Made in Argentina: Is the Rise in Protectionism Justified?

In Recoleta – the upmarket neighbourhood that most embodies Buenos Aires’ reputation as the ‘Paris of South America’ – things are becoming just a little less French.

By the end of October, luxury fashion label Louis Vuitton and renowned jeweller Cartier will join the likes of Yves Saint Laurent and Ralph Lauren in vacating their stores and pulling the shutters down on their Argentine operations.

The exodus of top-end clothing brands is blamed – in part at least – on the increasingly burdensome restrictions the government has placed on imports. The policy shift began in earnest last year, when the list of goods that do not qualify for automatic import licensing began to grow; some 600 products, including textiles and fabrics used by fashion retailers, are now held up at customs while the non-automatic licence is processed.

In addition, since 1st February, all importing firms have been required to prepare in advance a sworn declaration detailing their commercial transactions, including evidence of how they will meet another state-imposed requirement to exports goods to the same value as those imported.

The additional customs procedures have caused serious bottlenecks: in the port of Zárate, local press report an estimated backlog of 30,000 imported cars held for up to six months pending licences. Meanwhile, specialist goods not commonly found or produced within Argentina, ranging from salmon to silk and iPhones, have become increasingly scarce in the domestic market.

The government says the measures are necessary to defend local industry and employment, while gradually reducing the country’s dependence on foreign products. Critics, however, say they will ultimately be counterproductive, isolating Argentina from the world economy and leaving it vulnerable to retaliatory policies from its key trading partners.

Trading Criticism

Protectionism, shielding local businesses from cheaper or better-quality imports via tariffs or administrative restrictions, is considered taboo in orthodox economic wisdom. In its glossary, The Economist describes the practice as one that “usually makes the protected country worse off than if it allowed international trade to proceed without hindrance.”

In Argentina, the concept of “import substitution”, replacing imported goods with locally-made alternatives, was embraced by President Juan Domingo Perón in the 1940s. Despite growing momentum in the global free trade movement, it remained a key component of domestic economic policy until the military coup of 1976 ushered in several decades of neo-liberal, free-trade thinking. In 1995, under Carlos Menem, Argentina joined the World Trade Organisation (WTO), which exists to promote and regulate international trade among its 157 member countries.

It is in the WTO that today’s Argentina faces sharp criticism for its increasingly protectionist stance. In a report compiled by Global Trade Alert, released in July, Argentina was ranked second in a list of the world’s most restrictive countries for trade, having introduced 141 “discriminatory” measures since November 2008.

Angered by these measures, the EU, US, Japan, and Mexico have all filed complaints at the WTO in recent months against Argentina for implementing measures that “restrict the import of goods and discriminate between imported and domestic goods”. The EU claims that the non-automatic licences affected €500m of its exports in 2011, while new restrictions this year could impact €8.3bn, the sum of its trade with Argentina.

The Argentine government has responded by highlighting the protectionist measures adopted by its accusers, lodging its own complaints at the WTO against the EU for blocking biofuel imports, and the US for restricting the importation of Argentine beef on sanitary grounds without “scientific justification”. Argentina’s ambassador in Washington, Jorge Argüello, also pointed out that it is the US that has received the most complaints in the WTO since 1995, with 113 disputes compared to Argentina’s 17.

Argentina’s defiant stance was echoed by Brazilian leader Dilma Rousseff at the recent UN General Assembly. “We cannot accept that legitimate defence initiatives by developing countries be unfairly classified as protectionism,” declared Rousseff, after Brazil had been criticised for its plans to raise import tariffs on 100 products by 25% to protect local businesses.

Fine-Tuning

At home, the government has also rigorously defended its trade policy, dismissing the idea that the departure of foreign fashion brands is a problem, and pointing out instead the growing international presence of national brands such as Cardon (clothing) and Freddo (ice cream). And though Apple’s iPhone 5 will not be on sale in Argentina, the government points to the decision by Blackberry to begin fabricating two new models in Tierra del Fuego – the home of Argentina’s electronics industry and one of the biggest beneficiaries of protectionist measures – from December.

However, the argument for defending national industry and promoting the ‘Made in Argentina’ label is undermined by a heavy reliance on imported materials. In a monthly survey published by INDEC, 99.6% of industrial firms reported that their factories use imported parts or raw materials in the production process.

Last month, the head of the Argentine Industrial Union (UIA), José Ignacio de Mendiguren, highlighted the problem in an interview with El Cronista: “The restrictions have cut links in the production chain and today, the sector uses a high proportion of imported goods. We have to advance the substitution of them [for locally-produced parts], but we can’t while the chain is broken.” De Mendiguren had previously criticised the haphazard implementation of the new measures, arguing that “the virtue of legitimate tools is lost if they are used poorly”.

The benefits of protectionism can also come under threat if Argentine exporters face reciprocal discrimination in foreign markets. For example, exports to Brazil, Argentina’s most important commercial partner, have frequently been subjected to similar administrative checks, delaying sales and creating potential cash flow problems for small companies.

Though some of the early administrative teething problems of the new import restrictions have eased, the challenge for the government now is to manage the long-term transition to an import-substitution model without crippling local production in the meantime. A broader policy mix involving training skilled labour, encouraging innovation, and boosting technological capacity will also make the trade policies more effective.

Those that support the logic of protectionism will be hoping for some of the “fine tuning” that President Cristina Fernández de Kirchner has used to describe her administration’s approach to economic decision-making.