Essay, Research Paper: Argentina`s Economy


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Argentina lives in a democracy
since 1986. Before this year lived it under a military regime. In the nineties
under the presidency of Menem the country experienced a great increase in the
liberalization of trade. Argentina has a free market economic system. Due to the
recent privatization program, the State now has a very limited role in the
economy. According to the Competitiveness Report of the World Economic Forum
Argentina is classified as one of the most open, least protectionist countries
in the world. Its currency is convertible to the US dollars and there is total
freedom for moving capital internationally. Argentina has conducted one of the
most intensive privatization programs in the world. The telephone company,
airlines, most railroads, electric power production companies (including
hydroelectric power plants), the Argentine oil company YPF (bought by the
Spanish company Repsol) steel mills, ports, TV stations and most public services
were transferred recently to the private sector. Consistent with Fundacion
Invertir the combined value of privatized firms amounts more to more than US$ 30
billions. Many foreign firms have participated in this large-scale privatization
program. Foreign investors do not need to seek any kind of prior approval and
are free to repatriate full amount of their capital and earnings any time.
Foreign and domestic companies are treated equally. Under the law, they have
access to all economic sectors and are eligible for incentive program and state
procurement. II. TRADE PATTERN It is hard to state the type of trade that exists
between Argentina and Brazil in the automobile industry because both countries
import and export cars of the same brand and very similar models. Volkswagen
produces some of its model of cars in Argentina and some others model in Brazil.
The reason for this is to achieve economies of scale; each country specializes
in a certain model of car, by doing so they reduce the cost of each additional
unit. Another reason for specialization of production in each country is that it
might be cheaper to produce a certain model in either Argentina or Brazil.
Several companies as Volkswagen have invested in production facilities in
Mercosur. Additionally, joint ventures between local and foreign parts
manufacturers have improved quality. A report on Argentina auto parts/services
announced that local production in Argentina was estimated at $1.9 billion in
1997. From 1996 to 1997 the import market for automobile parts and accessories
grew by 30 percent to $2.2 billion. Imports from Brazil represent 35 percent of
the local import market. The gains in imports with exports from Brazil boost
employment in Argentina by a 30 percent and bilateral trade with Brazil as well
as nine fold growth in investments. (States-USA). See AUTO PARTS/SERVECE table
in appendix. In the period of July 1997-June 1998 Argentina exported wheat to
the following countries: Brazil, Turkey, Egypt, Iran, Peru, Indonesia, Sir
Lanka, Jordan, Tunisia and Kenya. Argentina experiences “inter” trade with
these countries because it has the comparative advantage of producing wheat at a
cheap cost. Soils in Argentina are fertile and farmers do not need to use as
much fertilizers as in the case of European farms. European farms have been
harvested for years. As a consequence of this farms need to be fertilized or
remain unused for a period of four years to produce crops. Argentina engages in
“inter” trade on the exports of corn to the following counties: Japan,
Brazil, Egypt, Taiwan, Peru, Chile, Spain, Iran, Venezuela, and Colombia.
Argentina exports corn to Brazil because it does not produce enough corn to
supply its domestic demand. Argentina also produces “Inter” trade exports of
sorghum with Japan, Mexico, Taiwan, Colombia, Norway, Spain, and Chile.
Argentina and Brazil benefit from trade among themselves because each country
exports something in which it does not have the comparative advantage or in
which its domestic production is not enough. Argentina imports coffee and sugar
from Brazil. Argentina does not produce coffee while Brazil is the largest
exporter in the world. In 1997 was the first time in 67 years that Argentina
exported beef to the United States of America. This country has been declared
free of foot and mouth disease in May 1997. Beef is an example of “Inter”
trade between Argentina and countries as Brazil because Argentina’s production
exceeds by far its demand. The “Comparative International Statistics” has
ranked Argentina as the number 1 country in the consumption of beef followed by
the United States in a second place. Argentina, as well as the US, has been
struggling to export their beef in the European Union. Both countries had no
positive results due to the high subsidies given by the European governments to
their farmers. Though primary products account for 38 percent and 37 percent for
agricultural manufacturers Argentine cattle ranchers as well as farmers receive
no subsidies from the Argentine government. They were not financially aided for
the floods they have suffered with “El Nińo” current in 1998. The Argentine
government hopes to export beef to Asia, especially to Japan. Argentina exports
oilseeds in the type of sunflowerseed or soybean to Brazil, China, Costa Rica,
Egypt, Germany, Holland Indonesia, Italy, Japan, Lebanon, Malaysia, Russia,
Spain, Taiwan, Thailand, United Kingdom, United States, and Venezuela. As
reported by the U.S Department of Agriculture, (Foreign Agriculture Service)
China was the largest importer of soybean in June 1999. The opening of the
economy of China and its possible entrance in the WTO could increase
Argentina’s exports of soybean and other products to China. III. TRADING
PARTNERS Argentina’s dominant trade partner is its largest neighbor, Brazil.
Brazil achieved this standing in 1992 and so far has retained it in every year
since then. In 1994 Brazil accounted for US $ 7.98 billion (21.3) percent of
Argentina’s total trade, in 1995 this grew to $9.658 billion (23.5 percent),
by 1996 total foreign trade with Brazil grew 25 percent. The nation’s second
largest partner was the US, with $ 6.110 billion (16.3 percent) of total trade
in 1994, $ 6.011 billion (14.6 percent) in 1995, $ 6.72 billion or (14.2
percent) in 1996, and $ 8.285 (or 14.6 percent) in 1997. Argentina conducts
almost 42 percent of its trade with these two countries. (World Bank) Argentina
also trades with the following countries: Italy (US$2.470 billion), Chile (US$
2.598), Germany (US$ 2.155), Spain (US$ 1.873), China (US$ 1.872), France (US$
1.679), and Japan (US$ 1.681). (Stat-USA). The top ten trade partners accounted
for more than 72 percent of Argentina’s trade in that year. Mercosur has
significantly affected Argentina’ trade relationship with its neighbors.
Mercosur means Market of the Southern Cone. The cone representing Argentina,
Brazil, Uruguay and Paraguay in South America. As said by Stat-USA, this market
is “one of the largest and most dynamic integrated markets in the developing
world, and close cooperation between Brazil and Argentina-historic
competitors-is key to mercosur’s impressive growth. Argentina accounts for 27
percent of Mercosur’s GDP; Brazil share exceeds 70 percent. Each country in
the Mercosur has preferential agreements with each other. The average
trade-weighted external tariff is 17 percent. 85 percent of goods are included
in Mercosur’s common external tariff, with the balance to be phased into he
common external tariff by 2006. Mercosur members’ countries expect to
implement a common auto policy by 2000, which is to replace the current quota
and tariff system. Argentina’s trade with its other neighbor countries is not
as significant as the trade it has with Brazil. Nevertheless, Trade between
Argentina and Bolivia (56.4 percent), Peru (20 percent), Uruguay (12.8 percent),
and Chile (8.3 percent) has grown in 1997. Fundacion Invertir maintains that
trade with Chile has been increasing consistently since 1995. In 1996 trade with
Chile was already up 17.6 percent, to US$ 2.33 billion, and in 1997, it rose to
US$ 2.598 billion. With the exception of its top two major suppliers, Argentina
gets its imports from a wide range of sources, non for which accounts for a
particular large percentage of its generally well diversified trade. In 1997 the
major sources of Argentine imports were the US, with US$ 6.089 billion (20
percent) and Brazil’ with US$ 6.896 billion (22.7 percent) together these two
suppliers accounted for almost 43 percent of imports into Argentina. When the
next three suppliers-Italy (US$ 1.741 billion, 5.7 percent of imports to
Argentina), Germany (US$ 1.654billion, 5.4 percent), France (US$ 1.37 billion,
4.5 percent)-are added, the top five represent almost 59 percent of all imports.
In 1997, the fastest growing exporters to Argentina were Colombia (up 81.6
percent), Paraguay (75.8 percent), Canada (61.1 percent), Brazil (29.5 percent),
and Chile (22.6 percent). (Fundacion Invertir) IV. POLICIES OF TRADE Argentina
has adopted common external tariffs of 0-20 % since the introduction of Mercosur
in January 1995. For trade with third parties, tariffs of 10% apply to capital
goods, of 15% to most intermediate products and of 20% to finished goods. A
"statistical" import-tariff surcharge of 3% applies to all goods
except those coming from other Mercosur countries. As of October, Mercosur
raised its common external tariff level by 3 percentage points. However, for
companies importing to Argentina, there is no impact since a "statistic
tax" of 3 percentage points was eliminated as a requirement imposed by the
World Trade Organisation. In October 1995, Argentina suspended import of fresh
fruit from California in response to Oriental fruit fly detection in that state.
In addition, certain U.S. fruits, such as Florida citrus, are currently denied
access to Argentina, while others face uncertain and non-transparent phyto
sanitary entry requirements. "In January 1997 during a Special 301
out-of-cycle review (OCR), the U.S. Government announced the suspension of 50%
of Argentina's GSP benefits effective in May 1997 due to Argentina's lack of
patent protection for pharmaceuticals. U.S. officials continue to strongly urge
Argentina to improve its patent and data exclusivity regimes." (U.S.
Department of Commerce) Argentina has a free ports zone in Tierra del Fuego and
La Plata. The executive Decree 1139 o 1998 allows duty free imports of goods
that are not produced in Argentina and that are designated in high priority
industries. Other imports incur 50 percent of the normal tariff. Importation of
equipment under bond is possible against a deposit equal to the item's import
duties. Upon re-export, the deposit is refunded. As stated by "The
Economist Intelligence Unit" report of June 1998 in Argentina more than
sixty companies have enlisted to set up shop in the new Free-Trade Zone (FTZ) at
the port of La Plata, capital of the province of Buenos Aires. The La Plata FTZ
started operating in the second half of 1997. V. CONCLUSION Argentine has
experienced a trade balance deficit for the past 30 years. In 1991 with the
presidency of Menem the country opened its trade barriers and the Mercosur was
put into action. In 1995, in reversal of a four year trend, Argentina had a
trade surplus of US$ 2.177 million with its Mercosur partners, a similar trade
surplus was reached in 1996 (US$2.093 millions), and in 1997 (US$1.888 million).
Nevertheless there was a trade deficit for 1998 and it is expected to follow the
same trend during 1999 due to the devaluation of the Real. The crisis in Brazil
spread into Argentina because Argentine exports decreased and import from Brazil
increase. Goods were more affordable in Brazil than in Argentina. This year
Argentina is suffering from recession and lack of liquidity. Unemployment
estimated in 16 % is rising because businesses are closing down. Presidential
elections held in October 24, 1999 also added more financial insecurity this
year. The currency board is committed to maintain a fix exchange rate of one
dollar for one peso. This fix rate makes our exports expensive and in
disadvantage for trade. Argentina should not rely so strongly in its Mercosur
partners for its exports. Especially in the case of Brazil due to the lack of
stability of this country. Argentina should try to open alternative routes of
trade with Asian countries like Japan. As informed by the November newsletter of
Fundacion Invertir Japan has approved Argentine wheat to be exported in Japan.
In Asia Argentina has only exported wheat to Indonesia up to now. Soybean is a
primary product in which Argentina has the comparative advantage on the factors
of production due to good soils and low costs of production. Soybean is widely
eaten and it is contained in many food items. Soybean and soybean derivatives
(oil and meal) exports could be promoted not only in Asia but as well as in the
many other countries. Argentina has to focus in diversifying its exports,
increasing production of high-value-added goods and create alternative trade
partners in case Brazil's financial system shakes. Not only Argentina has
current account deficit in merchandise but in invisibles (services), investment
payments, and transfers. Argentina has generally maintained a deficit position
in trade in services, and has historically paid out more investment income than
it has received, keeping its finances on edge. Countries whose foreign direct
investments keeps up with its domestic growth can afford such disparities.
Nevertheless Argentina's deficit current account shows that the economy might be
hurt even more by capital flight. Thus the development of exports, especially
nontraditional ones, is taking on greater urgency. In recent years exports of
manufactured products increased at respectable rates. "In 1995 industrial
products grew 40 percent while primary products and manufactured agricultural
products each grew 29 percent. In 1996, exports of industrial products decreased
0.6 percent, primary products grew 21 percent, and manufactured agricultural
products 13 percent. In 1997, exports of industrial products grew 27 percent,
and manufactured agricultural products 7 percent, however the primary products
decreased 2.4 percent. Imports of capital goods and parts are a major component
of total imports, which are being used to increase productivity."

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