As Trade Winds Shift, Argentina Will Need to Set its Course at the G20
One of the few silver linings of Argentina’s drastic currency devaluation this year has been its effect on the value of the country’s exports in the international market. In short, they’ve become more competitive. That’s finally some good news for the recession-stricken country, as Argentina’s trade deficit swung into a $314 million surplus in September, its first in nearly two years. Economists expect this trade surplus to grow over the next year, helping the country claw its way out of recession with an export-based economic recovery.
But, as always with Argentina, it’s not that simple. As host of this year’s Group of 20 summit, Argentina has found itself in the middle of trade disputes, calls for reform of the World Trade Organization (WTO), and shifting perceptions about the merits of globalization in an increasingly combative global trade climate.
Last week on The Essential, we previewed some of the largest issues in international trade that President Mauricio Macri will be managing at the G20 summit. This week, we’ll dive deeper into those issues, and pick apart what the shifting trade winds could mean for Argentina as it tries to pull itself out of recession and re-enter the international order as a major player in the global economy.
U.S.-China bickering continues
When it comes to picking sides in the U.S.-China trade war, Argentina may as well be a child caught between two parents going through a nasty divorce. As the U.S. and China fling tariffs at each other like insults at a custody hearing, Argentina is finding it has to quietly balance the interests of each world leader without overtly favoring one over the other.
One way Argentina has done this is by becoming a backdoor provider of U.S. soybeans to China. After China slapped a 25 percent tariff on U.S. soy, the Asian country has turned to Latin America to satiate its hunger for the protein-packed bean. While it has imported record amounts from Brazil, Argentina is quickly becoming China’s major soybean provider as Brazilian reserves are depleted.
The trouble is, this year’s drought withered 31 percent of Argentina’s soy crop. To fill the gap in demand, the country began importing U.S. beans to meet domestic consumption while shipping its own beans to China.
And while processed soy products are Argentina’s largest export commodity, the new trade flow hasn’t contributed to value-added industries like producers of soy oil and soymeal, a key ingredient in animal feed. Because China prefers to import raw beans and produce soymeal on the Chinese mainland, Argentina’s soy crushing industry has been pulverized. To manage the undersupply, Argentina-based soy crushing operations have announced mergers to shore up profits and keep production moving until a larger crop arrives next year.
All of this will come to a head at the G20, where the U.S. and China will either decide to bury the hatchet or escalate the fight, which will in turn affect how soon Argentina can normalize its trade balance.
Reforming the WTO
At nearly every G20 minister’s meeting held this year in preparation for the Leaders’ Summit, policymakers recognized the need to reform the World Trade Organization — an initiative backed by China and the European Union after Trump threatened to pull out of the 23-year-old trade organization.
While leaders have been tight-lipped about exactly what that reform might look like, a high-ranking Chinese official said in September “the aim of reform should be to allow countries to enjoy the development fruits of globalization more fairly, not to further widen the differences between [the Global] South and North.”
It’s a nice sentiment, but it doesn’t give any indication of how countries plan to even out global inequality. The EU has floated more specific ideas that would adapt the WTO rules to fit today’s reality. These ideas include reforming intellectual property right law, addressing how governments are allowed to subsidize industries and amending global trade rules to adapt to changing business environments; for example, the rise of e-commerce. Still, the U.S. has remained stalwart against many reform ideas, preferring instead to pursue unilateral measures like punitive tariff hikes.
It’s not just China that has felt the brunt of the hardline America First trade policy. In 2017, the U.S. levied a punishing 57 percent tariff on Argentine biodiesel exporters on grounds that Argentina unfairly subsidizes its biofuels industry and sells the combustible fuel (another product made from the all-powerful soybean) below U.S. market value. Argentina has brought the case in front of the WTO, although settlement is still pending.
The WTO has ruled in favor of Argentine biodiesel producers before, a 2016 anti-dumping dispute with the EU being the case in question. Whether the WTO will rule in favor of the Argentine biodiesel industry again will depend on if the WTO’s dispute settlement guidelines are reformed, and how. Moreover, Washington announced this month it would be willing to reconsider its high tariffs on Argentine biodiesel, indicating a thaw in the dispute ahead of the G20.
The long-awaited EU-Mercosur deal?
While ministers at G20 meetings this year have indicated they were optimistic an EU-Mercosur free trade deal would be reached by the end of 2018, it’s not likely to happen. The deal has been in the works for more than a decade, and Brazil’s recent election as well as the EU’s ongoing Brexit headache may mean the trade pact will continue to be a mirage on the horizon.
While such a deal would open new markets for Argentina (after Brazil, the EU is Argentina’s second largest trading partner), there are justified fears that reforming Mercosur’s high tariff structure may actually harm Argentine domestic industries. Because Argentina and Brazil — Mercosur’s two largest economies — are highly sheltered and levy relatively high import tariffs, quickly opening the economy could undercut Argentine firms at a time when domestic industries need all the support they can get.
Moreover, Brazil will re-shuffle its trade priorities when president-elect Jair Bolsonaro takes office on January 1. Following in the footsteps of Trump’s nationalist brand of trade protectionism, key Bolsonaro advisors have indicated a desire to shift away from the Mercosur customs union and move toward striking handpicked bilateral trade deals.
But Bolsonaro’s nationalistic trade strategy is different than Trump’s, whose NAFTA rewrite aimed to bolster U.S. domestic industry. Bolsonaro, rather, hopes to increase competition among Brazilian firms, driving down prices and spurring innovation while negotiating bilateral deals to fill in the gaps.
It’s a move that Macri supports, according to Bloomberg. And guiding Mercosur’s two largest economies into more nimble positions may spur more cross-border cooperation and boost output in the closely linked economies. But it may also alienate key allies like the EU, and leave other Mercosur countries to fend for themselves.