Following the spectacular festivities celebrating Argentina’s bicentennial on May 25, the government of President Cristina Fernández de Kirchner returned to earth to tackle urgent matters that it had postponed for that celebration. One key issue was a conflict that began in April when China suspended purchases of Argentina soy oil. At present, 77% of Chinese soy oil imports come from Argentina, which has 55% of the global market.Last week, an Argentine trade mission traveled to China but did not get the hoped-for results. The Chinese government declined to renew purchases of Argentine soy oil until Argentine soy oil exporters comply with certain Chinese health regulations.                                                                                                                                                            

At the heart of the conflict is China’s so-called “rule for specific vegetable oils.” This regulation strictly defines standards for the allowable level of residual solvents.

According to China’s Ministry of Commerce, Argentine imports contained 300 parts per million (ppm) of residuals of hexane, a chemical used in the extraction of oils from oleaginous seeds. However, the maximum level permitted by China is only 100 ppm. Nevertheless, Argentine observers contend that this sanitary barrier is really intended to punish Argentina for closing its border to various Chinese products that compete with local industries.

Gloria Baez, an expert in international agricultural negotiations at the University of Salvador’s Economic Research Institute, says “The fundamental reason [for China’s ban on soy oil imports] is Argentina’s strict application of trade restrictions on imports of numerous Chinese products — mainly shoes and textiles — largely in the form of anti-dumping duties” to police alleged unfair competition.

Along the same lines, Enrique Blasco Garma, an economist at ESEADE University Center for Research, notes that “The Asian [Chinese] diplomats assert reasons [for the ban] that are different from their true motivations. The cutoff in Chinese imports [of soy oil] is a response to the restraints on [Chinese] exports to Argentina.”

Gustavo Girado, a specialist in Asia-Pacific business and professor at the University of Buenos Aires and the University of La Plata (UNLP), points out that from the moment the conflict with China began, there have been no official messages from China specifying what are suspected to be the true  reasons for the soy oil ban. There have been only unofficial leaks and rumors involving a broad spectrum of possible motives.

One possible explanation, notes Girado, is Argentina’s unwillingness to treat China as a market economy. This formal recognition by Argentina would assure China of equal treatment in anti-dumping investigations. Another possible motive is the strict measures that Argentina has placed on imports from what the Argentine Customs agency calls Group 4 countries — 15 economies in the Asia-Pacific region, including China. “Finally, there has also been speculation that China’s intention was to reduce international prices on soy oil, something that it achieved immediately,” Girado adds.

Baez does not rule out the possibility that political motives also influenced the conflict. Fernández de Kirchner postponed her state visit [to China] planned for January amidst an open conflict with Martin Redrado, president of Argentina’s central bank, over whether to use the country’s monetary reserves to pay its sovereign debts. “You have to realize that when the trip was canceled, the President continued to comply with her international agenda, even while using the internal political crisis as an excuse for not honoring the commitment she had made to President Hu Jintao,” says Baez.

The Economic Impact

Several analysts project that China will import more than 2 million tons of soy oil this year, which would be worth US$1.947 billion. That is more than 45% of Argentina’s production and 77% of China’s needs. If the Chinese ban continues, not only would the income of Argentine soy oil exporters fall, but it would mean US$623 million in lost tax revenues for Argentina’s government.

What will soybean oil exporters do with their production? Girado is optimistic, arguing that Argentina “will not have major problems finding other markets, even if it does accept a slightly lower price [for them]….  The situation will not affect the overall sector this year, nor will it have fiscal implications.” Prices for soy oil are set in Chicago, where most of the grains are quoted on the commodity exchange.

However, Alberto Rubio, dean of the University of Belgrano’s business school, notes that it is hard to open new markets. “This is something that you can’t solve in just one day. It requires a credible strategy that can be sustained over time. The country does not have that image in its foreign trade. We are not used to seeing the country as the world sees it.”

Blasco Garma adds “Our exporters will find other channels, while sacrificing prices…. Our country will also find new customers in Asia and these people may, in turn, sell to China. So the costs of triangulation will fall on Argentina.” Some analysts suggest that India, Egypt and South Africa will be among the alternative sourcing channels.

Long-term Effects

More generally, Argentina’s trade conflicts have broadened to include other important trading partners, such as Brazil, which has seen Argentine trade restrictions slapped on chocolates, canned tomatoes and other products. The European Union (EU) also has complained about the unofficial request of the Kirchner administration to restrict EU food exports to Argentina.

“Both the Argentine government and producers fail ultimately to understand the true nature of the competitive challenges that exist in a world that is highly interrelated,” says Rubio. “This involves more than just closing your markets and incentivizing exports with exchange-rates; it also involves systematically improving your productivity.” Rubio adds that [these kinds of] conflicts “never generate profits, and if they do, such profits are short-lived, which is lethal for the manufacturing system over the long term. You cannot insist on taking a short-term view.”

On the other hand, Garma believes that China and other countries that have trade disagreements with Argentina “are trying to say that shutting down international trade hurts everyone; even those who impose such restrictions. Letting in foreign products helps local users…”

Nevertheless, Girado believes that it is useful to protect Argentine industry, “using all of the legal mechanisms within our reach, especially now that economic mismanagement of the main global economies has had horrendous consequences for people’s standards of living in those countries that are more vulnerable. International trade is not a zero-sum game, and free trade is not necessarily the best way to increase the well-being of developing economies.” Girado recognizes that Argentina needs a long-term policy that increases the role of Argentine companies in the Asia-Pacific region and makes it easier for Asian companies to invest in Argentina. Such policies have been successfully developed in economies that are natural competitors of Argentina, such as Chile, Australia and New Zealand, Girado adds.

If Argentina is going to diversify its markets and expand its export capability, says Garma, it must “stop making things hard for our producers and exporters. Good customers nourish relationships of trust, and make agreements [as a result]. This does not happen when the framework of official policy is [often] changing.”

Baez believes that in order to strengthen trade with China, “We need to thoroughly review the tools at our disposal so our agribusiness products are no longer the only option we have for trading with [China]. While [Argentine] exporters search for alternative markets, they should try to adapt their production plants so they can comply [more easily] with the health regulations imposed by China for soy oil.” In any case, all eyes will be on the meeting set to take place in China on July 13 between Fernández de Kirchner and Chinese President Hu Jintao.

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