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UNCLAS BUENOS AIRES 000095 
 
SIPDIS 
 
SIPDIS 
 
PASS USTR FOR DUSTR VERONEAU, AUSTR EISSENSTAT, SCRONIN 
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 
TREASURY FOR ALICE FAIBISHENKO 
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN 
USCINCSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFINOECD EAGR AR
SUBJECT: SCENESETTER: USTR AMBASSADOR VERONEAU'S JANUARY 26 
VISIT 
 
 
------------------------ 
Introduction and Summary 
------------------------ 
 
¶1. (SBU) Embassy Buenos Aires warmly welcomes your January 26 
visit to meet with the Ministers of Economy and Foreign 
Affairs and with members of the U.S. business community. Your 
arrival, immediately following your FTA consultations in 
Chile and your TIFA signing in Uruguay, will spark 
considerable interest from local media and from GoA trade 
officials.  Both the Ministries of Economy and Foreign 
Affairs have expressed a strong interest in using your visit 
as a platform to re-launch regular senior level talks via our 
Bilateral Commission on Trade and Investment that last met in 
October 2003. 
 
¶2. (SBU) GoA officials will be eager to review with you 
Argentina's participation in the January 18-19 Mercosur 
Summit and to present their vision for enhanced hemispheric 
economic integration via an expanded Mercosur.  They will 
likely seek assurances that your TIFA signing with Uruguay 
does not represent a USG move to fragment the Mercosur trade 
bloc.  They will also present their views on the WTO/Doha 
Round state-of-play, offer Argentina's support to revitalize 
NAMA negotiations with the G-22 and look forward to hearing 
U.S. perspectives from you.  You will also have an 
opportunity to review our developing bilateral trade with 
Argentina and address longstanding frictions surrounding U.S. 
phyto-sanitary barriers to Argentine beef and citrus exports, 
U.S. anti-dumping duties on honey, and an ongoing ITC 
anti-dumping investigation on Argentine lemon juice exports. 
 
¶3. (SBU) You will be able to highlight positive developments 
in our expanding trade relationship, including the two-year 
renewal of GSP (which benefits roughly 15% of Argentina's 
$4-plus billion in exports to the U.S.), close cooperation on 
the Container Security and Trade Transparency Unit 
initiatives, our recent announcement that Patagonia 
(Argentina below the 42nd parallel) may soon be declared foot 
and mouth disease-free, and our mutual interest in a positive 
resolution to the GoA's recent WTO case against Brazil for 
its application of anti-dumping duties on PET-resin exports 
from Argentina. 
 
¶4. (SBU) Representatives of U.S. Fortune 500 companies in 
Argentina's agro-industrial, automotive, pharmaceutical, 
financial services and other sectors will be eager to discuss 
with you challenges they face operating in an Argentine 
market that requires them to adapt to sudden changes in 
regulatory and tax regimes and to inadequate enforcement of 
intellectual property rights. 
 
¶5. (SBU) Your visit comes at a time of considerable ferment 
in Argentine political and economic arenas.  In October 2005 
President Kirchner won a resounding victory in mid-term 
legislative elections.  Based on these results, Kirchner has 
further tightened his already firm control of political and 
economic policy.  Political interest is focusing increasingly 
on the October 2007 presidential elections.  Argentina 
finished 2006 with its fourth straight year of strong 
economic growth, with exports, employment, industrial 
 
 
production, agriculture and livestock sectors turning in 
record performances.  Over 50% of total Argentine exports are 
represented by agricultural, livestock, and food shipments, 
and have been a focus of GOA policies to maintain low 
domestic prices and increase government revenues.  These GoA 
policies, which include a menu of export tariffs, export 
quantity controls and explicit and implicit price controls, 
have introduced significant micro economic inefficiencies to 
Argentine markets.  Nevertheless, Argentina has sustained an 
impressive economic recovery since suffering the worst 
economic crisis in its history, including the largest 
sovereign default in world history and a substantial nominal 
devaluation of its currency in 2001-02. 
 
¶6. (SBU) Ambassador Veroneau, senior GoA officials understand 
the need for increased trade and foreign investment to 
sustain Argentina's economic growth and they have made very 
clear their interest in re-engaging with you and other USG 
counterparts on the range of commercial issues.  There is 
also evident Argentine private sector support for enhanced 
bilateral commercial ties with the U.S.  Following your 
discussions here, GoA Economy and Foreign Ministry officials 
hope that you will be willing to jointly announce agreement 
to hold a USTR-hosted Bilateral Commission on Trade and 
Investment meeting in Washington sometime this spring.  Post 
strongly supports this initiative and, if you concur, looks 
forward to working closely with your USTR team on this 
project in the coming months. 
END INTRODUCTION AND SUMMARY. 
 
---------- 
Background 
---------- 
 
¶7. (SBU) Early in the 20th century, Argentina was one of the 
richest countries in the world, with a GNP per capita that 
would have place it among the G7 of its day.  However, the 
history of Argentina over the last 70 years has been one of 
economic decline and political instability.  Many Argentines 
are at a loss to explain how their country, blessed with rich 
natural resources, a fertile land and manageable population 
numbers, could have fallen so far.  Some blame the military 
dictatorships which predominated between 1930-1983; others 
blame Peron's corporatist state and economic model; and a 
significant number blame external factors: the IMF, the U.S., 
and, to a lesser extent, Europe, especially following the 
2001-2002 economic crisis, the worst in Argentine history. 
The election of left of center Peronist Nestor Kirchner in 
2003 marked a significant shift in Argentine foreign policy, 
aligning the country more closely with its MERCOSUR and other 
regional partners such as Venezuela and less closely to the 
U.S.  That said, Kirchner has cooperated with the U.S. on a 
number of issues, including counter-terrorism and narcotics, 
peacekeeping in Haiti, promoting stability in Bolivia, and 
working together at the United Nations. 
 
------------------- 
Political Landscape 
------------------- 
 
¶8. (SBU) Kirchner is widely perceived to be the strongest 
 
 
Argentine President since the return to democracy in 1983, 
and he faces a weak and divided opposition.  Argentines give 
Kirchner much of the credit for the country's phoenix-like 
recovery from its 2001-2002 economic crisis, an event 
equivalent to (albeit much shorter than) our Great 
Depression.  Political interest is focusing increasingly on 
next year's presidential elections.  It is widely thought 
that, if he chooses to run, Kirchner will win reelection 
easily.  There has been much speculation, including from 
president Kirchner himself, that he will not be a candidate 
and that his wife, Senator Cristina Fernandez de Kirchner, 
will stand in his place.  Declared or potential opposition 
candidates include former Economy Minister Roberto Lavagna, 
businessman and president of the famed Boca Juniors soccer 
team Mauricio Macri, center-left national congresswoman Elisa 
Carrio, Governor of Neuquen state Jorge Sobisch, and former 
President Carlos Menem. 
 
¶9. (SBU) Argentina has played a positive role in promoting 
human rights and democratic institutions in the hemisphere, 
particularly in Haiti and Bolivia.  Along with a number of 
its neighbors, Argentina currently has 575 peacekeeping 
troops in Haiti in support of MINUSTAH, reflecting its 
traditionally strong support of UN peacekeeping operations 
and commitment to Haiti. 
 
¶10. (SBU) Kirchner's administration has strongly supported 
counter-terrorism policies, having itself twice been a victim 
of international terrorist attacks in the early 1990s.  The 
GOA has ratified all of the 12 international 
counter-terrorism conventions.  Argentina is a participant in 
the Three Plus One regional mechanism, which focuses on 
possible terrorist-related activity in the Tri-border region 
between Argentina, Brazil, and Paraguay.  On December 20, 
President Kirchner signed the GoA's long-anticipated draft 
anti-terrorism and counter-terrorism finance bill and sent it 
to Congress. 
 
¶11. (SBU) The GOA has been a strong international voice on 
arms control and nonproliferation issues.  On Iran, the GOA 
voted to refer Iran's noncompliance to the UNSC at the 
September 24 IAEA Board of Governors meeting.  The GOA has 
also endorsed the Proliferation Security Initiative (PSI). 
 
------------------- 
Argentina's Economy 
------------------- 
 
¶12. (SBU) Argentina has had an impressive recovery since 
suffering the worst economic crisis in its history in 
2001-02, including the largest sovereign default in world 
history and a 70% nominal devaluation of its currency.  A 
surge in domestic aggregate demand facilitated by GoA fiscal, 
monetary and income distribution policies, has resulted in 
real GDP growth in the 8-9% range in each of the past four 
years, with GDP reaching about $206 billion at the end of 
calendar 2006, approximately $5,300 per capita.  The Kirchner 
Administration has ably managed the nation's public finances 
and achieved large budget surpluses.  As a result, investors 
in Argentine financial instruments perceive lower risk 
levels.  Moody's recently upgraded its sovereign credit risk 
 
 
rating for Argentina to B3 (several levels below investment 
grade), and Argentina's sovereign country risk premium, as 
measured by the benchmark JP Morgan Emerging Markets Bond 
Index, fell to 192 basis points, Argentina's lowest premium 
since JP Morgan introduced the index in 1992. Industrial and 
construction activity have been growing rapidly, and tourism 
has boomed, with a record high of an estimated 4.1 million 
foreign tourists visiting in 2006.  Economic expansion is 
creating jobs and unemployment dropped from 21.5% during the 
height of the crisis in 2002, to 10.2% during the third 
quarter of 2006.  Poverty has also fallen from the 
post-crisis level of 60%, but remains stubbornly high, at 
about 31% now living below the poverty line. 
 
¶13. (SBU) Argentina negotiated a debt exchange with 76% of 
its creditors in 2005 (paying roughly 34 cents on the 
dollar).  The government refuses to deal with investors 
holding approximately 24% of the value of Argentine defaulted 
bonds (currently totaling about $25 billion), and many of 
these holdouts are seeking compensation through U.S. and 
international courts.  Argentina owes approximately $7.2 
billion to Paris Club creditors, including over $3.5 billion 
arrears and past due interest.  The government has expressed 
interest in negotiating a debt rescheduling deal with Paris 
Club creditors.  An IMF program is required for the Paris 
Club to restructure Argentina's debt, and Argentina ceased 
its IMF program when it paid off its nearly $10 billion debt 
to the IMF in January 2006.  Nevertheless, informal 
discussions between the government and Paris Club Secretariat 
are ongoing.  Argentina owes approximately $360 million to 
the United States, of which over $300 is in arrears 
(including over $290 million owed to the U.S. Exmibank). 
Argentina fell under Brooke Amendment sanctions on October 1, 
2003, when it fell into arrears on principal payments on a 
USAID loan.  The Brooke Amendment to the Foreign Operations 
Appropriations Act (FOAA) bans the use of USG assistance 
under the FOAA to countries more than 12 months in principal 
or interest arrears on USG loans made under the FOAA.  This 
covers USAID programs as well as assistance under a number of 
military programs (FMF, MAP, FMS, PKO). 
 
¶14. (SBU) Argentina's impressive recovery, which has led to 
improvements in key socio-economic indicators, can be 
attributed to a number of factors.  First, following a decade 
of market reforms in the 1990s, the economy was fundamentally 
sound except for the high level of indebtedness.  Second, the 
adoption of a more flexible exchange rate regime in early 
2002 and the combination of high commodity prices and low 
interest rates catalyzed an increase in Argentina's exports. 
Third, strong global and regional growth has also contributed 
to Argentina's resurgence.  Exports are at record levels and 
Argentina's trade surplus is estimated to have totaled $11.3 
billion in 2006.  Foreign trade equaled approximately 38% of 
GDP in 2006 (up from only 11% in 1990) and plays an 
increasingly important role in Argentina's economic 
development.  The government has maintained a primary fiscal 
surplus and continues to accumulate reserves, which reached 
$32 billion in January 2007. 
 
¶15. (SBU) Argentina should continue to perform well in 2007 
with real GDP growth projected at about 7% and inflation in 
 
 
 
the 10-12% range.  Nevertheless, the GoA's slowness in 
addressing public service contract renegotiations, capacity 
constraints, potential energy shortages in the face of high 
growth and distorted energy prices, inflation and the 
government's heterodox policies to contain it (including 
pressure on the private sector to maintain price controls), 
and a still-weak investment climate are potential obstacles 
to attracting the levels of new foreign direct investment 
required to sustain the recovery. 
 
--------------------------------------------- - 
Trade Overview and Bilateral GoA/USG Frictions 
--------------------------------------------- - 
 
¶16. (SBU) Argentine trade has grown rapidly following the 
2002 economic crisis.  Between 2003 and 2006, exports jumped 
55% from $29.6 billion per year to $45.8 billion; imports 
jumped over 150% from $13.8 billion to $34.5 billion during 
the same four year 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 
 
¶17. (SBU) About 50% of 2005 exports fell into the category of 
agriculture, livestock and food, with over 20% - $8.2 billion 
- in soy (soybeans, meal, oil-cake and oil) alone.  Brazil is 
Argentina's top export market by far (15.8% of 2005 exports), 
and in 2005 was followed by Chile (11.2%), the U.S. (11.2%), 
and China (7.9%).  Imports were concentrated in intermediate 
and capital goods, with about 41% of the total.  Brazil is 
also Argentina's number one supplier of goods (36.4% of total 
imports in 2005), followed by the U.S. (15.7%), China (5.3%), 
and Germany (4.7%).  Despite Argentina's burgeoning trade, 
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 Brazil. 
Since export taxes on primary product exports contribute 
significantly to government revenue, any significant drop in 
international commodity prices would threaten not only 
Argentina's trade surplus but its fiscal surplus as well. 
 
¶18. (SBU) There remain a number of bilateral frictions in the 
Argentine/US trade relationship, some of which have lingered 
for years.  Both sides have concerns over beef: Argentine 
exports to the U.S. have been blocked for some years 
following a breakout of Foot-and-Mouth Disease, and the GoA 
complains that the U.S. phyto-sanitary review process is too 
slow.  Exports of U.S. beef and sweetbreads to Argentina have 
been banned since 2004 by the GoA due to fears of bovine 
spongiform encephalopathy, and some U.S. firms which import 
processed beef have been adversely affected by recent beef 
export limitations.  Argentina has been frustrated with slow 
progress towards permitting imports of Argentine citrus, 
suspended since 2001 due to citrus canker and pest risks. 
Both sides are presently watching anti-dumping investigations 
) one in the U.S. over Argentine lemon juice, and one in 
Argentina over blank optical compact discs.  Argentina is 
also discouraged by antidumping duties in the U.S. on oil 
 
 
 
country tubular goods, which have been in the sunset review 
status since 2000.  Finally, IPR has been a long-standing 
concern for the U.S., with Argentina on the Special 301 
Priority Watch List since 1996, mainly due to general lack of 
enforcement and an unwillingness to protect confidential 
pharmaceutical data used to obtain health approval. 
 
-------------------------------- 
Managed Trade in the Auto Sector 
-------------------------------- 
 
¶19. (SBU) Argentina's auto sector, composed entirely of 
American, European and Japanese players, closed 2006 with its 
best year since 1998.  Ford and GM are prime movers in this 
sector.  Production in 2006 reached 432,000 units, a 35% 
increase from 2005; new car sales amounted to 460,000 units, 
a 14% increase from 2005; and exports reached 237,000 units 
(55% of production is exported), up 30% from 2005.  Brazil 
and Argentina, virtually the only producers in the region, 
have a complex auto trading regime, and a substantial amount 
of auto trade.  Under their "flex" trading regime in effect 
until July 2008, for every USD 1.95 of Brazilian duty free 
exports of autos and auto parts to Argentina, Argentina can 
export USD 1 to Brazil duty free.  There appears little 
possibility that free trade in the auto sector will come 
about any time soon, as Argentina continues to aggressively 
press for managed trade schemes to protect its industry in 
the face of Brazil. 
 
------------ 
Agribusiness 
------------ 
 
¶20. (SBU) U.S. agribusiness companies have invested heavily 
in the Argentine economy for many decades and have made major 
contributions to the agricultural and livestock sectors. 
Cargill, for example, is making investments valued at $330 
million in agricultural processing facilities (soybeans, 
malt), a packing house, and port facilities.  Over the last 
two years, business and profitability in this sector have 
been challenged by GOA intervention exemplified by the ban on 
exports of fresh meat, price controls imposed on wheat, and 
the freezing of export sales of corn.  Another American firm, 
Monsanto, faces major challenges, in particular its inability 
to collect royalties on the Round-Up Ready soybean 
technology, which has revolutionized soybean production in 
Argentina.  It has attempted to negotiate a solution to this 
issue with seed companies, farm organizations, and other 
stakeholders and launched court cases in Europe. 
Unfortunately, Monsanto and GOA authorities have not found a 
meeting of the minds to resolve this important issue of 
intellectual property rights protection. 
 
----------- 
Agriculture 
----------- 
 
¶21. (SBU) The agricultural and livestock sectors, two of the 
mainstays of the Argentine economy (over 50% of total 
Argentine exports are represented by agricultural, livestock, 
and food shipments), have been negatively affected by GoA 
 
 
 
policies to contain inflation due to their importance in 
calculating the CPI.  The two principal policy initiatives 
which the GoA has chosen to curb inflation have been through 
price and export controls, which have affected grains (wheat 
and corn), dairy, and meat.  In 2006, when international 
wheat prices had sharply increased, the GoA mandated that 
Argentine exporters sell four million tons of wheat to the 
milling industry at a price ($120 per ton) well below the 
international price, in an attempt to maintain the price of 
bread at what it considers a "reasonable" level.  The GoA has 
also frozen advance corn export registrations, hoping to 
ensure sufficient corn for domestic use (the corn is used, in 
the main, as feed for livestock and poultry, and for food) 
without putting upward pressure on prices. 
 
¶22. (SBU) In January 2007, the Minister of Economy announced 
that the GoA would increase export taxes on soy and soy 
products by 4% to 27.5% and 24% respectively.  The GoA 
expects to collect an extra US $400 million annually from 
this export tax increase which it will use to subsidize 
domestic consumption of wheat, corn and soy.  Earlier in 
2006, as prices of dairy products rose, the GOA reacted by 
increasing export taxes on cheese and powdered milk.  These 
taxes undercut previously strong growth by this industry, and 
led one of Argentina's main dairy cooperatives, which was 
suffering from heavy indebtedness and low profitability, to 
seek credits and assistance from the government of Venezuela, 
which Hugo Chavez promised President Kirchner that he would 
deliver, but has not yet to date.  In 2005, the GOA increased 
the export tax on fresh beef from 5 to 15%, and the minimum 
slaughter weight to 280 kilograms.  In March of 2006, it 
banned almost all fresh beef exports (except those destined 
to fulfill the European Union's Hilton Quota, and those 
involved in country-to-country agreements).  Over the last 
five months, the GOA has relaxed some of these restrictions, 
after it realized that market intervention had become 
counterproductive.  It is, however, again poised to intervene 
aggressively if it believes that beef prices are increasing 
at an "unreasonable" rate. 
WAYNE