Chile has pursued generally sound economic policies for nearly three decades. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization, though at a slower pace. The government's role in the economy is mostly limited to regulation, although the state continues to operate copper giant CODELCO and a few other enterprises. Chile is strongly committed to free trade and has welcomed large amounts of foreign investment. Chile has signed free trade agreements (FTAs) with several important economies, including an FTA with the United States, which was signed in 2003 and implemented in January 2004. Over the last several years, Chile has signed FTAs with the European Union, South Korea, New Zealand, Singapore, Brunei, and China. It reached a partial trade agreement with India in 2005 and began negotiations for full-fledged FTAs with India and Japan in 2006. High domestic savings and investment rates also helped propel Chile's economy to average growth rates of 8% during the 1990s. The privatized national pension system (AFP) has encouraged domestic investment and contributed to an estimated total domestic savings rate of approximately 21% of GDP. However, the AFP is not without its critics, who cite low coverage rates (only 55% of the working population is covered) with whole groups such as the self-employed outside the system. There has also been criticism of the inefficiency and high costs due to a lack of competition among pension funds. Critics cite loopholes in the use of pension savings through lump sum withdraws for the purchase of a second home or payment of university fees as fundamental weaknesses of the AFP.

Unemployment has hovered in the 8%-10% range in recent years, well above the 5%-6% average for the 1990s. Unemployment remained at 8.8% at the end of 2004 in spite of strong economic growth. Most international observers blame the high unemployment rate on Chileís complicated and restrictive labor laws. Wages have risen faster than inflation as a result of higher productivity, boosting national living standards. The percentage of Chileans with incomes below the poverty line--defined as twice the cost of satisfying a person's minimal nutritional needs--fell from 46% in 1987 to around 18% by 2004.

Chile's independent Central Bank pursues a policy of maintaining inflation between 2% and 4%. Inflation has not exceeded 5% since 1998. Chile registered an inflation rate of 2.4% in 2004. In 2005, inflation reached an estimated 3.7%. Stronger than expected domestic demand coupled with higher worldwide energy prices led to most of the inflationary rise in 2005. The Chilean pesoís rapid appreciation against the U.S. dollar in 2004 and 2005 helped keep down inflation while at the same time the strengthening peso played a role in the stronger than expected domestic consumption. Most wage settlements and spending decisions are indexed, reducing inflation's volatility. Under the compulsory private pension system, most formal sector employees pay 10% of their salaries into privately managed funds.

Total foreign direct investment rose to $7.1 billion in 2004, up from $2.5 billion in 2003. Both foreign and domestic investment in Chile had declined during the countryís period of slower economic growth from 1999-2003, but both now appear to be recovering strongly. The Chilean Government committed in early 2002 to undertake a series of microeconomic reforms designed to create new incentives for private investment. The government also has encouraged the use of Chile as an "investment platform" for multinational corporations planning to operate in the region. Chile's welcoming attitude toward foreign direct investment is codified in the country's Foreign Investment Law, which gives foreign investors the same treatment as Chileans. Registration is simple and transparent, and foreign investors are guaranteed access to the official foreign exchange market to repatriate their profits and capital. The U.S.-Chile Free Trade Agreement offers a number of other investor protections.

Asia has been the fastest-growing export market in recent years. For example, Chileís number two, three, and four trading partners are China, Japan, and South Korea, respectively. Chileís recent FTAs with Asian trading partners and plans to sign more in 2006 underscore the growing importance of Asia to Chileís trade portfolio.

Chilean imports increased 32% in 2005, to $30 billion (est.), reflecting a positive change in consumer demand and overall economic recovery. Capital goods made up about 66% of total imports. The United States provided 13.7% (est.) of Chilean imports in 2005. Chile unilaterally lowered its across-the-board import tariff--for all countries with which it does not have a trade agreement--to 6% in 2003.

Higher effective tariffs are charged only on imports of wheat, wheat flour, and sugar as a result of a system of import price bands. The price bands were ruled inconsistent with Chile's World Trade Organization (WTO) obligations in 2002, and the government has introduced legislation to modify them. Also, Chile will have to phase out the price bands within 12 years under the terms of the U.S.-Chile FTA.

Successive Chilean governments have actively pursued trade-liberalizing agreements. During the 1990s, Chile signed FTAs with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association agreement with Mercosur--Argentina, Brazil, Paraguay, and Uruguay--went into effect in October 1996. Continuing its export-oriented development strategy, Chile completed landmark free trade agreements in 2002 with the European Union and South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed FTAs in recent years with New Zealand, Singapore, Brunei, and most recently China. In 2006, Chile has begun FTA negotiations with Japan and India.

After two years of negotiations, the United States and Chile signed an agreement in June 2003. The agreement will lead to completely duty-free bilateral trade within 12 years. The U.S.-Chile FTA entered into force January 1, 2004 following approval by the U.S. and Chilean congresses. The bilateral FTA has inaugurated greatly expanded U.S.-Chilean trade ties. Chile is a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA) and active in the WTOís Doha round of negotiations, principally through its membership in the G-20 and Cairns Group.