VZCZCXYZ0000
OO RUEHWEB

DE RUEHBU #0665/01 1581934
ZNR UUUUU ZZH ZUI RUEHCB SVC 2950 1591111
O 071934Z JUN 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3838
INFO RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000665 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EIND ELTN ETRD AR
SUBJECT: ARGENTINA: U.S. ELECTRONICS FIRMS FACE GOA TAX MEASURES 
SUPPORTING DOMESTIC PRODUCTION 
 
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Summary 
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¶1. (SBU) The GoA has proposed a legislative initiative that aims to 
promote domestic assembly of computer and telecom electronics and 
create jobs in Argentina's southern Tierra del Fuego (TdF) province 
by raising taxes on products imported or manufactured elsewhere in 
Argentina.  President Cristina Fernandez de Kirchner said that the 
proposed law could help Argentina save roughly US$ 6 billion a year 
in scarce hard currency reserves that are currently used to pay for 
imported electronics.  U.S. companies affected -- including HP, 
Dell, Microsoft, Intel, Apple, and Motorola -- argue that this 
protectionist measure will destroy more overall employment in 
Argentina than will be created in TdF and that any new TdF 
employment will be primarily low value-added assembly jobs.  They 
also argue that this will undermine Argentina's efforts to narrow 
the digital divide, because Argentina's demand for information 
technology equipment cannot be satisfied by TdF production, and that 
domestic prices for these goods will rise by at least 30%.  While 
the Embassy stands ready to defend U.S. company interests, these 
companies have made clear to us their concern that the GoA and local 
media could cast this issue in polarizing "us vs. them," foreign 
producers vs. domestic workers terms, which would not serve their 
short-term interests in preserving attractive market opportunities 
in Argentina.  They have asked the Embassy to not/not take any 
action at this time.  End Summary. 
 
--------------------------------------- 
Encouraging Electronics Assembly in TdF 
--------------------------------------- 
 
¶2. (SBU) In April 2009, the GoA issued a decree that lowered 
domestic value-added and other taxes on electronic products 
(computers, cellphones, digital cameras, refrigerators, etc.) 
assembled in Tierra del Fuego (TdF), Argentina's southernmost 
province. The TdF economy is already significantly dependent on its 
tax-advantaged electronic component assembly industry. 
 
¶3. (SBU) As a follow-on measure, GoA Minister of Production Debora 
Giorgi and Chief of Cabinet Sergio Massa have put forward a 
legislative initiative (Law 253/09) that would further strengthen 
TdF's competitive advantage in supplying electronic equipment for 
domestic sale by eliminating a number of tax benefits currently 
enjoyed by both importers of such products and on companies that 
manufacture these products elsewhere in Argentina.  The intent is to 
promote electronic product assembly, manufacturing, and associated 
job creation in TdF and to staunch the significant outflow of 
Argentina's hard currency resources currently used to pay for 
electronics imports.  According to embassy industry contacts and 
local media, the GoA bill was the result of negotiations between the 
federal government and two TdF legislators whose votes were critical 
to the GoA's bid to advance mid-term elections from October of June 
¶2009. 
 
---------------------------- 
President Kirchner Weighs In 
---------------------------- 
¶4. (U) In May 21 remarks, President Cristina Fernandez de Kirchner 
strongly supported the new legislation, arguing that the law could 
allow Argentina to save on roughly US$ 6 billion a year in scarce 
hard currency reserves to support domestic consumption of 
foreign-produced electronics: "Imagine if this US$ 6 billion had 
been manufactured here in laptops, cellphones, and desktops.  What 
(new) work for qualified Argentines and what (domestic) earnings! 
This amount (of foreign exchange saved) would cover Boden 12 
maturities (maturing bond payments that Argentina must pay in US 
dollars) that come due in 2009, 2010 and 2011!" (Comment: This US$6 
billion savings presupposes that foreign manufacturers of the 
imported products will move production to Argentina, which Post 
considers highly unlikely giving the relatively small size of the 
Argentine market.) 
----------------------------- 
Bill Proponents and Opponents 
----------------------------- 
 
¶5. (SBU) According to industry estimates, the immediate impact of 
the proposed GoA bill would be to increase the cost to consumers of 
imported electronics by roughly 27%.  Proponents of the bill include 
the TdF provincial governmentQnd manufacturers with assembly 
operations inQhe province, including the local Newsan group. 
Opposition to the GoA initiative comes from current electronics 
importers, including U.S. companies HP, Dell, Microsoft, Intel, 
Apple, as well as Argentine assemblers/manufacturers of electronics 
with plants outside of Tierra del Fuego.  Motorola, the only U.S. 
company with assembly operations (cellphones) in TdF, also opposes 
the measure: only 30% of Motorola's cell phones sold in the 
 
Argentine market come from its TdF operations, and cellphones 
represent only 60% of Motorola's electronic equipment sales in 
Argentina. 
 
------------------------------ 
U.S. Company Coping Strategies 
------------------------------ 
 
¶6. (SBU) U.S. companies and the various industry associations to 
which they belong tell us that, while strongly opposed to the 
proposed legislation, they are approaching the matter quietly out of 
fear of being accused by the GoA of working against Argentine 
employment.  Industry opposition to date, they say, is exerting 
extreme cautiously, putting out carefully crafted messages to local 
press.  Post Commercial Counselor and Attache have met with Buenos 
Aires- and U.S.-based reps of potentially affected companies; held a 
conference call with a Director of the ITIC Information Technology 
Industry Council; and attended a joint meeting of 13 Argentine 
IT-related trade associations.  ITIC members including HP, Cisco, 
Intel and non-U.S. companies including Nokia and Canon expressed 
their preference to have their local staff work this issue through 
local trade associations.  They have asked that the U.S. Embassy 
not/not become directly involved in advocacy efforts in the current 
economic climate for fear that the issue be played by the GoA and 
local media as a polarizing "us vs. them," foreign producers vs. 
domestic jobs issue.  Nonetheless, ITIC members have made clear they 
value Embassy support, awareness and readiness to advocate if 
needed.  Embassy Commercial officers continue to monitor 
developments in the case. 
 
¶7. (SBU) ITIC companies have outlined points they are making to GoA 
officials and to local media to support their contention that the 
new law will not serve Argentina's long term national interests. 
These include explaining that: 
 
-- More jobs will be lost in Argentina than created in Tierra del 
Fuego as a result of these protectionist measures. (The Argentine 
Office Machine Chamber of Commerce estimates the net loss of 6,000 
Argentine jobs from current non-TdF manufacturing operations.) 
 
-- The assembly facilities in TdF are not "real" manufacturing jobs 
but rather primarily assembly jobs with low added value-added. 
 
-- The digital divide will widen as Argentina's information 
technology demand cannot be satisfied by TdF production, and will 
result in increased prices for the consumer by at least by 30%. 
 
-- The "gray market" for these products will increase and domestic 
sales tax revenues will suffer accordingly. 
 
On this last point, Apple Argentinareps inform us that 90% of iPods 
brought in to Apple Argentina stores for warranty service were not 
purchased from Apple resellers in Argentina.  A substantial increase 
in the cost of purchasing imported iPods from authorized domestic 
distribution channels are expected to see more consumers turning to 
alternative sources of supply. 
 
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Comment 
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¶8. (SBU) The heated pre-mid term election environment has prompted 
the Kirchner administration to introduce a number of trade-related 
measures, including this domestic electronics production bill, that 
appeal to nationalist (and often protectionist) sentiments of 
sustaining Argentine employment during tough economic times.  While 
the Embassy stands ready to defend affected U.S. company interests, 
they have made clear to us their concern that the GoA and local 
media could cast this issue in polarizing "us vs. them" terms, one 
that would not serve their long-term interests in preserving 
attractive market opportunities in Argentina.  They have asked the 
Embassy not/not to take any action at this time. 
 
KELLY