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RESTRICTED WORLD TRADE WT/TPR/S/47/Add.1 23 December 1998 ORGANIZATION (98-5160) Trade Policy Review Body TRADE POLICY REVIEW ARGENTINA Report by the Secretariat Addendum OVERVIEW 1. The main report (WT/TPR/S/47), which highlighted progress over the six-year period that followed the first Trade Policy Review of Argentina, was completed in July 1998. This addendum provides an update on the major economic and policy developments to the end of November 1998. 2. During the period there were no major changes in Argentina's economic performance. Nevertheless, certain effects induced by the Asian and Russian crises became progressively more apparent and raised some concern about their impact on economic growth for 1999. In addition, legislation was passed in several areas, but no major and wide-ranging import restrictive measures were adopted. Further steps were taken to improve transparency and ensure compliance with WTO undertakings. I. DEVELOPMENTS IN THE ECONOMIC ENVIRONMENT1 3. Argentina's macroeconomic performance in the first semester of 1998 remained strong, albeit at a slower pace than in 1997 as a whole. Real GDP growth for the second quarter of 1998 was at 6.9% (as compared to the same period in 1997), slightly lower than in the first quarter; expansion was led by investment spending. For 1998 as a whole, growth is expected to be in the order of 5%; GDP growth for 1999 (a presidential elections year) is expected to decline to 4.8%, a level similar to that of 19962, partly in response to the trade repercussions of the Asian crisis. 4. Sectoral growth has been led mainly by goods, chiefly agriculture. Although industrial output expanded during the first half of 1998, its growth slowed to 0.1% and 1.7% in July and August 1998, respectively; according to private observers, falling sales in certain sectors and higher than needed stocks seemed to suggest that industrial activity had reached a plateau or that it was to grow modestly in the following months.3 1 This section contains information found in: MEOSP (1998), Informe Económico: La Economía Argentina en el Segundo Trimestre de 1998, Issue No. 26, Ministry of Economy, Works and Public Services, Buenos Aires, found at Internet address http://www.mecon.ar/informe/informe26/indice.htm (as of 2 December 1998); EIU (1998), Country Report 3rd quarter, 1 September; recent issues of the Latin American Economy & Business, and Latin American Weekly Report. 2 Latin American Weekly Report, 8 September 1998; Latin American Economy & Business, October 1998. 3 Latin American Economy & Business, September 1998. WT/TPR/S/47/Add.1 Page 2 Trade Policy Review 5. Inflation has remained low. In the first four months the CPI increased by about 3% as compared to the previous year. This rate has remained stable during the second semester. However, in October and November 1998, the figures have shown a declining tendency: 0.9% and 0.8% as compared to the same period of the previous year; and -0.4% and -0.2% as compared to the immediately preceding month. A decline move has recently been recorded in wholesale prices, influenced in part by trends in world commodity prices. In fact, in October and November 1998, wholesale prices dropped by -5.1% and -5.8%, respectively, as compared to the same period of the previous year. 6. The unemployment rate has remained stable, at 12.3% in October 1998. In September 1998, new labour legislation was passed.4 It allows for two co-existing sets of labour rules; the old rules govern labour employed prior to the passage of the new legislation. The new law reduces dismissal costs for new employees, maintains the automatic renewal of collective agreements, and keeps the bargaining process in the hands of national unions. According to international observers, to avoid reduced labour market flexibility, complementary legislation, a severance pay fund and the phasing out of the Special Labour Statutes are required. 7. Privatization in the provinces of Mendoza, Santa Fe and Santa Cruz has progressed in areas such as water supply and sewerage, electricity distribution and banking.5 Reportedly, the impact of the Russian crisis on international equity markets caused a delay to certain privatization projects, including the sale of the remaining stake of 14.99% in the oil company YPF and the shares of the National Mortgage Bank (BHN). 8. Argentina is preparing new fiscal legislation, the draft of which is in Congress; the text aims inter alia to tighten tax evasion.6 If passed, the legislation may extend the 21% VAT to previously exempt activities (radio and television broadcasting, billboard advertising, publications), introduce a 10.5% VAT rate on cable television and private healthcare, increases the tax on profits, and impose a 10.5% levy on interest and commissions on loans. In addition, a law has been passed by the Chamber of Deputies for the establishment of a US$700 million fund to finance public education; funds are to be raised by a 1-1½% tax on the sale of cars that cost more than US$4,000, motorbikes, aeroplanes and yachts. 9. During the first six months of 1998 the external current account deficit rose by 57% (as compared to the same period in 1997); this was mainly due to the increasingly negative merchandise trade balance (US$1.2 billion, equal to US$1.1 billion more than the same period in 1997) and weak investment income. For the same period, foreign direct investment inflows (about US$2.5 billion) remained strong but showed no major increase as compared to previous year.7 10. The widening of the merchandise trade deficit continued as imports grew three times faster than exports in the first half of 1998; the deficit was expected to be two times that of 1997. Slow export growth reflected declining world commodity prices (soya, wheat, maize, oil and gas) and reduced beef exports (due to higher domestic prices); in certain cases (e.g., maize) increased export volumes compensated partly for the price decline. Exports to the Quad markets increased while those 4 Latin American Weekly Report, 8 September 1998; EIU (1998), Country Report 3rd quarter, 1 September, p. 19. 5 EIU (1998), Country Report 3rd quarter, 1 September, p. 23. 6 Latin American Weekly Report, 15 September 1998; Latin American Economy & Business, October 1998. 7 A private sector study indicated that Argentina benefitted from the Asian crisis in as much as investors had avoided other markets in the region that had been more affected by the crisis (Latin American Economy & Business, August 1998). Argentina WT/TPR/S/47/Add.1 Page 3 to the rest of the world stagnated. Import growth was driven largely by capital goods and to a lesser extent by consumer goods, passenger vehicles and intermediary goods; imports from EU, MERCOSUR, and NAFTA countries rose, and the share of Asia in total imports grew significantly to 15%. 11. Despite the strength of the economy (stronger banking system and level of international reserves) for dealing with international crises, observers expressed concern over the impact of a turmoil on interest rates (a rise may slow growth) as well as the sustainability of financing the trade deficit in the long term against a background of reduced demand for soya in Asian markets and lower investment in oil activities.8 To mitigate the impact of the unsettled international financial markets and to advance financial and fiscal reforms in Argentina, in November 1998 the World Bank approved two special loan operations totalling US$3 billion.9 II. TRADE POLICY DEVELOPMENTS 12. Since August 1998, consultations have been held in MERCOSUR to examine forthcoming changes in import duty rates (both the Common External Tariff (CET) and/or applied rates) on 71 eight-digit HS items (including, chemicals, pharmaceuticals, cordage of jute, tubes of cast iron, iron or steel cables, extruding machines, parts of automatic processing machines, transmission apparatus, parts for measuring insulation of electric motors, used industrial ovens/cooking and packing machinery/lifts for the bakery industry); proposals involve the reduction of duties, except for nine items (chemicals, pharmaceuticals, herbicides, resins, copper foil, cellular phones) which may be increased. Argentina initiated more than ten requests for reductions, and two for increases (by 54% for a certain chemical, by 400% for copper foil).10 13. Argentina's WTO waiver on tariff binding obligations was extended to 30 April 1999, to allow it to finalize consultations and negotiations under GATT Article XXVIII in the context of the implementation of changes relating to the introduction of the Harmonized System 1996 (HS96) into Argentina's loose-leaf schedule.11 14. Argentina provided further explanations and shared its experience with other Members on the operation of its preshipment inspection regime in the context of the meeting of the WTO Working Group on Preshipment Inspection, held in October 1998.12 By August 1998, 95,000 certificates had been issued (affecting 25% of total imports, mainly consumer goods and automobiles) and about 100 claims had been registered; most of these claims related to confusion on certain issues. As a result of the operation of the PSI regime, the value of each kilogram of imports rose from 25% to 30%. The customs value of items subject to PSI requirements was much higher than that of the same goods outside the PSI scope (because their shipment value was below the threshold of US$3,000). To cope with this and other issues, in October 1998 the preshipment inspection regime was modified by inter alia lowering the threshold to US$800 and by raising inspection costs covered 8 Weak oil prices forced several oil companies to lower their investment budgets by 20% to 30%. By the end of July 1998 the number of drilling rigs had fallen from 60 to 45 (Statements of the Energy Minister and data of the Instituto Argentino de Petróleo y Gas contained in Latin American Economy & Business, October 1998). Latin American Economy & Business, September 1998; EIU (1998), Country Report 3rd quarter, 1 September. 9 World Bank News Release No. 99/2000/LAC, 10 November 1998. 10 MEOSP Resolutions 532/98 and 533/98, 24 August 1998; MEOSP Resolution 666/98, 5 October 1998; MEOSP Resolution 737/98, 4 November 1998. 11 WTO document WT/L/281, 20 October 1998. 12 WTO documents G/PSI/WP/W/17, 28 April 1998; G/PSI/WP/W/18, 17 September 1998; G/PSI/WP/M/7, 12 November 1998. WT/TPR/S/47/Add.1 Page 4 Trade Policy Review by the authorities (Federal Administration of Public Revenue) from 0.8% to 0.95% ad valorem, for a minimum of US$120 per shipment.13 15. New implementing regulations on anti-dumping and countervailing mesures were introduced in November 1998.14 In accordance with commitments under the relevant WTO Agreements, provisions deal inter alia with investigation procedures, provisional and definitive measures, duty payments, reviews and appeals. Assistance is to be available to small- and medium-size firms for collecting information required to initiate an investigation. 16. Anti-dumping duties in form of minimum export prices were imposed against imports of: vertical-turret milling machines, spokes with nipples for bicycles and motorcycles originating in China (P.R:) and Chinese Taipei; fireworks, padlocks, on locks for furniture and buildings from China (P.R:); spiral drills from the European Union ((EU) Italy); straight bi-metal sawing blades from the EU (Sweden, United Kingdom); and, cross-linked polythene from the United States. Similarly, countervailing duties were imposed against imports of olive oil (packaged and in bulk) and wheat gluten originating in the EU.15 Since September 1998, anti-dumping investigations have been initiated against unglazed ceramics from the EU (Italy); flat rolled products of iron or steel from Brazil, the Russian Federation and Ukraine16; an investigation (initiated on 30 December 1997) on crab-flavoured seafood sticks from Korea (Rep. of) was terminated.17 17. In September/October 1998, the EU requested consultations under GATT Article XXIII GATT with Argentina with regard to the imposition by Argentina of definitive countervailing duties on imports of wheat gluten from the EU.18 18. As from September 1998, items subject to provisional or definitive safeguards do not benefit from concessional treatment under the Temporary Admission Regime for export processing; applications for concessional treatment for these items are no longer considered.19 19. In October 1998 Argentina notified the WTO of its investment, production and export incentives under the regimes for Patagonian ports (with the subsidy to be eliminated as from 31 December 1999 at a rate of one percentage point a year), mining (with the VAT-related subsidy to be terminated by 31 December 1999), forestry activities and free zones.20 20. Protection of intellectual property rights was reinforced in October 1998 with new provisions confirming protection of computer software. With the enforcement of these provisions, the private 13 Paragraph 43 of Chapter III of WT/TPR/S/47; MEOSP Resolution 1106/98, 9 September 1998; MEOSP Disposition 4/98, 1 October 1998. 14 Decree 1326/98, 10 November 1998. 15 Table AIII.2 of WT/TPR/S/47; MEOSP Resolution 811/98, 16 July 1998; MEOSP Resolution 772/98, 25 June 1998; MEOSP Resolution 858/98, 14 July 1998; MEOSP Resolution 1111/98, 9 September 1998; MEOSP Resolution 1112/98, 9 September 1998; MEOSP Resolution 1391/98, 30 October 1998. WTO documents: G/SCM/44, 13 October 1998; G/ADP/N/43, 15 September 1998; G/ADP/N/44, 21 October 1998 16 MEOSP Resolution 630/98, 22 September 1998; MEOSP Resolution 661/98, 1 October 1998. 17 MEOSP Resolution 550/98, 27 August 1998. 18 WTO document WT/DS145/1/Rev.1-G/SCM/D29/1/Rev.1, 12 October 1998. 19 Paragraph 31 of Chapter III of WT/TPR/S/47; MEOSP Resolution 1113/98, 9 September 1998. 20 WTO document G/SCM/N/38/ARG, 17 November 1998. Argentina WT/TPR/S/47/Add.1 Page 5 sector forecasts an initial drop of 15% in illegal sales of software, thus bringing Argentina's piracy rate down to 60%.21 21. In the area of trade policy coordination, a Private Sector Advisory Council on Foreign Trade (Consejo Asesor Empresarial del Comercio Exterior) was established in August 1998 with a view of strengthening the participation of the business community in the development and implementation of foreign trade policies; it is to provide advice to MEOSP's Secretariat of Industry, Trade and Mining.22 A Registry of Barriers to Argentine Exports (Registro de Barreras a Las Exportaciones Argentinas) was created in October 1998, with a view to identifying and classifying access barriers in foreign markets; this database, which is to be open to the public and private sectors, is to be used in the context of regional or multilateral negotiations.23 III. SECTORAL POLICY DEVELOPMENTS 22. In agriculture SPS-related measures were adopted. Argentina is to lift a ban on imports of fresh pork meat from the United States. This ban, in force since 1992, was aimed at protecting domestic hog production from disease, but the United States provided scientific data showing that the risk of disease transmission through fresh meat was minimal.24 In October 1998, to protect human health, the production and trade of veterinary products and animal feed preparations containing certain chemical substances was prohibited.25 23. In accordance with recommendations resulting from the relevant WTO panel and Appellate Body reports, a regulation was issued in July 1998 to ensure that the ad valorem equivalent of the minimum specific duties (derechos de importación específicos mínimos) applied on textiles imports from Members of the WTO do not exceed the bound level of 35%; Customs was instructed to adopt enforcement procedures in this respect.26 In September 1998 the duration of minimum specific duties affecting imports of textiles and clothing was set until 31 March 2000; the ad valorem equivalent of such duties must not exceed, depending on the product, 35% or 30% until 31 July 1999, and 30% or 26% until their expiry. 24. In July 1998 a WTO dispute panel was established to examine safeguards affecting footwear.27 In November 1998, the safeguards affecting footwear imports in force until February 2000 were modified.28 Tariff quotas for minimum specific duties (derechos de importación específicos mínimos) were introduced and out-of-quota imports are charged 100% higher rates; in-quota volume is to be increased by 10% on 1 December 1999. Import licensing procedures are to be used for quota allocation. The timetable for duty reductions was also changed. 25. Since late 1998 the effects of lower export demand in certain markets (i.e. Brazil) has become more apparent in the automotive sector.29 Growth in output, exports and domestic sales has 21 Paragraphs 178 and 181 of Chapter III of WT/TPR/S/47; Journal of Commerce, 24 November 1998 found in Internet address http://www.joc.com/issues/current/t1rade. 22 Paragraph 15 of Chapter II of WT/TPR/S/47; MEOSP Resolution 570/98, 31 August 1998. 23 National Commission on Foreign Trade Resolution 1/98, 6 October 1998. 24 The Bureau of National Affairs (1998), International Trade Reporter, Vol. 15 No. 42, 28 October, Washington D.C. 25 MEOSP/SAGPA Resolution 76/98, 8 October 1998. 26 Paragraph 63 of Chapter II of WT/TPR/S/47; MEOSP Resolution 806/98, 3 July 1998; MEOSP Resolution 1184/98, 29 September 1998. 27 Paragraph 65 of Chapter II of WT/TPR/S/47. 28 Chapters II, III and IV of WT/TPR/S/47; MEOSP Resolution 1506/98, 16 November 1998. 29 Latin American Weekly Report, 27 October 1998; Latin American Economy & Business, October 1998. WT/TPR/S/47/Add.1 Page 6 Trade Policy Review progressively slowed. In October 1998 Argentine motor-vehicle manufacturers announced the scaling down of their operations by 2.2 million man-hours, which cost workers in the sector a quarter of their wages for the last four months of 1998. This may have repercussions on the auto parts industry, which exports two-thirds of its output to Brazil. 26. To date the level of the tariff surcharge (sobre arancel) that is pledged voluntarily by private importers at the quota auction for Category A vehicles has ranged from 8% to 70%.30 As of November 1998, there was no agreement on the MERCOSUR Common Automotive Regime that is expected to govern the automotive sector as of 1 January 2000. 27. In the services sector, commitments undertaken in the context of the WTO Agreement Basic Telecommunications (Fourth Protocol to the GATS) were ratified by the Congress in July 1998, meeting the second deadline for ratification.31 __________ 30 31 Chapters III and IV of WT/TPR/S/47; MEOSP Resolution 591/98, 9 September 1998. Paragraphs 133 and 157 of Chapter IV of WT/TPR/S/47; Law 25000, promulgated on 22 July 1998.