ARGENTINA: U.S. ELECTRONICS FIRMS FACE GOA TAX MEASURES

UNCLAS BUENOS AIRES 000665

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EINV EIND ELTN ETRD AR
SUBJECT: ARGENTINA: U.S. ELECTRONICS FIRMS FACE GOA TAX MEASURES
SUPPORTING DOMESTIC PRODUCTION

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Summary
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1. (SBU) The GoA has proposed a legislative initiative that aims to
promote domestic assembly of computer and telecom electronics and
create jobs in Argentina's southern Tierra del Fuego (TdF) province
by raising taxes on products imported or manufactured elsewhere in
Argentina. President Cristina Fernandez de Kirchner said that the
proposed law could help Argentina save roughly US$ 6 billion a year
in scarce hard currency reserves that are currently used to pay for
imported electronics. U.S. companies affected -- including HP,
Dell, Microsoft, Intel, Apple, and Motorola -- argue that this
protectionist measure will destroy more overall employment in
Argentina than will be created in TdF and that any new TdF
employment will be primarily low value-added assembly jobs. They
also argue that this will undermine Argentina's efforts to narrow
the digital divide, because Argentina's demand for information
technology equipment cannot be satisfied by TdF production, and that
domestic prices for these goods will rise by at least 30%. While
the Embassy stands ready to defend U.S. company interests, these
companies have made clear to us their concern that the GoA and local
media could cast this issue in polarizing "us vs. them," foreign
producers vs. domestic workers terms, which would not serve their
short-term interests in preserving attractive market opportunities
in Argentina. They have asked the Embassy to not/not take any
action at this time. End Summary.

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Encouraging Electronics Assembly in TdF
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2. (SBU) In April 2009, the GoA issued a decree that lowered
domestic value-added and other taxes on electronic products
(computers, cellphones, digital cameras, refrigerators, etc.)
assembled in Tierra del Fuego (TdF),Argentina's southernmost
province. The TdF economy is already significantly dependent on its
tax-advantaged electronic component assembly industry.


3. (SBU) As a follow-on measure, GoA Minister of Production Debora
Giorgi and Chief of Cabinet Sergio Massa have put forward a
legislative initiative (Law 253/09) that would further strengthen
TdF's competitive advantage in supplying electronic equipment for
domestic sale by eliminating a number of tax benefits currently
enjoyed by both importers of such products and on companies that
manufacture these products elsewhere in Argentina. The intent is to
promote electronic product assembly, manufacturing, and associated
job creation in TdF and to staunch the significant outflow of
Argentina's hard currency resources currently used to pay for
electronics imports. According to embassy industry contacts and
local media, the GoA bill was the result of negotiations between the
federal government and two TdF legislators whose votes were critical
to the GoA's bid to advance mid-term elections from October of June

2009.

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President Kirchner Weighs In
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4. (U) In May 21 remarks, President Cristina Fernandez de Kirchner
strongly supported the new legislation, arguing that the law could
allow Argentina to save on roughly US$ 6 billion a year in scarce
hard currency reserves to support domestic consumption of
foreign-produced electronics: "Imagine if this US$ 6 billion had
been manufactured here in laptops, cellphones, and desktops. What
(new) work for qualified Argentines and what (domestic) earnings!
This amount (of foreign exchange saved) would cover Boden 12
maturities (maturing bond payments that Argentina must pay in US
dollars) that come due in 2009, 2010 and 2011!" (Comment: This US$6
billion savings presupposes that foreign manufacturers of the
imported products will move production to Argentina, which Post
considers highly unlikely giving the relatively small size of the
Argentine market.)
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Bill Proponents and Opponents
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5. (SBU) According to industry estimates, the immediate impact of
the proposed GoA bill would be to increase the cost to consumers of
imported electronics by roughly 27%. Proponents of the bill include
the TdF provincial governmentQnd manufacturers with assembly
operations inQhe province, including the local Newsan group.
Opposition to the GoA initiative comes from current electronics
importers, including U.S. companies HP, Dell, Microsoft, Intel,
Apple, as well as Argentine assemblers/manufacturers of electronics
with plants outside of Tierra del Fuego. Motorola, the only U.S.
company with assembly operations (cellphones) in TdF, also opposes
the measure: only 30% of Motorola's cell phones sold in the

Argentine market come from its TdF operations, and cellphones
represent only 60% of Motorola's electronic equipment sales in
Argentina.

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U.S. Company Coping Strategies
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6. (SBU) U.S. companies and the various industry associations to
which they belong tell us that, while strongly opposed to the
proposed legislation, they are approaching the matter quietly out of
fear of being accused by the GoA of working against Argentine
employment. Industry opposition to date, they say, is exerting
extreme cautiously, putting out carefully crafted messages to local
press. Post Commercial Counselor and Attache have met with Buenos
Aires- and U.S.-based reps of potentially affected companies; held a
conference call with a Director of the ITIC Information Technology
Industry Council; and attended a joint meeting of 13 Argentine
IT-related trade associations. ITIC members including HP, Cisco,
Intel and non-U.S. companies including Nokia and Canon expressed
their preference to have their local staff work this issue through
local trade associations. They have asked that the U.S. Embassy
not/not become directly involved in advocacy efforts in the current
economic climate for fear that the issue be played by the GoA and
local media as a polarizing "us vs. them," foreign producers vs.
domestic jobs issue. Nonetheless, ITIC members have made clear they
value Embassy support, awareness and readiness to advocate if
needed. Embassy Commercial officers continue to monitor
developments in the case.


7. (SBU) ITIC companies have outlined points they are making to GoA
officials and to local media to support their contention that the
new law will not serve Argentina's long term national interests.
These include explaining that:

-- More jobs will be lost in Argentina than created in Tierra del
Fuego as a result of these protectionist measures. (The Argentine
Office Machine Chamber of Commerce estimates the net loss of 6,000
Argentine jobs from current non-TdF manufacturing operations.)

-- The assembly facilities in TdF are not "real" manufacturing jobs
but rather primarily assembly jobs with low added value-added.

-- The digital divide will widen as Argentina's information
technology demand cannot be satisfied by TdF production, and will
result in increased prices for the consumer by at least by 30%.

-- The "gray market" for these products will increase and domestic
sales tax revenues will suffer accordingly.

On this last point, Apple Argentinareps inform us that 90% of iPods
brought in to Apple Argentina stores for warranty service were not
purchased from Apple resellers in Argentina. A substantial increase
in the cost of purchasing imported iPods from authorized domestic
distribution channels are expected to see more consumers turning to
alternative sources of supply.

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Comment
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8. (SBU) The heated pre-mid term election environment has prompted
the Kirchner administration to introduce a number of trade-related
measures, including this domestic electronics production bill, that
appeal to nationalist (and often protectionist) sentiments of
sustaining Argentine employment during tough economic times. While
the Embassy stands ready to defend affected U.S. company interests,
they have made clear to us their concern that the GoA and local
media could cast this issue in polarizing "us vs. them" terms, one
that would not serve their long-term interests in preserving
attractive market opportunities in Argentina. They have asked the
Embassy not/not to take any action at this time.

KELLY