When Argentine President Cristina Fernandez de Kirchner expropriated control of the country’s largest oil producer, YPF, from its Spanish parent Repsol YPF in May, the shockwaves reverberated throughout South America and Spain. But the move shouldn’t have come as a total surprise. It was, after all, just the latest in a series of similar moves throughout South America.
In landlocked Bolivia, President Evo Morales recently nationalized Spanish firm REE, which owns and operates three-quarters of Bolivia’s power grid. In Venezuela, populist President Hugo Chavez has nationalized such foreign firms as the subsidiary of Spanish banking giant Santander. In Brazil, President Dilma Rousseff has increased import tariffs, and ordered tax cuts and other stimulus measures worth $35.4 billion in an effort to protect domestic manufacturers from what she called “predatory” competition from wealthy nations.
Yet no Latin American country has been more disappointing to advocates of free trade and deregulated foreign direct investment than Argentina. “The Argentine government has been taking an increasingly heterodox line, adopting policies that are intended to thumb their noses at the conventional wisdom,” said John Williamson, a senior fellow at the Peterson Institute for International Economics.
The expropriation cast a pall over Argentina’s prospects for attracting the foreign direct investment it needs to grow. “Presumably, Argentina wants to create a healthy, vibrant private sector,” Williamson said. “That’s what kept it going so far. But (this expropriation) also makes it a very unattractive place in which to do any foreign investment.”
With the government refusing to compromise on its statist policies and unpredictable regulatory environment, Argentina could be in for a long cold winter — and beyond. Unless Argentina starts behaving more like the nations of South America’s Pacific coast, “No one in any line of business will put one dollar into that country,” said David Lewis, vice president of Manchester Trade, a Washington-based consultant that advises U.S. companies about investing in Latin America.
Moises Naim, a senior associate in the international economics program at the Carnegie Endowment for International Peace, said Fernandez decided to take control of YPF in the context of a rapidly deteriorating economic and political outlook.
“Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure, and a less-than-welcoming environment for foreign investors,” he said. “It has had limited access to the international financial system since defaulting on its debts in 2001. Many of the president’s erstwhile supporters are abandoning her, and labor unrest is becoming more frequent.”
Free-market supporters agree Argentina needs to eliminate its popular but unaffordable and regressive subsidies, and that the government’s price controls inhibit much-needed investment and create bottlenecks that stifle competitiveness.
Until a decade ago, the U.S. share of Argentina’s imports and exports remained relatively stable, accounting for about 20 and 10 percent, respectively. Those figures have declined steadily since then. By 2010, U.S. imports accounted for about 10 percent of Argentina’s imports and 5 percent of its exports.
In 2011, the U.S. logged a trade surplus of $5.3 billion with Argentina. In the first four months of 2012, U.S. exports to Argentina amounted to $3.1 billion, up slightly from $2.8 billion in the same period in 2011. Over the first four months, U.S. imports of goods from Argentina totaled $1.37 billion in 2012, down slightly from $1.4 billion last year.
Trade friction has dogged the bilateral relationship in recent years. The Obama administration this year suspended Argentine participation in the Generalized System of Preferences, citing the country’s failure to pay arbitration payments awarded by the World Bank’s International Centre for Settlement of International Disputes to a number of U.S. companies hurt by the 2002 devaluation of the peso. Although the GSP benefit for Argentina totaled a mere $18 million in 2011, or 0.4 percent of Argentina’s exports to the U.S., the suspension was a symbolic move that demonstrated U.S. dissatisfaction with the Fernandez regime.
While the Pacific Coast countries of western South America, including Colombia, Peru and Chile, have been busily dismantling barriers to free trade, Argentina is moving in the opposite direction, creating import barriers in an effort to protect local industry and boost job creation.
Imported capital goods that compete against local Argentine producers are subject to a 14 percent tariff, while imported capital goods that don’t face any local competition pay only a 2 percent tariff.
Argentina manufactured a record 3.4 million computers in 2011, a 161 percent spike over 2010, as a result of such protectionism. The impact of the tariffs are especially clear in product lines for which Argentine producers compete against imports. In 2010, for example, Argentina imported 1.3 million laptops, and local manufacturers made only 289,654 units. A year later, Argentine imports of those products plunged to 861,000 units, while local manufacturers made 1.6 million units.
The Fernandez government’s populism has been well-received by the other founding members of Mercosur, the South American trade bloc that traditionally included Brazil, Uruguay and Paraguay, and now includes Venezuela. At this spring’s Mercosur summit in Mendoza, Argentina, government leaders announced they also were negotiating for the admission of Ecuador, Bolivia, Guyana and Surinam.
It’s no accident Mercosur’s expansion plans have no room for Chile, Peru and Colombia, three countries that, along with Mexico, agreed to establish a so-called Pacific Alliance. In 2011, the four members of the alliance exported $525 billion worth of goods, the equivalent of 55 percent of Latin America’s total exports.
Unlike Argentina, Chile, Peru and Colombia are ranked as “investment grade” economies and have enacted bilateral free trade agreements with the U.S. In addition, Mexico, the fourth member of the budding alliance, for almost 20 years has been linked closely to Canada and the U.S. by the North American Free Trade Agreement. In 2011, Argentina attracted a mere $7.2 billion in foreign direct investment, significantly less than South America’s new rising stars: Chile, which took in $17.3 billion; Colombia, which attracted $13.2 billion; and Peru, with $7.7 billion.
Contact Alan M. Field at email@example.com.