TRADE POLICY REVIEW MECHANISM ARGENTINA. Report by the Secretariat. Addendum

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1 GENERAL AGREEMENT ON TARIFFS AND TRADE RESTRICTED C/RM/S/18A/Add.l 27 February 1992 Limited Distribution COUNCIL TRADE POLICY REVIEW MECHANISM ARGENTINA Report by the Secretariat Addendum I. INTRODUCTION 1. The main report, Q/RM/S/18A, highlighted the importance of recent reforms for continued economic growth based on an outward-oriented economy. Since that report was completed in November 1991, there have been major developments. II. GENERAL ECONOMIC DEVELOPMENTS 2. Macro-economic and financial reforms are closely linked with micro-economic (trade, industrial and labour) policy changes in the Government's reform programme. The main targets of macro-economic policy have been debt reduction and the control of inflation with renewed economic growth. Reducing the budget deficit, control of the money supply and attracting foreign investment have been critical to the achievement of these targets. The micro-economic reforms are aimed at achieving growth through increased efficiency in the allocation of resources. The privatization programme, a key element in the Government's strategy, is linked to both the macro- and micro-economic objectives. 3. On the whole, economic indicators have continued to be favourable, leading to renewed confidence in the economy. Inflation and unemployment have fallen, and production has increased. There has been some discussion in Argentina about the idea of fostering a new immigration programme to The economic growth and fall in unemployment (to.3 per cent, the lowest rate since October 1987) are significant because meeting strict fiscal and monetary targets has often been associated with economic contraction

2 Page 2 meet labour shortages. Forecasts are for increased growth in real GDP to 6. per cent in 1992, up from. per cent in Nominal rates of interest have fallen; between January and November 1991, monthly bank borrowing and lending rates declined from 1.7 and 24.7 per cent, respectively, to 1.2 and 4.4 per cent. 4. Inflation fell through the end of 1991 from a peak of 27 per cent increase in retail prices in February to an increase of.6 per cent in the December retail price index, with an overall rate for the year of 84 per cent. An expected large seasonal increment in December 1991 did not occur, but, it is understood from press reports that the January figure may have been around 2 per cent, which would make it difficult for the Government to reach its target for There is a view that the increase in January is demand-driven, linked to growth in the money supply. It is believed that there has also been a substantial capital inflow, not merely from the disbursement of World Bank/IDB loans and IMF stand-by credit but also from the repatriation of flight capital and an increase in foreign direct investment as confidence in the economy has grown.. The rate of increase in wholesale prices has generally been lower than in retail prices; the wholesale price index actually fell by.4 per cent in August,.9 per cent in November and 1. per cent in December (C/RM/G/18/Add.2). This difference ~in the wholesale and retail price indices is believed to be one of the reasons behind the decree on deregulation (see below), as Government spokesmen have attributed this difference to cartelization of the retail and distribution sectors. 6. The trade surplus for the first months of 1991 was US$4,319 million, with exports reaching US$1,9 million and imports US$6,19 million (Chart I). There was some reduction of the surplus in On an annualized basis, the February rate was the equivalent of 1,66. per cent and the December rate was the equivalent of 7.4 per cent. The rates of inflation for the whole of 1989 and 199 were 4,12 and 1,344 per cent, respectively. 3 Latin American Economy and Business, February However, too much should not be made of one month's figures, since imports had also been falling in the last few months of a fact which is not normally associated with excess demand. The data for the last six months are estimates by the National Institute for Statistics and Census (Instituto Nacional de Estadisticas y Censos, INDEC). The Central Bank estimates that exports for the same period were US$, million and imports were US$8,1 million, giving a surplus for the period of US$3,4 million.

3 Page 3 October, associated with a decline in exports, which had been running at over US$1 billion a month, to US$93 million in October and US$4 million in November. This may be related to a reduction in wheat exports, following a poor harvest. Imports had been relatively stable from July through October (at over US$7 million), but also declined to US$2 million in November. It is not evident why imports and exports both declined at this time. Chart 1 Exports, imports and trade balance, January-November US$ million h 4 2 Exports Imports I I Balance Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Source: Data supplied by the Government of Argentina. 7. Government forecasts are for a trade surplus in 1992 similar to that of Imports tend to be driven by domestic economic activity, while exports are likely to be affected by economic activity in overseas countries, as well as by developments in the real effective exchange rate which is affected by nominal rates and relative rates of inflation in trading partners. While the rate of inflation remains somewhat higher than that of the United States - and the nominal rate is anchored to the

4 Page 4 US dollar - Argentina's inflation is considerably lower than that of its major trading partner, Brazil. 8. As planned, the Argentine austral (=US$.1) was eliminated on 1 January 1992 and replaced by the peso at a rate of 1 peso per US dollar. 9. Negotiations are underway to restructure the country's debt. The key to this restructuring will be agreement with the IMF on a three-year extension facility to replace the existing stand-by arrangement. (The second tranche of the standby, US$24 million, was released in December.) It is understood that some US$3 billion is being sought under the extension facility. Should this facility be granted, then additional loans from the World Bank and the Inter-American Development Bank will also be unlocked. This will also be critical for a Brady Plan restructuring, for which negotiations with creditor banks also began in January As noted in the main Secretariat report, Argentina's privatization programme is one of the most extensive in Latin America, and one of the most rapid in the world. The programme is aimed at raising funds to reduce foreign debt, reducing fiscal deficits by divesting loss-making public enterprises, and increasing efficiency throughout the economy by the improved operation of service industries. It is now predicted that over the next two years, the Government will " have sold off a further US$3 billion of State-owned assets, including transport, energy, roads, river transport, shipping, ports, petrochemicals, hydrocarbons, steel, postal services, gas supply, water supply and a number of military factories, shipyards and workshops. The sale of military-owned companies will apparently require the passage of a law by the Congress. The Government now expects to have completely withdrawn from the management of all public sector enterprises by the end of III. POLICY CHANGES (1) Trade Policy. The main trade policy changes since the preparation of the Secretariat report are in the tariff structure, in the automotive sector arrangements, and in the implementation of MERCOSUR. The basic foreign trade law is currently being reviewed. It is now hoped that this will pass through the legislature in the first half of From the middle of 1991, industries based in Tierra del Fuego, mainly the electronics sector, have been exempt from payment of VAT. Reference prices for electronics were replaced with a 3 per cent tariff, as noted in the main report. Various special industrial promotion régimes remain under suspension, pending study of their eventual reform.

5 Page (i) Tariffs 12. In November 1991, duties on items which had previously been set at zero were increased to per cent, and duties at per cent were increased to per cent, while items at and 3 per cent remained unchanged. However, from 1 January 1992, the rate for automobiles and parts was reduced from 3 per cent to per cent. These changes mean that the average tariff has increased from 9. per cent in April 1991 to 12.2 per cent at the beginning of 1992 (Table I). Averages for the petroleum, agricultural and industrial sectors increased from to per cent, 1.8 to per cent and 1.1 to 12.7 per cent, respectively. The November change was the thirteenth set of tariff changes since 1987, and the third involving an increase in rates.. It is not known to what extent there may be exemptions to this régime, such as characterized Argentina's discretionary industrial policy in the past. Certainly, local assemblers of automobiles will be able to import vehicles (not equivalent to locally produced models, and under quota - see below) and parts at a concessional rate of 2 per cent. 14. Overall, the tariff changes have reduced tariff escalation. This reduction in the spread can be identified from the smaller standard deviations from the average tariff rates in the November rates compared with those for April 1991 (Table II). This is also evident from the reduced spread of rates between raw materials and final processing stages. 1. A consequence of the reduced escalation is that effective rates of protection in a number of the more heavily protected sectors of the economy may also have fallen (unless tariff exemptions are granted). This would mean some reduction in the anti-export bias and in the extent of misallocation of domestic resources associated with the previous tariff structure. While it would have been preferable to achieve these efficiency The rate on automobiles and electronics products were increased from per cent to 3 per cent in July 1991, at the time that reference prices for electronics products were eliminated The tariff increases will have various effects. The extent of the increase in Government revenues will depend on exceptions from the increases, as well as demand, supply and substitution elasticities. The impact on the balance of trade, if any, will depend on the marginal propensities to save and to import in response to the income effect. Fiscal and monetary policy adjustment may be required to control any general inflationary effect, beyond the immediate direct price increase for imports subject to tariff increases and the indirect effect on user industries. A full breakdown of tariff rates by two-digit GATT Tariff Study category and stage of processing for November 1991 is given in Annex Table Al.

6 Page 6 goals by reducing high protection, the increase in lower rates, as a second-best, short- to medium-term policy, is understandable in an economy which, in the past, has had great difficulty in improving tax collection. 16. The main exception to the decline in effective protection appears to be the automotive sector where the tariff structure provides effective protection significantly greater than nominal protection in the sector. This occurs because automotive assemblers ("terminales") are able to import parts for a 2 per cent duty while the finished goods are protected by a per cent duty (C/RM/G/18/Add. 2). For models with locally-made equivalents, anyone can import a vehicle at a duty rate of per cent. As a rough indicator of effective protection based on tariffs alone, if all the 4 per cent local content were value added (i.e. not local materials) then effective rates would be in the region of per cent. However, if even one quarter of the local content consisted of local materials, then effective rates would be in the order of 2 per cent. 17. For models without a local equivalent, there is a global quota set at a level of 8 per cent of domestic output (rising to 9 and 1 per cent in 1983 and 1984). Within the quota, local assemblers pay only 2 per cent for assembled vehicles, depending on the level of local content and level of exports achieved. Manufacturers without a local assembly operation pay a duty of 18 per cent. 18. In the first half of 1992, assemblers are to present to the Government a plan for restructuring the industry, including the elimination of quotas on vehicles not produced or imported by the local assemblers. This is to be welcomed, because protection for this sector has adverse effects on all sectors which use transport, as well as on consumers. Elimination of quotas and further rationalization of the tariff structure would help to reduce the costs imposed by protection of the automotive sector on other sectors and consumers in Argentina. (ii) Regional policies 19. Since the preparation of the Secretariat report, MERCOSUR (the Southern Common Market formed by Argentina, Brazil, Paraguay and Uruguay under the Treaty of Asuncion signed on 26 March 1991) was ratified on 29 October 1991 by Brazil (having been ratified previously by the other members) and entered into effect on 29 November The first tariff The quotas may be increased if there is a shortfall in supplies.

7 Page 7 cuts of 47 per cent in m.f.n. tariffs for other members of MERCOSUR, which had been scheduled for 1 June 1991, were then implemented (with the exception of some 394 items in the case of Argentina). The second cut by 4 per cent of the m.f.n. rate was scheduled for 31 December 1991 (C/RM/S/18A, Annex II.1). 2. At the GATT Council meeting of 18 February 1992, Brazil announced that MERCOSUR had been ratified. (2) Other Policy Changes 21. In early November 1991, the Government of Argentina made a major change in policies aimed at stimulating internal competition. These were announced in Presidential Decree No. 84 of 3 October. A brief reference to these changes was made in the Summary Observations to the Secretariat report (C/RM/S/18A).. This major reform of the Argentine economy has now been extensively described in Addendum 2 to the report by the Government (C/RM/G/18/Add.2). In brief, the decree covered the deregulation of the internal market for goods and services; further liberalization of international trade; the elimination of various State bodies; the suppression of various taxes, including the statistical tax on exports; the reduction of charges and increased transparency in capital markets; the amendment of the collective bargaining process; and the creation of a unified system of social security. 23. The law on deregulation sweeps away State intervention in many areas. State Boards have been scrapped; centralized monopolies for the sale of fruit, vegetables and fish have ended; guaranteed prices for wholesalers of meat, grain, wine, sugar and tobacco are abolished; retailers can buy from the cheapest supplier, domestic or foreign; zoning restrictions have been abolished. The sectors affected include industry, insurance, transportation, ports, banking, capital markets, the professions, as well as the wholesale and retail trades. 24. The decree also affected the power of the labour unions, by allowing individuals to join company unions or professional associations instead of national unions. However, labour market reforms were also strengthened by a law on the reform of labour laws which passed the Congress in November The law includes provisions on temporary labour, severance pay, apprenticeship, workers' compensation, unemployment benefits, and registration of the workforce.

8 Page 8 IV. CONCLUDING REMARKS 2. The effects of Argentina's economic reform programme are already starting to be seen. Macroeconomic reforms have already made sufficient progress to allow the Government to engage in serious discussions with the IMF and commercial banks on a medium-term financing package which may include debt reduction. The trade policy changes made have transformed Argentina into one of the more open economies, developed or developing countries. In trade policy, further reform of the automotive sector, reducing effective rates of protection, should bring relief to other sectors of the economy. Among other sectors, only electronics, mostly located in Tierra del Fuego, has a tariff of 3 per cent and effective rates are also likely to be far greater. In this case, regional policy could be pursued by more effective instruments. 26. Concerns about areas of high protection are somewhat mitigated by the expectation that tariffs on trade within MERCOSUR will be reduced to zero, while quotas and exceptions within the regional group will be eliminated by the end of However, full benefits will only be realized domestically if MERCOSUR itself becomes an open trading area without extensive tariff escalation and other distortions arising from non-tariff barriers, such as industrial plans and production/market sharing arrangements.

9 ^ TABLE I AVERAGE NOMINAL TARIFFS, APRIL 1991 AND JANUARY 1992 BY BROAD SECTOR & TARIFF STUDY CATEGORY (2 DIGIT) OBS. APRIL 1991 MEAN ST.DEV. MIN. MAX. MEAN ST.DEV. NOVEMBER 1991 MIN. MAX. TOTAL PETROLEUM AGRICULTURE INDUSTRY TARIFF STUDY CATEGORY (2 DIGIT) RAW HIDES AND SKINS, LEATHER AND FURSKINS RUBBER WOOD AND CORK PULP, PAPER AND PAPERBOARD TEXTILES MINERAL PRODUCTS AND FERTILIZERS PRECIOUS STONES & PRECIOUS METALS ORES AND METALS COAL, PETROLEUM & NATURAL GAS CHEMICALS NON-ELECTRIC MACHINERY ELECTRICAL MACHINES AND APPARATUS TRANSPORT EQUIPMENT PROF. SCIENT. INSTR..PHOTOGR. & OPTIC. GOODS,CLOCK, WATCHES FOOTWEAR AND TRAVEL GOODS PHOTOGRAPHIC AND CINEMATOGRAPHIC SUPPLIES FURNITURE MUSICAL INSTRUMENTS, SOUND RECORDG OR REPRODUCTION APPARATUS TOYS WORKS OF ART AND COLLECTORS' PIECES FIREARMS, AMMUNITION, TANKS & OTHER ARMOURD FIGHTG VEHICLES OFFICE AND STATIONERY SUPPLIES MANUFACTURED ARTICLES NOT ELSEWHERE SPECIFIED FOODSTUFFS GRAINS ANIMALS AND PRODUCTS THEREOF OILSEEDS, FATS AND OILS AND THEIR PRODUCTS CUT FLOWERS, PLANTS, VEGETABLE MATERIALS; LACS, GUMS, ETC BEVERAGES AND SPIRITS DAIRY PRODUCTS FISH, SHELLFISH AND PRODUCTS TOBACCO OTHER AGRICULTURAL PRODXTS OF ANIMAL ORIGIN OTHER AGRICULTURAL PRODXTS OF VEGETABLE ORIGIN Note: Calculations by GATT Secretariat from Gui a Practica and data from the Government of Argentina.

10 TABLE II AVERAGE TARIFFS BY PROCESSING STAGE, APRIL 1991 AND JANUARY 1992 Obs. Mean April 1991 St.Dev. Min. Max. Mean January 1992 St.Oev. Min. Max. ALL GROUPS/PROCESSING STAGES TOTAL ~ FINISHED GOODS MORE THAN ONE IDENTIFIED PROCESSING STAGE TOTAL -- RAW MATERIALS -- SEMI-MANUFS Note: Calculations by GATT Secretariat from Guia Practica and data from Governmnet of Argentina. )

11 Page APPENDIX TABLE Al ARGENTINA - TARIFF RATES JANUARY 1992 BY GATT TARIFF STUDY CATEGORY ft PROCESSING STAGE DESCRIPTION NO. OF MEAN OBS. STD. MIN. DEV. MAX. TOTAL (ALL PROCESSING TS GROUPS) TOTAL (GROUPS WITH MORE THAN ONE PROCEESING STAGE) -- SEMI-MANUFS GOODS WITH DISTINCT IDENTIFIED PROCESSING STAGES RAW HIDES AND SKINS, LEATHER AND FURSKINS -- RAW MATERIALS RUBBER WOOD AND CORK PULP, PAPER AND PAPERBOARD TEXTILES MINERAL PRODUCTS AND FERTILIZERS PRECIOUS STONES & PRECIOUS METALS ORES AND METALS COAL, PETROLEUM & NATURAL GAS (CONT'D.)

12 Page 12 APPENDIX TABLE Al (CONT'D) DESCRIPTION NO. OF MEAN OBS. STD. OEV. MIN. MAX. CHEMICALS -- FINISHED GOODS FOODSTUFFS -- SEMI-MANUFS ANIMALS AND PRODUCTS THEREOF OILSEEDS, FATS AND OILS AND THEIR PRODUCTS DAIRY PRODUCTS -- FINISHED GOODS FISH, SHELLFISH AND PRODUCTS -- RAW MATERIALS TOBACCO OTHER AGRICULTURAL PRODUCTS OF VEGETABLE ORIGIN FINISHED GOOD WITH PRIOR PROCESSING STAGES NOT IDENTIFIED NON-ELECTRIC MACHINERY ELECTRICAL MACHINES AND APPARATUS TRANSPORT EQUIPMENT PROF. SCIENT. INSTR..PHOTOGR. & OPTIC. GOODS,CLOCK, WATCHES FOOTWEAR AND TRAVEL GOODS PHOTOGRAPHIC AND CINEMATOGRAPHIC SUPPLIES FURNITURE MUSICAL INSTRUMENTS, SOUND RECORDG OR REPRODUCTION APPARATUS TOYS WORKS OF ART AND COLLECTORS' PIECES FIREARMS, AMMUNITION, TANKS & OTHER ARMOURD FIGHTG VEHICLES OFFICE AND STATIONERY SUPPLIES MANUFACTURED ARTICLES NOT ELSEWHERE SPECIFIED BEVERAGES AND SPIRITS GOODS WITH SUBSEQUENT PROCESSING STAGES NOT IDENTIFIED GRAINS CUT FLOWERS, PLANTS, VEGETABLE MATERIALS; LACS, GUMS, ETC OTHER AGRICULTURAL PRODUCTS OF ANIMAL ORIGIN NOTE: COMPUTATIONS BY GATT SECRETARIAT FROM GUIA PRACTICA AND DATA FROM ARGENTINA.