Argentina has been in the news globally for the past few months. First, for placing restrictions on imports, a move that has been hurting trade partners. And, now, for ousting the Spanish company Repsol from the oil company YPF, which is likely to be nationalised again.
With public opinion in Argentina firmly backing President Cristina Fernandez de Kirchner on her move to re-nationalise the energy company, Spain, which has threatened to retaliate, may not have much of a choice but to let Repsol accept what Argentina hands over as compensation for the takeover. The compensation is certainly not expected to match what the Spanish company may have invested in the Argentinian company.
The charge against Repsol is that it did not invest enough, thereby increasing the energy import bill for Argentina. Repsol, however, is of the view that it has invested over $10 billion in the country after paying $13 billion for acquiring 51 per cent stake in the company earlier. Argentina had privatised YPF in 1999.
Though the dispute settlement body of the World Trade Organisation (WTO) would not be able to take up the issue of the YPF takeover, news reports suggest that the European Union (EU) is seriously considering taking Argentina to dispute at the WTO over its earlier move of imposing import restrictions stating they were not in line with its multilateral obligations.
The EU, the US, Japan, Mexico, and other WTO members had reprimanded Argentina for its import restrictions at a meeting of the WTO’s Council on Trade in Goods last month. They had stated that Argentinean policies were “unbefitting any WTO member”.
Several countries in Latin America, too, have been complaining about the import restrictions. However, Argentina has achieved its goal of restricting imports as its trade surplus has jumped to over $1 billion in March 2012.
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The protectionism mania that seems to have overtaken Argentina in the past few months is not restricted to policies emanating from Buenos Aries alone. Other countries in the region like Brazil, too, have in the past few months been taking up issues that point towards the growing mood for protectionism in the region.
Decree number 7567 issued by Brazil in September 2011 called for increasing regional content in auto industry in Brazil. Brasilia has imposed an average of 30 per cent extra duty on auto products that do not have a 65 per cent regional content.
Brazil has decreed that the vehicle manufacturing company must invest at least 0.5 per cent of its total gross revenues, resulting from the sale of goods and services in innovation and research and development activities within Brazil and must carry out at least six specified activities in Brazil for at least 80 per cent of its production. These specified activities include: assembly, final inspection and testing; stamping; welding; anticorrosive treatment and painting; plastic injection; engine manufacturing; transmission manufacturing; assembly of steering, suspension, electric, break, axis, engine, gear and transmission systems; assembly of car chassis and bodywork; final cabin or body assembly, including the installation of acoustic and thermal items, lining and finishing; and, production of auto bodies primarily from spare parts, stamped or formatted regionally. This decree has the potential to hurt India’s auto exports to Brazil.
Brazil has been, over the past few months, hitting out at the developed world stating that extremely loose monetary policy in advanced economies are flooding developing country markets with imports. Brazil has been struggling to combat the effects of the appreciation of its currency, the Real, on its manufacturing sector. Some of the other Latin American countries like Colombia have supported Brazil in this criticism of the advanced world for hurting manufacturing in developing economies.
The dynamic changes in the global economy in the past few years have meant that countries have been taking some very strong measures to deal with domestic issues at the cost of hurting international trade. This problem of growing protectionist tendencies is not restricted to countries like Argentina and Brazil but extends to large economies of the EU and the US as well.
This trend is only likely to increase with the WTO in its annual report stating that world trade will slow to 3.7 per cent this year — a number that is below the six per cent average for 1990-2008 and lower than the 5.5 per cent average of over the last two decades.
The author is Principal Adviser with APJ-SLG Law Offices