foreigners have ever seen an alerce, and only an estimated 1 in 10,000 Chileans has ever seen a live specimen.

The Monterey pine and the eucalyptus (which is also foreign to Chile) have already eaten up a million acres of native forest land, replacing diverse habitats with monocultures. It is very difficult to control the planting since it earns Chile so much foreign investment and hard currency. New Zealand and Japan have invested heavily in the Chilean wood industry. One article suggests that the depletion of forests in Chile is an example of the less visible effects of economic crisis. Chile's large foreign debt forces it to constantly "need to capture foreign exchange, the shortage of opportunities for high rates of return on industrial investment, and the absence of other employment opportunities appear in the Chilean case." Because of economic benefits, Chilean environmentalists and groups such as CODEFF and Ancient Forest International find it difficult to make headway with the government.

The Chilean government has since that time provided around 50 million U.S. dollars in forestation subsidies for establishing and maintaining timber plantations (see BRAZIL, USCANADA and USWOOD cases). In the past 15 years Chile has decreased its dependance on copper exports from 79 percent to 46 percent by diversifying into the forest, fruit and fish industries. With the increase of forestry export products, Chile has been destroying its environment, namely natural forests (which account for 10 percent of exports), fish stocks and agricultural products, because of the felling of native trees and replacement with plantation stocks.

Chile established a plantation system in which large tracts of native species were supplanted by quick-growing radiata pine. The loss of native tree results in a decline in associated flora and fauna in the habitat. The destruction of the natural habitat also causes severe soil erosion, reduces the productivity of the soil and dump sediments that harms fish stocks in streams. The added pine production is intended almost exclusively for export, mostly to destinations in East Asia.

Almost all of Chile's timber production is in softwood conifers; in 1987 conifers accounted for 6.16 million cubic meters of production, while non-conifers accounted for .79 million cubic meters. CINTRAFOR, associated with the College of Forest Resources at the University of Washington, has built a computer model to estimate wood production and consumption in Pacific Rim countries. In the model, "the specification of short-run timber supply in New Zealand and Chile requires special treatment because of their aggressive planation programs."

Chile's softwood production has jumped enormously over the last decade and is expected to continue to rise. Most of this increase is fueled by exports. CINTRAFOR's model shows Chilean exports of softwood conifers rising from 4.9 million metric meters (mmm) in 1980 to 14.5 mmm in the year 2000. In 1987, .25 mmm of coniferous sawlogs went to Japan from Chile, .33 mmm to Korea, .16 mmm to China, and various destinations in the Middle East accounted for .54 mmm. By the year 2000, Korea's imports will jump to 3.35 mmm and China's to 4.41 mmm (Japan will switch to importing more wood from Canada, the United States and Indonesia). Chile is also changing the structure of its wood industry. It has added substantial pulping capacity and raw sawlog exports are being slowly replaced by exports of pulp. Chile and Brazil already account for 80 percent of pulp exports from the developing world.

About 9.9 million acres (4 million hectares) of radiata pine plantations exist in the world. Radiata pine in Chile, Australia, and New Zealand, accounts for more than 85 percent of total plantation plantings (see Table III-13-1). Chile and New Zealand are expected to become significant exporters, given yields that already far exceed domestic demand. Both countries' production is expected to rise to 24 million cubic meters in 2010, from a base in 1992 of 15 million cubic meters in Chile and 13 million cubic meters in New Zealand. The countries posses lower production costs than North American producers.

Chile has been dependent on resource exports for centuries. Even today, 91 percent of Chile's exports are natural resources: mining, agricultural, fishery, and forest products. One legacy of the dependence is that anchovy stocks off the coast of Chile are virtually non-existent and Chilean copper mining has produced serious soil contamination and loss of farm resources.

3. Related Cases

USCANADA case
INDONES case
USWOOD case
BRAZIL case
MALAY case
CHILEAIR case
COLDEFOR case
ECUADOR case

4. Draft Authors: Kathleen Uribe and Sabrina Franzheim

II. Legal Clusters

5. Discourse and Status: DISagreement and COMPlete

Some American and Canadian producers, having lost market share to the Chilean exports, have complained that the subsidies are not in accord with the GATT Subsidies Code. Environmental groups within Chile and the United States complain that the plantation scheme is environmentally destructive in a number of ways.

6. Forum and Scope: CHILE and UNILATeral

7. Decision Breadth: 1 (Chile)

8. Legal Standing: LAW

The Chilean government "reimburses up to 90% of the cost of tree-planting on private land." With some exceptions for mature trees, the trees belong to the land owner.

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: South America [SAMER]

b. Geographic Site: ANDES

c. Geographic Impact: CHILE

10. Sub-National Factors: NO

11. Type of Habitat:TEMPerate

Some of this habitat could also be described as COOL, since the area is in the Andes.

IV. Trade Clusters

12. Type of Measure: SUBSIDY

The government scheme to reimburse private land owners for planting costs is a type of subsidy.

13. Direct v. Indirect Impacts: INDirect

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product:YES [WOOD]

b. Indirectly Related to Product:YES [PULP]

c. Not Related to Product:NO

d. Related to Process:YES [DEFORestation]

15. Trade Product Identification: WOOD (softwood)

The trade includes raw wood and semi- processed wood products, such as boards, wood chips, plywood, cellulose, and pulp.

16. Economic Data

The world's leading wood exporters are: Malaysia, Indonesia, Singapore, Philippines, Ivory Coast, Brazil, and Gabon (see MALAY, INDO and BRAZIL cases). The leading importers are Japan, China, Hong Kong, the United States, Singapore, South Korea, and the United Kingdom. Forestry industry employment in Chile is 80,000 and the percent of Chile's GDP accounted for by forest exports is 3.3 percent.

17. Impact of Trade Restriction:MEDIUM

About $50 million was invested in the plantation scheme since 1974 and therefore on an annual basis the "subsidies themselves are not very much...Nor do they represent a major cost reduction in the end product -- for pulp, for example, about $6 per ton out of a total manufacturing cost of around $200 a ton." The actual annual subsidy is probably no more than 5 percent. However, to "the extent that radiata pine is perceived as a more reliable resource supply and a credible substitute for U.S. timber species, it represents a significant competitive threat to forest exporters in the Pacific Northwest." The threat is the loss of lucrative Asian wood import markets. Moreover, the U.S. recently eased restrictions on New Zealand imports which have even penetrated domestic U.S. markets in the Pacific Northwest.

18. Industry Sector:WOOD

Because of the plantations built in the early 1980s, Chile's exports of coniferous sawlogs will rise from 4.9 mmm in 1980 to 12.5 mmm in the year 2000. The growth of production will accelerate as these trees come to maturity in the late 1990s.

19. Exporters and Importers: CHILE and MANY

V. Environment Clusters

20. Environmental Problem Type: HABITat loss

The Chilean government says the native forests are over- mature and suffer from log rot thus justifying the new reforestation effort. However, the area under question is losing its diverse forests which are being replaced by eucalyptus and pine trees. Much of Chile's native flora, fauna and animal species are being lost due to the plantation replacement programs.

The trade in Chilean timber is resulting is several environmental problems. One is the near extinction of two indigenous trees -- the Araucaria araucana, also known as the Chilean pine or monkey puzzle, and the last remaining stands of alerce, or Fitzroya cupressoides which is one of the three longest living species on Earth at 3,300-4,000 years of age. A related problem is the fate of certain indigenous groups who depend on the pine nuts of the monkey puzzle to feed themselves and their animals. The main culprit is the Monterey pine, which has generated some of the most remarkable economic growth in the Hemisphere. It was introduced to Chile in 1886 is now a leading export and is replacing natural ecosystems with a monoculture as it continues to spread at previously rates not attained anywhere including in its native United States. Worsening matters considerably, the military government in power from 1973-1989 had no environmental policy and actually promoted timber felling to earn precious foreign exchange.

21. Name, Type, and Diversity of Species

Name: Softwoods and Hardwoods

Type: Plants/Angiospermae/Dicots

Diversity: 1,269 higher plants per 10,000 km/sq (Chile) The problem is replacing a mixed forest of mostly softwoods with a single species of softwood, the radiata pine. Coniferous refers to "wood derived from trees classified botanically as 'Gymnospermae', e.g Abies, Agathis, Araucaria, Cedrus, Larix, Picea, Pinus, etc. The term SOFTWOOD usually refers to timber in this group. Coniferous pulps are usually LONG-FIBERED."

22. Resource Impact and Effect: HIGH and Structure [STRCT]

"Chile's native forests are chopped and replaced by mono- cultures of exotic trees like eucalyptus and pine trees. Between 1975 and 1985, 100 thousand hectares of native forests were destroyed. This resulted in the disappearance of much of the biological and cultural wealth of the community..."

By 1986, Chile had the largest man-made forest reserve in the world at 1.2 million hectares. The pine's growth comprises 65,000 cubic meters a day and current logging equals 11 million cubic meters a year. The pine's growth alone could fill two cargo holds daily without reducing the volume of existing stumpage. In 1989, the industry earned 783.6 million dollars in export earnings. Out of 74 million hectares of territory, Chile's woodlands account for almost 34 million hectares. Chile has joined the ranks of the top ten largest forest product powers in the world.

23. Urgency of Problem:LONG and 100s of years

Urgency is high since ecologists estimate there are five Chilean tree species on the verge of extinction and 26 others vulnerable. No estimates of years until extinction were given. The lifetime of the rarest tree, the alerce, is 3,300-4,000 years rendering it likely to complete extinction.

The problem is the long-term loss of the natural habitat and its bio-diversity. The problem is this exploitation is not sustainable. Monocultures are notoriously susceptible to pests and disease since the food chain and the ecosystem are out of balance. In addition, Chilean wood processors produce goods with very little value-added. Instead of focusing on high quality furniture or even paper, the industry is based on plywood, wood chips, and cellulose. These in turn must be produced in greater quantities for an increase in income and create very few jobs, whereas the value-added products would create more income without farming more trees and more jobs. In the long run, Chileans will be wish they had not been so eager to cut down their native trees to make fax paper in Japan.

24. Substitutes:RECYCling

VI. Other Factors

25. Culture: YES

The indigenous Pehuenche Indians have waged their own war with the government. The fight has been over the foreign-owned companies who have purchased traditional Indian lands for logging and made the Pehuenche move off, destroying their lifestyle. They've joined forces with CODEFF, but have had few successes thus far fighting the companies. The Pehuenches collect an average of 100,000 kilograms of pine nuts from the araucana a year. They feed themselves and their animals with the nuts and sell the rest to traders for cash to buy provisions. They believe the trees are sacred and take only the nuts.

26. Trans-Boundary Issues:NO

27. Rights:NO

28. Relevant Literature


Bunker, Stephen G.  "The Social Impact of the 1980's Crises."     
Quarterly Review of Economics and Business 31/3: 1991.  Cooper,
Marc.  "Alerce Dreams." Sierra (January, 1992) 77/1.  Coote,
Belinda.  The Trade Trap.  Oxfam, 1992.
Eastin, Ivan L.  "Radiata Pine: A Competitive Force in Pacific    
  Rim Markets."  CINTRAFOR NEWS 8/1 (Center for
     International Trade in Forest Products, April 1993).
Ewing, Andrew J. and Chalk, Raymond.  "The Forest Sector: An      
Operational Strategy for Developing Countries," World

    Bank Technical Paper No. 83, Industry and Energy Series     
(Washington, DC: World Bank, 1988).
Forest Products.  FAO Yearbook.  Rome: Food and Agriculture      
Organization of the United Nations, 1988.
Glass, Kathy.  "No Chip Off the Old Block."  Americas 42/6: 1990.
Industrial Outlook Report.  "Chilean Forestry Sector: An Emerging 
    Giant."  Santiago, Chile: Department of State, U.S.
     Embassy in Santiago Report, 1989.
George, Susan.  The Debt Boomerang: How Third World Debt
     Harms Us All  Pluto Press, 1992.
Gillis, Malcolm.  Forest Incentive Policies.  World Bank Policy   
  Paper.  Washington, DC, World Bank, November 26, 1990. Lewington,
Anna.  "Monkey Puzzle Wars End in Hunger."  New
     Scientist 142/1924 (May 7, 1994). 
Moffet, Matt.  "...Chilean Firms Pry Door Open to Japan."  Wall   
  Street Journal (June 7, 1994). 
"NAFTA: An Intensification of the Environmental Problems
      Related to Chile's Unsustainable Export Oriented
     Growth."  Instituto de Ecologica Politica, Santiago,
     Chile.  Paper prepared for "NAFTA, Chile and the
     Environment Conference, March 25, 1994, Washington, DC.
Repetto, Robert Gillis, Malcolm Gillis, eds.  Public Policies     
and the Misuse of Forest Resources.  Cambridge:
     Cambridge University Press, 1988.
UNIDO.  "Measures to Strengthen an Environmentally Sound 
     Sustainable Supply of Timber Resources," Second
     Consultation on the Wood and Wood Products Industry,
     Issue Paper No. 1.  Vienna: January 21-5, 1991.
Villegas, Hernan Munoz.  "Chile's Distinguished Immigrant Takes   
  Root."  Americas 42/2: 1990.