President Ricardo Lagos of Chile, in an exclusive interview with the Pacific Council, discusses globalization, international trade and politics in the aftermath of the September 11 terror attacks.

You've noted that trade is critical to Chile, so how concerned are you that the September 11 attacks could lead to transportation bottlenecks, protectionism and other obstacles to increased trade?

I'm sure that the question of security clearance at ports and airports is something that we will have to learn to live with. How we improve our security clearance and at the same time speed up the way that goods are going to be moved is something I am sure we will learn how to do. You have two options: to go to a more isolated world or you accept that to be a more globalized world means more trade.

What new measures can you take to stimulate exports from and investments in Chile?

There have been some measures in connection with capital movement that now are much more liberalized than before. Two, we have taken some measures like the issue of our government bonds in order to make sure that the markets make distinctions between different countries. It was a tremendous success. (Note: Chile sold $650 million in bonds priced to yield 7.226% annually to international investors on Oct. 11) Three, our budget next year represents a fiscal expenditure growth of almost 5 percent, and therefore I would say it's an anti-cyclical budget.

You earlier told President Bush that the most important thing in pursuing terrorists is "not to make the just pay for the sinners." How do you feel about the U.S. response so far?

I know it is very difficult in this kind of scenario to not have some innocent people being killed. And this is why I say one of the most difficult things probably is how is he going to target to make sure the terrorists will pay and not innocent people. And this I guess is the major challenge that you have. Sooner than later you will need to go to some kind of attack that's more on the ground than from the air. That's the only way finally to find where the terrorists are. And this is something that still remains to be seen. But nobody can be comfortable when seeing innocent people in a hospital who were burned. And you feel uneasy.

What can Chile, and the 19-member Rio Group of Latin American nations, do to help fight terrorism?

We know what our limitations are as a small country. What we can offer is very little. Nevertheless our major effort should be to make sure that within our own borders we don't have members of terrorist groups that participate eventually in actions like the one we had. To keep an open eye on this area is important. It also means in some cases it is going to be necessary to (exchange) information with different services. What is important is to share information.

Are you concerned that the United States may now be viewing the world through a single prism as it did during the Cold War, the difference being that then it was anti-communism and now it is anti-terrorism?

In this new kind of diplomacy in this tremendous effort, as long as you are against terrorism you are on the good side. I agree with you, but in the long run, in order to fight terrorism you need to be with the good guys, and the good guys are those guys that accept the rule of law. I mean the moral superiority, it's important in a fight like this.

In light of the strong showing by the Peronist opposition in Argentina's recent nationwide elections, how confident are you that free-market, democratic systems can endure in Latin America?

It's very difficult to think of a different system. It's true, a huge country like Brazil may attempt to grow inward, something like what's happening with China. No matter what happens in the world China keeps growing at 7 percent. But I doubt it is going to be possible (for Chile) given the size of our economy.

Can Chile and the United States conclude a free-trade agreement by the end of this year?

I'm not sure its going to all be finished this year. The technical teams are working very hard, and both teams have very clear orders to try to conclude before December. But the issues are rather big.

But you are confident it can be concluded in a timely fashion?

That's my impression (regarding) the negotiating part. There are two steps, you see, the negotiations and what is going to happen in Congress. That's another story.