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Argentina seeks a deeper integration to the global economy

Last December, President Macri assumed office and his administration rapidly took measures to solve the balance of payment crisis which was the underlying cause of the import restrictions that were in place during the previous four years. Since then, Argentina has normalized its flow of imports and sought a deeper integration to the global economy by incentivizing foreign investment and removing trade barriers. However, the level of openness that Argentina aims at achieving and the pace of the integration remain uncertain.

The Balance of Payment Crisis

At the end of 2011, Argentina entered into a balance of payment crisis which was the main driver of Argentina´s international trade policy during the following four years. The prior administration had been dealing with this crisis mainly with two tools: (1) the Import Prior Sworn Statement ("DJAI") System, under which all imports have to be authorized by the government, and (2) the regulatory and de facto restrictions to the purchase of foreign currency.

The criteria for obtaining the approval of the DJAI were not specified in the regulations and the parameters used by the authorities to grant them varied through time. Since the DJAI system was a balance of payment tool rather than a protectionist measure, the focus of analysis was more on the effect that the import had on cash flows than on the domestic industry. In general, it was easier to obtain a DJAI if the importer declared that it would not access the foreign exchange market to pay for the imports, was able to balance its own international trade position, or committed to limit the volume of its imports to an agreed budget.

As the inflation outpaced the devaluation of the Peso, the balance of payment crisis became more profound and restrictions to the import of goods and transfer of funds abroad became stricter. International discontent with Argentine policies grew and, eventually, the EU, Japan, and the United States initiated a dispute resolution process before the World Trade Organization. At the end, the DJAI System and the trade related restrictions in place in Argentina were found to be incompatible with the GATT both by the Panel and the Appellate Body.

The balance of payment crisis and restrictions to the import of goods were two of the most pressing issues in the agenda when the new administration took office at the end of last year.

Normalization of the Import Flow

Marci's administration identified the balance of payment problem as the main restriction to economic growth and was determined to solve such crisis rather than continue administering it. This resulted in significant changes in two areas: import licensing and foreign exchange controls.

Soon after assuming office at the end of last year, the new Central Bank authorities allowed residents to purchase up to US$2 million per month as freely available funds (i.e. without having to use them to cancel an authorized obligation) and lifted the de facto restrictions existing for the purchase of foreign currency. Regarding the specific case of payment of imports, the prior administration had authorized a large amount of imports but it did not authorized its payment and, therefore, there was a large stock of outstanding trade debts – mainly by local subsidiaries with their foreign affiliates. The Central Bank freed the payment of imports shipped after December 17, 2016 and set up a schedule for the gradual payment of the stock of trade debt.

However, contrary to the expectations, the loosening of foreign exchange controls did not result in a significant increase in the demand of foreign currency. Moreover, an increase in the interest rates led to a strong demand for Pesos and its appreciation in real terms during the last year. The Central Bank, now facing an upward pressure on the Peso, was able to normalize the payment of trade debt ahead of schedule and to remove almost all foreign exchange restrictions on Argentine residents. Currently, there are no balance of payment concerns related to international trade.

The administration also abrogated the DJAI system, which was condemned by the WTO Appellate Body and severely criticized by many local producers whose supply chains were affected. However, the administration created a new system, called SIMI, which in its face is very similar to the DJAI and also reintroduced the non-automatic licensing system which has raised the concern of WTO members.

During the last year, the SIMI and the non-automatic licenses have been timely granted and there have been no widespread complaints by importers. However, the administration has been actively monitoring the trade flow and made changes in the products reached by the non-automatic licenses. Therefore, while until now no significant trade restrictions have been put in place by the administration, the legal tools used in the past to manage the flow of imports are still in place.

Integration to Global Economy

The administration made it clear that it wants to end the trade and financial isolationist policy of recent years. Attracting foreign investment has been expressly pointed out as one of the key priorities. The administration took several steps in such direction, such as an ambitious tax moratorium, the settlement with sovereign debt hold-outs, the reforms to the capital market regulations and the hosting of investment forums.

On international trade policy, the government is trying to lift trade barriers which prevent the access of Argentine products to foreign markets. Opening markets for Argentine beef, lemons, sugar and other food products have been among the top priorities of the government. It has also been negotiating preferred tariffs under the General System of Preferences. At a more ambitious scale, the government has expressed its willingness to reach a Mercosur-UE trade agreement and has shown interest in the TPP.

As a consequence, the government has been willing to avoid trade disputes with its major trading partners and is considering reducing tariffs on certain specific products, such as computers and tablets. However, as the Argentine economy still fights to get out of recession, the pressure from the domestic industry to turn to a more protectionist policy is increasing.

Conclusion

The government has mostly normalized the flow of imports and took several steps towards the opening of the international trade and the promotion of foreign investment. The pressure of the domestic industry to turn into protectionist policies and the recent international developments in Europe and the United States may hinder this process. However, the government seems to continue to be committed to a higher degree of integration of Argentina to the global economy.