ARGENTINA'S POST-CRISIS TRADE BOOM

UNCLAS BUENOS AIRES 000056

SIPDIS

SENSITIVE
SIPDIS

EB/TPP/BTA/EWH FOR BETH LAMPRON
EB/TPP/ABT/ATP FOR MARSHA SINGER
EB/ESC/IEC FOR JEFF IZZO
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE,
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
EX-IM BANK FOR MICHELE WILKINS
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
TREASURY FOR ALICE FAIBISHENKO
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN
USCINCSO FOR POLAD

E.O. 12958: N/A
TAGS: ETRD ECON EAGR PREL AR
SUBJECT: ARGENTINA'S POST-CRISIS TRADE BOOM

REF: A. 05 BUENOS AIRES 858


B. 05 BUENOS AIRES 1562


1. (U) SUMMARY: Since the economic crisis of 2001/2,
Argentine trade has grown quickly, and much more so than the
economy overall. Total two-way trade has risen 85.0% since

2003. Argentina's leading trade partner remains Brazil,
followed by the EU as a whole, and bilaterally by the U.S.
and China for imports and Chile and the U.S. for exports.
Agricultural products, especially soy, are heavily
represented on the export side, though energy exports have
risen with global oil prices. Imports are concentrated in
intermediate capital goods, in particular machinery. Despite
Argentina's burgeoningtrade, its share of global exports has
fallen since 2002/3, and Argentina's trade surplus, while
still large, has shrunk considerably, led primarily by
changes in trade with MERCOSUR partners. Since export taxes
on primary product exports contribute significantly to
government revenue, the specter of lower international
commodity prices looms large. A significant drop would
threaten not only Argentina's trade surplus, but the GoA's
fiscal surplus. END SUMMARY

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EXPORTS: GROWTH, WHAT THEY ARE, WHERE THEY'RE GOING
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2. (U) Argentine trade has grown rapidly following the 2002
economic crisis. Between 2003 and 2006, exports jumped from
$29.6 billion per year to $45.8 billion (estimated),an
increase of 54.9% (16.9%, 15.8%, and 14.5% by year); imports
grew from $13.8 billion to $34.5 billion (estimated),a rise
of 149.4% (62.2%, 27.8%, and 20.2% by year). Total two-way
trade rose 85.0% in the same period. Despite the more rapid
growth of imports, Argentina continues to enjoy a sizable
trade surplus: 2006 will be the fifth consecutive year with a
trade surplus of over $10 billion. Because the devaluation
of the peso in 2002 significantly lowered GDP in dollar
terms, trade as a share of GDP nearly doubled from 17.0% in
2001 to 33.4% in 2002, and rose to 36.8% in 2005.


3. (U) While Argentine exports are heavily concentrated in
agricultural goods, the largest single category of exports
(in broad terms, by HTS - Harmonized Tariff Schedule -
chapter) is mineral fuels and oils (ch. 27),which totaled
16.4% of all exports in 2005, with a value of $6.6 billion.
Agricultural goods overall (including leather and leather
products),made up just under half (48%) of 2005 exports, and
were worth $19.2 billion. Soy is by far the most significant
in this area: soybean oil-cake alone was $3.8 billion (9.5%
of exports, and the largest export by tariff line),and that
plus soybeans and soy oil were $8.2 billion (20.5% of all
exports). Meat, corn, and wheat also have large export
shares, at 3.6%, 3.4%, 3.2% of total exports respectively.
Leather and leather goods comprised 2.3% of all exports,
worth $917 million. In manufacturing and industrial goods,
vehicles (ch. 87) comprised the largest group, with $2.9
billion in exports (7.2%),led by diesel trucks and
medium-sized cars. About 1.8% ($616 million) of all




non-petroleum exports were to the U.S. under the Generalized
System of Preferences (GSP) rubric. While about two-thirds
of agricultural exports have some value added (e.g.,
processed soy meal and oil vs. raw beans),the overall
dependence on agriculture indicates that Argentine exports
are not moving quickly up the value chain.


4. (U) Argentina trades mainly with its closest neighbors,
three of which (Brazil, Paraguay and Uruguay) are co-members
of MERCOSUR, the Southern Common Market, formed in 1991.
Brazil dominates this trade, receiving $6.3 billion of
Argentine goods in 2005, 15.8% of all Argentine exports.
MERCOSUR as a whole (NOTE: not including Venezuela, which
became a full member in 2006, though it has yet to adopt the
common external tariff and other protocols of membership)
received $7.7 billion in Argentine goods, or 19.1% of the
total. While the value of total Argentine exports to
MERCOSUR has risen from $5.7 billion in 2002, its share of
Argentine exports has fallen from 22.2% (and 31.9% in 2000).
The EU as a whole is currently Argentina's second largest
export partner, receiving nearly $6.8 billion in goods in
2005, up 8.7% from 2004. (Spain was the leading recipient
within the EU, and fifth overall, buying $1.8 billion in
Argentine products in 2005.) Exports to Chile reached $4.5
billion in 2005, an 11.2% share, just $5.5 million ahead of
the U.S. China became Argentina's fourth-largest export
market in 2003, receiving $3.2 billion in goods - a 7.9%
share - an increase of 189% over what it got from Argentina
in 2002.


5. (U) Argentine exports to some countries are highly
concentrated in certain products. For example, 2005 exports
to China included $1.7 billion worth of soy beans, 75% of all
such Argentine exports, 55% of all exports to China, as well
as slightly more than the Argentine trade surplus with China
($1.6 billion). Exports to Chile and the U.S. were dominated
by energy exports: $2.3 billion to Chile and $2.2 billion to
the U.S. - a combined total of 69.1% of Argentine
petroleum/gas exports, and about half of Argentine exports to
each country. In the case of Chile, exports consisted mainly
of petroleum products ($1.6 billion, or 36.5% of exports) and
natural gas ($440 million, 9.8% of exports, despite several
interruptions in delivery - Ref B),while exports to the U.S.
were mostly crude oil and unleaded gas. It's notable that
volumes of hydrocarbons exports to both countries fell
slightly in 2005, and that the higher value was driven
entirely by the price increase. Forty-three percent of
vehicle exports, worth over $1.2 billion, went to Brazil.
(Septel will review the bilateral Argentine-Brazil auto pact.)


6. (SBU) Argentine exports have grown by an impressive 72%
since 2002 and a leading factor in this export boom is
certainly the 2002 devaluation of the Argentine peso (ARP),
which has incented strong growth in Argentina's primary
product - principally agricultural product - exports. For a
decade before that, the ARP had been legally pegged to the
dollar at a nominal one-to-one parity, which was both
overvalued and, ultimately, unsustainable. At a current
nominal value of roughly 3.10:1, the nominal ARP exchange





rate is approximately 70% below its earlier parity value and
is generally considered to be significantly undervalued. The
current real value of the ARP is approximately half its real
value the time of its 2002 devaluation.


7. (SBU) Argentina continues to apply a number of impediments
to exports, including outright export bans (of beef and
natural gas),export quotas, and high export taxes. While it
is difficult to quantify their collective impact, these
barriers have certainly constrained overall export growth.
In this context, it is important to note that Argentina's
share of world exports has fallen from 0.433% in 2001 and
0.399% in 2002 to 0.387% in 2005.

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THE IMPORT SIDE OF THE STORY
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8. (U) Argentine imports are more diverse than its exports,
but are concentrated in intermediate capital goods, including
machinery, electrical equipment, organic chemicals, and
plastics, which together accounted for 41% of imports in
2005, worth $11.7 billion. Motor vehicles and parts were
also significant imports, at $4.25 billion or 14.8% of
imports. TV/radio receivers and transmitters were the
most-imported specific item, at 4.0% of all imports with a
value of $1.2 billion, followed by medium-sized autos at just
under one billion USD (3.4%). Argentina also imported about
$1.4 billion worth of hydrocarbon products, about 25% of the
value of exports in the same general category.


9. (U) Just as Brazil is the primary recipient for Argentine
exports, it is the main source of Argentina's imports, having
provided 36% of them - $10.4 billion - in 2005. MERCOSUR as
a whole supplied 39.5% of Argentine imports in 2005. While
Argentina's share of exports to MERCOSUR partners has fallen
in recent years, its share of imports has grown - from 32.2%
in 2002 and 28.3% in 2000. (Brazil supplied 28.0% in 2002
and 25.5% in 2000. Argentina's share of imports from Uruguay
and Paraguay fell from a combined 5.4% in 2000 to 3.4% in
2002 and 2005, with each country losing 1% share.) The value
of Argentine exports to MERCOSUR increased 35% from 2002 to
2005, while value of its imports from MERCOSUR grew 291%.
The result has been a shift from a trade surplus with
MERCOSUR of $2.8 billion in 2002 to a trade deficit of over
$3.6 billion in 2005.


10. (U) Of intermediate capital goods imports, Brazil shipped
$3.5 billion to Argentina in 2005, 29.8% of those categories
and 12.2% of all imports. The U.S. (which supplied $4.5
billion, or 15.7%, of all imports) was also a significant
source of those goods, providing $2.5 billion worth (21.4% of
those categories and 8.7% overall). The leading category of
imports from Brazil, however, was vehicles: $2.9 billion
worth, 68.4% of all vehicles and 10.1% of all imports. From
a low base, energy imports from Bolivia have jumped to $240
million (0.8% of all imports) in 2005, $10 million more than
from Brazil and $20 million more than from Paraguay. (The
Paraguayan total is mainly electrical energy generated by the





shared Yacyreta dam.) $4.8 billion of imports came from the
EU, led by $1.3 billion from Germany, the fourth largest
single exporter to Argentina.

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TWIN SURPLUSES - HOW FIRM A FOUNDATION?
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11. (U) Argentina's GDP growth since the 2001/2002 crisis -
projected to be about 50% in real terms from the end of 2002
to the end of 2006 - has been supported by the nation's
significant increase in export volume and value. This GDP
growth, in turn, has helped drive an even larger increase of
imports. While projections of 2006 exports are 78% higher
than 2002 exports, import growth over this same period is
projected at over 283%. As a result, while Argentina still
enjoys a trade surplus ($11.3 billion in 2005, projected to
be $21 million less in 2006),this surplus is shrinking, down
from $15.7 billion in 2003. Maintaining twin trade and
fiscal surpluses has been a cornerstone of the GoA's economic
policy mix. While global commodity prices stand at record
levels due to unprecedented demand from China and India, any
significant drop in commodity prices would threaten both
since GoA revenue is highly dependent on export taxes on
Argentine primary commodity exports.)

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COMMENT
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12. (SBU) The GoA frequently cites the country's "export
boom" as a key factor in its now four-year-long economic
recovery, and the value of Argentine exports has indeed grown
by an impressive 72% since 2002. While this export boom has
certainly been an important contributor to overall GDP
growth, the fact remains that Argentina's world export share
has fallen in a period when circumstances - including a
relatively undervalued nominal exchange rate and high global
commodity prices for its principal primary product exports -
are highly favorable. The GoA's reliance on revenues from
high and distortive export taxes and its variable imposition
of outright export bans on beef and natural gas have been
factors in constraining export growth. To be fair, on the
import side, Argentina has taken some positive steps,
including unilaterally dropping in 2003 the 10% MERCOSUR
common external tariff on capital goods imports in an effort
to enhance the nation's productive capacity. But other moves
to end-run MERCOSUR disciplines via the negotiation of
"voluntary" quotas with MERCOSUR partners when imports rise
quickly make clear that Argentina's commitments to the
efficiency and wealth benefits of liberalized trade remain
subordinate to domestic political priorities.
WAYNE