SCENESETTER: USTR AMBASSADOR VERONEAU'S JANUARY 26

UNCLAS BUENOS AIRES 000095

SIPDIS

SIPDIS

PASS USTR FOR DUSTR VERONEAU, AUSTR EISSENSTAT, SCRONIN
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
TREASURY FOR ALICE FAIBISHENKO
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN
USCINCSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON ETRD EFINOECD EAGR AR
SUBJECT: SCENESETTER: USTR AMBASSADOR VERONEAU'S JANUARY 26
VISIT


--------------
Introduction and Summary
--------------


1. (SBU) Embassy Buenos Aires warmly welcomes your January 26
visit to meet with the Ministers of Economy and Foreign
Affairs and with members of the U.S. business community. Your
arrival, immediately following your FTA consultations in
Chile and your TIFA signing in Uruguay, will spark
considerable interest from local media and from GoA trade
officials. Both the Ministries of Economy and Foreign
Affairs have expressed a strong interest in using your visit
as a platform to re-launch regular senior level talks via our
Bilateral Commission on Trade and Investment that last met in
October 2003.


2. (SBU) GoA officials will be eager to review with you
Argentina's participation in the January 18-19 Mercosur
Summit and to present their vision for enhanced hemispheric
economic integration via an expanded Mercosur. They will
likely seek assurances that your TIFA signing with Uruguay
does not represent a USG move to fragment the Mercosur trade
bloc. They will also present their views on the WTO/Doha
Round state-of-play, offer Argentina's support to revitalize
NAMA negotiations with the G-22 and look forward to hearing
U.S. perspectives from you. You will also have an
opportunity to review our developing bilateral trade with
Argentina and address longstanding frictions surrounding U.S.
phyto-sanitary barriers to Argentine beef and citrus exports,
U.S. anti-dumping duties on honey, and an ongoing ITC
anti-dumping investigation on Argentine lemon juice exports.


3. (SBU) You will be able to highlight positive developments
in our expanding trade relationship, including the two-year
renewal of GSP (which benefits roughly 15% of Argentina's
$4-plus billion in exports to the U.S.),close cooperation on
the Container Security and Trade Transparency Unit
initiatives, our recent announcement that Patagonia
(Argentina below the 42nd parallel) may soon be declared foot
and mouth disease-free, and our mutual interest in a positive
resolution to the GoA's recent WTO case against Brazil for
its application of anti-dumping duties on PET-resin exports
from Argentina.


4. (SBU) Representatives of U.S. Fortune 500 companies in
Argentina's agro-industrial, automotive, pharmaceutical,
financial services and other sectors will be eager to discuss
with you challenges they face operating in an Argentine
market that requires them to adapt to sudden changes in
regulatory and tax regimes and to inadequate enforcement of
intellectual property rights.


5. (SBU) Your visit comes at a time of considerable ferment
in Argentine political and economic arenas. In October 2005
President Kirchner won a resounding victory in mid-term
legislative elections. Based on these results, Kirchner has
further tightened his already firm control of political and
economic policy. Political interest is focusing increasingly
on the October 2007 presidential elections. Argentina
finished 2006 with its fourth straight year of strong
economic growth, with exports, employment, industrial


production, agriculture and livestock sectors turning in
record performances. Over 50% of total Argentine exports are
represented by agricultural, livestock, and food shipments,
and have been a focus of GOA policies to maintain low
domestic prices and increase government revenues. These GoA
policies, which include a menu of export tariffs, export
quantity controls and explicit and implicit price controls,
have introduced significant micro economic inefficiencies to
Argentine markets. Nevertheless, Argentina has sustained an
impressive economic recovery since suffering the worst
economic crisis in its history, including the largest
sovereign default in world history and a substantial nominal
devaluation of its currency in 2001-02.


6. (SBU) Ambassador Veroneau, senior GoA officials understand
the need for increased trade and foreign investment to
sustain Argentina's economic growth and they have made very
clear their interest in re-engaging with you and other USG
counterparts on the range of commercial issues. There is
also evident Argentine private sector support for enhanced
bilateral commercial ties with the U.S. Following your
discussions here, GoA Economy and Foreign Ministry officials
hope that you will be willing to jointly announce agreement
to hold a USTR-hosted Bilateral Commission on Trade and
Investment meeting in Washington sometime this spring. Post
strongly supports this initiative and, if you concur, looks
forward to working closely with your USTR team on this
project in the coming months.
END INTRODUCTION AND SUMMARY.

--------------
Background
--------------


7. (SBU) Early in the 20th century, Argentina was one of the
richest countries in the world, with a GNP per capita that
would have place it among the G7 of its day. However, the
history of Argentina over the last 70 years has been one of
economic decline and political instability. Many Argentines
are at a loss to explain how their country, blessed with rich
natural resources, a fertile land and manageable population
numbers, could have fallen so far. Some blame the military
dictatorships which predominated between 1930-1983; others
blame Peron's corporatist state and economic model; and a
significant number blame external factors: the IMF, the U.S.,
and, to a lesser extent, Europe, especially following the
2001-2002 economic crisis, the worst in Argentine history.
The election of left of center Peronist Nestor Kirchner in
2003 marked a significant shift in Argentine foreign policy,
aligning the country more closely with its MERCOSUR and other
regional partners such as Venezuela and less closely to the
U.S. That said, Kirchner has cooperated with the U.S. on a
number of issues, including counter-terrorism and narcotics,
peacekeeping in Haiti, promoting stability in Bolivia, and
working together at the United Nations.

--------------
Political Landscape
--------------


8. (SBU) Kirchner is widely perceived to be the strongest


Argentine President since the return to democracy in 1983,
and he faces a weak and divided opposition. Argentines give
Kirchner much of the credit for the country's phoenix-like
recovery from its 2001-2002 economic crisis, an event
equivalent to (albeit much shorter than) our Great
Depression. Political interest is focusing increasingly on
next year's presidential elections. It is widely thought
that, if he chooses to run, Kirchner will win reelection
easily. There has been much speculation, including from
president Kirchner himself, that he will not be a candidate
and that his wife, Senator Cristina Fernandez de Kirchner,
will stand in his place. Declared or potential opposition
candidates include former Economy Minister Roberto Lavagna,
businessman and president of the famed Boca Juniors soccer
team Mauricio Macri, center-left national congresswoman Elisa
Carrio, Governor of Neuquen state Jorge Sobisch, and former
President Carlos Menem.


9. (SBU) Argentina has played a positive role in promoting
human rights and democratic institutions in the hemisphere,
particularly in Haiti and Bolivia. Along with a number of
its neighbors, Argentina currently has 575 peacekeeping
troops in Haiti in support of MINUSTAH, reflecting its
traditionally strong support of UN peacekeeping operations
and commitment to Haiti.


10. (SBU) Kirchner's administration has strongly supported
counter-terrorism policies, having itself twice been a victim
of international terrorist attacks in the early 1990s. The
GOA has ratified all of the 12 international
counter-terrorism conventions. Argentina is a participant in
the Three Plus One regional mechanism, which focuses on
possible terrorist-related activity in the Tri-border region
between Argentina, Brazil, and Paraguay. On December 20,
President Kirchner signed the GoA's long-anticipated draft
anti-terrorism and counter-terrorism finance bill and sent it
to Congress.


11. (SBU) The GOA has been a strong international voice on
arms control and nonproliferation issues. On Iran, the GOA
voted to refer Iran's noncompliance to the UNSC at the
September 24 IAEA Board of Governors meeting. The GOA has
also endorsed the Proliferation Security Initiative (PSI).

--------------
Argentina's Economy
--------------


12. (SBU) Argentina has had an impressive recovery since
suffering the worst economic crisis in its history in
2001-02, including the largest sovereign default in world
history and a 70% nominal devaluation of its currency. A
surge in domestic aggregate demand facilitated by GoA fiscal,
monetary and income distribution policies, has resulted in
real GDP growth in the 8-9% range in each of the past four
years, with GDP reaching about $206 billion at the end of
calendar 2006, approximately $5,300 per capita. The Kirchner
Administration has ably managed the nation's public finances
and achieved large budget surpluses. As a result, investors
in Argentine financial instruments perceive lower risk
levels. Moody's recently upgraded its sovereign credit risk


rating for Argentina to B3 (several levels below investment
grade),and Argentina's sovereign country risk premium, as
measured by the benchmark JP Morgan Emerging Markets Bond
Index, fell to 192 basis points, Argentina's lowest premium
since JP Morgan introduced the index in 1992. Industrial and
construction activity have been growing rapidly, and tourism
has boomed, with a record high of an estimated 4.1 million
foreign tourists visiting in 2006. Economic expansion is
creating jobs and unemployment dropped from 21.5% during the
height of the crisis in 2002, to 10.2% during the third
quarter of 2006. Poverty has also fallen from the
post-crisis level of 60%, but remains stubbornly high, at
about 31% now living below the poverty line.


13. (SBU) Argentina negotiated a debt exchange with 76% of
its creditors in 2005 (paying roughly 34 cents on the
dollar). The government refuses to deal with investors
holding approximately 24% of the value of Argentine defaulted
bonds (currently totaling about $25 billion),and many of
these holdouts are seeking compensation through U.S. and
international courts. Argentina owes approximately $7.2
billion to Paris Club creditors, including over $3.5 billion
arrears and past due interest. The government has expressed
interest in negotiating a debt rescheduling deal with Paris
Club creditors. An IMF program is required for the Paris
Club to restructure Argentina's debt, and Argentina ceased
its IMF program when it paid off its nearly $10 billion debt
to the IMF in January 2006. Nevertheless, informal
discussions between the government and Paris Club Secretariat
are ongoing. Argentina owes approximately $360 million to
the United States, of which over $300 is in arrears
(including over $290 million owed to the U.S. Exmibank).
Argentina fell under Brooke Amendment sanctions on October 1,
2003, when it fell into arrears on principal payments on a
USAID loan. The Brooke Amendment to the Foreign Operations
Appropriations Act (FOAA) bans the use of USG assistance
under the FOAA to countries more than 12 months in principal
or interest arrears on USG loans made under the FOAA. This
covers USAID programs as well as assistance under a number of
military programs (FMF, MAP, FMS, PKO).


14. (SBU) Argentina's impressive recovery, which has led to
improvements in key socio-economic indicators, can be
attributed to a number of factors. First, following a decade
of market reforms in the 1990s, the economy was fundamentally
sound except for the high level of indebtedness. Second, the
adoption of a more flexible exchange rate regime in early
2002 and the combination of high commodity prices and low
interest rates catalyzed an increase in Argentina's exports.
Third, strong global and regional growth has also contributed
to Argentina's resurgence. Exports are at record levels and
Argentina's trade surplus is estimated to have totaled $11.3
billion in 2006. Foreign trade equaled approximately 38% of
GDP in 2006 (up from only 11% in 1990) and plays an
increasingly important role in Argentina's economic
development. The government has maintained a primary fiscal
surplus and continues to accumulate reserves, which reached
$32 billion in January 2007.


15. (SBU) Argentina should continue to perform well in 2007
with real GDP growth projected at about 7% and inflation in



the 10-12% range. Nevertheless, the GoA's slowness in
addressing public service contract renegotiations, capacity
constraints, potential energy shortages in the face of high
growth and distorted energy prices, inflation and the
government's heterodox policies to contain it (including
pressure on the private sector to maintain price controls),
and a still-weak investment climate are potential obstacles
to attracting the levels of new foreign direct investment
required to sustain the recovery.

-------------- -
Trade Overview and Bilateral GoA/USG Frictions
-------------- -


16. (SBU) Argentine trade has grown rapidly following the
2002 economic crisis. Between 2003 and 2006, exports jumped
55% from $29.6 billion per year to $45.8 billion; imports
jumped over 150% from $13.8 billion to $34.5 billion during
the same four year 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


17. (SBU) About 50% of 2005 exports fell into the category of
agriculture, livestock and food, with over 20% - $8.2 billion
- in soy (soybeans, meal, oil-cake and oil) alone. Brazil is
Argentina's top export market by far (15.8% of 2005 exports),
and in 2005 was followed by Chile (11.2%),the U.S. (11.2%),
and China (7.9%). Imports were concentrated in intermediate
and capital goods, with about 41% of the total. Brazil is
also Argentina's number one supplier of goods (36.4% of total
imports in 2005),followed by the U.S. (15.7%),China (5.3%),
and Germany (4.7%). Despite Argentina's burgeoning trade,
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 Brazil.
Since export taxes on primary product exports contribute
significantly to government revenue, any significant drop in
international commodity prices would threaten not only
Argentina's trade surplus but its fiscal surplus as well.


18. (SBU) There remain a number of bilateral frictions in the
Argentine/US trade relationship, some of which have lingered
for years. Both sides have concerns over beef: Argentine
exports to the U.S. have been blocked for some years
following a breakout of Foot-and-Mouth Disease, and the GoA
complains that the U.S. phyto-sanitary review process is too
slow. Exports of U.S. beef and sweetbreads to Argentina have
been banned since 2004 by the GoA due to fears of bovine
spongiform encephalopathy, and some U.S. firms which import
processed beef have been adversely affected by recent beef
export limitations. Argentina has been frustrated with slow
progress towards permitting imports of Argentine citrus,
suspended since 2001 due to citrus canker and pest risks.
Both sides are presently watching anti-dumping investigations
) one in the U.S. over Argentine lemon juice, and one in
Argentina over blank optical compact discs. Argentina is
also discouraged by antidumping duties in the U.S. on oil



country tubular goods, which have been in the sunset review
status since 2000. Finally, IPR has been a long-standing
concern for the U.S., with Argentina on the Special 301
Priority Watch List since 1996, mainly due to general lack of
enforcement and an unwillingness to protect confidential
pharmaceutical data used to obtain health approval.

--------------
Managed Trade in the Auto Sector
--------------


19. (SBU) Argentina's auto sector, composed entirely of
American, European and Japanese players, closed 2006 with its
best year since 1998. Ford and GM are prime movers in this
sector. Production in 2006 reached 432,000 units, a 35%
increase from 2005; new car sales amounted to 460,000 units,
a 14% increase from 2005; and exports reached 237,000 units
(55% of production is exported),up 30% from 2005. Brazil
and Argentina, virtually the only producers in the region,
have a complex auto trading regime, and a substantial amount
of auto trade. Under their "flex" trading regime in effect
until July 2008, for every USD 1.95 of Brazilian duty free
exports of autos and auto parts to Argentina, Argentina can
export USD 1 to Brazil duty free. There appears little
possibility that free trade in the auto sector will come
about any time soon, as Argentina continues to aggressively
press for managed trade schemes to protect its industry in
the face of Brazil.

--------------
Agribusiness
--------------


20. (SBU) U.S. agribusiness companies have invested heavily
in the Argentine economy for many decades and have made major
contributions to the agricultural and livestock sectors.
Cargill, for example, is making investments valued at $330
million in agricultural processing facilities (soybeans,
malt),a packing house, and port facilities. Over the last
two years, business and profitability in this sector have
been challenged by GOA intervention exemplified by the ban on
exports of fresh meat, price controls imposed on wheat, and
the freezing of export sales of corn. Another American firm,
Monsanto, faces major challenges, in particular its inability
to collect royalties on the Round-Up Ready soybean
technology, which has revolutionized soybean production in
Argentina. It has attempted to negotiate a solution to this
issue with seed companies, farm organizations, and other
stakeholders and launched court cases in Europe.
Unfortunately, Monsanto and GOA authorities have not found a
meeting of the minds to resolve this important issue of
intellectual property rights protection.

--------------
Agriculture
--------------


21. (SBU) The agricultural and livestock sectors, two of the
mainstays of the Argentine economy (over 50% of total
Argentine exports are represented by agricultural, livestock,
and food shipments),have been negatively affected by GoA



policies to contain inflation due to their importance in
calculating the CPI. The two principal policy initiatives
which the GoA has chosen to curb inflation have been through
price and export controls, which have affected grains (wheat
and corn),dairy, and meat. In 2006, when international
wheat prices had sharply increased, the GoA mandated that
Argentine exporters sell four million tons of wheat to the
milling industry at a price ($120 per ton) well below the
international price, in an attempt to maintain the price of
bread at what it considers a "reasonable" level. The GoA has
also frozen advance corn export registrations, hoping to
ensure sufficient corn for domestic use (the corn is used, in
the main, as feed for livestock and poultry, and for food)
without putting upward pressure on prices.


22. (SBU) In January 2007, the Minister of Economy announced
that the GoA would increase export taxes on soy and soy
products by 4% to 27.5% and 24% respectively. The GoA
expects to collect an extra US $400 million annually from
this export tax increase which it will use to subsidize
domestic consumption of wheat, corn and soy. Earlier in
2006, as prices of dairy products rose, the GOA reacted by
increasing export taxes on cheese and powdered milk. These
taxes undercut previously strong growth by this industry, and
led one of Argentina's main dairy cooperatives, which was
suffering from heavy indebtedness and low profitability, to
seek credits and assistance from the government of Venezuela,
which Hugo Chavez promised President Kirchner that he would
deliver, but has not yet to date. In 2005, the GOA increased
the export tax on fresh beef from 5 to 15%, and the minimum
slaughter weight to 280 kilograms. In March of 2006, it
banned almost all fresh beef exports (except those destined
to fulfill the European Union's Hilton Quota, and those
involved in country-to-country agreements). Over the last
five months, the GOA has relaxed some of these restrictions,
after it realized that market intervention had become
counterproductive. It is, however, again poised to intervene
aggressively if it believes that beef prices are increasing
at an "unreasonable" rate.
WAYNE