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 -------------- Summary -------------- ¶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. -------------- Encouraging Electronics Assembly in TdF -------------- ¶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. -------------- President Kirchner Weighs In -------------- ¶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.) -------------- Bill Proponents and Opponents -------------- ¶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. -------------- U.S. Company Coping Strategies -------------- ¶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. -------------- Comment -------------- ¶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