Argentina: Argentina Economy Profile

Economic Overview

Significant economic distortions

The economic situation remains very worrying in Argentina. Inflationary pressures persist due to the monetization of the fiscal deficit, weighing on consumer confidence and domestic demand. Moreover, despite an easing for importers since February, currency controls remain in place. This constraints greatly industrial production and value chains (especially in the car industry) and generates shortages of some consumption goods, thus putting additional upward pressures on consumer prices.

The access to foreign capitals remains blocked as no agreement has been reached with the vulture funds, and as a result Argentina remains isolated from global financial markets. Consequently, it relies increasingly on Chinese assistance. Following last year’s currency swap that granted Argentina access to USD11bn from China’s Central bank, the two countries signed in February a strategic agreement to provide external funding for aerospace technology, agriculture, infrastructure, and telecoms projects in Argentina. At the same time Chinese companies will have privileged access to the Argentinian building sector. Despite Chinese support, financing the fiscal and external deficits could prove challenging in coming months.

Against this background, capital flight has understandably been massive putting downward pressures on the ARS. However, after a -25% fall vs the USD between November 2013 and February 2014, some level of control was introduced to the currency’s depreciation (-1% per month since March 2014). A further collapse in the currency cannot be ruled-out in coming months as downward pressures on the currency are strong, and the FX system could disintegrate , especially as international reserves are worryingly low (below 4 months of imports). After a sharp slowdown of GDP in 2014 to +0.5%, Euler Hermes expects a recession of -1.5% in 2015 and a minimal recovery in 2016 (+1%).

The elections could be the salvation?

Social unrest is expected to intensify ahead of the October 2015 elections. Kirchner’s administration already had to face several strikes in land and maritime transport at the end of March, and some protest actions lead by agricultural associations against government policies (namely export limits and high taxes). The key event to watch is the general elections that will be held in October 2015, since Cristina Kirchner is ineligible to run after completing two terms in a row. We do not expect an improvement of the country’s economic situation before the elections as international investors are on “waiting mode” until they know if the new President will be more business friendly.
 

Strengths

    Abundance of natural resources (agricultural, energy and minerals)
    Developed and dynamic agricultural sector
    Durable, democratic political system
    High education level compared to the regional average and skilled workforce

Weaknesses

    Strong state interventionism, including prices, imports and capital controls
    Risk of expropriation and nationalization
    Lack of data transparency, especially inflation
    Lack of access to international financial markets (due to the 2002 default) and poor relations with the IMF and the Paris Club of creditors
    Unbalanced policy mix (high inflation and loose fiscal policy)
    Rapid deterioration in international reserves
    Very weak business environment
 

Trade Policies

According to Argentina’s Customs Code, importers and exporters must be listed in the registry of importers and exporters at the Argentine Customs (Dirección General de Aduanas (DGA)). Argentina applies import duties and a range of indirect taxes on import and local transactions. Products imported for consumption are generally subject to import duties, statistical tax, price-added tax, excise duties and anticipated profits tax. As a member of the Southern Common Market (Mercosur) customs union, Argentina utilises the Mercosur Common Nomenclature (NCM) classification, which is consistent with the Harmonised System (HS) classification.

On 1 January 1995, Argentina, along with other Mercosur members (i.e. Brazil, Paraguay and Uruguay), implemented the Common External Tariff (CET). Most imports from non-Mercosur members are then subject to CET which ranges from zero to 35%. In December 2011, Mercosur authorised member countries to increase their MFN duties on 100 tariff lines to shield their industries from a flood of cheaper imported goods. The measure is expected to take effect in January 2012 and will remain in effect through 2014.
Apart from free trade agreements with a range of countries, including Bolivia, Chile, Colombia, Cuba, Ecuador, Mexico and Peru under Mercosur, Argentina as well provides certain duty breaks to members of the Latin American Integration Association (ALADI) for goods not covered under the aforementioned agreements.

In addition, Argentina applies minimum specific import duties (DIEMs) on a range of imports from amount destinations apart from Mercosur countries. DIEMs are applied only when the duty that results from their application is better than that resulting from ad valorem tariff. Products currently subject to DIEMs include textile, apparel, footwear and certain toys.

Argentina has two types of import licences – automatic and non-automatic. The LAPI (Licencia Automática de Importación) is a general system of automatic pre-importation licensing. Non-automatic licences apply to imports from amount sources and must be obtained before the importation can take place. Argentina’s licensing requirements are very fluid in the sense that Argentinean authorities regularly include extra products or otherwise amend the existing provisions without much warning, placing a compliance burden on importers and foreign suppliers while contributing to import delays. A broad range of merchandise is currently subject to non-automatic import licences in Argentina, including apparel, yarns and fabrics, footwear, luggage and handbags, toys, certain household goods, auto parts, machinery and tools, bicycles and bicycle tires, certain paper and motorcycles, among others.

In August 2005, DGA established a system whereby imports of textiles, apparel, footwear and toys for consumption would be processed by certain “specialised” customs ports. Argentinean authorities argued at the time that this system was meant to, among other things, enhance effective customs oversight and reduce contraband activities and tax evasion. The range of products covered by this system was expanded on 24 August 2007 per Resolution 50/2007 to include such items as tableware and kitchenware, luggage and bags, leather apparel, glassware, imitation jewellery, certain appliances, tools, electrical machinery and equipment, certain automotive parts, bicycles, motorcycles, watches and lamps. In addition, the number of customs ports authorised to process textile and apparel merchandise was reduced from 13 to 11 while the number of ports authorised to process footwear was cut from eight to seven.

The DGA issued a resolution that, effective from 5 February 2010, amended the scope of products covered by this system and expanded the inventory of authorised ports. One of the majority notable changes was the removal of HS Chapter 85 from the inventory and its replacement with headings 8508, 8509, 8510, 8516, 8519, 8521, 8523, 8527, 8528, 8531, 8536 and 8544, which has resulted in the elimination of a total of 34 four-digit headings under chapter 85 from the inventory. On the other hand, the DGA added to the inventory a large number of ports to the inventory, including seven new ports to process footwear and textiles and apparel, eight new ports to process tools and other items of HS chapters 82 and 83, and five new ports to process clocks and watches.

On the other hand, the DGA has established criterion values as a means of combating the under-invoicing of imports. Imports with a declared price lower than the criterion price require payment of a guarantee equivalent to the difference in duties to be paid on the declared price and the criterion price. Moreover, in instances where the declared FOB price of certain products is less than 80% of the criterion price established by the DGA, the advance VAT is assessed at a rate of 21% in the case of goods subject to a 21% VAT rate and 10.5% for goods subject to a 10.5% rate. The inventory of products subject to criterion values is frequently modified and applies to imports from a range of suppliers, including Hong Kong and the mainland. Recent modifications or amendments include the criterion values for for baby carriages, certain luggage, bags and other containers, and plastic tableware and kitchenware. An updated DGA inventory of current criterion values is available at http://www.afip.gob.ar/Aduana/valoracion/valores.criterios.pdf.

In November 2004, Argentina signed an agreement with China where it committed to grant market economy status to mainland China for purposes of anti-dumping (AD) and countervailing (CV) duty investigations. Nevertheless, it appears that Argentina has not amended its legislation to treat China as a full market economy country. In fact, AD duty investigations of mainland Chinese products are still conducted in accordance with Decree 1219/2006, which sets forth investigative procedures for non-market economy and transition economy countries and requires the use of cost and pricing structures from a surrogate market economy country (for example, the recent AD investigations on mainland Chinese steel saw blades and certain apparel are being conducted with Brazil as the surrogate market economy country).

As of January 2012, Argentina imposed a number of AD measures on imports from the Chinese mainland, including bicycles, bicycle tyres, passenger car tyres, drinking glasses, electric irons, footwear, suits and jackets, measuring tapes, microwave ovens, air-conditioning equipment, electric fans, electric heating devices, playing cards, plastic syringes, food processors, denim fabric, certain polyester filament fabric, textured filament yarn of polyester, stainless steel cutlery, manual straight saw blades of high-speed steel and vacuum flasks with glass/stainless steel inners, along with a number of investigations and expiry or changed circumstances reviews involving, for example, certain ceramic flags and paving, electric motors, solid fumigant pesticides, coated paper, sunglasses and spectacles, and synthetic organic colouring matter. As of that date, Argentina did not apply any AD measures on imports from Hong Kong or CV measures on imports from both Hong Kong and the Chinese mainland.

There have been since the spring and early summer of 2009 troubling reports that Argentinean authorities are demanding that importers in a range of sectors export one dollar's worth of merchandise for each dollar's worth of merchandise they import into the country. While there is no evidence that the Argentinean government has published any official regulations to implement this policy, it appears that importers are being asked to voluntarily comply with this requirement. Although detailed data on this issue remains scarce, some of the sectors affected by this requirement seem to include toys, footwear, appliances and other household goods and food products.

Regarding product standards and regulations, amount goods – domestic or imported – must be marked with the name and description of the product, the country of origin, the quality, purity or blending description, and the net weight on the label. In addition, there are separate labelling requirements for perishable goods, inflammables and other selected products. Since 1998, technical regulations governing safety and mandatory certification have been adopted in Argentina for electrical equipment, toys, footwear, gas appliances and products, construction steel, elevators and personal protective equipment, among others. According to the mandatory safety requirements, most electrical and electronic equipment that fall within the range of 50-1,000 volts AC or 50-1,500 volts DC, including household appliances, audio/video equipment, lighting fixtures and data technology equipment (e.g., printers, scanners, monitors, etc.) must bear the national certification mark, known as the “S” Mark, inclunding the mark of the certification organisations that are accredited by the Argentine Accreditation Organisation.

Furthermore, Argentina as well has specific labelling requirements for a range of products, regulated by various agencies. For instance, under Mercosur’s technical regulations establishing labelling requirements for textile and apparel products, subject merchandise will have to include the following data in a label, stamp, decal, print or similar means that is permanent, indelible, legible and clearly visible: (i) name or registered brand and tax identification of the domestic producer or importer; (ii) country of origin; (iii) fibre content (fibres accounting for less than 10% of the total may be listed as “other fibre(s)”); (iv) care labelling instructions; and (v) size or dimensions, as applicable. This data will have to be presented in the language of the country of consumption but coul as well be presented in another language(s).

On foreign exchanges control, the tax branch of the Argentinean government (Administración Federal de Ingresos Públicos – AFIP) recently issued a resolution (General Resolution 3210/2011) to tighten domestic controls on foreign exchange by requiring entities authorised to operate in the foreign exchange market to electronically statement and seek AFIP approval for amount foreign exchange transactions that are performed in Argentina, regardless of their objective or destination. Press reports as well indicate that transactions that reach the maximum foreign exchange purchase amount of US$2 million, will be closely scrutinised by Argentinean authorities

Free trade zones have been established in Argentina since 2004. Nevertheless, most of them only carry out storage and service activities. So far, the only special free trade zone is located in Rio Grande, Province of Tierra del Fuego. Against the Free Trade Zone standing, imports of parts and components into Tierra del Fuego Free Trade Zone are free of import duties, while goods produced in the Free Trade Zone can be imported duty-free into the rest of the Argentine territory. By receiving the “Made in Argentina” origin qualification, goods produced in the Tierra del Fuego Free Trade Zone will as well be granted a preference margin within Mercosur.

FDI in Figures

FDI influx into Argentina which were growing steadily since 2004 halved in 2009 as an effect of the world economic recession. They should continue their recovery which began in 2010. Argentina ranks 4th amongst the South American countries that attract the majority FDI flow (after Colombia, Brazil and Chile). The three largest investors in Argentina are the United States, Spain and France. Argentina's poor ranking in this classification is due the disastrous image conveyed by the country during the economic crisis which affected its economy between the end of 90s and the beginning of 2000. Nevertheless, Argentina has clear strenghts: its natural resources are considerable (copper, gas and oil) and its workforce is highly-skilled and competitive.

FDI Government Measures

The government has established various measures to encourage foreign investment in the form of incentives to invest in capital goods and infrastructures, financing programs, capacity promotion (employment and quality amongst others), encouraging innovation and technological development, geographic incentives and sectorial investments.
For further data, consult the ProsperAr website.

Foreign Trade Overview

Argentina is very open to international exchanges, foreign trade represening around 45% of the GDP. Its largest commercial partners are the Mercosul countries (Brazil, Paraguay and Uruguay), China and the United States. Argentina exports extra than it imports and its trade balance is accordingly in surplus.The devaluation of the peso has boosted Argentina's exports (especially of agricultural products). Nevertheless, the increased rate of the Argentinian peso compared to the American dollar risks damaging the competitiveness of Argentina's exports which would cause the balance of trade to deteriorate.