How can the US-China trade war affect Argentina?

5th September 2019

By Fermín Koop

How can the US-China trade war affect Argentina?

Argentina already has big macroeconomic problems of its own, but a worsening international context could add to the mounting trouble.

With the country already dependent on prices of key exported commodities such as soy bean as well as highly vulnerable to changes in global capital flows, the trade war between the US and China could prove to be another silent enemy of Argentina’s potential for recovery.

Despite numerous rounds of negotiation, the conflict has no clear solution on the horizon, having recently escalated with new tariffs set up by both countries, plus the People’s Bank of China’s decision to devalue its currency.

</p> <p>The geopolitical tensions have had global consequences, with <a href="">global trade</a> in the first quarter of the year being the slowest since 2012. Argentina is also seeing the first effects of the conflict, from financial tensions to concerns over dumping of Chinese imports in the local economy.</p> <p>“It started as something small, but it ended up escalating and extending over time, creating a lot of uncertainties in the world. As an already vulnerable country, Argentina is starting to see the consequences of the trade war, which will likely worsen”, said Eva Bamio, foreign trade expert at Abeceb consultancy.</p> <h2><strong>China’s devaluation</strong></h2> <p>Chinese President Xi Xinping’s response to the new round of tariffs set by US leader Donald Trump was to allow devaluation past the psychological barrier of 7 yuans per dollar, which was held for roughly a decade. Since May, the Chinese currency lost 7 percent of its value, reaching a high of 7.18 earlier this week – its lowest level since 2008.</p> <p>The move may allow China to remain competitive and made its exports relatively cheaper. But for Argentina, the consequences might not be as good.</p> <p>For starters, the devaluation had a direct consequence on the Argentine Central Bank foreign currency reserves. The monetary authority has a currency swap with China worth 130 billion yuan, agreed back in 2009 during the Fernández de Kirchner administration and then increased last year amid the country’s financial crisis.</p> <p>A devalued yuan means Argentina’s foreign currency reserves are worth less than they used to be. In August, the country lost US$740 million of its reserves just because of China’s devaluation, according to an analysis by Abeceb consultancy. This means the currency swap is now worth US$18.156 instead of its original US$18.895. In a country rapidly losing its reserves, a billion dollars less can make things look ever more worrying.</p> <h2><strong>US dollar holding strong</strong></h2> <p>While the yuan has been getting weaker, however, the US dollar hasn’t – despite <a href="">Trump’s best efforts to pressure the Federal Reserve</a> into letting it slide.</p> <p>“A trade war is not good news to our economy, not at all. Impacts can happen across-the-board. And a stronger US dollar leads to higher currency instability,” said Marcelo Elizondo, trade expert at DNI consultancy. “Obstructing trade between the US and China would affect global trade and slow down the global economy.”</p> <p>A stronger US dollar due to the trade war can also mean higher inflation in the domestic economy. All imported assets and dollarized costs get more expensive, putting pressure on intermediaries to apply the new currency scenario into the prices paid by consumers.</p> <p>At the same time, the stronger currency can be linked to the phenomenon known as fly to quality, through which assets of emerging countries such as Argentina are sold by investors as they consider them risky, instead buying safer ones such as US Federal Reserve bonds. This can put pressure on the exchange rate and force larger devaluations, experts agreed.</p> <h2><strong>Remaining competitive</strong></h2> <p>A weaker yuan also means that a substantial quantity of goods and assets exported by China are cheaper and more competitive, putting pressure on local goods that will now be more expensive that those imported from China.</p> <p>“The devaluation of the yuan is a concern for all emerging countries, including Argentina,” said Nadin Argañaraz, head of Fiscal Analysis Institute (IARAF). “This is especially applicable for the countries that have a large trade flow with China, like us, which have to devalue their currency to remain competitive.”</p> <p>Local industries have already expressed their concerns. Horacio Moschetto, head of the Shoe Industry Chamber, said China has an “overproduction that challenges Argentina, especially in the current context.&#8221; Meanwhile, the Toys Industry Chamber highlighted similar concerns.</p> <p>At the same time, commodity’ exporters could also face difficulties because of the trade war, currently denting soy prices across the globe. Argentina sells annually around 85 percent of its soy production to China.</p> <p>The Macri administration estimated that this year’s harvest will yield <a href="">145 million</a> tonnes of soy, 44 percent higher than last year. The initial hope was that this would translate into US$16.2 billion, but due to lower prices the country is now expecting a <a href="">loss of income between US$1 and US$3 billion.</a></p> <p>“China’s economy will likely slow down because of the trade war, meaning it will reduce its overall imports, including Argentine soy. That combines with the current lower soy prices,” Elizondo said. “It’s a really volatile situation.”</p> <h2><strong>Key trade partners</strong></h2> <p>Argentina has a comprehensive strategic alliance with China, a diplomatic status the latter confers in a few countries. The relationship between the two strengthened during the government of former President Cristina Fernández de Kirchner, under whom more than 20 treaties and investment projects were agreed.</p> <p>In the last decade, Chinese products went from representing 5 percent to 20 percent of Argentina’s imports. Meanwhile, Argentina’s exports to China rose only marginally, between 8 percent and 10 percent percent of all exports. This has turned into a record <a href="">trade deficit</a> of more than US$7 billion in trade between the two countries.</p> <p>ArgentinaPulse, an initiative of consulting firm Poliarquia and the US-based Wilson Center, found that 80% of Argentine respondents are in favor of Chinese investment in Argentina, while 76 percent have a very good or good image of the Asian country.</p> <p>The survey noted that 83 percent of President Mauricio Macri&#8217;s supporters have a good opinion of China, while the same is also true of 73 percent of its opponents. Macri has maintained a good relationship with both the US and China during his first term in office.</p> <p>Only 32 percent of Argentines believe the country should have to choose between Washington and Beijing, the survey said. However, among those who foresaw a break with one of the two world superpowers, 54 percent would prefer Argentina to ditch China.</p> <p>

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Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.