Argentina paper - final

Running Header: Manufacturing in Argentina – Pro’s & Con’s 1

Manufacturing in Argentina – Pro’s & Con’s

Joanne Weddle

Friend’s University

Manufacturing in Argentina – Pro’s & Con’s 2

Introduction to Argentina

The U.S. is one of Argentina's largest trading partners with a historic high of $22 million

in trade in goods and services in 2011. U.S. exports to Argentina include machinery, oil, organic

chemicals, and plastic. U.S. imports from Argentina include mineral fuel and oil, aluminum,

wine, iron and steel products, and preserved foods. The two countries have signed a bilateral

investment treaty, and the more than 500 U.S. companies are among the top investors in the

country with nearly $15 billion invested in the country. U.S. direct investment in Argentina is

mostly in mining, nonbank holding companies, and manufacturing. In 2007, the U.S. and

Argentina modernized a bilateral civil aviation agreement to update safety and security and

provide for more-frequent flights between the two countries, allowing for increased volumes of

tourism and business travel. (CIA World Factbook, 2013)

Argentina benefits from rich natural resources, a highly literate population, an export-

oriented agricultural sector, and a diversified industrial base. Although one of the world's

wealthiest countries 100 years ago, Argentina suffered during most of the 20th century from

recurring economic crises, persistent fiscal and current account deficits, high inflation, mounting

external debt, and capital flight. A severe depression, growing public and external indebtedness,

and an unprecedented bank run culminated in 2001 in the most serious economic, social, and

political crisis in the country's turbulent history.

History U.S. – Argentina Relations

Argentina first established diplomatic relations with the U.S. in 1823 upon gaining

independence from Spain. Since that time both countries have enjoyed “regional peace and

stability, non-proliferation, human rights, education, cultural exchanges, and commercial ties.


The Government of Argentina has supported U.S. national and international security goals

through participation in international peacekeeping operations and advocacy for the

nonproliferation of weapons of mass destruction.” (Department, 2013)

Cooperation between both countries includes initiatives in the fields of science and

technology, “peaceful uses of nuclear energy, agricultural research and biotechnology, medicine,

and the environment.” (Department, 2013) The first bilateral joint science and technology

working group met in 2010, and in 2011 the two countries signed an agreement on the peaceful

uses of outer space. They also have a “bi-national energy working group.” (Department, 2013)

As of July 2013 Argentina is currently in dispute with the U.S. over defaulted payments

tied to investments in Hedge Funds that were tied to the mortgage market collapsed in the U.S.

economy during 2008. Argentina’s leadership frequently refers to the Hedge Fund as “Vulture

Funds”. “Argentina is appealing a lower court ruling that bars payments to the investors in

restructured Argentine debt unless holders of the nation’s defaulted bonds, led by billionaire Paul

Singer’s Elliott Management Corp. and its NML Capital Ltd. unit, are also paid.” (MercoPress.

South Atlantic News Agency, 2013)

In addition to strained U.S. relations, the bilateral relationship with Argentina has been

“difficult, due to the country’s relationship with the international financial community.” (US

admits relations with Argentina are “difficult” and calls for positive attitude, 2012)

To improve relations Argentina must “go back to having a positive relationship with the

international financial community and its creditors in the US and in the world,” (US admits

relations with Argentina are “difficult” and calls for positive attitude, 2012)

Argentina’s refusal to implement positive changes has “led president Barack Obama to

temporarily suspend tariff benefits to Argentina because the country has yet to honor


compensation payments involving 300 million dollars to two US companies, following a

favorable ruling from an international arbitration court.” (US admits relations with Argentina are

“difficult” and calls for positive attitude, 2012)

According to U.S., Assistant Secretary of State Western Hemisphere, Roberta Jacobson

“Of great concern is Argentina’s “decision to seize 51% of YPF belonging to Spanish oil

corporation Repsol arguing it creates “a very negative climate for investments” and affects the

“whole international community” (US admits relations with Argentina are “difficult” and calls

for positive attitude, 2012)

In addition to the “financial difficulties … security issues” … in February 2011 … the

Argentine government decided to seize instruments and other materials from a US Air Force

aircraft that was delivering in Buenos Aires support equipment for police training.” As a result

of the incident U.S. Officials have been unable to work issues such as cooperation in combating

the drugs trade.” (US admits relations with Argentina are “difficult” and calls for positive

attitude, 2012)

Numerous attempts to advance the U.S and Argentina relations in a positive directions

are routinely met with resistance. Republican Congressman Connie Mack, a member of the

Foreign Affairs committee said “Argentina was planning nothing good” and is ignoring “court

rulings” in reference to the International Centre for Settlement of Investment Disputes, which

depends from the World Bank … besides the suspension of tariff benefits, the diplomatic

disappointment, and the military aircraft incident, relations … suffered a further blow last March

when the country was included for the first time in the black list of countries not doing enough

about money laundering.” (US admits relations with Argentina are “difficult” and calls for

positive attitude, 2012)


Political History

Interim President Adolfo RODRIGUEZ SAA declared a default - at the time the largest

ever - on the government's foreign debt in December of that year, and abruptly resigned only a

few days after taking office.

His successor, Eduardo DUHALDE, announced an end to the peso's decade-long 1-to-1

peg to the US dollar in early 2002. The economy bottomed out that year, with real GDP 18%

smaller than in 1998 and almost 60% of Argentines under the poverty line. Real GDP rebounded

to grow by an average 8.5% annually over the subsequent six years, taking advantage of

previously idled industrial capacity and labor, an audacious debt restructuring and reduced debt

burden, excellent international financial conditions, and expansionary monetary and fiscal

policies.

Inflation also increased, however, during the administration of President Nestor

KIRCHNER, which responded with price restraints on businesses, as well as export taxes and

restraints, and beginning in 2007, with understating inflation data.

Cristina FERNANDEZ DE KIRCHNER succeeded her husband as President in late

2007, and the rapid economic growth of previous years began to slow sharply the following year

as government policies held back exports and the world economy fell into recession. The

economy in 2010 rebounded strongly from the 2009 recession, but has slowed since late 2011

even as the government continued to rely on expansionary fiscal and monetary policies, which

have kept inflation in the double digits. The government expanded state intervention in the

economy throughout 2012. In May the Congress approved the nationalization of the oil company

YPF from Spain's Repsol. The government expanded formal and informal measures to restrict


imports during the year, including a requirement for pre-registration and pre-approval of all

imports. In July the government also further tightened currency controls in an effort to bolster

foreign reserves and stem capital flight. (CIA World Factbook, 2013)

Economic Relations & Economy

Argentina’s economy is well known for its extreme volatility. In the past decade alone

Argentina has experience two very distinct periods in which there was a sudden rise and fall in

the economy and periods of hyperinflation. “Despite areas of concern, structural reforms

implemented in the 1990s have set Argentina on the path to sustained growth” (Pou, 2000) but

they implemented other measures that later eliminated the positive sustain growth.

In the late 1990’s Argentina removed most restrictions on trade and capital movements.

Which significantly opened the economy up to foreign investment and development. They

eliminated export taxes and most quantitative restrictions on imports. They also reduced import

duties, and established free entry and exit of portfolio and direct investment.

Public sector reforms substantially “reduced the scope of the public sector, entailed

privatizing almost all of the major public enterprises and had three main results. Public subsidies

to the enterprises were reduced or eliminated; the enterprises' efficiency and provision of

services improved dramatically; and funds became available to cover a substantial part of the

government deficit while other reforms, including of the tax system, were under way.” (Pou,

2000)

“Tax reforms increased consumption and income taxes and gradually eliminated many of

the more distortionary taxes (such as the one on exports). New and stronger laws increased the


government's ability to control tax evasion, while accelerated economic growth increased public

revenues.” (Pou, 2000)

A system combining public transfers and private capitalization replaced the public pay-

as-you-go pension system. The private pension system was optional but the majority of workers

switched to it. They reduced most industrial subsidies and encouraged the entry of new

international firms into the local market. This resulted in a dramatic change in the composition

and prices of goods publically available. The cumulative effect of “the reforms was to enable the

country to return to voluntary financing of its external public debt, which had been rescheduled

under the Brady Plan (named after the then U.S. Treasury Secretary, Nicholas Brady).” (Pou,

2000)

In 2008 however, Argentina announced it was taking over the 14-year old pension

system. The private pension system has been routinely raided in times of economic trouble. In

2008 the pension was worth $30 Billion and the move “channeled $400 million into the public

coffers to prevent default.” (Business, 2008) Argentina also nationalized a private oil company,

Repsol from Spain, further discouraging foreign investment.

Financial system reforms

Financial system reform is a process that continues to evolve, “with two benchmark

developments: the Convertibility Law of 1991 and the Central Bank Charter of 1992. The

convertibility law fixed the exchange rate at one Argentine peso per U.S. dollar, eliminated

indexing, and required the central bank to back two-thirds of the monetary base with

international reserves. These rules converted the central bank into a form of currency board (a

monetary arrangement in which domestic currency can be issued only in exchange for a specified


foreign currency at a fixed rate, limiting the board's discretion to create money by extending

credit to the government or the banking system), eliminating the possibility of inflationary

financing of the government deficit.” (Pou, 2000)

Banking regulations

Banking regulations increased competition between banks ensuring the safety of the

banking system. Restrictions on the entry of foreign banks and on the opening of new domestic

bank branches were eliminated. September 1991, capital requirements were implemented with an

initial rate of 3% and gradually increased to 11.5% in January 1995, substantially above the 8%

Basel Committee on Banking Supervision's recommendation for industrial countries. Reserve

requirements were set high, on average: 40% (later 43%) on checking and savings deposits and

0% (later 3%) on time deposits. Because of concern about moral hazard, deposit insurance was

eliminated, and the currency board restrictions on monetary policy stipulated in the Central Bank

Charter and the Convertibility Law curtailed the role of the central bank as a lender of last resort.

These measures strongly limited the safety net available to banks, reducing moral hazard in the

financial system.” (Pou, 2000)

The Tequila crisis in 1995 lead to a run on the banks following the devaluation of the

Mexican’s currency at the end of 1994. The devaluation of the peso lead to a decline of 18% of

the deposits within five months. This lead to severe repercussions for liquidity in the banking

system. (Pou, 2000) The decline was a valuable lesson for the authorities and “led them to revise

bank regulations significantly. They created two trust funds: one to help privatize provincial

banks and the other to aid in the restructuring or merger of troubled private banks. The central

bank's ability to extend rediscount operations with financial institutions under extraordinary


circumstances was increased through a change in the Financial Institutions Law that gave

substantial powers to the central bank to restructure troubled banks. The changes allowed the

central bank to divide the assets and liabilities of a troubled bank into a "good" bank to be sold

and a "bad" one (comprising the nonperforming assets of the original bank) to be liquidated,

which it achieved by transferring the "bad" bank's nonperforming assets—plus cash provided by

the deposit insurance agency—to the bank or group of banks absorbing its deposits.” (Pou, 2000)

The central bank set up a limited program of mandatory private deposit insurance in April

1995 with an initial limit of $20,000 per depositor, later raised to $30,000 to restore confidence

in the system. The central bank also opened contingent repurchase agreements with 13 private

international banks, triggered at its discretion. The contingent repurchase facility had been

enhanced by a line of credit with the World Bank and the Inter-American Development Bank for

a total of $1 billion, which became available if the private repurchase facility was triggered and

the central bank was required to meet margin calls because of declines in the prices of public

securities. (Pou, 2000)

Since 1995, bank regulations were further revised to impose more regulatory and market

discipline on banks. First, banks are now supervised under a CAMEL system—capital, assets,

management, earnings, and liabilities, where each aspect was assessed on a scale of 1 to 5, and

an overall rating for each bank is then expressed as an average of these scores, similar to that

used by the Office of the Comptroller of the Currency in the U.S.—and a BASIC system—

bonds, external auditing, supervision, information, and credit rating. All banks are inspected on

site by the superintendency at least every 18 months and more often if banks are having

problems.


Second, traditional reserve requirements were replaced by remunerated liquidity

requirements, which were based on the residual time to maturity of deposits and other bank

liabilities. The requirements had a decreasing rate that started at 20% for liabilities due in less

than 90 days and reaches 0% for liabilities due in one year or longer. Only 20% of these

requirements were channeled through the central bank. The rest was invested in a wide range of

very safe and liquid international assets. Minimum capital requirements were based on

counterparty risk, interest rate risk, and market risk for the trading portfolio. Total capital

requirements were the sum of the three requirements. Counterparty risk along Basel lines was

further adjusted by the bank's CAMEL rating and by loan interest rate spreads over

intermediation costs (as a proxy for risk premiums).

Following the Asian crisis of 1997-98, a rule (the so-called anti-bubble rule) was

introduced that increases the capital requirement for new mortgage loans when a nationwide real

estate price index surpasses certain thresholds. Standardized procedures for the origination of

home mortgages were introduced in 1998 to facilitate loan securitization. (Pou, 2000)

As a further measure of bank reform, between 1991 and August 1999, the number of

banks in the financial system declined from 167, of which 35 were public, to 119, of which 16

are public, and primarily as a result of mergers or closures following the Tequila crisis. In

addition, 16 small government-owned banks, mainly provincial, and the National Mortgage Bank

were privatized. (Pou, 2000)

The Central Bank Charter also made the central bank independent of the executive and

legislative branches and set as its principal goal that of maintaining the value of the domestic

currency. Also, by providing for the presidential appointment of a standing central bank

president and directors, it intentionally made their removal difficult. Under the charter, the


central bank is prohibited from financing provincial or municipal governments, public firms, or

the private nonfinancial sector. It can back the monetary base up to one-third with dollar-

denominated Argentine central government securities evaluated at market prices, but its holdings

of these securities may not grow more than 10% a year. (CIA World Factbook, 2013)

Payment system reforms

Before the reforms of the mid-1990s, payments were effected through 84 clearinghouses,

which were inefficiently operated. In 1995, the central bank and the banking associations

established a working group that generated widespread reform through the adoption of new

technologies. The system today consists of a real-time gross settlement system managed by the

central bank, an automated large-value clearinghouse, and two automated low-value

clearinghouses. (Pou, 2000)

Monetization advanced rapidly, and by 1999 M3* was over 30% of GDP. This broad

measure of money includes the monetary base plus both peso and dollar deposits and thus gives a

measure of the size of the financial system. Deposits per bank employee rose from $96,000 in

private institutions ($69,000 in public institutions) in March 1991 to $877,000 in private

institutions ($729,000 in public ones) in August 1999, and spreads have declined significantly.

Since the Financial Institutions Law took effect, 16 banks have been restructured, and in only 2

of these restructurings did the depositors suffer losses. The success of the reform is highlighted

by the fact that although the Asian, Russian, and Brazilian crises increased Argentina's country

risk, caused dramatic declines in asset prices, and precipitated a recession, they did not

precipitate either international or domestic capital flight from the banking system. (Pou, 2000)


Ongoing reforms

The reforms of the 1990s were extremely successful in bringing the economy back to a

sustained growth path. GDP growth averaged 4.7% in 1991-99 notwithstanding two recessions.

During 1992-99, the value of exports increased by 8.2% a year on average, and the volume by

9.4% a year, while employment increased by 12%. (Pou, 2000)

Two areas in which reforms are continuing were the public sector deficit at the national

and provincial levels and the sharing of revenues between the national government and the

provinces. Although the public sector deficit grew during 1999, in part because of the recession,

congress has recently passed three measures to address this problem. The Law of Fiscal

Responsibility mandates a reduction in the federal deficit over the next three years until a

balanced budget is reached in 2003. A tax reform law increased the tax rates on incomes,

personal net worth, and a number of consumer products. The third measure is related to

financing provincial governments that continue to depend on taxes raised at the federal level,

while the municipalities depend on taxes raised at the provincial level. A system needs to be

developed that improves the balance, at each level of government, between the political benefits

of public services and the political costs of raising revenues. A step has been taken in this

direction with a recent agreement that established a ceiling on future federal revenues to be

shared with the provinces. Federal tax revenues that exceed this ceiling will all go to the federal

government. (Pou, 2000)

The labor market was deeply affected by the structural reforms of the 1990s. Argentina's

unemployment rate remained high (14.3% in 1999), especially by historical standards (it

averaged 4-5% during the 1980s and 7.3% in 1990). Following the opening of the economy and

the privatization of public sector firms, capital imports increased dramatically and new capital-


intensive technologies were introduced. The rigidities of labor market institutions (such as

centralized bargaining, high severance costs, and high wage taxes) impeded the necessary

adjustments in labor demand. On the one hand, although some progress has been made in labor

market flexibility and wage tax reductions, the remaining rigidities limit the ability of labor

markets to adapt to the restructuring of the industrial sector. On the other hand, the introduction

of new technologies implies changes in the labor force skills that will be in demand. Education

will play a crucial role in helping the labor force adapt to changes in labor demand. (Pou, 2000)

Today Argentina currently boasts a labor force of 17.05 million people or which 5%

belong to the agriculture, 23% Industry, and 72% in the services secure as estimated in 2009.

The average unemployment rate for 2012 was 7.2% with an estimate of 30% below the poverty

line in 2010. (CIA World Factbook, 2013)

Some concerns remain

Although much progress has been made in establishing the basis for a sound financial

system, there are a number of ongoing concerns. Argentina's country risk premium remains high

and variable. The financial sector is still small by international standards and is expected to

continue growing more rapidly than output; thus, care needs to be taken to maintain the stability

of the system. Financial innovation, if too rapid, can weaken the regulatory framework and

requires continuous monitoring. Small and medium-sized companies are the main sources of

employment and output, and more needs to be done to improve their access to the system's

financial resources without impairing loan portfolio quality. The expected growth of the financial

system, as well as administrative and technological innovation, will further reduce

intermediation spreads and help Argentina achieve its objectives. (Pou, 2000)


As of July 2013 Argentina has disputed U.S. claims over defaulted payments tied to

investments in Hedge Funds (Vulture Funds) investments. Argentina has appealed a lower court

ruling that bars payments to the investors in restructured Argentine debt unless holders of the

nation’s defaulted bonds, led by billionaire Paul Singer’s Elliott Management Corp. and its NML

Capital Ltd. unit, are also paid. (MercoPress. South Atlantic News Agency, 2013)

Argentina was forced to restructured 93% of its debt due to the moratorium of almost

$100 billion dollars declared in the middle of the 2001 crisis, but a remnant of 7% of creditor and

bondholders that took the country to trial, in order to recover 100% of capital plus interest, in one

single payment without refinancing. The German courts rejected a petition from bondholders

related to the Argentine debt 'default', using a similar interpretation based in the 'pari passu'

clause that hedge funds pursued in New York which was accepted by Judge Thomas Griesa.

(German courts reject petition from hedge fund holders of Argentine debt, 2013) Britian and

other many other countries have publically stated that they would not support any more IMF

World Bank loans as a result of the current status.

The Argentine president made the admission during her speech to her peers in support of

Mercosur unity and condemning the attitude of four European countries that denied their air

space to Bolivian president Evo Morales who was forced to land in Vienna and wait thirteen

hours.

“I am going to be extremely sincere. I cannot fly to some countries in Europe with my

presidential airplane, because there might be a judge who will dispose a seizure order after a

‘vulture fund’ request”, explained Fernández de Kirchner.


“If I am aboard, I don't know if they won't seize me as well,” she said. “There are new

forms of colonialism, more subtle than those practiced centuries ago.” (Cristina Fernandez

admits few European countries are a flying option for her, 2013)

After joking that probably they would keep the plane and let her go “To the

disappointment of the opposition in my country”, Cristina Fernandez insisted that “we still see

people that want to disunite us, they want to divide us, and so they can take our natural

resources”. (Cristina Fernandez admits few European countries are a flying option for her, 2013)

Gross Domestic Product History

The GDP purchasing power in 2012 was estimated at $755.3 billion with an official

estimated exchange rate of $475 billion. At the beginning of 2012, Argentina experienced a

GDP real growth rate of 1.9%, while in 2011 the estimated growth rate was 8.9% and in 2012 the

estimate was 9.2%. The GDP per capita in is estimated for 2012 $18,400; 2011 $18,300, and

2010 $17,000. The 2012 GDP consisted of the following sectors; agriculture 9.1%, Industry

30.5%, and the service sector with 60.4% (CIA World Factbook, 2013)

Capital investment represents 21.8% of the GDP as estimated in 2012 with an annual

budget of $121.3 Billion in revenues with expenditures of $133.6 billion. This leaves a net

shortage of 12.3 billion. As a result the country has defaulted on a number of foreign loans.

Current public debt is 43.6% of the GDP (2012 est.) As of 2012 the current inflation rate is

25.3% and the average Commercial prime lending rate is 14.06% as of 2012. (CIA World

Factbook, 2013) 25.5% of the GDP in 2012 were attributed to income generated by taxes.

Inflation


“Argentina’s June inflation according to the ‘congressional index’ was 1.93%, and

23.78% in the last twelve months, it was announced on Thursday by the opposition members

from the Lower House Freedom of Speech committee.”

“Current policies implemented by Cristina Fernandez every day they pinch into

Argentine citizens’ pockets through inflation and the income tax floor which remains particularly

low and nets most wage earners”, claimed member of Congress Patricia Bullrich (Argentina:

private estimates’ June inflation reached 1.93% and 23.78% in twelve months, 2013)

“Lawmaker Ricardo Gil Lavedra said that the inflation data “can only mean suffering and

sadness for those unemployed, with fiscal problems and for who have to face soaring prices for

health and education services” and then blasted Domestic Commerce Secretary Guillermo

Moreno “whose hooligan and bully tactics have only confirmed the failure of this government in

containing prices”.

“Finally Eduardo Amadeo, another opposition lawmaker said he hoped that President

Cristina Fernandez makes decisions that favor the people and not Moreno. He admitted that after

a few months in which prices were frozen and seemed to ‘plateau’ they have again started to

climb steeply.”

“Private economic consultants Ferreres said that inflation in Argentina climbs in the

context of “an increasing budget fiscal deficit and with the country using (Central bank) reserves

to meet payments which means other strong alternatives will have to be found by the

government”

“Every month Argentina loses a billion dollars in reserves, 12 billion in a year, and this

will certainly complicate the economy by mid-2015”, anticipated Ferreres. However he

anticipates the government will continue “with the current policy until the end of its mandate in


2015, hoping to generate sufficient confidence among consumers and investors to paddle along.

(Argentina: private estimates’ June inflation reached 1.93% and 23.78% in twelve months, 2013)

Another financial indicator was the recent statements made from the Argentina Domestic

Commerce Secretary, Guillermo Moreno has given mills and exporters until Friday to normalize

the wheat market which has been under stress with bread prices doubling in the last month, and

farmers’ complaining about the worst harvest in decades because of government policies. The

Argentine Wheat Association (Argentrigo) criticized the policies of the federal government for

the grain market “over the last seven years.” The association said that the “interference in the

commercial sector” led to “a limited stock.” (Argentina prepares to confiscate wheat stocks to

ensure bread supply at ‘normal prices’, 2013)

Government Foreign Investment

“Argentina will offer energy companies incentives if they invest 1 billion dollars or more

over a five-year period as the country struggles to lift output and pare fuel imports a year after

seizing a majority stake at YPF from Spain’s Repsol.”

“Concern over Argentina's erratic policy on foreign investments is pushing regional

business entrepreneurs toward caution and or keeping them away from South America’s second

largest economy. Argentina nationalized Spanish oil major Repsol's majority stake in local

energy giant YPF last year, a move that triggered alarm in the international investor community.”

“The considerable drop in the parallel market contrary to forecast, can be attributed to the

strong campaign by the government of President Cristina Fernandez, particularly in anticipation

of the ‘tax amnesty’ bill or ‘whitewashing bill’ that is expected to become effective next week


following Congressional approval. (Argentina dollar markets waiting for implementation of the

‘whitewashing bill’, 2013)

Argentina's Membership in International Organizations

Argentina and the U.S. are active participants in many of the same international

organizations and forums, including the United Nations, Organization of American States,

International Atomic Energy Agency, the G-20, and the World Trade Organization. Argentina

joined the UN Security Council as a non-permanent member in January 2013.

Market Challenges

The primary market challenges for Argentina will arise from the slowing economic

growth, as well as the restrictions on import and foreign exchange restrictions imposed in late

2011 and early 2012. Argentine’s economy is uncertain in 2013 due to various factors including

lower commodity prices which is trending downward from historic highs. Economic disruptions

caused by the foreign exchange and import restrictions. GDP growth slowed markedly in 2012 to

1.9% from 8.9% in 2011, according to official statistics. However, the IMF and some private

analysts believe the official statistics may be inflated. Strong commodity prices and automobile

exports to Brazil contributed to Argentina’s rapid growth over the past several years. “Non-

automatic import licenses (NAILs) were ended late last year for all but a few products, but a

regime erected by the GOA February 2012 whereby all importers are required to request

approval from the Argentine Tax and Customs Authority (AFIP) prior to making each purchase

for import from abroad is still in effect and constitutes import licensing in all but name. This

system is a subject of WTO complaint by the U.S. and other countries against Argentina.


Moreover, the GOA’s policy of tying the percentage age of import application approvals to

changes in the trade balance and foreign exchange levels has added to the uncertainty. Sustained

inflation generally estimated at 25+% has raised the unit labor costs and resulted in a more

challenging business environment, especially as the real effective exchange rate has appreciated.

Limits on profit remittances have also discouraged new investment in Argentina. Lack of

transparency and a public comment period for new regulations adds to business uncertainty, as

does the lack of a credible national statistics agency. As a result of the aforementioned

government policies, many local and international firms based in Argentina have put on hold

plans for expansion or the adoption of new product lines until the economic climate and

regulatory regime become more clear, consistent and predictable.” (Doing Business in

Argentenia, 2013)

Market Opportunities

This Country Commercial Guide presents information for companies to determine the

market potential of the Argentine market. “This year’s top market sectors described in Chapter

Four are: Agricultural Machinery and Parts; Electronic Security Equipment; Food Processing

Equipment; Information and Communication Technology (ICT); Medical Equipment,

Instruments, and Supplies; Mining Machinery and Equipment; Renewable Energy Equipment,

and Travel & Tourism to the U.S. In the agribusiness sector bull semen, food ingredients, and

planting seeds are key areas with high potential.” (Doing Business in Argentenia, 2013)

If a company choose to do business in Argentina, it is “encouraged to work with the U.S.

Embassy to explore opportunities in all sectors. Services offered to American firms in Argentina

include help with market-entry or expansion strategies and advocacy for tender bid and policy


obstacles. The U.S. Embassy also stands ready to help U.S. companies understand and address

market challenges.” (Doing Business in Argentenia, 2013)

“In addition to the services of the U.S. Embassy, the U.S. Export-Import Bank is open for

short-and medium-term financing for U.S. exports to private sector clients in Argentina, but not

for entities tied to the GOA. The Overseas Private Investment Corporation (OPIC) offers

assistance to U.S. private investors in the form of political risk insurance, as well as loans and

loan guarantees for their direct investment in Argentina.” (Doing Business in Argentenia, 2013)

Market Entry Strategy

Marketing U.S. products and services requires a high level of research, preparation, and

involvement.

Companies intending to export to Argentina must ensure that their customers fulfill all

import requirements. Companies should contact the U.S. Commercial Service in

Argentina for advice.

U.S. companies exporting to Argentina generally market products and services through

local agents, representatives and distributors.

Close personal relationships are important to develop.

U.S. companies need to consider Argentina’s unique economic, demographic, and

cultural characteristics that make it unique from other Latin American countries.

The Argentine "typical customer" is difficult to predict due to new purchasing habits and

to the variability of income distribution and demography.


Promotion is an important component of the marketing mix. Visiting local or trade show

regional trade shows in Argentina, and to visit trade shows in the U.S. frequented by

Argentine buyers.

To protect intellectual property companies must engage qualified local professionals and

lawyers in contract negotiations. (Doing Business in Argentenia, 2013)

The U.S. Embassy Commercial Service in Argentina provides a wide range of services to

help U.S. companies enter and expand operations in the country.


Economic Freedom Index

(Argentina's Economic Freedom Score , 2013)

Background:

Under President Cristina Fernández de Kirchner, respect for markets and the rule of law

has deteriorated and corruption has boomed. Mrs. Kirchner has strengthened ties to regional

strongmen such as Venezuela’s Hugo Chávez and the Castro brothers in Cuba and threatened the

right of self-determination on the U.K.’s Falkland Islands. The government’s seizure of nearly

$30 billion in private pension funds in 2008, failure to settle with creditors since the 2002

default, and expropriation of Spanish oil company Repsol’s YPF subsidiary in 2012 have

severely damaged the country’s investment profile. The end of central bank independence has

also disturbed investors. Although the economy has benefited from booming commodity prices,


Mrs. Kirchner’s pursuit of expansionary fiscal and monetary policies has fueled already high

inflation. (Argentina's Economic Freedom Score, 2013)

Argentina’s economic freedom score is 46.7, making its economy the 160th freest in the

2013 Index. Its overall score has decreased by 1.3 points. With lower scores on six of the 10

economic freedoms including property rights and government spending, Argentina now ranks

27th out of 29 countries in the South and Central America/Caribbean region, and its overall score

is far below the regional and world averages. (Argentina's Economic Freedom Score , 2013)

The foundations of economic freedom in Argentina are increasingly fragile, severely

hampered by structural and institutional problems caused by growing government intrusion into

the marketplace. The judicial system has become more vulnerable to political interference, and

corruption is prevalent. (Argentina's Economic Freedom Score , 2013)

The policy mix of harsh capital controls, restrictions on imports and a series of

nationalizations have severely undercut economic freedom. Regulatory pressure on the private

sector has continued to rise, with populist spending measures and price controls further distorting

markets. The central bank’s independence was essentially destroyed in 2012 when its charter was

changed to allow the government unlimited use of the bank’s reserves to pay its debts. Efforts to

reform the rigid labor market have long been stalled. (Argentina's Economic Freedom Score ,

2013)


(Argentina's Economic Freedom Score, 2013)

Rule of Law

Property Rights 15.0

Freedom From Corruption 30.0

The courts are slow, inefficient, and vulnerable to corruption and executive branch influence.

Though the crime rate is fairly low, corruption is ingrained in the upper echelons of leadership

and the police. Typical court cases can take up to 14 years to be heard. Patent protection is lax,

and pirated copies of copyrighted products are widely available. The government manipulates

official statistics. In 2011, harsh restrictions were imposed on foreign-currency transactions to

protect dwindling dollar reserves. In 2012, the state expropriated the country’s largest privately

owned oil company. (Argentina's Economic Freedom Score , 2013)


Limited Government

Government Spending 52.1

Fiscal Freedom 64.3

The top individual and corporate tax rates remain at 35%. Other taxes include a value-added

tax (VAT), a wealth tax, and a tax on financial transactions. The overall tax burden now equals

33.5% of total domestic income. Government spending has risen to 40% of GDP. Public debt

remains at around 44% of domestic income. The budget deficit has doubled over the past year

due to pension nationalization and increased subsidies. (Argentina's Economic Freedom Score ,

2013)

Regulatory Efficiency

Business Freedom 60.1

Labor Freedom 47.4

Monetary Freedom 60.4

The business environment has deteriorated as bureaucratic interference has increasingly

undermined efficiency and productivity growth. The labor market remains rigidly controlled.

The government regulates prices of electricity, water, and retail-level gas distribution, pressuring


companies to fix prices and wages. Official government statistics on inflation are not

trustworthy. (Argentina's Economic Freedom Score , 2013)

Open Markets

Trade Freedom 67.6

Investment Freedom 40.0

Financial Freedom 30.0

A variety of restrictive non-tariff barriers reduce trade freedom. Hostility to foreign

investment persists, and through an emergency decree to bypass Congress the state has increased

its voting rights in partially government-owned companies. The financial system remains

hobbled by state interference and uncertainty about the direction of economic policies. State-

owned banks play a dominant role, reducing competition in the sector. (Argentina's Economic

Freedom Score , 2013)


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Argentina paper - final

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