Argentina's International Trade Disaster
Alejandro Echeagaray got into the rice business in a roundabout way. As president of BMW Group Argentina, he’s not known for his farming abilities. But in March 2011, Argentina’s government decided that car importers would have to match their imports with exports of equal value. As Echeagaray tried to figure out a way to comply, vehicles piled up in customs like undocumented aliens. Echeagaray could not be reached for comment, though Buenos Aires dealer Adrián Santos says “about 500” BMWs packed the huge lots at the car port 55 miles northwest of the city. During the first 10 months of 2011, overall BMW sales plunged by half, according to Argentina’s car dealers association.
After months of negotiations, Echeagaray figured out a fix. The government agreed to let in BMW’s vehicles as long as the company’s Argentine subsidiary exported an equivalent amount of upholstery leather, car parts, and … processed rice. Echeagaray worked a deal with the Ministry of Industry to get the necessary import permits.
He wasn’t the only auto executive taking a crash course in the agricultural export business. To bring in $8 million in cars, the local Porsche importer agreed to export olives and Malbec wine. Subaru agreed to export chicken feed. Hyundai began sending soy flour to Vietnam. At Mitsubishi, they started selling peanuts.
If that seems crazy, welcome to Argentina. In a desperate gambit to save local jobs and central bank reserves, the government has since 2010 implemented a series of economic regulations that seem to mix purposeful self-delusion—akin to closing the window shade and claiming it’s nighttime—with discredited economic theories last taken seriously during the era of black-and-white television.
The country’s economy should be doing very well. A sort of Latin Spring has swept across South America: Brazil, Colombia, Chile, and Peru have escaped seemingly unending cycles of dictatorship and bust. Argentine gross domestic product grew 7.8 percent a year on average from 2003 through 2011. Then it stopped growing at all.
It’s part of a cycle familiar to natives and longtime observers: Argentina is always on the verge of joining the club of serious economies, and always finds a way not to. Its governments keep trying to relive the early 20th century, when the nation became wealthy, and the 1940s, when Juan Domingo Perón distributed that wealth to the people. “Argentina has in its collective memory that it has the richest, most egalitarian, most European culture in Latin America,” says Gastón Rossi, an economist who served as the country’s secretary of economic policy from 2007 to 2008. “To regain our Golden Age, we ignore what’s going on in the rest of the world. We look for magic recipes, and that ends up being counterproductive.”
Overseeing the current spasm of magical thinking are President Cristina Fernández de Kirchner and Guillermo Moreno, secretary of domestic commerce. Elected in 2007, Fernández is a left-leaning populist with a penchant for combative rhetoric and stylish black mourning outfits, which she’s worn since the 2010 death of her husband (and presidential predecessor) Néstor Kirchner. Popular mythology has it that the even more bellicose Moreno, who’s been caught on camera multiple times shouting down opponents, once put a handgun on a conference table during a meeting to show he meant business. Moreno did not respond to repeated interview requests.
The problem the duo is trying to solve is simple: Years of double-digit inflation have made Argentine products prohibitively expensive. Consumers have turned to imports, which in turn endanger local jobs as well as the U.S. dollar reserves the country uses to pay debt. (Importers need to pay for imports in U.S. dollars—foreign companies won’t take pesos—and they buy those dollars from Argentina’s central bank.) A more conventional country might try to tame rising prices by cutting public spending or raising interest rates and letting the market work it out. The Fernández regime went with Perón-style, closed-border nationalism.
Shortly after Fernández’s 2011 reelection, her government issued a series of border-shutting decrees. Argentines discovered they would need permission from the country’s tax authority, the AFIP, to buy dollars for savings or travel. Dollar-sniffing golden and Labrador retrievers were put to work at airports and ferry terminals to catch locals trying to take more than $10,000 out of the country without declaring it. And the seemingly arbitrary import permission regimen was also introduced. Popularly known as DJAI, for its Spanish initials, it made importing anything extremely difficult.
Imports indeed fell some 7 percent over the first eight months of the year, allowing Fernández to announce in early September that the country had already met its trade surplus goal for the year. But the deeper result was a bizarre string of unintended consequences: Barbie dolls and Jägermeister disappeared from stores; Ralph Lauren, Cartier, and Louis Vuitton closed their boutiques in Buenos Aires; electronic toothbrushes were almost nowhere to be found.
Other shortages were more serious. Medicines and medical devices such as EpiPen epinephrine autoinjectors grew scarce. Factories, such as a Fiat plant in Córdoba, suspended production because of a foreign parts shortage. Workers were furloughed. Second-quarter GDP was unchanged from the year before and shrank 0.8 percent from the first quarter, according to the INDEC national statistics agency. Industrial activity, which had grown 9.7 percent in 2010 and 6.5 percent in 2011, fell 1.3 percent during the first nine months of 2012. Once again, Argentina has managed to give itself an economic sucker punch.
Enrique Españon is the third-generation owner of Bicicletas Enrique, a family bicycle business in the central city of Córdoba. He’s 51, compact, accessorizes with a scarf draped over a cream V-neck sweater, and sounds like a disappointed drug rehab counselor when he talks about Argentina’s economy. “There are times when you don’t believe in it,” he says. “Then in a year, two years, you begin to believe again, to think, ‘This isn’t so bad.’ And then something happens again, and you fall again.”
In 1998, Españon sold 35,000 bicycles. In 2001, as Argentina defaulted on $95 billion in bonds and went through four presidents in four weeks, sales fell to 300 per month. Over the following decade, business recovered. By 2011 bike sales were booming again, back up to 36,000, and looking to go a lot higher.
Españon expected a breakout year in 2012, so he decided to add a wing to his factory. Last year his business took out a 1.4 million peso government loan (then worth about $325,000, now about $290,000) and kicked in 600,000 pesos of its own. To prepare for the coming boom, last November he placed an $80,000 parts order with Shimano, the Japanese bike components maker, to be delivered in May. Timing was important because he needed the parts to manufacture bikes for the Día del Niño (the Day of the Child) in August, a huge bike-giving holiday.
In mid-September, Españon leads a visitor toward the new 24,000-square-foot wing. Bursts of high-decibel power tools erupt as workers put the final touches on the factory. “It’s almost done,” Españon says, stepping into the empty warehouse. When asked when he plans to inaugurate the building, Españon laughs. “Nooo. This gets closed up.”
He’s planning to finish it and lock the door. “We began construction assuming we would sell 5,000 bikes a month,” he says. “And the way I am now, I’m not going to reach 3,000.” Españon says he was blindsided by Fernández’s import controls. When he applied to bring in the Shimano-made parts earlier this year, he was denied without explanation. “What do you say to the Japanese?” he says, his voice rising. “They couldn’t understand! ‘You made an agreement!’ ‘Yes, but now they won’t let me bring it in.’ ‘But we’ve already begun production!’ ”
It’s a scenario repeated across Argentina. As the hurriedly planned system strains under the sheer number of DJAI requests (some 800,000 so far), important capital goods and supplies have been blocked while frivolous items pass. Import permits remain a crapshoot. For every jar of Maille mustard that gets through, a box of refrigerator parts is stuck in a foreign port awaiting permits. “There doesn’t seem to be criteria,” says Mauricio Ropelato, general manager of Atlantic International Trade, a customs brokerage in Buenos Aires. Ropelato says some of his applications are approved in 12 hours, others in 15 days, and a full 60 percent are rejected.
Quickly adapting to Buenos Aires’s nonsensical government decrees is such a necessary survival skill that many Argentine businesspeople use a proverb to describe it: “El cocodrilo que se duerme es cartera.” Rough translation: “Crocodiles must stay awake. If they fall asleep, they wake up as a purse.”
For Españon, not becoming a purse meant learning from large carmakers. In the year before the DJAI law, the domestic trade secretariat, headed by domestic trade secretary Moreno, began asking large importers such as BMW and Porsche to “compensate” for their imports with an equal value of exports. (Neither Moreno nor the president could be reached for comment.) Noting that those who offered to export something—anything—seemed to have better luck getting in their own supplies, Españon decided to give it a try.
He had to find something to export, fast. His father mentioned that one of his childhood friends in his native town of Morrison, some 120 miles away, founded an agricultural parts company. With a few phone calls, Españon became a sort of sales agent for the manufacturer, Industria Caillet Bois. When he spoke to his foreign bike suppliers, he began asking whether they could put him in touch with agricultural resellers in their areas who might want a good deal on a zaranda.
Until he began exporting them, Españon had never heard of a zaranda, which he defines as “a square thing with a bunch of holes.” (It’s a perforated metal sheet used to sift grains.) He says he has no idea how many have been sold in his name. “The only thing I want to have in my head is making bikes, not doing this other thing,” he says. “But whatever, the government asks for it and you do it.”
The absurdity of this “compensation” system—beyond requiring businesses to export goods they’ve never heard of—is that it often doesn’t even add new exports. Instead, it creates a kind of international trade three-card monte game. Many importers pay exporters a commission to shift existing exports to their name to make the government think they’ve compensated for their imports. Says Martín Redrado, president of Argentina’s central bank from 2004 to 2010: “Exporters are getting about 7 percent or 8 percent for doing nothing, so they are quite pleased.”
Españon finally got his Shimano parts, as well as the aluminum frames he ordered, but they arrived too late for Día del Niño. “I presented the DJAI three times before one went through. That was after I gave them my com-pen-sa-tion plan,” he says, banging each syllable. He expects sales this year to come in at 29,000, or 20 percent lower than 2011. He attributes about half that drop to the import restrictions, and the rest to an economic slowdown caused in part by the restrictions. “Earlier this year I had a market, but no merchandise,” Españon says. “Now I have merchandise, but no market.”
The rules are making other countries angry, too. The small town of Aimogasta in the northwestern province of La Rioja is the cradle of Argentina’s olive industry. The valley is packed with 20,000 acres of olive groves, some boasting 400-year-old trees, and with its arid soil and cloudless skies it could be a Mediterranean village. Here, the Nucete olive processing plant isn’t quite idle, but it’s quiet. A worker points out several processing lines and a bottling line that are shut. At full capacity, the factory can turn out 1,200 casks of olives a day. And today? “Nada,” he says.
Normally, the Argentine olive industry’s biggest market is Brazil, which imported some $30 million of Argentine olives in 2010, according to statistics from the Cámara Olivícola Riojana, a La Rioja olive growers’ trade group. “A Brazilian truck driver eats olives like an Argentine truck driver eats candy,” says Jorge Catalán, a local grower, imitating someone popping olives into his mouth one after the other.
Of Argentina’s trading partners, Brazil was the one hardest hit by the new import restrictions; Argentina’s imports from Brazil dropped 19.2 percent in the first nine months of 2012, to $13.2 billion, from the same period in 2011. So Brazil retaliated, suspending automatic import licenses for many products from Argentina, especially foods. The Argentine government had apparently believed that no one would notice its lockdown on imports. “These guys think trade is like football: You kick someone when the referee isn’t looking, and he will not return the kick because the ref may see him,” says José Manuel Ortega Gil-Fournier, a former Goldman Sachs investment banker who founded the O. Fournier Group, a Mendoza-based winery. “But in the trade world, if you kick a country [like Brazil], he will kick you twice, so you don’t do it again.”
In Aimogasta the olive industry had been suffering for several years as inflation, in the form of increasing labor and energy costs, ate away at profits. For the weakened industry, Brazil’s trade reprisals were a stake to the heart. On May 2, Brazil closed the border to Argentine olives and kept it closed until the end of June, says Orlando Colombo, the general manager of Agro Aceitunera, Nucete’s parent company. According to Colombo, his shipments to Brazil—where Nucete sells more than 60 percent of its production—fell from 20 truckloads a week to zero. “Imagine that your company is prepared to sell to a certain market. And then overnight they say, ‘No, we’re not buying any more,’ ” he says. “You can’t do anything.”
After the company threatened to lay off half of its 470 workers in Aimogasta, the national and provincial governments began to subsidize its payroll. Today, Colombo says, the government pays 46 percent of payroll costs—about 1.1 million pesos a month.
In July, Brazil began to normalize olive shipments, Colombo says, but the damage had been done. Spanish and Peruvian olive growers eager to find new markets have moved in, offering lower prices and longer payment terms. While sales volume has returned to near normal, Colombo says, Nucete now gets from $1,100 to $1,200 per ton of olives, compared with $1,400 before the blockade.
“The Brazilian business person is taking complete advantage of the situation,” says Catalán, the La Rioja olive producer. “Knowing our desperation, they are playing hard. They pay when they want, they buy at whatever prices they want, or they simply don’t pay. We made it clear that we were desperate when we didn’t have to.”
Is it profitable to sell at $1,200 per ton? “Eh, no,” Colombo says. “We are spending our working capital to keep the business alive. You normally have a pool of money to make repairs, to buy raw materials. We’re consuming it to survive.”
Argentina’s current predicament would be more comic than tragic if there were any sign of reason in the Casa Rosada presidential offices in Buenos Aires. “The current Argentine government does not have the capacity to reach consensus on regulations with the people who know the issue,” says Jorge Rodríguez Aparicio, president of Cambras, the Argentine/Brazilian chamber of commerce. “There’s an ideological bias that discards all those who are not in agreement.”
Business owners who complain publicly may suffer the wrath of Fernández, who occasionally interrupts her nationally televised announcements to call out whiners. It would be a little like the American president using a State of the Union address to single out a Tucson hair salon owner for griping to the local paper about the White House’s China policy.
For many Argentine businesspeople, the iconic example of this—and the object lesson for keeping silent—is Jorge Toselli, who heads the JT Inmobiliaria real estate agency in Buenos Aires. In a July interview with Clarín, Argentina’s largest daily newspaper, Toselli said his sales had fallen from about a dozen properties a month to two. He blamed government currency restrictions; real estate transactions in Buenos Aires are typically conducted using dollars. Several days later, the president in a speech expressed her displeasure with Toselli. “And the truth is I got interested and I said, ‘Let’s see if this has really hurt them, how are they doing so badly if they were doing so well,’ ” the president said, adding that she put in a call to the head of Argentina’s tax authority. A day later, JT Inmobiliaria’s tax number was suspended for failure to pay taxes, temporarily putting the company out of business.
Some Argentine business owners seem to relish testing the Fernández administration’s limits. Enrique Piñeyro, a 55-year-old doctor, pilot, and film director, is sometimes compared with Michael Moore. Recently, after he complained to a local business paper that a film industry development zone announced by the president would work much better if directors could import cameras, he got a call from Moreno. The secretary was surprisingly polite and said his cameras would be allowed to enter, Piñeyro says, though Moreno did note that Piñeyro hadn’t filed the correct paperwork.
That night the president called out Piñeyro in one of her televised speeches but didn’t mention the tax authority. It seemed just a touch kinder and gentler. Piñeyro says that, so far, he hasn’t had any visits from the tax man. But he’s not taking any chances. He had a doormat made for the entrance to his production company, Aquafilms. It reads, “La próxima vez, vení con una orden de allanamiento.” Or: “Next time, come with a search warrant.”