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Analyse this: biofuel duties and the rush for reform

Let’s get serious. In our last exchange we discussed Argentina’s never-ending wait for capital investment.

Monday 11 September, 2017
Foto:Pablo Temes - Cedoc.

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Today we will continue the correspondence with Dr Hale (the New England academic introduced last week with a monomaniac fascination with the Argentine economy) as we doubtless will many more times to come, such is the intensity of this man’s obsession. 

Here is his latest email:

"Hi, Michael.

Yes, it’s me again – always remember: “Dr Hale, without fail,” if you will allow me to go from bad to verse. We New Englanders are not just money-minded number-crunchers.

But OK, let’s get serious. In our last exchange we discussed Argentina’s never-ending wait for capital investment (“Long time, no C”, as a Chinaman might say). 

What has really been bugging me recently has been the duties slapped by my country last month on biofuel imports from Argentina (and also Indonesia) because for almost the first time I feel that I’m throwing stones from a glass house. Like so many others, I’ve long bemoaned the strength of protectionism and populism in Argentina and then what does our populist President go and do but inflict crassly protectionist duties? The Donald was a bit more flexible about Tucumán’s lemons but then that mostly affects California which gave four million more of its votes to Hillary Clinton so why should he care?

I’ve always argued that Argentina needs to break free from the dead-end industries created by the import substitution of almost a century ago and now Donald Trump steams ahead with his smokestack protectionism at the expense of a renewable energy source. The United States had a majority of its population on the farm until the Great Depression which gave birth to import substitution and in more recent years most of the developed world has de-industrialised – Argentina still has around a fifth of its workforce in manufacturing industry, which is way too high for the 21st century, and needs to restructure.” 

My reply:

“Yes, we were talking last time about the need for a new product mix. I agree with you about the need to break away from import substitution but the way ahead does not lie in going back to before those days. The nostalgic often harp on Argentina being in the world’s top ten in some of the early decades of the past century but it was a very different globe – the planet had around 20 percent of its current population and five percent of economic output at the outbreak of World War I while Argentina’s high ranking in the 1930s owed much to many other countries being far worse hit by the Great Depression. 

The pure agricultural model worked fine for the eight million Argentines of a century ago but now there are some 45 million to absorb – which is also why it is not so easy to transfer the experience of Australia (as urged by many) with 20 million. When you have 90 percent of your population in cities (as Australia also does – curious how two countries with such strong agricultural traditions have almost the most urbanised populations in the world), it becomes more difficult to play to your farming strengths while sustaining a democracy voting every two years (although Australia does not seem to have a problem despite the frequency of its elections). 

But we are straying into generalisations. let’s get back to the specific issue of the biodiesel duties. Like you I deplore them and they certainly hand all the moral high ground to Argentina (especially when coming just after all the flattery lavished during Mike Pence’s vice-presidential visit) but both the vulnerability of this market and the lack of possible commercial reprisals raise questions. 

The stiff tariffs of up to 64 percent stand to cost Argentina some 90 percent of its biodiesel export markets but why is so much concentrated in the US in the first place – why so few sales elsewhere? 

And while nobody wants to see anything like North Korea’s nuclear brinkmanship, the scant scope for reprisals is faintly alarming – Argentina’s response is almost limited to saying: ‘Please don’t do this or we’ll cry’ and protesting to the World Trade Organisation. They dare note even raise the technical health objections to US pork which are available without need for protective duties or non-tariff barriers. 

With or without reprisals, the US consumer and environment will also suffer but Argentina does not have many options beyond compensating the loss of export markets by upping the biofuel component in petrol domestically or downscaling the share of oil-yielding crops in the harvest.” 

DH: “With that bleak outlook for biofuels, I should consider changing my name to Dr Shale, not that things look much brighter for that sector. Anyway neither biofuels nor lemons nor pork really represent the big picture – the biodiesel duties are more my personal bug because they look too much like ‘white man speaks with forked tongue’ over protectionism (especially when measured against standard US values rather than Trump). The big question these days for me and many others in the US is what kind of labour, tax and other structural reforms can be expected now that last month’s PASO primaries have shown that an electoral mandate exists for something other than primitive populism?” 

Me: “This question is premature because with all these reforms the devil lies in the details, which can vary enormously according to the precise breakdown of the future Congress. The Mauricio Macri administration often sounds off on its plans for these labour, tax and other reforms without spelling them out in any way – this is open to rather obvious criticisms along the lines of electoral dishonesty but I also think that they are genuinely unable to define their plans ahead of knowing the exact composition of Congress and what they can and cannot negotiate. 

Nevertheless, there is one point I would like to make which can already be factored into the expectations. There is a fundamental federal aspect to tax reform which is easily overlooked. Many outsiders seem to imagine that this reform is simply a question of finding a minister with a soft spot for supply-side economics who understands the need to lower the ‘Argentine cost.’ But while achieving the mutually exclusive aims of tax cuts and deficit reduction is indeed a challenge at national level, in many ways the key player for the reforms is going to be Interior Minister Rogelio Frigerio rather than Economy Minister Nicolás Dujovne. 

The tax reforms hinge on the provinces for both structural and specific reasons. Tax reform is inseparable from federal revenue-sharing, which still awaits the overhaul stipulated by the 1994 constitutional reform. The current legal regime is governed by a 1988 law assigning four pesos out of every seven to the provinces (56.66 percent, to be exact) but this has long been overtaken by reality – the current distribution of a one-trillion-peso pie is more like 70/30 in the central government’s favour. 

Yet there are also more specific problems, of which the most important is the Greater Buenos Aires Fund. Inflation has pulverised the cap of 650 million pesos from the  same sum in dollars while convertibility lasted (until early 2002) to almost nothing but Macri also wants to showcase the province run by his star turn electorally, Buenos Aires Governor Marìa Eugenia Vidal. 

Could write another page but have to run. 

Until next time, Dr Hale.”


*  Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017. 


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