The protectionist racket

If Donald Trump imagines that the 60 percent tariff mountain he is proposing against China is anything of a record, he has another think coming – Argentine protectionism can reduce that to a molehill with, for example, import duties of up to 73 percent on electronic items (66 percent for any old laptop). Nevertheless, while the president-elect of the United States and his future Argentine colleague Javier Milei might be a mutual admiration society, they are moving in opposite directions on that front.

Our libertarian president naturally includes free trade among his dogmas, in whose application he tends to be highly selective and opportunistic but with always an end to justify the means. The PAIS tax is a case in point. No levy could be more repugnantly Kirchnerite than the PAIS (Para una Argentina Inclusiva y Solidaria) tax introduced in the first month of the previous Frente de Todos administration just before the Christmas of 2019 and slapped on all imports as from 2022 yet while it served to prop up the fiscal surplus as the fifth juiciest source of revenue, it worked out fine for Milei. But this fiscal surplus was in turn a means towards slaying the inflationary dragon, the government’s trump card for next year’s midterms, and once this started to click, the end of PAIS became desirable to keep the momentum rolling within a general drive to lower import costs. A move which might horrify an ultra-protectionist Trump (not to mention Cristina Fernández de Kirchner) but whereas the US trade deficit flirts with a monthly 12 digits, Argentina is heading towards a trade surplus of some US$17 billion this year (over double last year’s deficit) so that there is some wiggle room for imports.

Bully for the government and the war on inflation but this creates a double whammy for the industrial sectors of one of the world’s most protected economies in suddenly pressuring them to become more competitive on two fronts. The menace of import competition should be obvious enough but if it also serves to tame inflation, that becomes a problem too. Inflation notoriously helps governments maintain deficit financing by swelling revenues while shrinking costs but it also allows the private sector to price their way out of any troubles in the confidence that whatever the price increases, the money would be printed to pay them. Now it starts becoming the survival of the fittest.

Welcome to the jungle, the government might say, with libertarian deputy and Budget Committee chairman José Luis Espert having some harsh words for spoiled cry-baby businessmen all too used to selling shoddy goods at stratospheric prices to captive markets (not that he seems in any hurry to end the ultra-protected regime privileging Tierra del Fuego regime assembly plants which makes electronics so exorbitantly priced). But industrialists would beg to differ, arguing that life might not be fair but much else besides – excessive taxation (when paid at all, thus making the underground economy an extra source of unfair competition quite apart from imports), prohibitively costly labour litigation and a supposedly overvalued currency making fiscal life easier at the expense of their profitability. They might also argue that halting public works is a false economy, forcing them to face the rest of the world with deficient infrastructure and connectivity. Without a level playing-field to compete on equal terms, they have every right to whine.

Milei is verbally committed to ending a model of import substitution protecting labour-intensive industries at the expense of agriculture and other export sectors but he has barely started. In his first year some 30,000 industrial jobs have been lost – compare that with the Chile of 1982 when a military dictatorship forcibly globalised the country, brutally exposing its industry to the rest of the world with all uncompetitive deadwood eliminated at a stroke, with an economic contraction of minus 14.3 percent that year and unemployment of 23.7 percent. Figures which could easily be replicated here with a similar dosage of medicine but spin doctors would not recommend that here with the midterms. Yet improvements are also possible without chainsaws. Take the most overpriced sector of electronics. Precisely because of the collapse of demand in the depths of the recession, sales are picking up with the discounts to clear accumulated stocks while deregulation also has a positive effect – trends which are only beginning as the government eases imports.

Protectionism has a long history on these shores predating Argentina with the Spanish colonial stranglehold on commerce an open invitation to contraband. From its construction in 1778 the Aduana customs was the real centre of power in Argentina – the federalist strongman Juan Manuel de Rosas was both Argentina’s most centralist ruler and ran the whole country for almost an entire quarter-century thanks to its revenues. The most recent public holiday earlier this month marked the battle of Vuelta de Obligado (1845), which resulted from an Anglo-French fleet seeking to bypass the Buenos Aires customs house for direct trade with the hinterland – contrary to local myth, their ships broke through the blockade and sailed up the Paraná River, only to discover that Corrientes and Paraguay were not the succulent markets imagined. Although governed by the 1853 Constitution, import and export duties were not systematised until 1875 – the notorious retenciones were introduced as a temporary expedient to finance the Triple Alliance War with Paraguay (1865-70) but were retained for 130 of the 154 years since then (the exceptions being the 1905-18 and 1991-2002 periods). Protectionism was the rule since then (thus the economic saviour of 1890 Carlos Pellegrini, who introduced the gold standard, was an especially ardent advocate) and it became permanent with the model of import substitution as from the Great Depression of the 1930s.

Permanent until now but times could be changing after almost a century. But quite apart from lobbies at home and developments in the outside world (not least Trump’s tariffs), it remains to be seen whether free trade is an end in itself or whether it is a means towards lowering inflation, in turn a means towards winning next year’s midterms which are themselves means towards converting into reality a whole matrix of economic theory (including free trade?)