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US and Argentina: friend and foe in agri-trade

They are two of the global agricultural powerhouses in terms of reputation, quality, and export levels. But they are also competitors, particularly in grains.

Saturday 10 March, 2018
Argentina and the US are both powerhouses in the agricultural sectors and they’ve generally managed to keep out of each other’s way.
Argentina and the US are both powerhouses in the agricultural sectors and they’ve generally managed to keep out of each other’s way. Foto:PERFIL/CEDOC

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Argentina and the United States are two of the global agricultural powerhouses in terms of reputation, quality, and export levels. And while they have mainly avoided locking horns, both nations have engaged in tit-for-tat protectionism over the years, a policy the administration of Mauricio Macri is looking to revert. Despite an early victory with Argentine lemons, Donald Trump’s “America First” policies won’t make it easy.

The trade relation is most easily ascertainable through the markets. Take Argentina’s current drought as a microcosm: since late 2017, The pampas have seen precipitation that’s 20 percent of normal levels in some areas, causing at least three provinces to declare a state of agricultural emergency. Farmers and analysts predict yields up to 30 percent lower than usual and some experts to forecast that the bad weather could shave one percent off GDP this year.

Enter the US commodity markets. Soybean prices in Chicago have surged past US$400 a ton, their highest highest levels since 2016, while soy meal futures shot up 19 percent just in 2018, the largest gain among the 22 raw materials tracked by the Bloomberg Commodity Index. Most point to China – the world’s largest importer – and increased demand, but no one denies lower Argentine yields have an impact.

There are specific cases of a substitution effect at work between the two. China, once seen as a sleeping giant, saw economic growth average 9.5 percent from 1976 to 2013 on the back of Deng Xiaoping’s economic reforms, causing a commodities supercycle in the 2000s. As demand for foodstuffs surged, China banned US beef imports in 2003 due to an outbreak of mad cow diseased. While the ban was lifted a few months ago, Argentina, along with Brazil and Australia, took over the market. Nearly half of Argentina’s beef exports and 11 percent of total exports go to China, according to Gorelik. Plenty of Argentine soybeans head China’s way as well (though the US does compete modestly there), and the East Asian power has invested billions in Latin American energy and infrastructure, including in Argentina.

In South Korea, high tariffs mean US soybean imports have long struggled to make headway into the market, representing only 22 percent a few years ago. That gap meant Argentina and regional producers Vietnam and Thailand came to dominate. But a recent agreement that will slowly faze out the tariffs has seen US market share more than double within two years.

As Mercosur pursues a freetrade agreement with the European Union, Argentina looks to benefit. With optimists expecting an agreement on final terms of the deal in coming weeks, the result will be more Argentine beef to flow into Europe (and more European cars crossing the Atlantic). The US has little skin in the game. Due to steep barriers to entry – as the US doesn’t have an agreement with the EU in place, and with Trump in the White House won’t be seeking one – little US beef makes its way into Europe anyways, Gorelik explained.

It may seem odd that two nations with a competing portfolio of agricultural exports don’t butt heads more often. For both Argentina and the US, soybeans, corn, beef and wheat are the sector’s core. The United States does produce, export, import and consume more overall, but in international trade they’re neck-and-neck. Argentina is one of the top five producers and exporters of most major crops, and agriculture is 10 percent of its GDP. A whopping 61 percent — US$35 billion — of its exports were related to its agricultural sector in 2016. For the US that’s 11 percent and US$144 billion.

“The US and Argentina both take pride in exporting highquality, expensive beef,” Gorelik says. “Both have a very prestigious global reputation in terms of the quality of the meat, far ahead of other competitors.”

Logic might also suggest two major producing nations would trade little with each other agriculturally. That’s largely the case: Argentina is the United States’ 41st largest-trading partner, and a modest US$28 billion swapped nations in 2016, with only a few billion of that being agricultural products. Still, they’ve managed to find beef with each other.

Over the past two decades, trade skirmishes have been built up by the media as a sort of economic battle. First there was the Argentine ban on US beef imports in 1992. That was rescinding last August, though Gorelik points out that domestic production is more than enough to satisfy Argentine beef demand, so massive imports are unlikely.

Then in 2001 the United States hit back with bans on Argentine beef and lemons, all three for food safety concerns. Beef returned in 2015, and lemons in 2017 after Macri directly negotiated with Trump. Yet, the American President upped the ante, imposing anti-dumping duties on Argentine biodiesel — valued at $1.2 billion in 2016 and the destination for 90 percent of Argentine exports, according to Reuters. According to INDEC, Argentine biodiesel exports fell 30 percent in the third quarter of 2017. If Trump’s recent global tariffs on aluminum and steel – which represent more than US$700 million in Argentine exports to the US – are any indication, protectionism is here to stay.

Mauricio Macri, however, is looking to introduce Argentina back into the world. As his nation has opened up, the United States has closed itself off. The biodiesel tariffs remain; the US pulled out of the TPP, recently signed by the other members; tariffs on steel and aluminum are in limbo and could have harsh effects on Argentina; Trump wants to renegotiate NAFTA; and while Canada recently signed and Mercosur nears a deal, the chances of a free trade agreement with the EU have slowly disappeared.

With new approaches in Argentina, the US and China, the way forward, like much of history, doesn’t look likely to include more than a modest US-Argentina ag trade relationship. But despite this year’s drought, as Argentine exporting heft increases and China, the US and Europe all debate the next economic step forward, fresh clashes could come to the fore.

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