VZCZCXYZ0000
PP RUEHWEB

DE RUEHBU #0056/01 0122034
ZNR UUUUU ZZH
P 122034Z JAN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 6954
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 5844
RUEHBO/AMEMBASSY BOGOTA PRIORITY 1476
RUEHCV/AMEMBASSY CARACAS PRIORITY 1040
RUEHLP/AMEMBASSY LA PAZ JAN 4390
RUEHPE/AMEMBASSY LIMA PRIORITY 1939
RUEHME/AMEMBASSY MEXICO PRIORITY 1277
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0452
RUEHQT/AMEMBASSY QUITO PRIORITY 0821
RUEHSG/AMEMBASSY SANTIAGO PRIORITY 0062
RUEHMN/AMEMBASSY MONTEVIDEO PRIORITY 6065
RUEHSO/AMCONSUL SAO PAULO PRIORITY 3090
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHMFIUU/HQ USSOUTHCOM MIAMI FL PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHINGTON DC PRIORITY

UNCLAS BUENOS AIRES 000056 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EB/TPP/BTA/EWH FOR BETH LAMPRON 
EB/TPP/ABT/ATP FOR MARSHA SINGER 
EB/ESC/IEC FOR JEFF IZZO 
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN 
WHA FOR WHA/BSC AND WHA/EPSC 
E FOR THOMAS PIERCE, 
PASS NSC FOR JOSE CARDENAS 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
EX-IM BANK FOR MICHELE WILKINS 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
TREASURY FOR ALICE FAIBISHENKO 
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN 
USCINCSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EAGR PREL AR
SUBJECT: ARGENTINA'S POST-CRISIS TRADE BOOM 
 
REF: A. 05 BUENOS AIRES 858 
 
     ¶B. 05 BUENOS AIRES 1562 
 
¶1. (U) SUMMARY: Since the economic crisis of 2001/2, 
Argentine trade has grown quickly, and much more so than the 
economy overall.  Total two-way trade has risen 85.0% since 
¶2003.  Argentina's leading trade partner remains Brazil, 
followed by the EU as a whole, and bilaterally by the U.S. 
and China for imports and Chile and the U.S. for exports. 
Agricultural products, especially soy, are heavily 
represented on the export side, though energy exports have 
risen with global oil prices.  Imports are concentrated in 
intermediate capital goods, in particular machinery.  Despite 
Argentina's burgeoningtrade, its share of global exports has 
fallen since 2002/3, and Argentina's trade surplus, while 
still large, has shrunk considerably, led primarily by 
changes in trade with MERCOSUR partners.  Since export taxes 
on primary product exports contribute significantly to 
government revenue, the specter of lower international 
commodity prices looms large.  A significant drop would 
threaten not only Argentina's trade surplus, but the GoA's 
fiscal surplus.  END SUMMARY 
 
--------------------------------------------- ------ 
EXPORTS: GROWTH, WHAT THEY ARE, WHERE THEY'RE GOING 
--------------------------------------------- ------ 
 
¶2. (U) Argentine trade has grown rapidly following the 2002 
economic crisis.  Between 2003 and 2006, exports jumped from 
$29.6 billion per year to $45.8 billion (estimated), an 
increase of 54.9% (16.9%, 15.8%, and 14.5% by year); imports 
grew from $13.8 billion to $34.5 billion (estimated), a rise 
of 149.4% (62.2%, 27.8%, and 20.2% by year).  Total two-way 
trade rose 85.0% in the same period.  Despite the more rapid 
growth of imports, Argentina continues to enjoy a sizable 
trade surplus: 2006 will be the fifth consecutive year with a 
trade surplus of over $10 billion.  Because the devaluation 
of the peso in 2002 significantly lowered GDP in dollar 
terms, trade as a share of GDP nearly doubled from 17.0% in 
2001 to 33.4% in 2002, and rose to 36.8% in 2005. 
 
¶3. (U) While Argentine exports are heavily concentrated in 
agricultural goods, the largest single category of exports 
(in broad terms, by HTS - Harmonized Tariff Schedule - 
chapter) is mineral fuels and oils (ch. 27), which totaled 
16.4% of all exports in 2005, with a value of $6.6 billion. 
Agricultural goods overall (including leather and leather 
products), made up just under half (48%) of 2005 exports, and 
were worth $19.2 billion.  Soy is by far the most significant 
in this area: soybean oil-cake alone was $3.8 billion (9.5% 
of exports, and the largest export by tariff line), and that 
plus soybeans and soy oil were $8.2 billion (20.5% of all 
exports).  Meat, corn, and wheat also have large export 
shares, at 3.6%, 3.4%, 3.2% of total exports respectively. 
Leather and leather goods comprised 2.3% of all exports, 
worth $917 million.  In manufacturing and industrial goods, 
vehicles (ch. 87) comprised the largest group, with $2.9 
billion in exports (7.2%), led by diesel trucks and 
medium-sized cars.  About 1.8% ($616 million) of all 
 
 
 
 
non-petroleum exports were to the U.S. under the Generalized 
System of Preferences (GSP) rubric.  While about two-thirds 
of agricultural exports have some value added (e.g., 
processed soy meal and oil vs. raw beans), the overall 
dependence on agriculture indicates that Argentine exports 
are not moving quickly up the value chain. 
 
¶4. (U) Argentina trades mainly with its closest neighbors, 
three of which (Brazil, Paraguay and Uruguay) are co-members 
of MERCOSUR, the Southern Common Market, formed in 1991. 
Brazil dominates this trade, receiving $6.3 billion of 
Argentine goods in 2005, 15.8% of all Argentine exports. 
MERCOSUR as a whole (NOTE: not including Venezuela, which 
became a full member in 2006, though it has yet to adopt the 
common external tariff and other protocols of membership) 
received $7.7 billion in Argentine goods, or 19.1% of the 
total.  While the value of total Argentine exports to 
MERCOSUR has risen from $5.7 billion in 2002, its share of 
Argentine exports has fallen from 22.2% (and 31.9% in 2000). 
The EU as a whole is currently Argentina's second largest 
export partner, receiving nearly $6.8 billion in goods in 
2005, up 8.7% from 2004.  (Spain was the leading recipient 
within the EU, and fifth overall, buying $1.8 billion in 
Argentine products in 2005.)  Exports to Chile reached $4.5 
billion in 2005, an 11.2% share, just $5.5 million ahead of 
the U.S.  China became Argentina's fourth-largest export 
market in 2003, receiving $3.2 billion in goods - a 7.9% 
share - an increase of 189% over what it got from Argentina 
in 2002. 
 
¶5. (U) Argentine exports to some countries are highly 
concentrated in certain products.  For example, 2005 exports 
to China included $1.7 billion worth of soy beans, 75% of all 
such Argentine exports, 55% of all exports to China, as well 
as slightly more than the Argentine trade surplus with China 
($1.6 billion).  Exports to Chile and the U.S. were dominated 
by energy exports: $2.3 billion to Chile and $2.2 billion to 
the U.S. - a combined total of 69.1% of Argentine 
petroleum/gas exports, and about half of Argentine exports to 
each country.  In the case of Chile, exports consisted mainly 
of petroleum products ($1.6 billion, or 36.5% of exports) and 
natural gas ($440 million, 9.8% of exports, despite several 
interruptions in delivery - Ref B), while exports to the U.S. 
were mostly crude oil and unleaded gas.  It's notable that 
volumes of hydrocarbons exports to both countries fell 
slightly in 2005, and that the higher value was driven 
entirely by the price increase.  Forty-three percent of 
vehicle exports, worth over $1.2 billion, went to Brazil. 
(Septel will review the bilateral Argentine-Brazil auto pact.) 
 
¶6. (SBU) Argentine exports have grown by an impressive 72% 
since 2002 and a leading factor in this export boom is 
certainly the 2002 devaluation of the Argentine peso (ARP), 
which has incented strong growth in Argentina's primary 
product - principally agricultural product - exports.  For a 
decade before that, the ARP had been legally pegged to the 
dollar at a nominal one-to-one parity, which was both 
overvalued and, ultimately, unsustainable.  At a current 
nominal value of roughly 3.10:1, the nominal ARP exchange 
 
 
 
 
 
rate is approximately 70% below its earlier parity value and 
is generally considered to be significantly undervalued.  The 
current real value of the ARP is approximately half its real 
value the time of its 2002 devaluation. 
 
¶7. (SBU) Argentina continues to apply a number of impediments 
to exports, including outright export bans (of beef and 
natural gas), export quotas, and high export taxes.  While it 
is difficult to quantify their collective impact, these 
barriers have certainly constrained overall export growth. 
In this context, it is important to note that Argentina's 
share of world exports has fallen from 0.433% in 2001 and 
0.399% in 2002 to 0.387% in 2005. 
 
---------------------------- 
THE IMPORT SIDE OF THE STORY 
---------------------------- 
 
¶8. (U) Argentine imports are more diverse than its exports, 
but are concentrated in intermediate capital goods, including 
machinery, electrical equipment, organic chemicals, and 
plastics, which together accounted for 41% of imports in 
2005, worth $11.7 billion.  Motor vehicles and parts were 
also significant imports, at $4.25 billion or 14.8% of 
imports.  TV/radio receivers and transmitters were the 
most-imported specific item, at 4.0% of all imports with a 
value of $1.2 billion, followed by medium-sized autos at just 
under one billion USD (3.4%).  Argentina also imported about 
$1.4 billion worth of hydrocarbon products, about 25% of the 
value of exports in the same general category. 
 
¶9. (U) Just as Brazil is the primary recipient for Argentine 
exports, it is the main source of Argentina's imports, having 
provided 36% of them - $10.4 billion - in 2005.  MERCOSUR as 
a whole supplied 39.5% of Argentine imports in 2005.  While 
Argentina's share of exports to MERCOSUR partners has fallen 
in recent years, its share of imports has grown - from 32.2% 
in 2002 and 28.3% in 2000.  (Brazil supplied 28.0% in 2002 
and 25.5% in 2000.  Argentina's share of imports from Uruguay 
and Paraguay fell from a combined 5.4% in 2000 to 3.4% in 
2002 and 2005, with each country losing 1% share.)  The value 
of Argentine exports to MERCOSUR increased 35% from 2002 to 
2005, while value of its imports from MERCOSUR grew 291%. 
The result has been a shift from a trade surplus with 
MERCOSUR of $2.8 billion in 2002 to a trade deficit of over 
$3.6 billion in 2005. 
 
¶10. (U) Of intermediate capital goods imports, Brazil shipped 
$3.5 billion to Argentina in 2005, 29.8% of those categories 
and 12.2% of all imports.  The U.S. (which supplied $4.5 
billion, or 15.7%, of all imports) was also a significant 
source of those goods, providing $2.5 billion worth (21.4% of 
those categories and 8.7% overall).  The leading category of 
imports from Brazil, however, was vehicles: $2.9 billion 
worth, 68.4% of all vehicles and 10.1% of all imports.  From 
a low base, energy imports from Bolivia have jumped to $240 
million (0.8% of all imports) in 2005, $10 million more than 
from Brazil and $20 million more than from Paraguay.  (The 
Paraguayan total is mainly electrical energy generated by the 
 
 
 
 
 
shared Yacyreta dam.)  $4.8 billion of imports came from the 
EU, led by $1.3 billion from Germany, the fourth largest 
single exporter to Argentina. 
 
--------------------------------------- 
TWIN SURPLUSES - HOW FIRM A FOUNDATION? 
--------------------------------------- 
 
¶11. (U) Argentina's GDP growth since the 2001/2002 crisis - 
projected to be about 50% in real terms from the end of 2002 
to the end of 2006 - has been supported by the nation's 
significant increase in export volume and value.  This GDP 
growth, in turn, has helped drive an even larger increase of 
imports.  While projections of 2006 exports are 78% higher 
than 2002 exports, import growth over this same period is 
projected at over 283%.  As a result, while Argentina still 
enjoys a trade surplus ($11.3 billion in 2005, projected to 
be $21 million less in 2006), this surplus is shrinking, down 
from $15.7 billion in 2003.  Maintaining twin trade and 
fiscal surpluses has been a cornerstone of the GoA's economic 
policy mix.  While global commodity prices stand at record 
levels due to unprecedented demand from China and India, any 
significant drop in commodity prices would threaten both 
since GoA revenue is highly dependent on export taxes on 
Argentine primary commodity exports.) 
 
------- 
COMMENT 
------- 
 
¶12. (SBU) The GoA frequently cites the country's "export 
boom" as a key factor in its now four-year-long economic 
recovery, and the value of Argentine exports has indeed grown 
by an impressive 72% since 2002.  While this export boom has 
certainly been an important contributor to overall GDP 
growth, the fact remains that Argentina's world export share 
has fallen in a period when circumstances - including a 
relatively undervalued nominal exchange rate and high global 
commodity prices for its principal primary product exports - 
are highly favorable.  The GoA's reliance on revenues from 
high and distortive export taxes and its variable imposition 
of outright export bans on beef and natural gas have been 
factors in constraining export growth.  To be fair, on the 
import side, Argentina has taken some positive steps, 
including unilaterally dropping in 2003 the 10% MERCOSUR 
common external tariff on capital goods imports in an effort 
to enhance the nation's productive capacity.  But other moves 
to end-run MERCOSUR disciplines via the negotiation of 
"voluntary" quotas with MERCOSUR partners when imports rise 
quickly make clear that Argentina's commitments to the 
efficiency and wealth benefits of liberalized trade remain 
subordinate to domestic political priorities. 
WAYNE