Crisis hits Argentina and its commodity export model
Scarcely two years after taking office, the government of Mauricio Macri in Argentina is facing a severe economic crisis. Devaluation of the currency and a sizeable external debt have triggered fresh concerns over an economic model based on the export of raw materials.
Expectations of growth and tackling rampant inflation when the government came to power in 2015 have given way today to an increase in consumer prices of at least 40% and a 2% contraction of the economy. Rising interest rates in the US – the biggest investor in Argentina – have meant slower investment, and a range of domestic problems have exacerbated the situation.
Earlier this year, Argentina experienced an unprecedented drought which generated a loss of at least one percent of its GDP. The agricultural sector is the central pillar of the economic model favoured by Macri, who has chosen to devalue the peso by 52%.
This dire situation forced president to reintroduce taxes on exports of raw materials, which boomed over the past decade thanks to unprecedented demand from China. The businessman and former mayor of Buenos Aires had eliminated these at the beginning of his mandate. However, the crisis has not led to a change in the model, which also has important consequences for the environment.
“Macri sees Argentina as an exporter of primary products and this is the backbone of the economy. The aim is to increase exports from agriculture, of minerals and all products without added value,” said Ariel Slipak, an economist specialising in Argentina’s relations with China. “It is clearly deindustrialisation.”
For China, however, that is good news. In the first seven months of the year, Argentina exported US$2.9 billion in goods to China, more than 60% of which were primary products, according to official statistics. At the same time, imports from China were US$7.5 billion, 85% of which were manufactured goods.
These figures mean a record trade deficit of US$5.3 billion between the two countries. Although this gap is not new, it has become more pronounced following the opening up of imports to Argentina, which was originally restricted by former president Cristina Kirchner to protect Argentine industries.
In the last decade, the share of Chinese products in Argentina’s imports has grown from 5% to 20%. However, exports from Argentina to China have not grown in tandem, remaining at between 8% and 10% of total exports.
Ariel Setton, an economist at the University of Buenos Aires, said Argentina has changed the structure of its economy since Macri’s takeover, focusing more on primary products – a model that he says meets China’s needs:
“China has invested heavily in Latin America in different areas and is a key ally for the region, more so than the US. The current government’s economic vision suits China and its raw material needs.” He added: “Macri understands that the countryside is where Argentina has advantages over the rest of the world.”
Trade war – new opportunities?
The trade war between the US and China, with tit-for-tat measures taken between the two nations, could offer an opportunity for Argentina and its agro-export model, especially if the dispute continues long term.
China will impose 25% tariffs on imports of soya beans, corn and meat from the US, primary products which are also produced by Argentina and Brazil. However, Argentina’s crippling drought means that there will be insufficient soya beans to export, meaning Brazil stands to benefit more.
“Argentina does not have the capacity to supply the volume of soybeans that the US sells to China, so the trade war would not have an immediate effect,” Slipak said. “However, if the dispute continues, Chinese demand for Argentine and Brazilian soya beans would escalate.”
Last year, Brazil supplied half of the soya beans imported by China, about 100 million tonnes. The US is its second supplier with 35 million tonnes. Argentina, meanwhile, exported seven million tons.
President Xi Jinping’s upcoming visit to Argentina as part of the G20 Leaders’ Summit in November could give political impetus to addressing the trade imbalance between the two countries. There have been a number of fits and starts in the relationship under Macri.
After initially questioning the agreements signed by Fernández de Kirchner, Macri chose to strengthen ties with China, especially given the need for financing. New agreements were signed, among which China would finance a new nuclear plant and improvements to the San Martín freight train system.
Macri’s decision to boost the country’s agricultural sector has meant the deforestation of native forests, especially in Argentina’s northern provinces, and increasing greenhouse gas emissions due to changes in land use.
Argentina’s forests are also now in crisis, according to several national and international indicators. In 2014, the Intergovernmental Panel on Climate Change (IPCC) warned that 4.3% of global deforestation occurs in Argentina.
At the same time, a report by the United Nations’ Food and Agriculture Organization (FAO) listed Argentina among the ten countries that deforested the most between 1990 and 2015. Some 7.6 million hectares were lost – a rate of 300,000 hectares per year.
80% of deforestation takes place in four northern provinces: Santiago del Estero, Salta, Formosa and Chaco. The main causes of forest loss are the expansion of the agriculture frontier (to make way for transgenic soybeans and intensive cattle ranching) and fires.
In 2007, Congress passed the Law on Forests, which establishes minimum standards for forest protection and forest zoning in keeping with intended uses. However, ten years after its approval, the implementation of the law still faces challenges.
“Argentina reaffirmed its agro-export model, and for the forests it means direct destruction,” said Noemí Cruz, coordinator of Greenpeace’s forest campaign. “Livestock and soybeans are advancing more and more, even in areas that are not to be deforested according to the Law on Forests.”
At the same time, advancing deforestation puts pressure on Argentina´s climate commitments. In its Nationally Determined Contribution (NDC), the commitments Argentina made under the Paris Agreement on climate change. Macri’s government pledged to reduce its emissions unconditionally by 18%, and conditionally by 37%.
Argentina is responsible for 0.7% of the emissions that contribute to global warming. According to the latest greenhouse gas inventory, 44% of the country’s emissions come from agriculture and deforestation, followed by energy (27%), transport (13%), industry (12%) and waste (4%).
“Argentina has a ‘productivist’ model [focusing on economic growth above all else] that tries to exploit more resources. The big question is the environmental cost that it will bring,” said Enrique Maurtua Konstantinidis, director of Climate Change at the Environment and Natural Resources Foundation (FARN).
He added: “The land use sector will be the most problematic on reducing emissions in Argentina, considering the country’s commitment to expanding the agricultural frontier and increasing livestock numbers. These policies go against the country’s climate ambitions.”