Southerly Trade Winds

LHD-9 Santiago, Chile November 10, 1966

One of the world’s least probable auto industries lurches along 1200 miles north of Santiago in a green blemish on the Atacama Desert known as Arica. This hand-me-down Detroit is serving as a laboratory of Latin American integration -- in spite of the fact that Arica has long been a focus of Chile’s uneasy relations with its neighbors.

Arica is not a very imposing place. But by all the laws of economic advantage it should not exist at all. Too many companies assemble too few autos there, at too high a price, for a market that is too small and much too far away.

The manner in which Arica got into such a fix is a study in the difficulties of industrialization in underdeveloped states. The government’s attempt to write on a happy ending, through creation of an international auto parts market, provides a live example of the economic integration that so far has been mostly talk in South America. And the real physical and political barriers that divide Chile and its neighbors are lessons in the complexities that will make progress toward a common market as slow as the process of changing the minds of men.

Arica and the Auto

Historians may one day conclude that the United States’ principal contribution to earthly culture was the auto. Chile is probably typical of developing states in that just about everyone here itches to get behind the wheel. The lust for a chrome-plated Impala is the demonstration effect gone mad. There is no question of whether Chile should go by car, simply the matter of how it will keep up the payments.

Opposed to this fervor but doing little to dampen it is the fact that cars are outlandishly expensive for Chileans. A classified ad the other morning pretty well characterized the auto market here. “For sale: ‘42 Studebaker in good condition,” it said. The price, converted into U.S. currency, was $1200. A day laborer -- who in the United States could afford to buy a 24-year-old car if not to maintain it -- makes the equivalent of $1.50 per day in Chile. He would have to devote all his earnings for three years to buy that clattering old headache. A two-year-old deluxe Chevrolet can cost $12,000.

One reason for the high price is the cost of shipping autos to Chile. But this can account for no more than a $360 mark-up. The major increment is caused by national policies of ‘prohibitive import duties on cars, or their absolute exclusion. This in turn is the result of tight limitation on the amount of money Chile has for buying abroad. If the government were to allow this money to go into sufficient autos to meet the local demand, Chile would not have enough dollars left to import more urgently necessary machinery, and it probably would become internationally bankrupt.

Inevitably, among the results of the import restriction have been aberrations in the market that come from attempts to capture the big profits thereby made possible. One quirk is that the diplomatic community, with its unique privilege of importing duty-free, actually becomes a prime supplier of cars for the domestic market. Some embassies’ functionaries are said to have become rich men by trafficking in the auto import trade. The government has refrained from applying seemingly obvious prohibitions, perhaps because one of the main groups active in bringing in foreign cars are returning members of Chile’s own foreign service.

During the postwar auto shortage this sort of thing was common practice in many capitals, and in some it still is, but in few are Vie returns as large as in Santiago. U.S. diplomats used to count as one of the perquisites of a tour in Chile the opportunity to sell their car for a profit of $5000 and up after two years. But in 1965 the State Department stipulated that U.S. officials abroad who sell their cars must contribute to charity the difference between the carts cost and the sale price. One curious result is that Chileans buying cars from Yankees have now contributed half a million dollars to U.S. charities. *

Other anomalies in the market include a surfeit of taxis that never accept customers, driven by owners who took advantage of lowered tariffs for collective transit vehicles; families that ride about in pickup trucks for much the same reason; autos kept alive beyond their normal span to the point that the country is a veritable museum on wheels.

The government has tried to harness, in home production the great pressures to overcome the auto tariff wall. But with a population of only 9 million and an annual per capita income of under $500, the very real market is also a very small one. It could never hope to support even one true automaker. The planners decided that the next best hope was to encourage assembly plants of the international makers to locate in Chile. This could result in the introduction of some of the vaunted benefits of auto industries in developed countries: growth of parts manufacturers, expansion of employment in related services, manpower training through experience in the plants. With time the government could demand that an increasing percentage of each car would be of Chilean origin.

Legislators thought they saw a way to have these benefits and at the same time achieve an old objective -- creation of employment opportunities and a stable society in Arica. This would thwart what was seen as a gradual assimilation of tile isolated town by the neighboring Bolivians who gravitate to the port from their land-locked country. Since only the sea, air and 1200 miles of arid Pan American highway link Arica with the population center around Santiago, Chileans fear that the loyalties of the area -- which was taken in war -- might be won by Bolivia. Besides, the government would like to speed development more evenly through Chile’s great length rather than see it all concentrated between Santiago and its port of Valparaiso.

In the 1950s the same sentiments had led to creation of a free port in Arica. The citizenry looks back on that time as an. orgy of imports. The town’s 13,000 people had more watches, radios, hair dryers, Scotch and automobiles per head than Hong Kong. The rules said the goods must stay in Arica but the game was to smuggle them to Santiago and elsewhere. As hoped, Arica grew. It now has perhaps 70,000 people. But, the price was too high; the port is free no more. Other inducements were attempted. A gambling casino was built that, along with a church designed by Eiffel in northern Chile’s great nitrate age, attracted some tourists. Yet the real hope for sustained growth came in new laws permitting low-cost imports into Arica of auto components and machinery for assembly plants. In the late ‘50s construction began on what would become no less than 20 assembly firms, Chile’s first, some of them consisting of little more than a garage, wrenches, the imported parts and a book of instructions.

All considered, the operation was a lemon. Costs were high, partly because the number of units produced was so low in each plant that the savings of the assembly line were not realized. Quality control was inferior. Producers favored with access to foreign exchange generally made considerable profit. They often could parlay these profits with credit that, after inflation, was available at negative rates of interest. But the expected growth of parts plants did not occur. Required percentages of Chile-origin value were too easily met in labor costs, in juggling of the ledgers, or in transportation costs -- cars were even flown to Santiago because in any case the customer would have to pay. Other Chile-added value came in tires and batteries, but they were being manufactured here already, if at prices above the world market.

Gradually some simple parts were built by Chilean suppliers. But often they were extremely expensive and of uneven quality. Supply was sporadic and shutdowns often resulted. These failings occurred partly because of suppliers’ indifference or inexperience. But fundamentally the cause probably lay in the fragmented and thin demand for unfamiliar parts.

Arica failed to benefit, since the parts were made in the Santiago area, the only place where ‘ jobbers were available. Much of the killed labor for the assembly plants had to be imported from the capital also.

By 1962 the force-fed industry was in uncertain motion, with the 20 foreign, national or mixed capital firms producing some 40 models of cars. Only two companies exceeded 1000 units in annual production. This was despite the fact that even at the prevailing bloated prices the Chile market was estimated at 40,000 vehicles annually. While the producers were turning profits at a still undetermined rate, the buyers and the government were losing.

Autos and Free Trade

This time, when Chilean economists sought to redirect the misguided auto industry they turned to the Latin American Free Trade Association, formed in 1960 with the purpose of stimulating the negligible trade among continental countries. The main tool of LAFTA was elimination of tariff barriers. Chile proposed a barter interchange of auto parts among LAFTA members, tariff-free.

Brazil and Argentina had achieved auto industries that were producing about 100,000 autos each annually. Though much of the capital was foreign, 90 per cent of the value per car originated in the particular countries. The cars cost about three times as much as the same models built at the home plant of the parent firm. The principal reason for the high price was, and continues to be, low production -- much as in the case of Arica although the production is far higher in Brazil and Argentina.

If the price is high, the advantages are also undeniable. Buenos Aires rides in rather modern style, while Santiago’s cars look like fugitives from the set of a Depression-era movie. In Buenos Aires and Cordoba, the Argentine auto capital, considerable feeder industry development has occurred. But the Brazilian and Argentine industries now are caught in a cul-de-sac. They cannot expand their domestic market unless they can bring down their price. And they cannot lower costs significantly without expanding production.

This situation helped inspire the Chile plan. The Chileans offered their 40,000-unit market to LAFTA-nation producers who agreed to import the equivalent value of auto parts manufactured in Chile. The plan is similar to the U.S.-Canadian auto pact that allows Canada to specialize in certain lines of auto parts under the shadow of the huge U.S. industry.

The Chileans reasoned that this country with its wealth in copper, for instance, could specialize in a few -parts lines that would be exportable. Chile wants to build radiators, wiring harnesses and light forged assemblies for the LAFTA export market. Such parts count for little in the total cost per auto in an Argentine plant. But Argentina, with a market over twice as big as Chile’s, might well absorb enough units of radiators and wiring to barter for sufficient engines and chassis and bodies to sate the Chile assembly lines.

If Chile could produce her limited line of parts for the entire industries of Argentina and Brazil, it should become a rather efficient producer of those components. And if other LAFTA countries should make similar agreements, the Brazilian and Argentine lines could expand their runs considerably.

So far, however, the only interchange is between Chile and Argentina. Chilean law now requires that 50 per cent of the value of a car built in Arica must originate in this country. This percentage is considered quite an accomplishment in comparison with countries with similar-sized markets. But the half of the car that is counted as Chilean can also consist of imports from LAFTA countries that take Chile parts exports in barter. At the moment, the average Arica car carries half its value in imports from the parent company -- Ford, General Motors, Fiat, Citroen -- 20 per cent from an Argentine subsidiary of these firms, and 30 per cent in Chile-added value. In future years the non-LAFTA percentage will have to diminish further.

Through the LAFTA mechanism, the Chileans hope to drop their costs from the present level of four times the world price down to the Argentines’ range, about 25 per cent lower.

Introduction of the LAFTA alternative to national origin had one brutal but salutary immediate effect. It closed all the numerous assemblers of autos in Arica that have no companion, major plant in Argentina. This shook down the competition to five makes, more in keeping with Chile’s market though still generally considered too many. It also seemed to favor the big U.S. firms since they are among the better established in Argentina. This irritated the leftwing here, but the planners make a strong case for the economic sense of dealing with those prepared to invest heavily in the LAFTA area.

Perhaps the most interesting, because the most Chilean, of the Arica operators is the French Citroen firm that builds the Citroneta. This car has a spirit akin to the Model A if not its pleasing appearance. The Citroneta has become the nearest thing to the national auto. With production in recent years running at 1500 units, Citroen has the relative position here of General Motors in the U.S. Market.

The little car somehow achieves the appearance of a duck-billed platypus mounted on wheels, big wheels in the back and little ones in the front. The 18-horsepower engine is imported from France (but soon will come from a plant in Spain). The rather sophisticated and costly suspension system that has endured on Chile’s lumpy roads comes from Argentina. So do the back doors, the gearbox, the universal joints. But the body is by Arica. No other assembler has attempted to create such a major component in Chile. The decision required compromise. The steel comes from Chile’s big Huachipato mill 2000 miles to the south. But the mill rolls sheet no wider than three feet, so that some of the bigger stampings -- for what basically would o1herwise be the same car as made in France -- had to be eliminated. One result is that the Chilean Citroneta has a fiberglass hood, made here at the plant. And the trunk becomes a sort of enclosed back porch.

**On the line in Arica. The world’s cheapest car costs $3,000.

Arica’s entire annual Citroneta production would be turned out in two days at the factory in France. Understandably, the Chile subsidiary cannot hope to amortize some of the more expensive molds and dies. Therefore it does without. So where a saving curve appears on the French model, forgive the pun, a straight line has to do in Arica.

Only the general manager of the 240-man workforce has ever seen the parent French factory Factually a small percentage of the subsidiary’s capital is Chilean). The technical director not only has modified the product to Chilean conditions, he has created his own assembly line techniques as well. Some of his modifications have been accepted in the far larger Argentine Citroen plant and at another branch in the Middle East.

There is a certain air of ingenuity to the place, the frail fragrance of smoldering curiosity that would seem to bode well for the future of Chile’s underprivileged industry. The visitor almost feels as though he has walked into Dearborn half a century ago. In those days Henry Ford was supposed to have mystified parts suppliers by insisting that the goods come in crates slatted to precise measure -- with Henry getting the last laugh when the cartons fell into place as floorboards for the Model T. The harassed men of Arica only ask that the parts meet tolerances and arrive somewhere near delivery date. But a door design will be rethought and simplified until it can be made up of only four pieces -- and with every discarded part a supply bottleneck is broken.

Yet price comparisons show that more inventiveness, and more than just mechanical ingenuity, is needed. The French Citroneta sells for $800; the Chilean costs over $3000. The company says that 40 per cent of that price represents taxes (while the disassembled cars are allowed through port at relatively low duty, the assembled car is taxed heavily as soon as the builder ships it out of Arica). Of course, an unusual amount goes for transportation to Santiago. The typical mode is by truck of unspecialized design that meanders down the desert stacked high with Citronetas that look as though they might spill after a big bump. Standard car haulers do not have the advantage of being able to bring loads of parts, or foodstuffs, on the return from Santiago.

Citronetas in the desert sun, waiting for laggard parts.

The ubiquitous Chilean paradox of sophistication existing simultaneously with underdevelopment is at hand in Arica. If there are budding inventors in the task of building cars, there are Machiavellis in the business of financing them. This involves manipulation of the effects of inflation, of the government’s policies to control inflation, and specifically of the government’s methods of allocating scarce foreign exchange so necessary to purchase the foreign components.

As the government regulators learn more about the auto business and its bookkeeping, the contest is becoming more even. One effect seems to be a smoothing out of the production cycle, which in the past saw most of a year’s total production concentrated in a few months. There seem to have been various financial windfalls that encouraged this, but the parts acquisition problem was a contributing factor. Assemblers try to store a six-month or year supply of Chile-supplied parts. They buy all the foreign components that they can when they have the foreign exchange. When I visited Arica in October, the Citroen plant had 700 cars on hand, nearly half its expected year’s production. I was told that an inventory of 300 was normal. One reason is that the red tape accompanying shipment of a car to Santiago absorbs one month, said an official. He explained that the other 400 cars were all waiting for the arrival of one crucial part or another.

Citroen says that its unbeautiful little sedan is the least expensive auto worthy of the name made in the world today. The other companies represented in Arica start with a costlier design, so the price of the Chilean version can be outlandish. With a Chilean partner, Ford assembles the same basic Falcon that it sells in the United States. The motor is smaller, made in Argentina with machinery shipped there when the design was discarded in Detroit in 1964. The car sells for over $10,000 here. Fiat has been in Arica since 1962. The manager is Italian. He says that he has seen a steady improvement in the quality control if not the price of Chilean parts and that now they are in many instances approaching the parent country standards -- but that this last small gap is the hardest to close. He adds that this is a problem affecting production but not the final product, since only parts of quality equal to the home level are used. Right or wrong, the traditionally self-depreciating Chileans often disparage the products of their own auto industry. The llama, they say, is a horse assembled in Arica.

The question is whether the Chileans are headed in the direction of a viable future source of autos. The government’s efforts to fulfill the demand without liquidating foreign exchange include not only pressing the LAFTA interchange, but also modification of the Arica subsidy. Legislation is now before the Congress that would allow installation of assembly plants elsewhere than in Arica. This probably will result in relocation of most of the industry in or near Santiago; where nearly all of the autos are sold. This amounts to an admission that the social-political goal of building up Arica could not be accomplished at the expense of a fragile auto industry. This is not to say that the industry will not still be used to pay more than its way. Taxes on cars will remain high.

Most of the present assemblers have plants near the capital already picked out. However, to prevent a complete abandonment of Arica, the government plans to reduce the present subsidy there only to a point that it will equal the cost of transportation between Santiago and Arica. This is estimated at six per cent of the value of each car. With this it is hoped that some of the producers will remain in the north.

The Arica gambit always had an air of unreality about it, and some potential big investors have held back accordingly. Argentina’s biggest producer, Kaiser, is expected to set up in a plant near Santiago that is at the terminal of the trans-Andean train line, a direct connection to the parent plant in Cordoba.

But while the new legislation should help rationalize Chilean production, the ultimate hope really is in the streamlining of the Argentine -- and Brazilian -- industry. The parts interchange under the Latin American Free Trade Association can help bring Chile’s costs down. But beyond a certain point the only further saving can be from a lowered cost of the Argentine car. The LAFTA parts trading seems like a way to do this, potentially with a greater advantage for Argentina than for Chile. But so far all of the initiative has come from the Chileans. Signs of Argentine enthusiasm will be watched for eagerly by the plan’s advocates here.

Brazil’s failure to participate is perplexing. The Brazilian position is said to be that Chile ought to buy entire autos from countries capable of producing them and in turn ought to export to these countries unrelated specialties for which Chile has a comparative advantage.

Chilean authorities tend to agree on the rationality of the argument as theory. But they see two practical weaknesses. First, Chile would be buying autos at three times the world price, so that Brazil would have to agree to purchase Chile exports at a similarly inflated level -- an alternative unacceptable to the Brazilians. Since the value-added of LAFTA-origin parts in Chile is to be computed on the basis of the cost of the item in the parent country, the Chile plan carries its own downward pressure on price. Second, if the limited interchange in auto parts were to be expanded into a far broader exchange of disparate commodities, the global planning required would be on a far grander scale than LAFTA is now capable of providing.

Though the Brazilians are balking so far and the Argentines are not exploiting all possibilities, the Venezuelans and Mexicans are said to be interested in exchanging parts with Chile. To date, Mexico has been able to achieve only 60 per cent national origin in its car output, according to figures here, despite the fact that it has a far larger market than Chile.

For the parts plan to achieve its potential, even the simple exchange between Chile and Argentina must break loose from the rigidity of barter. Balances and deficits will have to be possible. One of the Arica plants recently was closed for weeks because the company had a $9000 deficit in its account with its Argentine trader.

A question that the Chileans do not seem to answer fully is why they do not exchange their parts specialties for entire autos and simply abandon the assembly plants. One justification they cite is that the assembly-line principle has been proven economic for production of as few as 5000 vehicles annually, a level anticipated by the surviving Chile firms. It may be, too, that unassembled autos are easier to ship great distances than the whole product. And if the interchange should really become multi-national, each contributor might well retain its own assembly point where the components would gather. But a factor that probably is more decisive is one that will threaten all attempts at integration -- nationalism. Many Chileans feel that the auto is too decisive in their future to trust its provision to another nation. National pride, then. Chile o to have an auto industry, they say, and at this point economics doesn’t count.

Geography, Politics and LAFTA

Chile’s dealings in the auto parts interchange and its relations generally with its neighbors offer some insights into the frustrations that await impatient economic integrationists.

The parts’ travel between Argentina and Chile illustrates only pall idly LAFTA’s severe transportation problems. Links between this pair of countries are stronger than most, fairly efficient despite the Andes that form their border. Ship rates and runs between Arica and Buenos Aires are described as adequate and have not contributed to the more national problems of Arica’s supply. Land transport is untenable between those points, but is fairly dependable between the Santiago area and the Argentine, focal points of the auto industry that Chile foresees. The railroad previously mentioned is a rarity among border-crossing lines in South America in that it does not change gauge at the frontier. The Inter-American Bank has just loaned Chile $15 million to help build a highway that will facilitate truck crossings of the Andes parallel to the railroad.

Institutional weaknesses of LAFTA, in banking for instance, will become obvious in any attempts to broaden the auto parts plan. The very failure of more LAFTA nations to participate in the project -- and the failure of Chile and others to participate in similar projects launched under the LAFTA banner -- illustrates the disunity that interacts with nationalism to deter integration. Brazil sees its interests best served by trucking in cars independently (although it has exchanged tractor parts with Mexico under LAFTA); Peru, adjoining Chile and proximate in size and many aspects of development, has opted to spend the earrings from its raw-goods exports to import cars at the lower prices of the big producers -- so this potential partner is lost to the common marketers. Chile’s other neighbor, Bolivia, is not even a member of LAFTA. But more on Bolivia after a short look at Chile’s general relations with auto collaborator Argentina.

Chile’s trade with Argentina is larger than with any other Latin nation. It consists mainly of heavy imports of wheat and beef. Lately the Argentine industry has imported considerable Chilean raw materials so that the Chilean trade deficit across the mountains is only a small one.

While the economies would be complementary in many respects, the people and hence the governments are less inclined to cooperate. Fortunately the border that runs down the Andes spine is largely innocent of habitation, but occasionally a provocation will stir passions that are always at the ready. This happened a year ago and resulted in death of a Chilean policeman who was posthumously raised to the rank of general, or so the newborn legend goes.

Chileans are often haughty about the Argentines’ political instability, although President Frei has made real efforts to keep alive with Gen. Carlos Ongania the cooperative interchange he enjoyed with deposed Argentine President Arturo Illia -- and Ongania has responded in some degree. On the other hand, Buenos Aires businessmen and technicos, queried on the possibilities they see for economic ventures with Chileans, tend to show disinterest or amusement. The Argentine has been described as a proud man who once was rich but now has to watch his accounts. This makes him not only proud, but easily offended. Perhaps with these sensitivities, many Argentines look upon Chile as occupying the same economically inferior and insignificant relation to Argentina that they feel Argentina holds in relation to the United States.

While numerous examples of cooperation exist, from joint efforts against forest fires in the south to simplification of tourist exchange, these efforts are dimmed by such vivid themes as the Chileans’ purchase of jet aircraft almost solely because earlier the Argentines had done the same thing.

No doubt the two countries will argue forever over some pocket of disputed dust among their mountains of the border. And a British surveyor team will be up there mediating on Armageddon. Back around the turn of the century the countries almost went to war, blat settled, and built the Christ of the Andes that can be seen from the train up on the border. The inscription says, “Sooner shall these mountains crumble into dust than Argentines and Chileans break the peace sworn at the feet of Christ the Redeemer.”

The calmer heads on both sides still expect no serious conflict, anyway, and economic cooperation might even provide impetus for more durable political understanding.

But Chile’s other neighborly difficulty, with Bolivia, may well prove more difficult. This conflict is severe, and nowhere more apparent than in Arica. In the War of the Pacific in 1879 Chile wrested from Bolivia and Peru what is now the northern quarter of this country. The objective was the lucrative nitrate fields and copper de-posits. Their capture resulted in Bolivia losing its access to the Pacific Ocean. That loss has obsessed Bolivia ever since. Chile’s defense of its action has been scarcely less obsessive. Peru, which actually lost Arica, seems to be the country now least inclined to look back in wrath.

The treaty after the war assured Bolivia outlets to the sea via rail routes that were provided through the Chilean ports of Arica and Antofagasta. This has seldom worked to the entire satisfaction of either side. The terrain is partly to blame, for the trains to Bolivia’s capital of La Paz must climb 14,000 feet over the Andes. With the best of luck, a freight from Arica takes two days, from Antofagasta longer. The climb presents incredible engineering challenge. That the rails were laid at all half a century ago is a tribute, that they are inadequate today is no surprise, Some of the original rolling stock is still waiting replacement, though now even diesel engines are promised and the cogs are to be eliminated. There is no highway connection with Arica, although one of the Chilean efforts at mollifying the Bolivians involves construction of such a road. The Bolivians say they have never been consulted about it, don’t particularly want it, and in any case are building a road to the Peruvian border that will take them to the sea.

Recently oil from a very rich field in southeastern Bolivia began to flow to Arica through the Sica Sica dust that is an engineering accomplishment in itself. This had long been disputed, since the-treaty hadn’t provided for oil ducts. The task was completed only when both sides allowed Gulf Oil, the exploiter of the Bolivian find, to do the work. Bolivia complains that the port facilities in Arica are inadequate and that the pip is too small. They plan another one over an undetermined but non-Chilean route.

**Arica-La Paz line, over the dust and through the rock to 14,000 ft.

Chile and Bolivia broke diplomatic relations in 1962. Both sides restate their intransigence from time to time, but renewal of relations probably will come only after a major concession from the Chileans, and this could come only if Frei were so successful in his domestic program that he could endure the voter outrage that surely would follow.

A study made for the Inter-American Bank two months ago suggested joint economic development of the frontier areas of Peru, Bolivia and Chile. Among the suggestions was multi-national use of the waters of the big Lake Titicaca, which is divided by Peru and Bolivia. Although the tri-state area logically could be developed only as a whole, the Bolivians indignantly dismissed the idea. The suggestion that Bolivian water might wet Chile was sufficient cause for rejection outright.

Such animosities will not give in easily to economic integration. Misinformation is both a symptom of and a prod for the conflict. An editor of a principal La Paz daily told me in utter seriousness that Chile spends 20 per cent of its national budget on its military, and he felt that the main reason was to maintain a threat to Bolivia. In fact, Chile’s budget includes 11 per cent in defense spending, much of this going to such purposes as supplying isolated citizenry in the south and providing earthquake aid.

In Santiago recently, some conservative politicians brewed up a minor hysteria without much difficulty, saying the Bolivians planned to invade. One senator declared that supersonic jets of the Bolivian military had flown over Chile. Bolivia has no jets of any kind, nor any army capable of seriously attempting to invade Chile.

Except where Chile is involved, Bolivia is showing more interest in multi-national development. This is despite traditionally cool relations with its neighbors, Brazil, Argentina and Para ay. It lost in the Chaco War to the latter in 1936. Bolivia is anxious to participate in development of the Amazon and Plate river basins -- both offering other hopes for outlets to a sea. The present government is showing interest in joining LAFTA, if protection is offered for Bolivia’s weak industrial base. Occasionally even antipathy for Chile can be sidestepped. Through encouragement of U.S. AID, technical assistants from Chile’s rather successful savings and loan field are in La Paz helping to get the same thing started there.

But this is an isolated case in that isolated country. A traveler receives a realistic lesson, indeed, in the difficulties facing LAFTA when he rides the motorcar up the rails from Arica to La Paz. The route begins in one of the valleys of two little rivers that flow from the high Cordillera and afford Arica a bit of green before they enter the Pacific. At valley’s end the little Swiss train abruptly lifts up in a steady climb among absolutely barren hills, passes a couple of snow-sided volcanoes, nears what is called the world’s highest lake, and finally, after half a day, levels out upon the altiplano, the great plateau that is over two miles high.

Up there, some vegetation supports Indians herding llamas and sheep. It is these Indians, mostly from the Bolivian side of the border, who often wander on foot into Arica. Partly the lure is the market, in some cases closer for them than La Paz. But Chileans who have bothered to ask have been told that the real reason for the migration is just the lure of the sea.

In La Paz, many community leaders seem to feel that their land-locked condition cannot endure, because access to the sea is thought essential to the economic betterment they seek. The country maintains a navy, a merchant marine (based in Buenos Aires for the duration), billboards reminding the citizenry to look to the ocean. It almost seems that Bolivians consciously resort to imports in order to eat more seafood than the Chileans, whose tastes run to beef.

Chile rejects the argument that lack of a national port hampers Bolivian development. It cites the examples of Czechoslovakia and Switzerland. But one of the many ways in which South America differs from Europe is in the dependence on sea transportation. A function of LAFTA will be to encourage other forms of transport, and indeed the airplane has cracked the old dependence, but the ship is still paramount in carrying goods among the countries as well as to and from their foreign markets.

Chile, too, is only with difficulty emerging from an insularity imposed by its being the last stop on the world’s trade routes. The isolation is accordingly more exaggerated in its neighbor on the hill, Bolivia, with its 3.5 million people (give or take a million -- there has never been an accurate census). While some big international jets drop down a few feet to land at La Paz, they have to fly around once to frighten off the sheep grazing on the runway, and they must come during the day for the field is unlit. The terminal was begun in 1952 but is unfinished yet.

Few tourists come, so the mixed effects of that influence are little felt. The country has a wonderfully distinct aspect, symbolized in the Indian women. They are everywhere, uniformly round, impassive with a slight smile, draped in numerous colored skirts. They all tote a bundle on their backs, wrapped in a woven blanket of bright wools, the contents either their latest-born or their items for sale -- herbs or dried llama fetuses for medicine, silver bangles, fruits or just ground corn. And on every pig-tailed head a derby hat.

The affairs of state can be almost as quaint. My appointment with the foreign minister had to be postponed a day while an enraged delegation from the Spanish embassy pounded his table. It seems that the Minister’s secretary, in preparation for a gathering of the diplomatic corps, had addressed the Madrid envoy’s invitation to The Republic of Spain.

Whether the waters of the Pacific could wash away Bolivia’s insularity more effectively than economic integration may be a moot question. Between Chile and Bolivia, and among many pairs of continental neighbors, the clamor for righting old wrongs will slow the acceptance of new for mulae. But Frei and most of the hemisphere’s leaders with vision are betting that the economic advantages of sharing markets will slowly overcome the political inertia of isolation.

Industrialization is an ideology today in Chile and probably is so in all of the LAFTA lands. Though Frei is spending much time and money on agrarian reform, he and his fellow modernizers are convinced that the future depends on industrial development. That is why the market sharing is so important to the smaller states, and the big states with small effective markets.

On the basis of past performance Chile would seem to have as much reason as any state to hedge on integration. The general trade expansion among LAFTA’s nine-members during the organization’s first five years saw Chile’s position erode. In the ‘50s it was a net importer from LAFTA countries in the amount of $32 million annually. In 1965 this figure had risen to $42 million. Chile exported $80 million in copper, newsprint, nitrates, iron, steel, wood and miscellany to LAFTA, countries last year. It imported $121 million, almost exclusively agricultural products, from the same countries -- Argentina, Brazil, Colombia, Ecuador Mexico, Paraguay, Peru and Uruguay (Venezuela has just joined LAFTA). Chile ran a deficit with every main country.

Yet not only Frei but leaders in economic and business as well as political circles here are showing a willingness to open up Chile to foreign producers for the chance of competing themselves in neighbors’ markets. This may be the real importance of the Chilean auto experiment.

Certainly at this point the performance of the auto parts plan cannot be judged on either its national or international impact. But the tendency does seem to be toward improvement of the pastiche that once was auto assembling in Arica.

If the auto parts plan works, Chile will press still harder on similar departures in electronic equipment and petrochemicals. The middle range countries -- Venezuela, Colombia, Ecuador and Peru, considered with Chile to be a group in size and stage of development --are all said to be interested in the electronics market sharing. This sort of goal was the meat of the meeting in Bogotá last August of the presidents or representatives of these states.

The day is not here when Arica’s lizzies will be made of Bolivian tin, but the motion though slow does seem to be in the direction of economic integration. From here, that’s the way the trade winds look to be blowing.

The State Department regulation is known as the Dungan Rule around the embassy circuit, for Ralph Dungan, ambassador to Chile. He is known to have proposed the idea while he was in Washington before coming to Santiago. The rule has been closely enforced here, though bitterly resented, and there have been cases where personnel have left a check for their profit in sale of their car only to stop payment when they reached the United States. Auto dealers are fairly brazen in offering to buy low, with the difference passing under the table. Considerable money has gone to charity, however, including a small percentage given to Chilean charities. In other ports around the continent the potential profit is less great, but apparently the rule is often ignored. The constitutionality of the rule has been challenged in a case now before the U.S. Court of Claims.

Other embassies in Santiago have not followed suit, rather they attribute the rule to North American idealistic naiveté. The United States did get considerable laudatory publicity here recently when the car fund was used to pay for transportation to Texas of a little girl needing emergency surgery.


Mr. Diuguid is a 1965 Alicia Patterson Fund fellowship award winner on leave from The Washington Post. Permission to publish this article may be sought from the Foreign Editor, The Washington Post.

Received in New York November 14 1966.