Economy

Will this time be different for Argentina’s import restrictions?

23rd January 2020

By Martín Trombetta

Will this time be different for Argentina’s import restrictions?

After a gradual process of import liberalization during the Macri administration, it is no secret that Argentina is turning more protectionist again under President Alberto Fernández. Although some changes are yet to be announced, business leaders have been holding multiple meetings with the Ministry of Productive Development over the return of many non-automatic licenses for imports, among other reforms.

DJAIs vs. Non-automatic licenses

Many believe this means a return to the very strict control system implemented during the late Kirchnerite years, based around the Advanced Import Sworn Statements (DJAIs).

This might be an overstatement—DJAIs implied a highly bureaucratic system in which every importer required a special permit to have any good pass through customs. The system was extremely inefficient and arbitrary: each DJAI took very long to be authorized and criteria were opaque to say the least. In practice, this allowed the government to let requests expire, restricting imports in order to avoid a trade deficit. What is more, rumors of corruption spread—many business leaders state having <a href="https://www.lapoliticaonline.com/nota/94901-radiografia-de-la-estructura-de-la-campora-envuelta-en-el-escandalo-de-coimas-con-las-djai/">paid bribes</a> to authorities in exchange for authorization of their DJAIs.</p> <p>Non-automatic import licenses are still far from what DJAIs used to be. The fact that an import license is non-automatic merely implies that certain controls can be applied to determine whether the goods to be imported might be considered harmful for the country, whether on environmental, economic or social grounds. It is an instrument <a href="https://www.wto.org/english/tratop_e/implic_e/implic_info_e.htm">accepted by the World Trade Organization</a> (WTO) and used in most countries around the globe.</p> <p>Unlike the DJAIs, non-automatic import licenses do not affect all foreign goods, and the criteria are not as arbitrary. It is however up to the economic authorities to decide which categories of goods will be affected and which controls will be applied to them. The Macri administration aimed at the simplification of importation bureaucracy and that is why, as well as overhauling the DJAI system back in 2015, the non-automatic licenses were only used in a limited fashion, even though they never disappeared.</p> <p>That is already beginning to change, as Minister <a href="https://gettheessential.com/economy/2019/12/12/infographic-the-new-governments-economic-cabinet">Matías Kulfas</a> has increased the customs’ categories affected by non-automatic licenses <a href="https://www.cronista.com/economiapolitica/El-Gobierno-amplia-el-listado-de-productos-que-tendran-licencias-no-automaticas-20200109-0041.html">from 12 to 15 percent</a>, adding woodwork, house appliances, electronics, motorcycles, cars and car parts to a list that already included clothing, footwear and toys, among others. That figure could reach up to 20 percent of imports soon, and the government is also working on reforms to the AFIP tax bureau’s SIMI import monitoring system, created during Macri’s term.</p> <h2><strong>A closed economy</strong></h2> <p>Despite Macri’s efforts to open up economically, Argentine imports did not skyrocket during his term. Far from it, actually, they averaged 27.6% of Gross Domestic Product (GDP) in 2015-2019, only slightly above the 25.6% average of 2011-2015. Many factors may account for this result.</p> <p>Firstly, the weak economic performance—GDP is today 3% lower than it was four years ago and a poorer economy will generally consume fewer imported goods. Secondly, the jump in the real exchange rate after the 2018 balance of payment crisis, which made such goods relatively more expensive.</p> <p>But how much did Argentina really open up during Macri’s term? Some economist would cast doubts on how deep the liberalization process might have reached. Even if controls at the ministries were in fact weakened or eliminated, that does not necessarily mean things were smooth and easy for importers at customs. Sources at customs offices state that corruption is not only widespread but also often independent of the government’s political sign. “Our country was founded by smugglers who ran crooked customs and that is not going to change, no matter who is in charge,” one source explains.</p> <p>Unconventional import restrictions have historically combined with high import duties and few trade agreements with other countries to produce one of the most closed economies among countries with GDPs higher than 100 billion USD, that is, excluding countries that are either too small or too far down the development ladder. According to a famous economic principle known as the Lerner symmetry theorem, when an economy limits imports, this ends up undermining exports as well, even if that’s not the goal. This is what has happened with Argentina as of late: despite protectionist efforts, exports have ended up being lower than imports almost all along the last decade.</p> <h2><strong>Liberals and protectionists</strong></h2> <p>The debate is not new. Liberal economists and politicians blame Argentina’s trade restrictions for much of its economic lag and have thus historically advocated trade openness. They usually draw on ideas such as the aforementioned Lerner symmetry—our country will not be able to boost its exports unless it can freely import key supplies and capital goods that cannot be produced locally. At the same time, Argentine companies will never reach international productivity standards if they are artificially sheltered from competition. Low productivity invariably translates into high prices and low wages.</p> <p>Fernández’ economists hold different views. They firmly support the idea that Argentina faces an “external restriction”—a chronic shortage of dollars. Their remedy to this problem is a strategic management of Central Bank’s foreign currency reserves, and that is where commercial policy comes in. Since current account deficits imply net currency outflows, they must be prevented, particularly if these outflows are mostly explained by the importing of consumption goods or by international tourism, which should ideally find local substitutes.</p> <p>Government policymakers believe that this strategy will lead Argentina to build exporting capacities that will ensure current account surpluses in the future, thus making import restrictions redundant. At the core of this idea lies what is called the infant industry argument—the view that Argentine companies lag behind international corporations in terms of productivity because they are still at an earlier stage of development. Free trade would do nothing but destroy local businesses and, consequently, jobs. Protectionism is therefore not a matter of principle but a pragmatic necessity—one that all developed countries (even the most liberal ones) have resorted to in the past.</p> <h2><strong>Unintended consequences</strong></h2> <p>But here liberal economists resort to a response that is often compelling: that there is no such thing as a free lunch. There are inevitable costs to protectionism: if Argentines have to buy local goods produced by Argentine companies with low productivity, this means high prices and scarce product variety. Tradable goods such as clothes or electronics have been traditionally overpriced in Argentine stores and newest models are seldom available. Take the iPhone as an example: the newest one you can legally buy from an Argentine telephone company is iPhone 6s plus at 580 USD. In the United States, such an old model will go for barely 325 USD.</p> <p>But even if paying a king’s ransom for a cell phone does not sound like a big deal, it must be kept in mind that expensive technology also means high costs for the very companies that are supposed to be able to export, as they depend on state-of-the-art foreign inputs and machinery to remain internationally competitive. It is Lerner symmetry all over again.</p> <p>Economic authorities’ optimism about their ability to tell essential imports from dispensable ones seems exaggerated. Discretionality means mistakes will be made and efficiency will be compromised, to some extent at least. Fernández’s team, however, believes it can do better, combining incentive schemes with efficient and reasonable trade protection, learning from the mistakes of the 2011-2015 period and looking up to more successful industrialization processes that partially relied on protectionism, such as 1970s South Korea. It will certainly not be an easy feat, but with Macri’s liberalization program ending badly, it is no surprise that protectionism will now get a new try.</p> <p>

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Martín Trombetta

Martin Trombetta holds a PhD in Economics from Universidad Nacional de La Plata, a research grant at the CONICET institute, and teaches at the Universidad Argentina de la Empresa (UADE). His publications have focused on labor markets, income mobility, gender gaps and other topics.