New Argentine policies may lower trade with Brazil

The details of the Argentine government package are still emerging, but it includes at least three measures directly affecting foreign trade with Brazil. The first is the devaluation of the official exchange rate, which changed from about 400 pesos per dollar to 800 pesos per dollar. The second is an increase in the tax on dollar purchases for imports at the official rate, going from 7.5% to 17.5%. The third measure extends the 15% export tax to all products; previously, only agricultural and mining exports were subject to this tax.

“These are necessary measures, but they will negatively impact bilateral trade,” said Welber Barral, Brazil’s former foreign trade secretary and a founding partner of BMJ Consultores e Associados. Mr. Barral has been in Buenos Aires since July, where his consultancy firm maintains an office and supports Brazilian and multinational companies operating in Argentina.

Among the unresolved issues in Argentina’s economic situation is the dilemma faced by private-sector companies unable to access dollars at the official exchange rate for import payments. This has resulted in a debt of approximately $30 billion, according to Mr. Barral.

He points out a positive aspect of the package: the commitment to streamline the import license process. This has been a significant challenge for many companies in Argentina. However, Mr. Barral expresses concern over the increased taxes on exports and, particularly, the higher taxes on dollar purchases for imports. He believes these measures will raise import costs and negatively impact Brazilian sales, effectively acting like a tariff.

See below Brazil’s top maritime exports to Argentina between Jan 2023 and Oct 2023. The data is from DataLiner.

Brazilian Maritime Exports to Argentina | Jan 2023 – Oct 2023 | TEU

Source: DataLiner (click here to request a demo)

President Milei remarks that these measures are intended to be temporary, lasting until at least throughout 2024. There is an expectation that, following a period of adjustment, the economy will become more balanced.

In the meantime, the government and economists anticipate a recession, rising inflation, increased poverty, and the potential for social unrest.

Livio Ribeiro, an associate researcher at the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV/Ibre) and a partner at the BRCG consultancy firm, asserts that the decline in Brazilian and other countries’ exports to Argentina will not primarily result from taxes.

“The issue is the lack of demand from Argentina. The fact that it becomes more expensive for Argentinians is less significant; the main concern is the absence of demand,” he explained. Argentina is a significant importer of car parts and automobiles from Brazil, along with iron ore and electricity. Due to a historic drought, the country has been importing large volumes of soy since last year.

“Demand is set to decline,” stated Federico Servideo, president of the Argentine-Brazilian Chamber of Commerce in São Paulo. Despite this downturn, he identifies opportunities for Brazilian companies to invest in Argentina, particularly in the energy, agro, mining, finance, and retail sectors.

In discussing devaluation, Mr. Servideo notes that “the real dollar” had already been hovering around 800 pesos per dollar for some time, suggesting that more competitive exporting companies are likely to benefit. He endorses the current approach: “The direction is correct. The key is further integrating Argentina into the global market, normalizing the exchange rate, and fulfilling commitments. The major concern, however, is how this will be implemented and whether it will have political sustainability.”

Source: Valor Econômico

Click here to read the original news piece: https://valor.globo.com/mundo/noticia/2023/12/14/pacote-deve-encolher-comercio-com-o-brasil-dizem-economistas.ghtml