THE TRADE AND INVESTMENT ROLE OF ARGENTINA FOR US FIRMS SEEKING TO ESTABLISH OPERATIONS IN MERCOSUR

by Ivanna Garibaldi ^©

Submitted to the Committee on Undergraduate Honors at Baruch College of The City University of New York in partial fulfillment of the requirements for the degree of Bachelor of Business Administration in International Marketing with Honors.

 

1. ABSTRACT

This thesis presents Argentina as a "trade bridge" to Mercosur. It was on March 26, 1991 that Argentina, Brazil, Paraguay, and Uruguay signed the agreement to enlarge their domestic markets through economic integration.

The concept of "trade bridge" depicts Argentina as a potential link for American firms seeking to invest in and trade with the rest of the Mercosur nations. Argentina can be the principal gateway into these other emerging markets and establish the first means by which this expansion can take place. This thesis attempts to answer key questions such as:

1. Is Argentina more suitable for trade with US companies than the other Mercosur countries? and if so, why?
2. Which US industries will benefit? How will specific industry participation affect Argentine-US trade and overall investment flows?
3. How can American companies benefit from trade and investment with Argentina, and through Argentina, trading with Mercosur countries?

As the countries within Mercosur consolidate their respective programs of modernization, regional economic integration will move forward even more rapidly, since the existence of Mercosur will indeed ease the coordination of trade, exchange rate, fiscal, credit, and other macro-economic and sectoral policies. (Carlsson, 1997)

Within Mercosur, Argentina has not only reversed the poor economic performance evident during the past ten years, but during the 1990's its economic improvement has been of the most successful of Western nations. (Campbell, 1997).

Trade patterns and foreign investments volume has increased dramatically as a result of improved economic conditions, legislation reforms and privatization efforts. After Brazil, the US represents the most important trade partner for Argentina. Since 1989 activity between the two nations has evolved into a dynamic exchange of goods and services. The most notable evidence of this, are the increased establishments of operations by top American companies in Argentina. Another notable example are the innumerable privatization projects in which US firms have so far dominated.

There are vast opportunities in distinct industries including food, chemicals, automotive, mining, communications, petroleum and natural gas, computer services, insurance and banking, hotels and supermarkets.

The greatest opportunity for US firms exists in the technology-service industry including automation through computers, networking devices and other telecommunication products. Argentina represents a growing market which possesses a population whose purchasing power and consumer needs are increasing at record pace. It is necessary for these firms to realize the potential "link" that Argentina can establish for future expansion into the other Mercosur nations.

Argentina as a "trade bridge" will link these US companies to a region of vast economic growth and wondrous opportunities in terns of market size, future prospects in trade and investment and sustainable growing trends.

2. INTRODUCTION

Globalization of the world economy, enhancement of free trade frontiers together with the reduction of customs tariffs and the creation of a new organization known as the World Trade Organization (WTO: which is widely empowered to enforce international treaties) are extremely important aspects of today's global trade trends. These collectively reveal that the recent economic growth of countries is closely related to trade dynamization and expansion within increasingly wider geographic areas. ( Herrera-Vegas, 1996).

Perhaps the most recent example of this has been last April 19th's Summit Meeting of The Americas in the city of Santiago, Chile. It was there that leaders of 34 countries in the Western Hemisphere took a first step toward creating the world's largest free trade zone, one that would span then Americas. In a joint declaration signed by President Clinton and 21 other presidents and 12 prime ministers, the leaders said that talks on the subject would begin in September and they pledged to make "Concrete progress" toward a goal of signing an agreement by 2005. The Free Trade Area of the Americas (FTAA) would have 34 member nations (Cuba is not included) with 750 million people and a gross domestic product of more than US$ 9 Trillion. The United States accounts for 85% of the region's economy. (Sims, 1998).

The important advances made in these trade expansion and integration agreements suggest that they are not only a necessity for growth, but also that isolation may threaten the subsistence of those nations that do not succeed in finding their way to enter these processes of trade frontier enhancements. (Hoopes, 1996)

Regional integration and participation in trade agreements is usually based on the reciprocal extension of trade privileges and as such these agreements serve to lower tariffs, eliminate quota restrictions, or otherwise remove protectionist barriers to cross-border trade between nationals of member countries. Global and regional trade agreements may contribute significantly to future prosperity and freedom of world markets and it is in this way that regional integration represents a crucial element for economic growth (de la Balze, 1996)

A most notable example of this is Argentina's current trade policy and how thoroughly it embraces the notion of free markets. To encourage foreign investment and open Argentina's markets to the forces of competition, the administration in power since 1989 has employed unilateral market liberalization and stabilization measures in combination with multinational and regional trade agreements like Mercosur. Such liberalization measures have boosted production and caused the domestic economy to expand greatly. In an effort to encourage export opportunities, the country has aggressively pursued membership in such agreements (Borner, 1994).

Regional Economic Integration

The processes of economic regional integration that have developed or are being developed in the world, may be classified according to their higher or lower degree of integration. (Cateora, 1996).

They are as follows:

1. Free Trade Zone (or FTZ): To facilitate export trade, countries designate areas within their borders as customs-privileged areas where manufacturers can assemble their products without paying tariffs on the imported parts until they enter a country and are for sale. Some countries designate a factory or a warehouse where goods can be stored or assembled; others designate an entire area as an FTZ.

2. Free Trade Area (or FTA): It is an agreement between two or more nations to reduce or eliminate customs duties and non-tariff trade barriers among partner countries while members maintain individual tariff schedules for external countries. It provides its members with a "mass market" without barriers that impede the flow of goods and services. (Ex: NAFTA)

3. Customs Union: It represents the next stage in economic cooperation. It enjoys the free-trade areas' reduced or eliminated internal tariffs and adds a common external tariff on products imported from countries outside the union. The Customs Union (as is Mercosur) is a logical step in the transition

4. Common Market: It eliminates all tariffs and o ther restrictions on internal trade, adopts a set of common external tariffs, and removes all restriction on the free flow of capital and labor among member nations. It is a "unified economy", but lacks "political unity" to become a Political Union (Economic Union)

5. Economic Union: This represents the most fully integrated form of regional cooperation. It involves complete political and economic integration; it may voluntary or enforced. At its ideal point it may involve the free flow between borders of all factors of productions (such as where the EU is evolving into). Another example is The Commonwealth of Nations which represents the loosest possible, voluntary relationship that can be classified as economic integration.

There is no question that during the last 15 years a new trend towards globalization of the economy has emerged world wide. Examples of the new trend include NAFTA, EU, APEC (Asian Pacific Economic Cooperation), and of course Mercosur. It was on March 26, 1991 that Argentina, Brazil, Paraguay, and Uruguay signed the agreement to enlarge their domestic markets through this economic integration. Mercosur is the most recent regional trade agreement which certainly appears to be drawing increasing attention from world investors. It represents an unavoidable actor in the field of global commerce and economy (Hoopes, 1996). Mercosur has evolved into the 4th largest economic group in the world and the second largest Customs Union after the EU.

 

Table 1

ECONOMIC INDICATORS OF THE MAJOR TRADING BLOCS

* Comprised of Japan, Korea, Hong-Kong, Taiwan, Malaysia, Thailand, and Indonesia.

It is interesting to note that the members of NAFTA and Mercosur are the principal economic players of the Western Hemisphere. Combined they represent 96 percent of the hemisphere's total GDP. The importance of Mercosur for the United States is reflected by the fact that more than 55 percent of its exports to South America are currently concentrated in the four Mercosur countries, and 65 percent of the United States' foreign direct investment in South America is in the Mercosur member nations. (Carlsson, 1997)

3. RESEARCH METHODOLOGY

Argentina represents a positive business environment for firms through its market based economy, its favorable legal framework for investments, its efficient service infrastructure and its highly skilled human resources. For these reasons I will examine the role of Argentina within Mercosur and determine whether and how US firms can take advantage of this in terms of both investment and trade.

Argentina represents a "trade bridge" into Mercosur through its currently favorable socio-economic climate of growth and long-term stability. There are several industries which present great investment opportunities for American firms wishing to invest capital as well as those companies wishing to engage in exporting, joint ventures or other means of market penetration.

In order to illustrate the gateway that Argentina represents for US firms seeking to invest and engage in trade within Mercosur I examine several critical questions in this thesis. The first set of these, concerning Argentina's basic economic conditions, are:

• How has Mercosur affected Argentina's economic growth?
• In which of the nation's economic variables is this growth most evident?
• Haw has this apparent "trade and investment drive" accelerated Argentine economic recovery?

 

In order to answer these questions in depth, I analyzed Argentina's basic economic indicators conducting a Pre-Post study (1987-1997) of the figures prior to Mercosur's existence and after its signing into effect. I compare the changes in the major indicators before Mercosur and then the indicators following a few years after Mercosur. This will indicate the nature and degree of influence the regional agreement had on the nation's overall economic and trade environment.

Most of the figures researched are from The UN Statistical Abstract of the World (Third Edition) and the Statistical Yearbook (40th issue), recent publications, and current newspaper articles on the subject from The Wall Street Journal, New York Times, Business Week, Latin Trade, Financial Times, and some Argentine publications including Clarin and La Nacion.

The general economic variables I study are:

These economic indicators are closely observed to determine each one's behavior as a result of Mercosur's creation and I will attempt to measure the observable impact of Mercosur on them individually and then the impact on them within the framework of the whole economy.

Clearly, during 1995 and 1996, the economy has been accomplishing the principal criteria for sustained growth. (Fidler, 1997). It is interesting to dissect the major sectors of the economic environment to determine what the results have been and what future prospects can be predicted through trend analysis. For example, even though the nation's economy has flourished under the new stabilization, unemployment rates have not decreased dramatically and this represents a major area of concern for the nation's people. My objective is to examine these variables and closely study the current situation and how it all relates to Argentina's performance and participation within the framework of Mercosur.

After running a strong deficit in 1994, Argentina's trade balance moved solidly into surplus after the first quarter of 1995 as exports climbed sharply and imports declined slightly. The development of trade with Brazil under the protection of Mercosur has become an important element of Argentina's trade strategy. Mercosur is viewed as "the most effective" tool Argentina has to promote long-term economic growth. For example, in the agricultural sector alone, Argentina ran a US$1.3 billion surplus in its trade with the other three Mercosur members. (Decker, 1997). I will examine impacts and results such as these for the major sectors of the economy.

I also describe the changes in the flow of investment before and after the implementation of Mercosur in 1991. It is important to note that as a result of the development of Mercosur, there has been not only a dramatic increase in trade, but also an even greater increase in the flow of foreign investment into the country. (Diaz, 1996).

In addition, I examine the trade impact both within the Mercosur (intra-regional trade) and between Argentina and other non-member nations paying particular attention to the United States, Japan, the EU nations, and other Latin American countries which are not currently Mercosur members. I compare the Argentine export and import figures and break the numbers down into total Argentine imports and exports to Mercosur, USA, EU and other countries (subdivided into Japan, Mexico, Canada, and other Latin American nations.

 

My contribution determines the reasons for these recent increases in trade activity and foreign investment. Most importantly I quantify Mercosur's observable impact on these recent developments.

-Does Argentina's membership in Mercosur guarantee the nation more active investment sectors? And if yes, why and how much?

• Is Argentina indeed more suitable for trade with American firms than other Mercosur nations?
-What are the Selection Criteria ?

Asking this question and attempting to answer it implicitly gives the notion that despite Mercosur (tending towards a market) each country is distinct as a trading partner and that a US firm, despite economic advantages offered by the region, common should focus on a single country to achieve greater results.

The question should be looked at from the point of view of a comparative analysis between the member nations. What socio-economic characteristics does Argentina have that the other member nations lack?

A comparison across the four nations (paying attention at basic data, historical background, as well recent trends in their business climates) enables the analysis of the information and interpretation of the reasons why Argentina presently represents the strongest market in terms of size, purchasing power, educational attainment and socio-political stability.

• What Are The Present Investment and Trade Opportunities Available for US Firms in Argentina?
-Which industries and sectors of the economy (products, services)?
-Privatization involving US firms' capital investments?
• How can these American firms take advantage of the opportunities in Argentina to trade and invest in other member nations?

To answer these questions I examine the current conditions existing in Argentina (within the framework of Mercosur) and what opportunities exist for American firms wishing to export there, make a foreign direct investment and some other form of market entry or invest intense capital or even engage in other means of market penetration (such as: strategic alliances, and other licensing agreements).

Indeed, the reduction --if not the removal-- of non tariff restrictions (through Mercosur) on the import of consumer goods has opened up the market to imports and increased the sales of many products. (Hinkelman, 1996). Improved economic conditions are increasing consumers' discretionary income. Since 1993 the demand for imported goods has slowed somewhat following the initial boom period in February of 1991, but a moderate to very strong demand continues to exist virtually across the board for capital, intermediate and consumer goods. In addition, even when domestic industries are filling most of the current demand in their particular markets, they are increasingly relying on imported materials and components, as well as on capital goods, creating additional markets for foreign suppliers. (Hinkelman, 1996).

I establish the particular industries in which both export and import opportunities exist for US firms and examine the future prospects in the coming few years and how Mercosur's growth will affect this. Some of the industries are: aerospace, computers and software, construction materials, electricity, industrial equipment, medical and scientific equipment, motor vehicles and vehicle parts, and telecommunications. These specific industries were selected as they are the sectors in which great opportunities for growth exist and where US firms can achieve the highest benefits if they decide to engage in trade in the above areas.

There have been many reasons for the current foreign investment boom in Argentina including new legislation (Argentine Foreign Investment Act of 1993), and political, social and economic stability. FDI continues its heated pace ever since the signing of Mercosur, remaining strong in the last few years. Cumulative, recorded, direct, non financial inflows of foreign investment (investments other than portfolio investment placed in securities that can be liquidated the initial boom period in February of 1991, but a moderate to very strong demand continues to exist virtually across the board for capital, intermediate and consumer goods. In addition, even when domestic industries are filling most of the current demand in their particular markets, they are increasingly relying on imported materials and components, as well as on capital goods, creating additional markets for foreign suppliers.(Hinkelman, 1996).

I establish the particular industries in which both export and import opportunities exist for US firms and examine the future prospects in the coming few years and how Mercosur's growth will affect this. Some of the industries are: aerospace, computers and software, construction materials, electricity, industrial equipment, medical and scientific equipment, motor vehicles and vehicle parts, and telecommunications. These specific industries were selected as they are the sectors in which great opportunities for growth exist and where US firms can achieve the highest benefits if they decide to engage in trade in the above areas.

There have been many reasons for the current foreign investment boom in Argentina including new legislation (Argentine Foreign Investment Act of 1993), and political, social and economic stability. FDI continues its heated pace ever since the signing of Mercosur, remaining strong in the last few years. Cumulative, recorded, direct, non financial inflows of foreign investment (investments other than portfolio investment placed in securities that can be liquidated rapidly --the so called "hot money") in Argentina as of year end 1993 amounted to approximately US$ 28 billion between 1990-93; the third largest inflow among emerging markets worldwide. (Hinkelman, 1996)

Private capital inflow in 1992 almost reached US$ 8 billion and was slightly more than US$5 billion for 1993. With privatization largely completed, the massive capital inflows of the early 1990's are expected to subside somewhat. However, assuming continued growth and stability, foreign investment should remain in a surplus position for the remainder of the decade, although observers expect annual flows to level off at figure around US$ 2 billion (Hoopes, 1996)

I examine FDI's past history in Argentina and the trends that were evident prior to Mercosur (perhaps dating back to 1987) and then compare with the current booming situation in Argentina. I explain the extent of Mercosur's impact on the changes in FDI patterns in Argentina in the last five to ten years.

I collect both historical data as well as administering a mail survey/ questionnaire to managers of major US firms based in Argentina. Companies to be surveyed include: General Motors, Lockheed Aircrafts, Lone Star Industries, NL Industries, telecom Ventures, Unisys, Nortel, Mattel, just to name a few.

The above were selected because they are the particular ones in which American firms have a substantial direct capital investment and which have been identified by the parent firm as a wholly or partially owned subsidiary, affiliate, or branch. Franchises, representatives and non-commercial enterprises or institutions, such as hospitals, schools, etc. financed or operated by American philanthropic or religious organizations are not included.

The primary source of primary data is the mail surveys / questionnaires completed by the parent corporations and annual reports provided by them. Direct telephone contact and personal interviews will be used extensively for verification and clarification of the functions of subsidiaries in Argentina. Ideally, the personal interview will be a follow-up to the completed mail questionnaire in order to clarify major points of interest not covered previously.

 

Questionnaire Design (Please refer to Appendix C for a sample of the questionnaire; PDF file 167 KB)

Questionnaire consists of 26 detailed questions (open ended, multiple choice, and rating through scales) covering numerous aspects of the firm's operations in Argentina:

Questions 1-5: cover the location of operations (what major cities), date of establishment in Argentina, the particular industry in which the company competes, the relationship with the US headquarters, and the reasons why the company decided to take operations to Argentina.

Questions 6-8: ask about the current business climate in the Argentine operations such as whether there has been recent expansion or contraction and the reasons why, ratings of firm's performance in comparison to worldwide operations, competitive strength within local industry.

Questions 9-11: introduces Mercosur within framework of the company's operations in Argentina. These questions ask about Mercosur's influence on operations, its potential strengths and weaknesses as it relates to the particular industry in which the firm is competing.

Questions 12-16: ask about Argentina's overall economic and business environment, focusing on the factors that have led to US companies' success or lack of success in the country. The firm is asked to respond to a series of scale-design questions as to whether they agree or not agree with statements regarding privatization efforts and the conditions existing for such projects.

Questions 17-18: focus on Argentina's restructured legal framework. Companies are asked to rate the level of influence of this new legislation on their level of investment within the past years and the overall impact it has or no has had on the firm and industry as a whole.

Questions 19-21: describe the future outlook of the company's operations in Argentina as well as the possibilities for movement into neighboring Mercosur nations (Brazil, Paraguay and Uruguay). Respondents are also asked to describe the most dramatic changes that the firm has experienced as a result of Mercosur's implementation.

Questions 22-26: illustrate the company's future strategic plans as Mercosur eventually grows into a true common market (both long term and short term prospects and goals). Respondents are also asked to point out their most important competitive advantages and benefits derived from having established operations in Argentina and other comments and opinions they may have regarding the subject.

 

• What has been the social impact of the economic reform in Argentina?
- in particular, relating to the major socio-demographic segments of the population?
- How has Mercosur contributed to the overall social climate?

In my research I address the impact that Argentina's economic advance has had on Argentine society as a whole. I undertake a closer analysis of population perceptions, attitudes, and opinions on the reforms undertaken, privatization efforts as well as Mercosur itself. This will enable a better in depth look into the trade agreements role within the dynamically evolving Argentine economy.

What this question poses is the issue of the current economic reforms' impact on employment rates, consumer spending, education levels and the country's literacy rate. By comparing the major trends existing today in Argentina and those figures prior to 1989 (beginning of the economic restructuring period) I can infer the effects (both the positive and the negative) evident in the lives of the Argentine population

Another aspect of the "social implications" on the agreement which cannot be quantified, but are indeed observed and studied, are the general attitude changes and reactions of the people: How they feel about the economic reforms and Mercosur and how the implementation of these has benefited them in their everyday life, and how it has altered their perspective on the current economic situation of the country. In order to achieve this, I conduct an examination of the recent polls in the last elections, recent articles and publications in both American and US magazines and newspapers.

• What have been the recent criticisms on Mercosur?
- Counter arguments?
-What is Trade Diversion vs. Trade Creation?
• Has Mercosur erected barriers to foreign (non- Mercosur) competition?

Here I analyze the views presented in a very stimulating and well-publicized academic critique on the South Cone Common Market (Mercosur). I discuss and interpret perhaps the strongest case written against Mercosur and attempt to refute each point made by the author: Alexander J. Yeats (the principal economist from the International Trade Division of the World Bank, Washington DC).

By gathering supporting data I summarize my findings on the agreement and enhance its benefits while at the same time counter-arguing Mr. Yeat's attempts to undermine all that Mercosur has achieved. I focus on his "key points of attack". It is essential to define the concepts presented and what exactly is mean by "trade diversion" and "trade creation". Also, of great importance is measuring the extent of the influence that this criticism may have no future investment and trade between Mercosur nations and the rest of the world.

During the last decade, the formation and development of Mercosur have undoubtedly been two of the main achievements of Argentina and its partners in a process largely exceeding the "mere" economic and business arena. Overcoming chronic difficulties and leaving historical regional antagonism behind, around 1985 the nations of the region took up an ambitious challenge.

Contrary to many predictions, Mercosur has punctually and strictly complied with each and every schedule agreed. It has even grown to include some new "associate members" such as Chile and Bolivia (which was discussed earlier on in the proposal).

In concrete terms, the marked increase in Argentine participation in international trade has been accompanied by significant growth in "world" trade with the country, not only for other Mercosur nations, but also for external economies, such as East Asian countries, the United States and the European Union. But is it all as it seems?

In other words, is it clear that as a consequence of the creation of Mercosur, trade volume generated is higher than trade diverted?
How will American firms seeking to become involved in substantial trade with the Mercosur bloc benefit greatly from viewing Argentina as this "trade bridge"?

In my research I answer the questions above and prove that regional integration agreements are not means of protecting members, rather they are a means of liberalizing trade worldwide and enhancing the emergence of global, interdependent economies.

4. A CLOSER LOOK AT MERCOSUR

Latin America is widely considered the fastest growing area of the world (alongside South East Asia) and within it, Mercosur is the fastest growing region representing a single market of 230 million people; more than 58 percent of Latin America's GDP; 59 percent of its total area; slightly more than 51 percent of its industrial production and inter-regional trade and 33% of total Latin American foreign trade. 'Mercosur will develop faster in the next few years than NAFTA," predicted former US Secretary of State Henry Kissinger at a meeting of the Latin America Business Council last year. (Silva, 1997)

Combined GDP of its member nations (Argentina, Uruguay, Paraguay, and Brazil) is just below US$ 900 million. Its total trade (exports plus imports) reached 124.4 billion dollars in 1995. In other words, Mercosur is an integrated market which accounts for more than half the value of Latin America's main economic indicators, and has an unmistakable potential and drawing power.

Table 2

MERCOSUR IN NUMBERS 1996

Source: Hinkelman, 1996.

Judging by recent developments, the integration process in Mercosur has made enormous strides and has reached a level of interrelationship that provides a solid foundation for future, additional progress. (Herrera-Vegas,1996). Mercosur has created an impressively dynamic market of US$ 1 trillion. This dynamism is based primarily on bilateral trade between the two largest economies of South America, Brazil and Argentina. From 1990 to 1994, trade among Mercosur economies of South America, Brazil and Argentina. From 1990 to 1994, trade among Mercosur countries increased by 181 percent (roughly 30 percent per year) (Hinkelman, 1996). Without a doubt Mercosur's greatest impact has been the extraordinary growth in trade and investment among the member nations.

Figure 1

MERCOSUR INTRAREGIONAL TRADE
1981-1997

Source: The Economist, 1998

As shown in the graph above, intra-regional trade (within member nations) increased dramatically after 1991, the time around which Mercosur took an important role in the region's trade patterns. It must be pointed out that the larger figures have been the result of the two larger nations: Argentina and Brazil. Estimated total trade at mid 1997 was US$ 17 million and projected numbers for 1998 may reach the 20 million mark. (Warn, 1998). However, "intra-regional" trade has not been the only area in which great increases have taken place. Interestingly enough, Mercosur's overall "global trade" in 1996 increased approximately 43,5% over the 1995 figures. Total trade (exports + imports) reached US$ 135 billion in 1996.

 

Figure 2

MERCOSUR GLOBAL TRADE
1996

Source: Bannister, 1997

If one takes a closer look at how this global trade pattern is broken down among the different areas of the world, we see that United States is the number one trade partner of the Mercosur nations collectively. Even though, the EU has a greater amount as a whole entity, none of the other individual nations in the world come close to the US- Mercosur Trade numbers.

Figure 3

MERCOSUR GLOBAL TRADE
1996 (Segmented into regions)

Source: Ministry of Economy Report, 1997

Table 3

MERCOSUR GLOBAL TRADE

Source: Ministry of Economy Report, 1997

Table 4

MERCOSUR'S TRADE WITH U.S
(Mercosur's exports and imports to the U.S)

Ministry of Economy Report: 1997
Note: Mercosur is the 8th largest export market in the world and the 12th largest supplier overall.

What is worth mentioning from the US perspective is that eighty percent of the major American companies in Latin America are settled in Mercosur and even though the principal trade and investment partner is by far the EU (with which Mercosur has a "bilateral trade agreement"), the US represents the most important individual country in terms of trade volume with Mercosur.

An older agreement with the United States called the "Four Plus One" has grown substantially in the last five years. Also referred to as "The Rose Garden", "Four Plus One" agreements was originally signed in 1991 to provide the US and Mercosur members with a structures within which to negotiate reciprocal trade and investment arrangements. Specifically, it provides the US with the means to negotiate with Mercosur members collectively rather than having to negotiate with each country individually, while it also allows the members of Mercosur to speak with a more powerful united voice. (Hinkelman, 1996)

It is in this south American region that the US companies will have the greatest opportunities for both investment and wider trade relations. (Campbell, 1998)

Mercosur's long term goals are as follows:

* Harmonization of legislation, tax structure, commercial practices, tariff structure, and standards for quality and production.
* Disappearance of protection for certain companies, subsidies, monopolies and market shares.
* Increase of market potential, competition, employment, productivity, consumer demands, regional enterprise initiations and extra-territory investment flows.

The agreement will allow for free movement of goods, services, and factors of production (including capital, labor and natural resources) among member countries upon fulfillment of the long-term goals of the agreement. Currently it establishes a CET (Common External Tariff) to third countries. Mercosur's governing body is the Common Market Council, composed by the Ministers of Foreign Affairs and Economy of each member state. The Executive Body of Mercosur is the Common Market Group composed of sixteen members representing Ministers of Foreign Affairs; of Economy and Central Banks. The Common Market Group has a permanent Secretariat based in Montevideo (Uruguay) and eleven working groups dealing with sectarian policies. The Mercosur Trade Commission overlooks the implementation of the CET and Mercosur Trade Policy. (Decker, 1997)

 

It is imperative to point out that Mercosur is still far from being a "true common market", but the members have managed to achieve a customs union and continue negotiations aimed at full common market status by 2006.

The current priorities of Mercosur are as follows: first, to maintain what was already arranged; second, to deepen the agreements in terms of new economic sectors, third: to advance in the external front at a regional level; and fourth to participate in hemispheric and international initiatives with similar regional trade markets.

To maintain the agreements already obtained is a daily exercise. Frequently new restrictions appear that have to be discussed and overcome. This appears to reflect that increasing commerce and at greater trade volume can lead to a greater quantity of possible conflicts.

Originally, in the case of Mercosur, a period of transition was established, as from the date of the execution of the agreement (December 31st 1994), in which the member countries set up a Program of Trade Liberalization, whereby tariffs levied on trade within the bloc would be linearly and automatically reduced. In this way, as of December 31, 1994, all goods that originated in Mercosur would be free from tariffs with non-tariff restrictions upon them, and presumably if they were traded within Mercosur.

In practice, the first stage of economic integration was an imperfect free trade association. The four countries made lists of goods, which were not affected by tariff preferences because they were being considered sensitive to competition. Year by year, those lists were reduced and, on January 1, 1995 a 100 percent of liberalization was obtained for the whole universe of tariffs that affected the goods originated in Mercosur. The only exception was a list of products filed by each country within the system of final adequacy to customs union (Decker, 1997)

The concepts of inter-zone and extra-zone trade must be differentiated to distinguish the first stage of trade liberalization from the second. Inter-zone trade means trade developed exclusively within the limits of the bloc, that is to say, trade which involves the member countries only. On the other hand, Extra-Zone trade refers to that between the bloc and the rest of the world, that is to say, commercial transactions performed between any of the member countries and the rest of the world (Carlsson, 1997)

 

Therefore, the first stage of integration, the free trade association, involved only inter-zone trade, without affecting the tariff level that each country in the Mercosur maintains with the rest of the world. In order to reach the Customs Union stage in Mercosur as of 1995, each of the member countries had to replace their own particular tariff structure.

An extra-zone common tariff structure was adopted by the four countries, which meant that the protection level upon the imports from the rest of the world would be the same for all the countries in the Mercosur. The existence of a CET (Common External Tariff would prevent leakage of products that could be imported through the country that offered the lower tariff protection, this becoming a place for goods in transit to be sent to a further destination.

During 1994, a variety of events took place which led to greater regional economic integration across the world. On January 1, NAFTA (North American Free Trade Agreement) signed by Mexico, US and Canada was put into force. Also, the agreements reached by the Summit of Presidents -held in Miami on December 1994- which put negotiations into motion to set up a continental free trade zone in the year 2005, represented a new step towards Inter-American integration.

A regional undertaking of major importance blossomed in 1994: the leaders of the main countries adjacent to the Pacific Ocean created APEC (Asian Pacific Economic Cooperation). This group included several economically powerful countries led by the US, Japan and China. In South America, the process of Mercosur was consolidated by the agreements reached in Ouro Preto on December 1994, which ensured the enforcement of a Free Trade Zone (FTZ) and a Customs Union among Argentina, Brazil, Paraguay and Uruguay as of January 1, 1995.

Although this is a matter of considerable debate, "regional agreements" (like NAFTA, and Mercosur) generally are not devised to foster internal free trade on the one hand and protectionism towards the rest of the world on the other. On the contrary, agreements among blocs tend to be achieved, which then accelerate the globalization of the world trade. In other words, "open" regionalism may be understood as a "non-multilateral" means of advancing towards a more open international trade system. (Ribeiro, 1997)

 

Basically, this view of regionalism may be construed as an integration process which neither builds walls nor intends to become a fortress, isolated from the rest of the world. This is the concept which inspired the "founders" of Mercosur and continues to inspire those concerned with its further development. (Decker, 1997)

A clear indication of this is the fact that only eighteen months after the setting up of the Customs Union, Mercosur concluded its first NonMercosur free trade agreement, in this case with Chile. This country and Bolivia have since signed free trade association agreements with Mercosur. Negotiations aimed at achieving a similar agreement with the Andean Pact countries (Venezuela, Colombia, Ecuador, Peru) will soon follow. Mercosur is also participating as a bloc in the Free Trade Area of the Americas hemispheric integration negotiations (FTAA).

In a very significant step, on December 22nd 1994 a Joint Declaration between the EU Council and the Mercosur member countries was made known, in which the interest in establishing an inter-regional political and economic association was remarked. Two negotiations carried out in September, in Brussels, and in October, in Montevideo, ended up with the signing in Madrid on December 15th 1995, of the inter-regional Framework Agreement of Cooperation between the EU and Mercosur. This model for negotiation of a trade pact became this way the first agreement entered into by two regional systems of integration, opening doors to the future creation of an economic space with 580 million consumers, and as an answer to the importance of the trading exchange between both blocs and to the great amount of European investments in Mercosur. When the pact becomes officially signed in 1999, it will establish joint cooperation mechanisms with regards to customs for the inter-regional trade with the aim of completely freeing it by the year 2008. (Hoke, 1997)

In this respect, it is important to point out that, in addition to any trade benefits which may be derived from regional trade agreements, the latter imply (to a greater or lesser degree) the partial or total elimination of tariff preferences received at a given time within the Mercosur framework. This phenomenon would not be imaginable in the case of a regional trade agreement which aimed at the discrimination of third parties or in which the development of the regional market were "a purpose in itself' (Devlin, 1997)

 

The proliferation of preferential trade agreements clearly in evidence in the international economy in recent years is putting the old ideal of multilateral liberalization in international trade to the test. However, the idea that attempting to achieve an open international economy does not necessarily exclude integration agreements which could even facilitate its attainment has recently become accepted in both academic and government circles. (Devlin, 1997)

It is important to understand that, although the interest of those American firms striving to get into these new markets will be concentrated on the commercial possibilities of the bloc or region, they, nevertheless, should specifically take into account the strategic framework offered by the country that will constitute their basis. Special attention must be paid to relevant factors such as economic deregulation, legal certainty, low tax cost and the establishment of clear and simple non-economic governmental regulations that fit in with international trade dynamics.

Mercosur has a vision of "open regionalism" meaning that it has no apparent walls (except for CET) and the member nations do not want to be isolated from the rest of the world. Despite the fact that a significant portion of Mercosur trade occurs within its boundaries, the agreement was not conceived primarily as an intra-regional one, nor does it aim to satisfy the needs of its own population. Rather, Mercosur is designed to serve two main purposes: opening bigger markets for large companies operating within the bloc, and creating increased competitiveness in order to reach markets outside the region. (Ribeiro, 1997)

A clear example of this is that Mercosur, after one and a half years of the creation of the customs union, concluded its first agreement of free trade with Chile, hoping to arrive at a similar one with Bolivia and with the countries of the "Andean Pact". Mercosur also actively participated in the initiative towards hemispheric integration (ALCA) and even Mexico (that forms together with the US and Canada in NAFTA) expressed an interest in being part of Mercosur. The formula to be applied would be that of "4+1", creating this way a free trade area with a potential market that would cover almost the whole American continent.

Likewise, Mercosur has begun dialogues with Japan, and India, and with other countries of the world. Judging by the recent developments (i.e.: with Chile, Bolivia mentioned previously), the integration process in Mercosur has made enormous strides and has reached a level of interrelationship that provides a solid foundation for additional progress in the years to come. (Omega, 1997).

One of the most interesting phenomena of the Mercosur process is the fact that from its creation, as an area of preferential trade from 1991 and a customs union from 1995, the volume of its commerce with the world has increased. That is for the partner countries, Mercosur is not an "end in itself", but on the contrary it is a tool to be inserted in world trade. (Hinkelman, 1996). This notion of Mercosur as a useful pathway for increased international trade is a question I will address more specifically in my research. Mercosur's regional trade with the rest of the world has increased by 74.3% (from 1990-1995) in comparison to the NAFTA's 21% and EU's 31.7% growth rate during that same five year period.

Mercosur's ever growing role in global trade is evident by the recent October 1997 signing of the Mercosur-Chile Free Trade Zone Agreement between Mercosur and Chile was created. This implies the institutionalization of an economic trade relation that was naturally growing since the beginning of the decade at a rate of over 4.6% annually. (Decker, 1997). Because the Chilean economy has an important international prestige, its incorporation into Mercosur as an associate member can be considered as a "quality seal" and a positive sign. Chile may indeed represent Mercosur's gateway into the Pacific markets due to its geographic location (which makes it a natural bridge to the Pacific Rim) and its close trade ties and past commitment in commerce with Southeast Asia.

The importance of Mercosur for the United States is reflected by the fact that more than 55 percent of its exports to South America are concentrated in the four Mercosur countries. But without a doubt Mercosur's greatest impact has been the extraordinary growth in trade and investment for its two biggest members, Argentina and Brazil. Between 1986 and 1990 the region's share of Argentina's total trade remained around 14.3%. Regional trade began to grow rapidly in 1991 with an increase of its share in total Argentine trade from 18.7% in 1991 to 26.5% in 1994 and to 28% during the first six months of 1995. (Hoopes, 1996).

5. ARGENTINA WITHIN MERCOSUR

Argentina not only has reversed the poor economic performance evidenced during the past decade, but during the 90's its economic improvement (through membership in Mercosur) has been one of the most successful of Western nations. (Campbell, 1997). Considering variables such as the increasing GDP, the investment rate and specially foreign trade, the current results indicate a prosperous period of growth for this country. (Decker, 1996) But before embarking on a more in depth analysis of the nation's present economic conditions, it is necessary to understand its overall role it has within Mercosur in terms of regional trade with the member nations.

Between 1986 and 1990, the region's share of Argentina's total trade remained around 14,3%. However, as Mercosur evolved in both strength and stability, regional trade began to grow rapidly in 1991 with an increase of its share in total Argentine trade from 18,7% in 1991 to 26,5% in 1994 and to 28% during the first six months of 1995. During 1996, this figure jumped to 31% and has remained here through most of 1997.

Figure 4

ARGENTINA'S TRADE WITH MERCOSUR
Mercosur's % of Total Argentine Trade

Source: Madigan, 1998

Presently, Argentina's trade with Mercosur nations represents approximately 31% of Argentina's trade with the world. The structure of imports to its neighbors is representative to that of the rest of the world's. Intermediate goods (33%) constitute the greater volume in imports, followed by consumption goods (21%), then capital goods (20%), parts and accessories for capital goods (18%), passenger vehicles (5%), and fuel (3%).

Figure 4(a)

STRUCTURE OF IMPORTS
(1996)

Source: Ministry of Economy Report, 1997

Argentine exports to the Mercosur nations is comprised of primary products: 28% (including cereals, unprocessed vegetables, legumes, fresh fruits, livestock, etc), manufactures of farming origin or MFO: 37% (leather and furs, edible oils and fat, dairy products, processed fish and seafood), manufactures of industrial origin or MIO: 30% (transport material, machinery an electric equipment, related chemical products, textiles and clothing, artificial plastic material), fuel and energy: 5%.

Figure 4(b)

STRUCTURE OF EXPORTS

Source: Ministry of Economy report, 1997

Within the framework of Mercosur, Argentina is consolidating two main principles to guarantee the sustained development and the welfare of its citizens: the politics rationality and the economic rationality. These principles (which will be discussed in greater detail later on in the paper) have led to overall stability evident in

1. Convertibility Law: Argentina's 1991 law fixed the exchange rate parity against the US dollar and provided that it could not be changed with the approval of the Congress. As under a monetary system called a "currency board", the Law also provided that the monetary base had to be backed by foreign reserves. This prevents the central bank from discretionary issuance of money, such as for financing a budget deficit, and ensures a firm limit to the growth of the money supply.

2. Price Stability: achieved through drastic reduction in inflation figures.

3. Argentina's growing importance and key role within Mercosur: the emerging role of Argentina at the head front of the Mercosur union is becoming more clear through current economic indicators and socio-political stability in the region.

4. Privatization of Public Enterprises

5. Fiscal Balance through reduction of trade deficit

6. Environmental Protection

7. New Investment Legislation and Tax Reforms

8. Nuclear Non Proliferation agreements

Argentina's exports have increased between 1989 and 1995 at annual accumulative rate average of almost 14% (placing it among the highest, as far as growth is concerned, in the world).

The success of the convertibility plan with regard to anti-inflationary incentives (thus resulting in a dramatic decrease of inflation rate in past years), allows Argentina to be among the nations with the lowest inflation rates in the world. Two of the main achievements Argentina has obtained in the last few years are credibility and certain economic recovery, especially in the exchange market and in commercial issues. In this sense, the notable decline in country risk since 1991 enabled the state and private sector to finance themselves better in the international capital markets (Hoopes, 1996)

 

Table 5

Source: UN Statistical Yearbook (40th Edition)

All these factors have generated an environment of wider credibility and farsightedness. This greater confidence makes possible the performance of a major number of productive projects that were not possible before for the high risk rates. With democracy and economic stability the possibilities to obtain a positive and convenient interaction with the rest of the world is decisively increased.

6. ARGENTINE FOREIGN TRADE

The Origin of Argentine Foreign Trade

During much of its modern history, Argentina has focused on the export of primary commodity agricultural products and the import of manufactured, high-value-added goods. This pattern was altered during the 1940's and 1950's with the advent of protective tariff and non-tariff barriers, imposed to allow the development of domestic import substitution industries. For most of the 1960's through the 1980's, Argentina's national policy shifted back and forth between an open and a closed regime, to the detriment of both foreign and domestic interests. (Hinkelman, 1996)

After amassing large trade surpluses for most of the 1980's, during which time the government discouraged imports in an attempt to stabilize Argentina's finances, policy makers shifted again. In 1989 they adopted an open-market approach, allowing the economy to run up substantial trade deficits while encouraging the import of capital goods and other inputs to strengthen domestic production. While this deregulation enabled Argentine industries more access to the equipment needed to upgrade production, it also unfortunately hurt many local industries that were unable to compete with foreign goods that flooded the domestic market. This was particularly true for manufacturers of consumer goods. Although roughly 20% (US$4.41bn) of total imports (US$21.544bn) still consist of consumer goods (Hinkelman, 1996)--despite high import duties designed to restrict such trade in nonessentials-- the vast bulk of imports are now made up of capital goods, parts for such goods, and intermediate inputs.

The Argentines in general remain somewhat distressed that the payoff in terms of higher-value-added exports has yet to be realized from allowing this import-driven trade deficit to swell. Nevertheless, the trend is positive, especially in comparison with the past, when imports were predominantly for industrial inputs and domestic consumption. The current surge in investment in Argentina's industry should begin to show greater long term results by the year 2000.

In line with its open market policy, the Argentine government reduced and eliminated many previous existing barriers to international trade, resulting in the doubling of foreign trade between 1980 and 1996. The maximum import tariff was cut by more than half, from 50 to 20 percent, and the 15 percent surcharge (which constituted a minimum charge) was fully eliminated, allowing some goods to enter duty free. In 1989 the average tariff was 39 percent; just five years later in January 1994 the average tariff had fallen to 9.1 percent (Hoopes, 1996).

Today the tariffs on almost all imports have fallen even further, and as a signatory to the General Agreement on Tariffs and Trade (GATT), Argentina has pledged to reduce them even more. Discretionary import licensing, which had served to strictly limit imports in the past, was also dropped. At the same time, the administration also eliminated most export tariffs and implemented a drawback system to rebate tariffs on inputs for products destined for export. Between 1980 and 1995, foreign trade grew at a compound annual growth rate (CAGR) of nearly 5 percent (Hoopes 1996).

 

The 1995 inauguration of Mercado Comun del Sur (Mercosur) --a customs union consisting of Argentina, Brazil, Uruguay and Paraguay that allows preferential trade to occur among these partners-- has dramatically altered the trade situation for Argentina. Preferential trade among Mercosur began in 1991, and free trade went into effect in 1995. Argentina's 1993 trade with its Mercosur partners rose by nearly 30 percent (from the previous two years), and has steadily grown. Although Argentina currently maintains a trade deficit with these nations, its exports to them are also rising sharply. As the full provisions of the agreement take effect, the mutual benefits among all the trading partners are expected to continue to multiply.

Size of Argentina's Foreign Trade

After taking a large downfall in the 1980's, Argentina's total foreign trade has more than tripled in the past ten years, rising roughly from US$11.6 billion in 1986 to approximately US$40 billion in 1996. During these same years, the share of Argentina's gross domestic product (GDP) representing foreign trade has remained nearly level at an average of 12.5 percent. (De la Balze, 1996)

This indicates that domestic production and foreign trade have been expanding at close to the same pace. The relative proportion of foreign trade to the total economy also graphically points up that the Argentine economy continues to be largely oriented toward the domestic sphere: more than 85 percent of the economy is focused on domestic markets. While the share of foreign trade relative to the economy appears to be growing, the overall proportional increase has been slight. Nevertheless, the focus is currently export production.

In relation to other countries trading in world markets, the percentage of Argentina's GDP represented by foreign trade is fairly low. For example, in 1992 the following countries registered levels of foreign trade relative to their GDP's higher than the 11.8 percent registered by Argentina.

 

Table 6

FOREIGN TRADE RELATIVE TO GDP

Source: de la Baize (1996)

All these numbers point to the fact that Argentina continues to concentrate on its domestic markets to a greater extent than many other countries with more developed or rapidly expanding economies.

The emphasis on domestic markets in Argentina is a function of two factors or variables:

• Argentina's economy is still relatively undeveloped when compared with the more developed economies of such nations as European Union (EU) members like the UK, France and Germany, which depend on foreign trade for a much greater proportion of their overall economic activity.

• Argentina's proportionally large and important domestic markets constitute the core of its economy, as is also the situation in Brazil, the US, and Japan. Many domestic producers are just starting to enter the international trade sector, and it is a slow process because many of these producers need to invest heavily in imported capital goods and intermediate inputs to upgrade their production capabilities. The process is made even more difficult because the opening of Argentina's markets to increase the availability of those imports has also intensified the competition at home. Thus, domestic producers are having to become more competitive not only in international markets, but simultaneously in Argentine markets. (Carlsson, 1997)

 

Prior to 1989 Argentina's markets were for the most part closed to imports, while exports were highly concentrated in a few sectors. When open markets were implemented, foreign trade performed as might be expected --that is, it surged rapidly. The overall numbers also camouflage a significant differential in the rate of growth of the various trade components. Imports have more than quadrupled (from US$4.7 billion in 1986 to over US$22 billion in 1996, while exports have more than doubled (from US$6.8 billion in 1986 to US$16 billion in 1996). This differential between growth patterns between imports and exports has arisen largely because of the need to import modern technology before domestic industries can supply exports in such quantity, quality, and diversity as to become competitive in global markets. This gap --between imports and exports-- is likely to continue for some time, and narrowing it will require:

1. Intensive capital investment
2. Modification of the management structure
3. Training of the workforce

Many Argentine businesses -and whole industries- are now engaged in this challenge. Those that find a way to persevere will start to transform the current trade deficit into a more balanced level of foreign trade.

Exports

Until the 1990's exports from Argentina remained at approximately the same level for decades, although tariff and non-tariff barriers on imports permitted the country to post trade surpluses until 1981. The products exported were highly concentrated in three sectors: agriculture, industrial manufactures, and fuels. From 1980 through 1989 roughly 2/3 of Argentina's exports continued to be associated with agriculture (primary products averaged 30 percent; agricultural manufactures --processed and semi processed-- averaged 37 percent). About 1/5 of exports (21 percent) during the 1980's were industrial manufactures, consisting mainly of base metals (iron, steel, aluminum, some machinery, and chemicals). Only about 4 percent of the exports were fuels and fuel derivatives, production by the state-run monopoly was designed primarily to fill domestic need rather than to contribute to export revenues.

 

The country is still known primarily for its agricultural exports (grain, oilseeds, and meat products). According to statistics compiled by Argentina's National Institute of Census Statistics (INDEC) for 1996, exports of agricultural manufactures fell to a 29 percent share from a 37 percent share of total exports, while primary (agricultural) products dropped to a 24 percent share from a 38 percent share --or combined, from nearly 3/4 to about 112. Meanwhile, industrial manufactures rose to a 37 percent share from a 21 percent in 1996. Fuel exports rose as well, to a 10 percent share from a 4 percent share, but the real story was the surge in higher-value-added manufactured industrial products.

In 1996 exports were still heavily concentrated in a few sectors, but diversification was beginning to be visible. In that year INDEC reported that the top four exports (fuels, fats and oils, food byproducts, and cereals) together made up 37 percent of total merchandise exports. The top ten exports represented roughly 70 percent of all exports. Some of the highest growth in exports in 1996 came from higher-value-added goods, including transportation equipment (up 25.6%), chemical products (up 29.5%), and machinery and electrical products (up 13.2%)

For some, the shift in Argentine exports is occurring too slowly. Some analysts have voiced concern that the growth of non-traditional, higher-value-added exports needs to be further encouraged if they are going to supply the foreign exchange that is currently being supplied through foreign investment. Nevertheless, export rates have been growing steadily since 1992. In dollar terms, exports took a 3 percent dip in 1991, but then recovered, growing by 2.1 percent in 1992, by an even stronger 7 percent in 1993, by 14 percent in 1994, and by 20 percent in 1996. (Hoopes, 1996)

 

Table 7

ARGENTINE EXPORTS BY CATEGORY 1996

Source: INDEC, 1996

Imports

Argentina has become a hot market for imports. Imports grew by 20-fold between 1965 and 1996, but the major growth has only been since 1991 when the more open policies of the Menem government began to go into effect. During much of the 1980's, the nation discouraged products from abroad, but Argentina is continuing to open its markets, reduce tariffs, deregulate government monopolies, and stabilize its exchange rate (currently pegged to the US Dollar). End user demand is high for both consumer and industrial goods.

As mentioned before, imports of capital goods, intermediate products, and parts and accessories represented 72.5 percent of imports by economic utilization category in 1996. In another listing by more specific categories, it was shown that machinery and electronic equipment represented the largest category of imports in 1996, accounting for 34 percent of all imports (up 27 percent from the previous year). Imports of transportation equipment ranked second at 18 percent (up 43 percent), indicating the strength of the Argentine automotive industry, because much of this tariff represents trade in components with Brazil. Chemicals represented the third largest category with a 12 percent share of total merchandise imports (up 28 percent). Together these three categories accounted for nearly 2/3 of Argentina's 1996 imports, as well as for all imports categories representing more than US$ 2 billion and 14 percent of the total. The top ten import categories account for 92 percent of all imports.

Table 8

ARGENTINE IMPORTS BY CATEGORY
1996

Source: INDEC, 1996

Trade Partners

Argentina's dominant trade partner is its largest neighbor, Brazil. Brazil achieved this standing in 1992 and has retained it every year since then. In 1996 Brazil accounted for US$ 7.875 billion (21.1 percent) of Argentina's total trade. The nation's second largest partner is the United States, with US$ 6.645 billion (17.8 percent) of total trade. Argentina conducts almost 39 percent of its trade with these two countries alone.

Aside from the two largest trading partners, eight other nations had trade with Argentina greater than US$ 1 billion in value in 1996. Individually their share of total foreign trade ranged from 5.5 percent to 2.9 percent, falling substantially below those of the top two partners. In order of their ranking these are:

Table 9

ARGENTINA'S TOP TRADING PARTNERS
1996

Source: Cooper, 1998

When foreign trade with these eight traders is combined with the two top partners, the top ten trade partners account for almost 73 percent of Argentina's trade. Argentina's trade relationships with its neighboring countries have been significantly affected by Mercosur. From 1975 to 1989, an average of only about 11 percent of Argentina's total foreign trade was conducted with Brazil. When the first step of preferential trade began at the start of the present decade, that figure jumped to 17 percent in 1990, and it has been rising steadily ever since. By 1992 Brazil had become Argentina's number one trading partner, and the amount and proportion of trade between the two countries continues to grow. To date Brazil has been the major purchaser of Argentina's new, non traditional, higher-value-added exports.

 

Balance of Trade

During the past 30 years, Argentina has maintained a balance of merchandise trade surplus in all but four years: 1981 and 1992 through 1994. During many of these years, Argentina actively managed its trade by using tariff and other barriers to artificially exclude imports. When open-market policies were introduced, imports began to outpace exports, causing deficits in the early 1990's. Based on improved export performance in early 1995 and 1996, officials have projected break-even performance, or perhaps even a slight surplus by the end of the decade. (Fidler, 1997). To regain its trade surplus, the country is focusing on diversifying its exports, stepping up production of high-valued added goods, and trading with its Mercosur partners.

Argentina's current accounts have been in deficit in 20 of the past 30 years, most recently showing a surplus only in 1990. In addition to merchandise trade, the current account deficit includes trade 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 that generate substantial amounts of inbound investment and a high rate of growth in the domestic economy can sustain such disparities, but imbalances in current accounts pose more than the usual danger for Argentina, because its domestic economy could still be hurt by the loss of the outside funds.

Thus the development of exports, especially non traditional ones, is taking on greater urgency. In 1996 non traditional industrial products accounted for 40% of the growth in exports. In comparison, 40% of the increase in imports consisted of capital goods, which in turn are being used to increase productivity. Argentines point out that their current account deficit in 1996 was only 4% of its GDP, barely half the level of Mexico's deficit when it got into trouble at the end of that year. (Carlsson, 1997).

As Argentines focus more and more on opportunities within Mercosur, the balance of trade situation is indicative of trends. Trade with Mercosur members posted a deficit of US$ 1.428 billion in 1995; however, this was reduced to US$ 530 million in 1996, and US$ 389 million in 1997. (Warn, 1998).

 

Argentine Trade Policy

The wide ranging reform programs introduced back in 1989 have effected drastic changes in an economy that had reached an acute crisis stage in the late 1980's. Most of the statist controls imposed during prior decades have been fully removed, deregulation and restructuring of public and private sectors is well underway, and industries are being privatized. Argentina has adopted outward -looking trade policies in this early phase of economic recovery.

Even with the government's adoption of open market trade policies, the process of becoming internationally competitive is proving to be somewhat slow, yet certain. There is a great need to reform industry, management, and labor structures. Open market policies have not eliminated the issues that Argentine businesses face in producing goods that can compete in both domestic and international markets. As a result, imports are likely to remain high for some time in order to meet domestic consumer demand, industrial investment in capital goods, and consumption of intermediate inputs for re-export production. However, it is in this situation that US businesses can seek to maximize their opportunities. The rising consumer demand in these areas, represents unchartered waters for potential growth in which American companies can derive the most benefit. (Decker, 1997)

The government has committed itself with its open trade policies for he most part, allowing for a transitional period only when protection of an important industry becomes necessary for its survival. Nearly barriers to exports have been eliminated, and exports have been showing an increased growth rate --growth was particularly strong during the first six months of 1996-- although growth has nevertheless been comparatively gradual and occurs from a relatively low base level. (Carlsson, 1997).

Observers argue that 1996 has been the turning point for Argentina's exports. First, some see the domestic market as nearly saturated for a wide range of goods, even without the negative effects of the emerging markets downturn in early 1996 which have served to depress imports. Second, and more positively, the effects of investment appear to be greatly more noticeable: Argentine manufacturing activity --up by 15% in 1996 from 1995-- increased for the 21 st consecutive quarter in the first quarter of 1996. (Fidler, 1997). Also, the fixture years promise to be a record period for harvests of agricultural products, while international demand seems to be either growing or at least stable for the intermediate products that form the bulk of Argentina's exports.

The Argentine government is seeking to improve trading relationships and increase export access regionally -culminating in bilateral trade agreements and in the Mercosur pact -and on a global scale through GATT, potential ties with EU, and the future hemispheric free trade area of the Americas (FTAA).

7. FOREIGN INVESTMENT IN ARGENTINA

Origin of Foreign Investment

Leading Foreign Investors: The main sources of foreign investment in Argentina are the US, Europe, and its closest Latin American neighbors, Chile and Brazil. The US has been the leading foreign investor in Argentina, topping the list in 1991 through 1994; US investors' share of the country's total foreign investment over the past four years was more than 40 percent. Much of that participation has been in the form of the purchase of privatized assets (primarily infrastructure assets), with the next most prevalent form representing capital investments in the consumer products, and automotive industries.

Table 10

U.S FINANCIAL INVESTMENT POSITION IN ARGENTINA
(US$ millions)

Source: Bureau of Economic Analysis, US Department of Commerce, 1997.

Table 11

US DIRECT INVESTMENT POSITION IN ARGENTINA
(US$ millions)

Source: Bureau of Economic Analysis. US Department of Commerce, 1997.

Other principal foreign investors include those from Italy, Spain, France, Brazil, Chile, Germany, Switzerland, the Netherlands, and Canada. As noted, backing the overall foreign investment trend are bilateral agreements between Argentina and various countries, primarily those from Europe and the Americas. Typically, these bilateral trade agreements establish a government-to-government framework for channeling private investment and official financing and guarantees between firms from the participating nations. They also usually provide for international arbitration of investment disputes and grant foreign investors protection from uncompensated expropriation and full capita) repatriation rights (even in the event of a currency crisis). The agreements and new reforms have gone a long way toward reducing Argentine sovereign risk for all investors, not just those covered under bilateral national agreements.

Sources of foreign capital are expected to diversify in the wake of the continued expansion of free market reforms around the world. Argentina's rich natural resource wealth, relatively high national income, open market economic policy, and historical international bent should continue to make it attractive to foreign capital in the years to come.

Based on announced projects scheduled for completion between 1994 and 2000, the US should remain the major investor in Argentina, being involved in 35 projects and 5 additional joint ventures with Argentine or third country firms. French firms are participating in 7 projects plus 4 multinational joint ventures; UK firms in 7, plus 3 joint ventures; and German firms in 7, plus 1 joint venture. Other investors include Chileans (6 projects and 3 joint ventures); Canadians (4 and 2); Italians (4 and 2); Japanese (2 and 1); Mexican (2 and 1); Dutch (2 and 1); Brazilian (2 and 1); Swiss (2 projects); Australian (1 project and 1 joint venture); and the Irish and Venezuelans with 1 project each.

Investment Climate and Trends

Historical Perspective At the beginning of the 20th century, Argentina was a liberal democracy with the tenth largest economy and the sixth highest per capita income in the world. Its abundant natural resources, coupled with some of the best agricultural land in the world, attracted immigrants and development capital from around the globe. Indeed, these factors --together with a largely middle class population of European ancestry --made for a welcome and attractive environment for direct foreign investment. In the late 19th and early 20th centuries foreign investors, primarily from the US and the UK, rushed in to develop first infrastructure --ports, railways, and electric power and natural gas production and distribution facilities-- and later manufacturing operations.

For 1880 to 1930 the nation flourished with a stable currency tied to a gold standard and an annual average inflation rate of only 1.5 percent; between 1900 and 1920 gross domestic product (GDP) doubled. Moderate protectionism began to develop during the period of World W