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Cablegate: Argentina-China Trade Update: Imports Not Crowding Out

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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0106
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6785
RUEHBJ/AMEMBASSY BEIJING 0184
RUEHMN/AMEMBASSY MONTEVIDEO 6982
RUEHSG/AMEMBASSY SANTIAGO 1007
RUEHBR/AMEMBASSY BRASILIA 6668
RUEHLP/AMEMBASSY LA PAZ 5079
RUEHCV/AMEMBASSY CARACAS 1684
RUEHCN/AMCONSUL CHENGDU 0012
RUEHGZ/AMCONSUL GUANGZHOU 0104
RUEHHK/AMCONSUL HONG KONG 0031
RUEHRI/AMCONSUL RIO DE JANEIRO 2417
RUEHSO/AMCONSUL SAO PAULO 3633
RUESLE/AMCONSUL SHANGHAI 0028
RUEHSH/AMCONSUL SHENYANG 0016

UNCLAS SECTION 01 OF 04 BUENOS AIRES 000081

SIPDIS

SIPDIS
SENSITIVE

PASS NSC FOR MICHAEL SMART
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR KATHERINE DUCKWORTH AND MARY SULLIVAN
TREASURY FOR ROSELLEN ALBANO
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ETRD EINV AR CH
SUBJECT: ARGENTINA-CHINA TRADE UPDATE: IMPORTS NOT CROWDING OUT
PRODUCTION

Refs: (A) Buenos Aires 1708
(B) Buenos Aires 1648
(C) Buenos Aires 1644

-------
Summary
-------

1. (SBU) In response to a surge in goods imports from China, the GoA
imposed a series of "non-discriminatory" non-tariff trade
restrictions implicitly aimed at Chinese goods seen as crowding out
domestic production. Argentina's trade surplus with China peaked in
2003 at $1.8 billion, but may have turned the corner from surplus to
deficit at the end of 2007. While exports to China grew 32% in the
first half of 2007 (vs. the first half of 2006), Chinese imports
increased 96% in the same period. (Overall Argentine exports and
imports rose 8.8% and 25%, respectively, in the first half of 2007.)
GoA officials have singled out specific goods from China as
potential threats to local producers, given the rapid increase of
imports of those products. However, domestic production of these
same goods has also increased, undermining the GoA's argument for
imposing restrictions. The Chinese government initially criticized
the measures as WTO-inconsistent, but has not retaliated in kind or
complained formally to the WTO. The instinctively protectionist
response of the previous Kirchner government to rising imports helps
explain the defensive nature of the GoA's Doha Round negotiating
position, which may well continue under the new Kirchner government.
End Summary.

---------------------------
The Perceived Chinese Flood
---------------------------

2. (SBU) Beginning in August, the government of Argentina imposed a
series of non-tariff trade restrictions targeting Asian imports,
which included limiting the port-of-entry for numerous goods,
setting thousands of new region-specific reference prices, and
imposing new non-automatic import licenses on some products (Ref B).
On August 17, then-President Kirchner and then-Economy Minister
Peirano announced the measures as defense against "unfair
competition" (Ref C) from a group of thirteen Asian countries. Post
private sector contacts tell us, however, that the majority of goods
affected are in fact imported from China. While GoA officials claim
these measures are non-discriminatory and WTO-compliant, the GoA
rhetoric that preceded their implementation clearly singled out
burgeoning China imports perceived as crowding out domestic
production. The Chinese government initially complained that the
Argentine measures were WTO-inconsistent and claimed the right to
take "necessary measures" in response. However, the PRC has to date
not followed through on this threat nor formally approached the
WTO.

--------------------------------------------- -
A Declining Argentine Trade Surplus with China
--------------------------------------------- -

3. (U) Argentina has maintained a bilateral trade surplus with China
since 2001. The surplus peaked in 2003 at $1.76 billion. (Unless
otherwise stated, all trade data herein is for goods only and comes
from the Global Trade Atlas, www.gtis.com, which reportedly obtains
its data directly from the GoA.) By the end of 2006, the annual
surplus had fallen to $1.32 billion, and it dropped precipitously -
55% - in 2007, from $663 million in the first half of 2006 to $299
million in the first half of 2007. Argentina's overall trade

BUENOS AIR 00000081 002 OF 004


surplus is also shrinking, albeit at a slower pace. After
increasing 5.2% in 2006 to $12.3 billion (and 11.5% in the first
half of 2006, to $6.2 billion), the overall surplus dropped in the
first half of 2007 to $5.2 billion, a 16% y-o-y decrease.

4. (SBU) The clear trend of bilateral Argentine-China trade led both
Diego Perez Santisteban, President of the Argentine Chamber of
Importers (CIRA), and MFA Trade Secretary Alfredo Chiaradia, to
predict that the bilateral surplus with China turned to a deficit by
the end of 2007. (The final 2007 trade numbers for China are not
yet available.) Embassy contacts in the Economy Ministry confirm
that these headline bilateral trade numbers were a large part of the
motivation for the GoA's imposition of new trade restrictions.

-----------------------------
Burgeoning Imports from China
-----------------------------

5. (U) Imports from China climbed to an all-time high of $2.15
billion in 2006, up 41% from 2005 levels, vs. a 19% increase in
Argentine 2006 global imports (including China). Chinese imports
further accelerated in 2007, with the total in the first half
reaching $1.8 billion, a 96% y-o-y increase. Argentine global
imports increased 25% in the same period. China, having passed
Germany in 2005, was Argentina's third-largest supplier of goods in
2006 and the first part of 2007, behind Brazil and the U.S.

6. (U) Imports from China are concentrated in capital goods - over
40% of 2006 imports from China were in electrical machinery and
machinery. Organic chemicals accounted for another 12%. While
those shares have remained relatively steady over the last few
years, imports of Chinese vehicles and parts have risen rapidly,
from $9.4 million (1.3% of imports) in 2003 to $198 million (9.2% of
imports) in 2006. In the first half of 2007, electrical machinery
and machinery have jumped to 48% of total imports. China is also
Argentina's top supplier of toys and sporting goods, leather goods,
miscellaneous manufactured goods, base metal, and musical
instruments (though by value, only toys and sporting goods, at No.
6, is in the top 10 categories of Chinese imports).

7. (SBU) The sharp increase in imports from China has been felt the
most in Argentina in a few specific categories - such as
motorcycles, leather handbags, toys, and tires - that have been
singled out in speeches by GoA officials and businesspeople when
speaking about the new import measures. For example, motorcycle
imports increased over 8000% from 2003 to 2006 (and 161% in 2006 vs.
2005), from $1.7 million to $145 million, and are now the single
largest line item in Argentina's imports from China. Leather
handbags and luggage imports have risen 465% since 2002 (46% in
2006), up to over $38 million. Toy imports are up 536% since 2002
(31% in 2006), with the 2006 total just under $38 million. Imports
of tires were much less than those at $19.5 million, but that
represents an increase of 1045% since 2002 (and 7% in 2006). The
same products have also seen marked increases in 2007 imports. For
the first half of 2007, imports of motorcycles, leather handbags and
luggage, toys, and tires from China have increased 81%, 69%, 86% and
59% y-o-y respectively.

----------------------------------------
Impact of Imports on Domestic Production
----------------------------------------

8. (SBU) Argentines' fear of rising imports would make sense if
domestic production was being harmed, but that does not seem to be

BUENOS AIR 00000081 003 OF 004


the case. While imports from China and elsewhere of those specific
goods have increased, so has domestic production, according to data
obtained from local chambers representing the importers and
manufacturers of those goods. Motorcycle production in Argentina
rose 229% from 2004-06. The quantity of imported tires from China
rose 12% from 2004 to 2006, as domestic production increased by 15%.
Domestic toy production also has risen 30% (in nominal terms) each
year since 2004, though specific duties on such imports have been
gradually lowered during that period.

9. (SBU) Despite the precipitous rise in Chinese imports in these
specific categories of products, the GoA has not initiated any
antidumping cases against China. One likely reason for this is that
the GoA could institute these new measures quickly (some of them
took effect the day after publication), whereas antidumping
investigations can take months. However, it may also be a tacit
admission by the GoA that such cases lack sufficient merit to
withstand a WTO challenge, since domestic production has not fallen.
The reality is that domestic consumption of all these goods has
grown along with the overall rapid growth of the Argentine economy.
While Argentine manufacturing has grown in response to this demand,
more competitive imports have captured a majority of the increase.

---------------------------------------------
Exports to China Growing, but Low Value-Added
---------------------------------------------

10. (U) Argentine exports to China hit $3.47 billion in 2006, a new
bilateral record, and up 8.8% over year-end 2005. In the first half
of 2007, they grew 32% y-o-y, reaching nearly $2.1 billion. Exports
to China grew at a much faster pace than global Argentine exports,
which rose 15% in 2006 and 13% in the first half of 2007 y-o-y (to
$46.5 and $24.7 billion respectively). China was Argentina's
fourth-largest export market from 2003-06, but moved up to number
two - passing Chile and the United States - in the first half of
2007.

11. (SBU) Over 95% of Argentina's exports to China were agricultural
and animal goods, hydrocarbons, mining and seafood, led by $2.07
billion worth of soy and soy products, comprising nearly 60% of
total 2006 exports to China. Fully two-thirds of Argentine soy
shipped to China (over $1.4 billion) was in the form of raw
soybeans, with another 30% ($630 million) in soy oil. Those
proportions stand in sharp contrast to Argentine soy exports to the
rest of the world, of which only 20% was raw soy (80% of Argentine
raw soy exports went to China), 31% soy oil, and nearly 50% soy
oilcake. According to Ministry of Economy trade contacts, the
difference in Argentina's export tax rate on unprocessed soybeans
(27.5%) vs on processed soy (24%) was designed to encourage higher
value-added agricultural sector exports. This puts the composition
of soy exports to China in even starker contrast. However, while
Argentina's soy crushing capacity of 46 million metric tons per year
is the third highest in the world, and projected by the private
sector to be operating at 83% capacity in the current harvest
season, China's crushing capacity is some 50% higher. Hydrocarbons
followed soy, with 26% of total exports, while leather, beef and
wool combined for nearly 6%. Mining (mostly copper) was under 2%
and fishing was 1.5%.

-------
COMMENT
-------

12. (SBU) Post's contacts in the private sector (and also many media

BUENOS AIR 00000081 004 OF 004


analysts) speculate that then-President Nestor Kirchner's decision
to impose non-tariff barriers -- and his tough talk that accompanied
it -- was merely pre-election strategy to boost his wife Cristina
Fernandez de Kirchner's presidential campaign. However, there is
also speculation that Kirchner was motivated by a long-held
grievance against the PRC: when Argentina recognized China as a
market economy in late 2004 for China's WTO accession, Chinese
President Hu Jintao appeared to promise during a visit to Argentina
that Chinese firms would invest up to $20 billion in Argentina,
which has yet to materialize. Some concern may also arise from the
fact that China apparently passed Argentina in 2007 to become the
second-largest exporter to Brazil.

13. (SBU) Regardless of the political motivations behind the policy,
the traditionally protectionist industrial sector and labor unions -
a key constituency for the previous and current Kirchner governments
-- will not make it easy for the GoA to reverse the new measures.
Nevertheless, as CIRA President Diego Perez Santisteban predicted in
late 2006 to the press, the clear trend is for Argentina to finish
2007 with a bilateral trade deficit with China. While the impact of
the barriers is as yet unclear, and possibly minimal, they offer
insight into the protectionist, mercantilist mind-set of the first
Kirchner administration - which seems to have been largely
reproduced in the current one. The GoA has taken essentially the
same stance (albeit on a much larger scale) in its Doha Round
negotiations, seeking to limit the increase of imports, even in
areas where Argentina's industry is not competitive, at the expense
of potentially substantial gains from increased agricultural
exports. While the new government's economic leadership is still
settling into office, there are no early indications that the new
government will make significant changes.

WAYNE

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